Item 1. - Business
As used herein, the term "Company" refers to Kimball International, Inc., the Registrant, and its subsidiaries unless the context indicates otherwise. The Company was incorporated in Indiana in 1939, and present management assumed control in 1950. The corporate headquarters is located at 1600 Royal Street, Jasper, Indiana. The Company provides a vast array of products from its two business segments: the Furniture and Cabinets Segment and the Electronic Contract Assemblies Segment. The Furniture and Cabinets Segment manufactures furniture for the office, residential, lodging and healthcare industries and store display fixtures, all sold under the Company's family of brand names. Other products produced by the Furniture and Cabinets Segment on an original equipment manufacturer basis include store fixtures, television cabinets and stands, audio speaker systems, residential furniture and furniture components. The Electronic Contract Assemblies Segment is a global provider of design engineering, manufacturing, packaging, and distribution of electronic assemblies, circuit boards, multi-chip modules and semiconductor components on a contract basis to customers in the transportation, industrial, telecommunications, computer, and medical industries. The Company utilizes a substantial degree of vertical integration. It does not consider seasonal fluctuations to be significant. Production is carried on in facilities located in the United States, Mexico, Austria, France and Thailand. In the United States, the Company has facilities and showrooms in 16 states.
Financial information by segment and geographic area for each of the three years in the period ended June 30, 2000 is included in Note 14, Segment and Geographic Area Information, of the Notes to Consolidated Financial Statements, which can be found in Item 8, and is incorporated herein by reference.
Segments
FURNITURE AND CABINETS
Historical Overview Since 1950, the Company has produced wood furniture and cabinets, which continue to be a significant part of the business. Included in this segment are sales of office furniture that has been manufactured and sold under the Kimball (registered trademark) trade name since 1970. In 1992, the Company expanded its product offering with the acquisition of Harpers, a metal office furniture manufacturer. Harpers has marketed metal office furniture under the Harpers (registered trademark) trade name since 1982. In fiscal year 1999, the Company further expanded its office furniture product offering with the acquisition of Transwall, a manufacturer of stackable panel systems and floor-to-ceiling products. Kimball and Harpers office furniture systems have broad market application, while Transwall office furniture systems are focused more toward technical applications where wiring capabilities need to be flexible. The Kimball and National (registered trademark) casegoods and seating lines are more focused to the wood segment of the office furniture industry. The Cetra (registered trademark) and Footprint (registered trademark) lines of Kimball office furniture systems provide flexible configurations and help architects and designers optimize space planning by utilizing Traxx (registered trademark), which increases space efficiency and eliminates the need for a secondary support structure by using existing walls. The Reasons line of Kimball office furniture systems provides interchangeable panels that stack vertically and allow the flexibility of stacking from floor to ceiling. The Interworks (registered trademark) line of Harpers office furniture systems is designed to integrate easily with existing Kimball systems products and provide more flexibility and functionality in office design. The Corporate Wall line of Transwall office furniture combines the privacy and security of a full height partition with the versatility of an open plan system. The Company has expanded its sales and manufacture of furniture over the years to include residential furniture, lodging and healthcare furniture, and in fiscal year 1999, store fixtures through the acquisition of Southeast Millwork. The Company expanded its offering of fully upholstered and wood framed seating products to the lodging and healthcare market with the purchase of Jackson of Danville in fiscal year 2000. Other products within this segment are original equipment manufacturer (OEM) furniture and cabinets, including store fixtures, television cabinets and stands, audio speaker systems, residential furniture, and other wood related products manufactured on a contract basis and sold to leading manufacturers in the home entertainment and home furniture industries. Also included in the Furniture and Cabinets Segment are sales of furniture component products including unprocessed lumber, dimension lumber, veneer, wood panels and cabinet doors to both internal and external customers. The Company also manufactures various miscellaneous products including plywood, polyurethane and polyester molded products, stamped metal components and welded assemblies and sells them to both internal and external customers. Through a predecessor acquired in 1966, L. Bosendorfer of Vienna, Austria, the Company has been engaged in acoustical piano manufacturing and sales since 1828. The prestigious Bosendorfer line of high-end pianos is sold and recognized worldwide. The Company was also engaged in the manufacture and sales of a domestically produced piano product line since 1857 through a predecessor, W. W. Kimball Co., acquired in 1959, until cessation of this product line in 1996.
Services of the Company's trucking fleet are also sold to unaffiliated customers.
Locations Office, home, lodging and healthcare furniture, store fixtures and OEM furniture and cabinets and related products, which make up the largest part of this segment, are produced at twenty-five plants, sixteen located in Indiana, three in Kentucky, and one each in Idaho, Pennsylvania, North Carolina, Florida, Mississippi, and Mexico. Nine of the twenty-five plants presently producing furniture and cabinets could interchange production between these two basic products, if needed. In fiscal year 1999, the Company purchased a manufacturing facility in Mexico to produce television cabinets and to provide additional capacity for other manufacturing operations in the future. The Company also owns and operates three sawmills, three lumber yards, two dimension lumber plants, two plants which manufacture contract wood products and a newly constructed technologically advanced veneer mill which began operations in June 2000. The operations of the Company's former sliced veneer plant have been relocated to the newly constructed veneer mill and the former plant is currently idle. These facilities are located in Indiana, Tennessee and Kentucky. Acoustical pianos are produced at a facility located in Austria. The Company sold its period reproduction furniture production facility located in Alabama, and its carbide cutting tools operation located in Indiana during fiscal year 1999. A facility in Jasper, Indiana houses an Education Center for dealer and employee training, the Product Design and Research Center, and a Corporate showroom for product display. In the United States, showrooms are maintained in eleven cities for office furniture and two cities for home furniture. In addition, office furniture is maintained in showrooms in London, England and Toronto, Canada. In certain showrooms other Company products are also on display. A piano showroom and service facility is located in Vienna, Austria.
Marketing Channels Kimball, National, and Harpers brands of office furniture are marketed through Company salespersons to office furniture dealers, wholesalers, rental companies and catalog houses throughout North America and England. Transwall brands of office furniture are marketed through Company salespersons and independent sales representatives to office furniture dealers throughout North America. Home Furniture is generally marketed through independent sales representatives to independent furniture dealers throughout the United States. Lodging and healthcare furniture is marketed through independent manufacturers' representatives. Store fixtures are generally sold directly to retail businesses. Cabinets and contract furniture are generally marketed through Company salespersons. The Company's marketing strategy facilitates the sale of related office furniture, residential furniture and upholstery product within the lodging and healthcare channels. Furniture component products manufactured by the Company are used internally as well as sold to others. Products sold to others are marketed principally to furniture manufacturers, primarily through Company personnel. Bosendorfer (registered trademark) pianos are marketed through Company salespersons and agents to independent dealers.
Major Competitive Factors The major competitive factors in the office furniture industry are price in relation to quality and appearance, the utility of the product, customer lead time, and ability to respond to requests for special and non-standard
products. Certain market segments are more price sensitive than others, but all segments expect on-time, damage-free delivery. The Company maintains sufficient finished goods inventories to be able to offer prompt shipment of certain lines of Kimball, National and Harpers office furniture to domestic dealers, thereby permitting the dealers to maintain smaller inventories. Many products are shipped through the Company's delivery system, which the Company believes offers it the ability to reduce damage to shipments, enhance scheduling flexibility, and improve the capability for on-time deliveries, which are all key competitive factors in the office furniture industry. The lodging and healthcare furniture markets compete on quality, reliability, customer lead time and price. The Company offers its own line of lodging and healthcare furniture as well as producing contract lodging and healthcare furniture to customers' specifications. The major competitive factors in the store fixtures industry are quality, customer lead time, price, service and installation. Store fixtures are produced to customer specifications from specific orders. The major competitive factors in the home furniture, cabinet and OEM product markets are quality, performance history, price, on-time delivery and customer lead time. Contract home furniture, television and audio speaker cabinets, and television stands are produced to customer specifications from specific orders and finished goods inventories are generally small, consisting primarily of goods awaiting shipment to customers. The Company's own lines of home furniture are offered for sale on an immediate ship basis. Competitive factors in the furniture component products market are price, quality, availability, on-time delivery and customer lead time. The major competitive factors in the high-end acoustical piano industry are quality, acoustical tone and appearance.
Competitors There are numerous manufacturers of office, home, lodging, and healthcare furniture competing within the marketplace. The Company believes, however, that there are a limited number of relatively large producers of wood office and lodging furniture, of which the Company believes that it is one of the larger in net sales. In many instances wood office furniture competes in the market with metal office furniture. Based on available industry statistics, metal office furniture has a larger share of the total office furniture market. The Company has positioned Harpers and Transwall as vehicles to strengthen its market share in the non-wood segment of the industry. There are many manufacturers of both home furniture and store fixtures and the Company does not have a significant share of either of these markets. The Company believes that it is one of the largest independent domestic manufacturers of television and audio speaker cabinets, but certain manufacturers of televisions and audio speakers, including some customers of the Company, produce cabinets for their own use. For furniture and cabinet components, the Company competes with many integrated forest and specialty hardwood product companies and does not have a significant share of the market for such products. The high-end acoustical piano industry is characterized by a limited number of competitors, including one major competitor.
Raw Material Availability Many components used in the production of furniture and cabinets are manufactured internally within the segment, including processed wood parts, stamped metal components and certain polyurethane and polyester molded plastics, all of which are generally readily available. Other raw materials used in the production of wood furniture and cabinets are generally readily available. Certain metal components, such as precision slide mechanisms, used in various wood office furniture products are purchased in a pre-fabricated stage with additional fabrication and finishing performed by the Company. Raw materials used in the manufacture of metal office furniture, primarily rolled steel and aluminum, are readily available in the world market. The Company purchases certain component parts for home furniture from Asia. Certain fabricated seating components and wood frame assemblies are currently sourced from Europe and Asia and are readily available. Raw materials used in the manufacture of store fixtures are readily available. Certain pre-fabricated components used in the company's piano line are available from a limited number of sources, although no interruptions in supplies have been experienced.
ELECTRONIC CONTRACT ASSEMBLIES
The Company entered the electronic contract assemblies market in 1985 with knowledge acquired from the production of electronic keyboards for musical instruments, which were first produced in 1963. Electronics and electro-mechanical products (electronic assemblies) are sold on a contract basis and produced to customers' specifications. The Company expanded its capabilities to include semiconductor DIE processing, design, testing and packaging through an acquisition in 1996. The Company's Electronic Contract Assemblies Segment consists of six manufacturing facilities with two located in Indiana and one each in California, Mexico, France and a newly opened facility in Laem Chabang, Thailand. One additional facility located in Texas is utilized to receive inbound materials and distribute finished goods for the Mexican facility. The fully automated Thailand facility offers board level assembly as well as box-build capability of products for sale to outside customers in the global market. One facility in Indiana, formerly utilized for warehousing space, has recently been converted to a high-flexibility production facility. Both Indiana facilities manufacture electronic assemblies and assemble products for sale to outside customers. The facility located in Mexico provides services similar to those provided from the Indiana facilities. The California facility assembles product and also provides semiconductor DIE processing, design, testing and packaging services. In June 2000, the Company broke ground on a new manufacturing facility located in Valencia, California to replace the current leased facility in Burbank, California. The new facility will increase capacity and expand manufacturing capabilities. The facility in France provides DIE processing and assembly services for the European market. Engineering design and support services are provided to the manufacturing facilities within this segment and to outside customers through the Kimball Electronics Design Services company, which is based in Indiana. Manufacturing and design services are marketed primarily by Company salespersons. Contract electronic assemblies are manufactured based on specific orders, generally resulting in a small amount of finished goods consisting primarily of goods awaiting shipment to specific customers. Raw materials are normally acquired for specific customer orders and may or may not be interchangeable among products. Inherent risks associated with rapid technological changes within this contract industry are mitigated by procuring raw materials, for the most part, based on firm orders. Key competitive factors in the electronic contract assemblies market are competitive pricing on a global basis, quality, engineering design services, production flexibility, reliability of on-time delivery, customer lead time, test capability, and global presence. Growth in the electronic contract assemblies industry is created through the proliferation of electronic components in today's advanced products along with the continuing trend of OEM's in the electronic industry to subcontract the assembly process to companies with a core competence in this area. The electronics industry is very competitive as numerous manufacturers of contract electronic assemblies compete for business from existing and potential customers. The Company does not have a significant share of the market for such products. Raw materials utilized in the manufacture of contract electronic products are generally readily available from both domestic and foreign sources, although from time to time the industry experiences allocations of certain components due to supply and demand forces, combined with rapid product life cycles of certain components. While the total electronic assemblies market has broad applications, the Company's customers are concentrated in the transportation (automobiles and light trucks), industrial, telecommunications, computer, and medical industries. Included in this segment are sales of electronic assemblies to one customer, TRW Inc., which accounted for approximately 17% of consolidated net sales in fiscal year 2000, compared to 16% in fiscal years 1999 and 1998. The success of this segment is contingent on the success of our customers' products. This segment's investment capital carries a higher degree of risk than the Company's other segment due to rapid technological changes, component availability, the contract nature of this industry and the importance of sales to one customer.
OTHER INFORMATION BACKLOG
The Company owns the Kimball (registered trademark) trademark, which it believes is significant to its office, electronic, lodging, healthcare and home furniture businesses, and owns the following trademarks which it believes are significant to its furniture business only: National (registered trademark), Cetra (registered trademark), Footprint (registered trademark), Artec (registered trademark), Traxx (registered trademark), Harpers (registered trademark) and Interworks (registered trademark); and to the piano business only: Bosendorfer (registered trademark). The Company also owns certain patents and other trademarks and has certain other patent applications pending, which in the Company's opinion are not significant to its business.
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ENVIRONMENT AND ENERGY MATTERS The Company's operations are subject to various foreign, federal, state and local laws and regulations with respect to environmental matters. The Company believes that it is in substantial compliance with present laws and regulations and that there are no material liabilities related to such items. The Company is dedicated to excellence, leadership and stewardship in matters of protecting the environment and communities in which the Company has operations. The Company believes that continued compliance with foreign, federal, state and local laws and regulations which have been enacted relating to the protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position. Management believes capital expenditures for environmental control equipment during the two fiscal years ending June 30, 2002, will not represent a material portion of total capital expenditures during those years. The Company's manufacturing operations require significant amounts of energy, including natural gas and oil. Federal and state statutes and regulations control the allocation of fuels available to the Company, but to date the Company has experienced no interruption of production due to such regulations. In its wood processing plants, significant energy requirements are satisfied internally by the use of the Company's own wood waste products.
The Company has no collective bargaining agreements with respect to its domestic employees. All of the Company's foreign operations are subject to collective bargaining arrangements. The Company believes that its employee relations are good.
Item 2.
Item 2. - Properties
Included in Unallocated Corporate are executive, national sales and administrative offices, an energy center for the Kimball Industrial Park consisting of 3 trifuel boilers, and a child development facility for employees' children. Properties are generally utilized at normal capacity levels on a single shift basis, with certain facilities operating a second shift, while other facilities utilize a reduced second or third shift to meet increased demand levels. At times, certain facilities were not utilized at normal capacity levels during the fiscal year, because of declines in sales. The energy center is not operating at full capacity. Significant loss of income resulting from a facility catastrophe would be partially offset by business interruption insurance coverage. Operating leases totaling 614,000 square feet expire from fiscal year 2001-2008, with all leases subject to renewal options. In addition to the above production, warehouse and office properties, the Company has 14 leased showroom facilities totaling 116,000 square feet, in 9 states in the United States, one location in London, England, one location in Vienna, Austria, and one location in Toronto, Canada. The Company owns approximately 27,778 acres of land which includes land where various Company facilities reside, including approximately 26,826 acres generally for hardwood timber reserves, approximately 183 acres of land in the Kimball Industrial Park, Jasper, Indiana (a site for certain production and other facilities, and for possible future expansions), and approximately 60 acres in Post Falls, Idaho, where the Harpers plant is located. The Company leases approximately six acres of land in Laem Chabang, Thailand for possible future expansion of production facilities with the lease expiring in 2030.
Item 3.
Item 3. - Legal Proceedings The Registrant and its subsidiaries are not parties to any material pending legal proceedings, other than ordinary routine litigation incidental to the business.
Item 4.
Item 4. - Submission of Matters to Vote of Security Holders None to report in the 4th quarter of fiscal year 2000
PART II
Item 5.
Item 5. - Market for the Registrant's Common Stock and Related Share Owner Matters
Recent Sales of Unregistered Securities: On November 2, 1999 the Company issued 350,000 shares of unregistered restricted Class B Common Stock to five individual investors in connection with the acquisition of 100% of the Capital Stock of Jackson Furniture of Danville. On July 15, 1999 5,925 shares of unregistered restricted Class B Common Stock were issued to one individual investor as part of the August 1998 agreement to purchase substantially all of the assets of Transwall, Inc. The Common Stock in these transactions were issued in reliance on the private placement exemption under Section 4(2) of the Securities Act of 1933, as amended.
Share Owners: On July 31, 2000, the Company's Class A Common Stock was owned by approximately 640 Share Owners of record and the Company's Class B Common Stock by approximately 2,390 Share Owners of record, of which approximately 380 also owned Class A Common Stock.
Fiscal year 1999 results include a $1,337,000 after tax gain ($0.03 per diluted share) on the sale of a stock investment of which the Company held a minor interest and a $2,674,000 after tax gain ($0.06 per diluted share) on the disposition of two non-core operating facilities.
Fiscal year 1998 results include a $1,008,000 after tax gain ($0.02 per diluted share) on the sale of real estate and a $616,000 after tax gain ($0.01 per diluted share) on the sale of a stock investment of which the Company held a minor interest.
Fiscal year 1996 net income was reduced by $1,870,000, or $0.05 per share, for estimated costs associated with exiting sales and production of the Company's domestic wholesale piano product line.
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Item 7.
Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW Net sales of $1,200,945,000 reached record levels in fiscal year 2000, topping the prior year by 8%. Net income and Class B diluted earnings per share were $48,462,000 and $1.21, respectively, a decrease of 13% and 12%, respectively, from fiscal year 1999, excluding non-operating gains recorded in fiscal year 1999. Fiscal year 1999 non-operating items include a $1,337,000 after tax gain ($0.03 per diluted share) on the sale of a stock investment of which the Company held a minor interest and a $2,674,000 after tax gain ($0.06 per diluted share) on the disposition of two non-core operating facilities within the Furniture and Cabinets Segment. Including fiscal year 1999 non-operating gains, net income decreased 19% and Class B diluted earnings per share decreased 18% in fiscal year 2000 when compared to the year earlier.
RESULTS OF OPERATIONS 2000 DISCUSSION Net sales for fiscal year 2000 surpassed 1999 net sales on increases by both of the Company's segments -- the Furniture and Cabinets Segment and the Electronic Contract Assemblies Segment. Net income for fiscal year 2000 declined from fiscal year 1999 in both segments.
FURNITURE AND CABINETS Product line offerings included in the Furniture and Cabinets Segment are office furniture, home furniture, lodging and healthcare furniture, store fixtures, original equipment manufacturer (OEM) furniture and cabinets and furniture components. The Company's production flexibility allows it to utilize portions of the available production capacity created by lower volumes within these product lines to support and balance increased production schedules of other product lines within this segment.
In fiscal year 2000, the Company purchased Jackson of Danville, a privately held manufacturer of custom and in-line fully upholstered seating products and wood framed chairs. The acquisition was accounted for as a purchase with operating results included in the Company's consolidated results from the date of acquisition, and was financed with available cash on hand and the Company's Class B Common Stock. The acquisition price and operating results of this acquisition were not material to the Company's fiscal year 2000 consolidated operating results.
The Furniture and Cabinets Segment set a new annual net sales record in fiscal year 2000 with an increase of 8% from the prior year. Sales increased over fiscal year 1999 for all product lines, except lodging and healthcare, within this segment.
Increased volumes in the office furniture product line resulted in record sales in fiscal year 2000. Sales of casegoods, systems, and seating products within the office furniture line all increased over fiscal year 1999. Office furniture sales growth, excluding prior year acquisitions, outpaced the 5% growth in shipments reported by the Business and Institutional Furniture Manufacturer's Association (BIFMA) for the Company's fiscal year ending June 2000.
Net sales of the lodging and healthcare product line decreased in fiscal year 2000 from the previous year. Sales of both the Company's custom-made products and standard product offerings declined in fiscal year 2000 when compared to fiscal year 1999. Product mix continued to shift toward lower margin custom-made products in fiscal year 2000. Lodging and healthcare sales are expected to improve beginning with the first quarter of fiscal year 2001 as evidenced by an increase in open orders as of June 30, 2000 compared with open orders at June 30, 1999. The preceding statement is a forward-looking statement under the Private Securities Litigation Reform Act of 1995 and is subject to certain risks and uncertainties including, but not limited to customer order changes, a downturn in the lodging and healthcare markets, loss of key customers, availability of raw materials, or a natural disaster or similar unforeseen event.
Fiscal year 2000 outside net sales of OEM furniture and cabinets, excluding the acquisition of Jackson of Danville, experienced double-digit growth when compared to 1999. Increased volume of OEM large-screen projection television cabinets, including those produced at the Company's Juarez, Mexico facility, was the largest single contributor to the sales growth.
Outside net sales of furniture components increased in fiscal year 2000 primarily as a result of increased sales of lumber products.
Net income in the Furniture and Cabinets Segment decreased in fiscal year 2000 from fiscal year 1999 despite increased sales. Fiscal year 1999 net income includes an after tax gain of $2.7 million from the sale of two non-core operating facilities. Gross profit, as a percent of sales, declined from 1999 primarily due to an increase in material costs, as a percent of sales. Lower sales margins on the furniture components and lodging and healthcare product lines contributed to the decline in gross profit in fiscal year 2000 when compared to fiscal year 1999. Also contributing to the reduced gross profitability in fiscal year 2000 were start up costs and inefficiencies early in fiscal year 2000 related to the Company's Juarez, Mexico facility that was acquired in fiscal year 1999. The Company, however, has seen continued improvement in gross profitability in each quarter of fiscal year 2000 from the Juarez facility and is expecting continued improvement in gross profitability from this facility in fiscal year 2001. The preceding statement concerning the Company's Juarez, Mexico facility is a forward looking statement under the Private Securities Litigation Reform Act of 1995 and is subject to certain risks and uncertainties including, but not limited to, material price changes, unexpected manufacturing inefficiencies, a downturn in the economy or similar unforeseen event. Selling, general and administrative expenses increased in dollars in fiscal year 2000 but decreased as a percent of sales partially resulting from efforts to manage costs. Incentive compensation costs, which are linked to company profitability, decreased in both dollars and as a percent of sales also contributing to the lower selling, general and administrative costs, as a percent of sales.
ELECTRONIC CONTRACT ASSEMBLIES Net sales for fiscal year 2000 surpassed the prior year by 9% in the Electronic Contract Assemblies Segment. Sales of electronic transportation products and medical components increased while sales of computer related products declined when compared to the prior year. -19-
In fiscal year 2000, the Company embarked on a number of strategic expansion opportunities in the Electronic Contract Assemblies Segment. In April 2000, the Company announced the opening of a new manufacturing facility in the export zone of Laem Chabang, Thailand. This fully automated facility will serve the global requirements of its customers and includes future expansion possibilities. In May 2000, the Company announced the opening of a new high-flexibility manufacturing facility located in Jasper, Indiana that will allow the manufacture of high mix/low volume assemblies as well as test capabilities to meet the needs of its customers. The Company also broke ground for a new microelectronics facility located in Valencia, California during June 2000. The new Valencia facility will replace a current facility located in Burbank, California and will increase capacity and expand manufacturing capabilities.
Net income in fiscal year 2000 decreased from the prior year despite higher sales. Gross profits were lower in fiscal year 2000, compared to historic margins that were achieved on more mature product lines, resulting from a planned diversification of its customer base into a variety of new products as well as production of the next generation of anti-lock braking components. Start up costs associated with the new manufacturing facilities in Jasper, Indiana and Laem Chabang, Thailand also contributed to the lower gross profitability in fiscal year 2000. Selling, general and administrative expenses increased in dollars but decreased as a percent of sales in fiscal year 2000 driven by lower incentive compensation which is linked to company profitability.
Included in this segment are sales to one customer, TRW, Inc. which accounted for 17% and 16% of consolidated net sales in fiscal year 2000 and 1999, respectively. Sales to this customer represent approximately one half of total sales in the Electronic Contract Assemblies Segment.
This segment's investment capital carries a higher degree of risk than the Company's other segment due to rapid technological changes, component availability, the contract nature of this industry and the importance of sales to one customer.
CONSOLIDATED OPERATIONS Consolidated selling, general and administrative expenses decreased, as a percent of sales, 1.1 percentage points in fiscal year 2000 when compared to fiscal year 1999. This reduction in selling, general, and administrative costs, as a percent of sales, is primarily due to lower incentive compensation costs which are linked to company profitability as well as lower selling expenses and lower administrative employee compensation costs, as a percent of sales.
Other income decreased from the prior year on lower interest income caused by lower average investment balances. In addition, fiscal year 1999 results include a $1,337,000 after tax gain ($0.03 per diluted share) on the sale of a stock investment of which the Company held a minor interest and a $2,674,000 after tax gain ($0.06 per diluted share) on the disposition of two non-core facilities.
The effective income tax rate decreased 0.4 percentage point in fiscal year 2000 when compared to fiscal year 1999. Decreases in both state and federal effective tax rates contributed to the lower overall effective income tax rate.
Fiscal year 2000 net income and Class B diluted earnings per share of $48,462,000 and $1.21, respectively, decreased 13% and 12%, respectively, from fiscal year 1999 net income of $55,714,000 and Class B diluted earnings per share of $1.38, excluding fiscal year 1999 non-operating gains. Including fiscal year 1999 non-operating gains, net income and Class B diluted earnings per share declined 19% and 18%, respectively, from prior year levels of $59,725,000 and $1.47, respectively.
1999 DISCUSSION Net sales for the 1999 fiscal year surpassed 1998 levels on increases by both of the Company's segments -- the Furniture and Cabinets Segment and the Electronic Contract Assemblies Segment. Net income for fiscal year 1999 also increased over the prior year in both segments.
FURNITURE AND CABINETS In fiscal year 1999, the Company completed a number of acquisitions included within the Furniture and Cabinets Segment. In September 1998, the Company acquired the assets and assumed certain liabilities of Transwall, Inc., a privately held manufacturer of stackable panel office furniture systems and floor-to-ceiling products, which increased its already extensive office furniture product offering. In January 1999, the Company purchased the assets and assumed certain liabilities of Southeast Millwork, a privately held manufacturer of store display fixtures. This acquisition provided an entry point for the Company to pursue the store fixtures markets. These two acquisitions were accounted for as purchases with results of operations included in the Company's consolidated results from the date of purchase. In April 1999, the Company purchased a manufacturing facility located in Juarez, Mexico. The results of these acquisitions were not material to fiscal year 1999 consolidated operating results.
The Company also completed the sale of two of its non-core facilities in fiscal year 1999. In May 1999, the Company sold Kimball Furniture Reproductions, a furniture manufacturing facility located in Montgomery, Alabama. In June 1999, the Company sold ToolPro, a carbide cutting tools production operation located in Jasper, Indiana. Proceeds from the divestitures will be used to help fund future acquisitions and general corporate purposes to support the Company's growth strategy. An after tax gain of $2,674,000 was recorded on these two dispositions.
Fiscal year 1999 net sales increased 9% in the Furniture and Cabinets Segment, including acquisitions, when compared to the prior year. Sales increased for all product lines within this segment.
Increased volumes in the office furniture product line resulted in record sales in fiscal year 1999. Casegoods and systems products within the office furniture line both increased over fiscal year 1998, while sales of seating products declined slightly. Excluding acquisitions, office furniture sales growth outpaced the 2% growth in shipments reported by the Business and Institutional Furniture Manufacturer's Association (BIFMA) for the twelve-month period ending May 1999.
The lodging and healthcare product line experienced increased net sales in fiscal year 1999 over the prior year. Increased sales of the Company's custom-made products more than offset sales declines of standard product offerings. The latter part of the fiscal year showed a general slowing in orders from the lodging industry.
Fiscal year 1999 outside net sales of OEM furniture and cabinets experienced double-digit growth when compared to 1998. Increased volume of OEM large-screen projection television cabinets was the major contributor to the sales growth. Fiscal year 1998 sales of these cabinets were lower due to the relocation of a large customer and its longer than anticipated start up time.
Outside net sales of furniture components increased in fiscal year 1999 primarily as a result of volume increases in furniture component parts, mainly kitchen cabinet doors.
Net income in the Furniture and Cabinets Segment increased in 1999 when compared to 1998. Gross profit, as a percent of sales, decreased from 1998 primarily due to deeper discounting and increased material costs, as a percent of sales. Selling, general and administrative expenses increased in dollars in 1999 but decreased as a percent of sales as focused cost reductions resulted in lower freight, sales incentives and people costs, as a percent of sales.
ELECTRONIC CONTRACT ASSEMBLIES Net sales for fiscal year 1999 in the Electronic Contract Assemblies Segment exceeded the prior year by 3%. Sales of electronic transportation products increased while sales of computer related products declined when compared to the prior year. The Company continued to expand its product line offering in the Electronic Contract Assemblies Segment including components for consumer electronics, appliances, and industrial controls.
Net income in fiscal year 1999 increased slightly over the prior year, primarily due to higher sales volumes. Gross profit, as a percent of net sales, remained relatively consistent in 1999 when compared to 1998. Selling, general and administrative costs increased in dollars but decreased slightly, as a percent of sales, in fiscal year 1999. Net income was also affected by a higher effective state income tax rate.
Included in this segment are sales to one customer, TRW, Inc. which accounted for 16% of consolidated net sales in both fiscal year 1999 and 1998. Sales to this customer represented approximately one half of total sales in the Electronic Contract Assemblies Segment.
This segment's investment capital carries a higher degree of risk than the Company's other segment due to rapid technological changes, component availability, the contract nature of this industry and the importance of sales to one customer.
CONSOLIDATED OPERATIONS Consolidated selling, general and administrative expenses decreased, as a percent of sales, 0.2 percentage point in fiscal year 1999 when compared to 1998. The Company focused on reducing costs and continued to review activities and processes to assess where costs could further be reduced in fiscal year 1999 while providing quality products and services to the marketplace.
Other income decreased from the prior year on lower interest income caused by lower average investment balances and a shift in the Company's investment portfolio to a mix more heavily weighted toward tax-free municipal bonds with lower pre-tax interest rates. Partially offsetting the decline in interest income was an increase in miscellaneous income. In fiscal year 1999 the Company recorded a $1,337,000 after tax gain ($0.03 per diluted share) on the sale of a stock investment of which the Company held a minor interest and a $2,674,000 after tax gain ($0.06 per diluted share) on the disposition of two non-core facilities. Fiscal year 1998 results include a $1,008,000 after tax gain ($0.02 per diluted share) on the sale of real estate and a $616,000 after tax gain ($0.01 per diluted share) on the sale of a stock investment of which the Company held a minor interest.
The effective income tax rate decreased 1.8 percentage points in fiscal year 1999 in comparison to 1998. An increase in state tax rates was more than offset by a decrease in the federal effective tax rate as the Company utilized available capital loss carryforwards to offset capital gains.
Net income and Class B diluted earnings per share of $59,725,000 and $1.47, respectively, in fiscal year 1999 increased 9% from the prior year levels of $55,027,000 and $1.32, respectively.
LIQUIDITY AND CAPITAL RESOURCES The Company's aggregate of cash, cash equivalents, and short-term investments decreased from $132 million at the end of fiscal year 1999 to $85 million at the end of fiscal year 2000 due primarily to cash outlays for strategic capital investments and repurchases of the Company's Class B Common Stock. Working capital at June 30, 2000 was $190 million with a current ratio of 1.9, compared to working capital of $218 million and a current ratio of 2.3 at June 30, 1999.
Operating activities generated $41 million of cash flow in fiscal year 2000 compared to $98 million in fiscal year 1999. Net income and non-cash charges to net income were partially offset by increases in receivables of $46 million and inventories of $17 million. The Company reinvested $71 million into capital investments for the future, including new manufacturing facilities in Chandler, Indiana and Laem Chabang Thailand, computer equipment, production equipment, and office facilities. Financing cash flow activities were primarily in the form of $26 million in dividend payments and $24 million of Class B Common Stock repurchases. Net cash flow, excluding the purchases and maturities of short-term investments was an outflow of $47 million.
At June 30, 2000, the Company had $35 million of short-term borrowings outstanding under its $100 million revolving credit facility that allows for both issuance of letters of credit and cash borrowings. The Company did not have any debt outstanding under this credit facility at June 30, 1999. The credit facility requires the Company to comply with certain debt covenants including debt-to-total capitalization, interest coverage ratio, minimum net worth, and other terms and conditions. The Company is in compliance with these covenants at June 30, 2000 and does not expect these covenants to limit or restrict the Company's ability to borrow from the credit facility in fiscal year 2001. The preceding statement is a forward-looking statement under the Private Securities Litigation Reform Act of 1995 and is subject to certain risks and uncertainties including, but not limited to a downturn in the economy, loss of key customers or suppliers, availability or increased costs of raw materials, or a natural disaster or similar unforeseen event.
The Company anticipates maintaining a strong liquidity position for the 2001 fiscal year and believes its available funds on hand, unused credit line available under the revolving credit facility and cash generated from operations will be sufficient for working capital needs and for funding investments in the Company's future. This statement is a forward-looking statement under the Private Securities Litigation Reform Act of 1995 and is subject to certain risks and uncertainties including, but not limited to a downturn in the economy, loss of key customers or suppliers, availability or increased costs of raw materials, or a natural disaster or similar unforeseen event.
YEAR 2000 DISCLOSURE The Company implemented a plan to alleviate any potential problems which may have been caused by the Year 2000 which included inventory assessment, remediation and testing. The Company has not experienced any major interruptions or malfunctions in its operations related to the Year 2000 issue but will continue to monitor throughout the remainder of the calendar year. In addition, the Company has currently not experienced any interruptions caused by a lack of Year 2000 readiness by any of its key suppliers, distributors, customers, public infrastructure suppliers and other vendors.
The total gross cost of Year 2000 compliance approximated $8.1 million which favorably compares to estimated costs disclosed in the Company's Form 10-K filing for its fiscal year ended June 30, 1999 of $9 million to $11 million. Existing information technology resources were redeployed, which accounted for approximately 50% of the total gross costs above. Approximately 30% of the
above total gross costs relate to machinery and other fixed assets which were capitalized or in certain situations leased, with the remaining costs being expensed as incurred.
ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The Company did not have any derivative instruments at June 30, 2000, however the Company periodically engages in limited forward purchases of foreign currency and does not expect this new standard to have a material effect on the Company's financial condition or results of operations. This standard will be effective for the Company's fiscal year 2001.
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue 00-10 "Accounting for Shipping and Handling Fees and Costs." EITF Issue 00-10 requires that all amounts billed to a customer in a sale transaction for shipping and handling be classified as revenue. The EITF did not reach a consensus with respect to the classification of costs related to shipping and handling. The Company currently classifies most all shipping and handling revenues and costs, on a net basis, in selling and administrative expense. Accordingly, the Company has determined that EITF Issue 00-10 will require reclassification of shipping and handling revenues and costs, but does not believe EITF Issue 00-10 will impact its financial position or net income. The effective date of this standard is the fourth quarter of the Company's fiscal year 2001.
Item 7a
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2000 and 1999, the Company had an investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $79 million and $115 million respectively. The Company classifies its short-term investments in accordance with Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. Held-to-maturity securities are stated at amortized cost and available-for-sale securities are stated at market value with unrealized gains and losses being recorded net of tax related effect, if any, as a component of Share Owners' Equity. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. A hypothetical 100 basis point increase in market interest rates from levels at June 30, 2000 and 1999 would cause the fair value of these short-term investments to decline by an immaterial amount.
The Company's earnings are also affected by changes in short-term interest rates as a result of borrowings under its line of credit facility. Based on the outstanding balance of the Company's credit facility at June 30, 2000, a hypothetical 100 basis point increase in interest rates prevailing at this date would not affect the consolidated operating results of the Company by a material amount.
The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency rate changes. The effect of movements in the exchange rates were not material to the consolidated operating results of the Company in fiscal years 2000 and 1999. The Company estimates that a hypothetical 10% adverse change in foreign currency exchange rates would not affect the consolidated operating results of the Company by a material amount.
REPORT OF MANAGEMENT
To the Share Owners of Kimball International, Inc.
The management of Kimball International, Inc. is responsible for the preparation and integrity of the accompanying financial statements and other related information in this report. The consolidated financial statements of the Company and its subsidiaries, including the footnotes, were prepared in accordance with generally accepted accounting principles in the United States and include judgements and estimates, which in the opinion of management are applied on a conservative basis.
The Company maintains a system of internal controls intended to provide reasonable assurance that assets are safeguarded from loss or material misuse, transactions are authorized and recorded properly, and that the accounting records may be relied upon for the preparation of the financial statements. This system is tested and evaluated regularly for adherence and effectiveness by the Company's staff of internal auditors, as well as the independent public accountants in connection with their annual audit.
The Audit Committee of the Board of Directors, which is comprised of directors who are not employees of the Company, meets regularly with management, the internal auditors and the independent public accountants to review the work performed and to ensure that each is properly discharging its responsibilities. The internal auditors and the independent public accountants have free and direct access to the Audit Committee, and they meet periodically, without management present, to discuss appropriate matters.
Douglas A. Habig Douglas A. Habig Chairman of the Board, Chief Executive Officer
James C. Thyen James C. Thyen President
Robert F. Schneider Robert F. Schneider Executive Vice President, Chief Financial Officer, Assistant Treasurer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Share Owners of Kimball International, Inc.
We have audited the accompanying consolidated balance sheets of Kimball International, Inc. (an Indiana corporation) and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of income, cash flows and share owners' equity for each of the three years in the period ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kimball International, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedule listed under item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois August 2, 2000
KIMBALL INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of all domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.
Revenue Recognition: Revenue from product sales is recognized when title passes to the customer which is generally when goods are shipped.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts included in the consolidated financial statements and related footnote disclosures. While efforts are made to assure estimates used are reasonably accurate based on management's knowledge of current events, actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments: Cash equivalents consist primarily of highly liquid investments with original maturities of three months or less at the time of acquisition. Cash equivalents are stated at cost, which approximates market value. Short-term investments are cash investments, primarily municipal bonds and U.S. Government securities with maturities exceeding three months at the time of acquisition. Held-to-maturity securities are stated at amortized cost. Available-for-sale securities are stated at market value, with unrealized gains and losses excluded from net income and recorded net of related tax effect, if any, in Accumulated Other Comprehensive Income, as a component of Share Owners' Equity.
Foreign Currency Translation: Assets and liabilities of foreign subsidiaries (except for Mexico and Thailand operations, whose functional currency is the U.S. dollar) are translated into U.S. dollars at fiscal year-end exchange rates, income statement accounts are translated at the weighted average exchange rate during the year, and the resulting currency translation adjustments are recorded in Accumulated Other Comprehensive Income, as a component of Share Owners' Equity. Financial statements of Mexico and Thailand operations are translated into U.S. dollars using both current and historical exchange rates, with translation gains and losses included in net income.
Inventories: Inventories are stated at the lower of cost or market value. Cost includes material, labor and applicable manufacturing overhead and is determined using the last-in, first-out (LIFO) method for approximately 45% and 51% of consolidated inventories in 2000 and 1999, respectively. Cost of the remaining inventories is determined using the first-in, first-out (FIFO) method.
Property, Equipment and Depreciation: Property and equipment are stated at cost. Depreciation is provided over the estimated useful life of the assets using the straight-line method for financial reporting purposes. Maintenance, repairs and minor renewals and betterments are expensed; major improvements are capitalized.
Research and Development: The costs of research and development are expensed as incurred. These costs were approximately, in millions, $13.5 in 2000, $11.6 in 1999, and $13.1 in 1998.
Medical Care and Disability Benefit Plans: The Company is self-insured with respect to certain medical care and disability benefit plans for approximately 75% of covered domestic employees. The Company carries stop-loss insurance coverage to mitigate severe losses under these plans. The balance of domestic employees are covered under fully insured HMO plans. The costs for such plans are charged against earnings in the year in which the incident occurred. The Company does not provide benefits under these plans to retired employees. Employees of foreign subsidiaries are covered by local benefit plans, the cost of which is not significant to the consolidated financial statements.
Income Taxes: Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. If remitted, the additional United States taxes paid would not be material.
Off-Balance Sheet Risk and Concentration of Credit Risk: The Company engages in financing arrangements with customers on a limited basis and has business and credit risks concentrated in the transportation, computer, telecommunications, consumer electronics and furniture industries. One customer, TRW, Inc., represented a significant portion of consolidated accounts receivable at June 30, 2000. The Company currently does not foresee a credit risk associated with these receivables.
Reclassifications: Certain prior year amounts have been reclassified to conform with the current year presentation.
Stock-Based Compensation: The Company continues to account for its employee stock option plans using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which results in no charge to earnings when options are issued at fair market value. The Company has adopted the disclosure requirements of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation.
New Accounting Standards: In 1998, the Financial Accounting Standards Board issued Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The Company currently engages in limited derivative activity and currently does not expect this new standard to have a material effect on the Company's financial condition or results of operations. This standard will be effective for the Company's fiscal year 2001.
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue 00-10 "Accounting for Shipping and Handling Fees and Costs." EITF Issue 00-10 requires that all amounts billed to a customer in a sale transaction for shipping and handling be classified as revenue. The EITF did not reach a consensus with respect to the classification of costs related to shipping and handling. The Company currently classifies most all shipping and handling revenues and costs, on a net basis, in selling and administrative expense. Accordingly, the Company has determined that EITF Issue 00-10 will require reclassification of shipping and handling revenues and costs, but does not believe EITF Issue 00-10 will impact its financial position or net income. The effective date of this standard is the fourth quarter of the Company's fiscal year 2001.
NOTE 2 ACQUISITIONS AND DISPOSITIONS
Acquisitions of Subsidiaries: In the second quarter of fiscal year 2000, the Company purchased Jackson of Danville, a privately held manufacturer of custom and in-line fully upholstered seating products and wood framed chairs. The acquisition was accounted for as a purchase with operating results included in the Company's Consolidated Statements of Income from the date of acquisition, and was financed with available cash on hand and the Company's Class B Common Stock. The acquisition price and operating results of this acquisition were not material to the Company's fiscal year 2000 consolidated financial position and operating results.
During fiscal year 1999, the Company completed a number of acquisitions related to its core competencies aimed at penetrating new markets and expanding existing markets. In the first quarter, the Company acquired the assets and assumed certain liabilities of Transwall, Inc., a privately held manufacturer of stackable panel office furniture systems and floor-to-ceiling products. In the third quarter, the Company acquired the assets and assumed certain liabilities of Southeast Millwork, a privately held manufacturer of store display fixtures. These acquisitions were accounted for as purchases with operating results included in the Company's Consolidated Statements of Income from the date of acquisition. The results of these acquisitions were not material to fiscal year 1999 consolidated financial position and operating results.
In the fourth quarter of fiscal year 1999, the Company purchased a manufacturing facility located in Juarez, Mexico. The Juarez facility produces projection television cabinets and will provide additional capacity for other manufacturing operations in the future.
Dispositions of Subsidiaries: The Company sold Kimball Furniture Reproductions, a furniture manufacturing facility located in Montgomery, Alabama, and ToolPro, a carbide cutting tools production operation located in Jasper, Indiana in the fourth quarter of fiscal year 1999. The sale of these subsidiaries generated a $2.7 million after-tax gain which is included in 1999 consolidated financial position and operating results.
NOTE 3 INVENTORIES
Inventories are valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 45% and 51% of consolidated inventories in 2000 and 1999, respectively, including approximately 80% and 85% of the Furniture and Cabinet Segment inventories in 2000 and 1999, respectively. The cost of Electronic Contract Assemblies Segment inventories and the remaining inventories in the Furniture and Cabinet Segment are valued using the lower of first-in, first-out (FIFO) cost or market value.
Had the FIFO method been used for all inventories, net income would have been $1.5 million higher in 2000, $0.2 million lower in 1999, and $0.6 million higher in 1998. Additionally, inventories would have been, in millions, $22.7 and $20.0 higher at June 30, 2000 and 1999, respectively, if the FIFO method had been used. During 2000 and 1999, certain inventory quantity reductions caused a liquidation of LIFO inventory values, which were immaterial.
NOTE 4 PROPERTY AND EQUIPMENT
NOTE 5 LEASE COMMITMENTS
Operating leases for certain office, showroom, warehouse and manufacturing facilities, land and equipment, which expire from fiscal year 2000 to 2030, contain provisions under which minimum annual lease payments are, in millions, $5.1, $4.6, $3.9, $3.0, and $1.5 for the five years ended June 30, 2005, respectively, and aggregate $1.8 million from 2005 to the expiration of the leases in 2030. The Company is obligated under certain real estate leases to maintain the properties and pay real estate taxes.
Total rental expenses amounted to, in millions, $7.4, $7.1, and $6.7 in 2000, 1999 and 1998, respectively.
NOTE 6 LONG-TERM DEBT AND CREDIT FACILITY
Long-term debt is principally obligations under long-term capitalized leases. Aggregate maturities of long-term debt for the next five years are, in thousands, $1,021, $850, $450, $907, and $37, respectively, and aggregate $355 thereafter. Interest rates range from 0% to 9.74%. Interest paid was immaterial in the three years ending June 30, 2000. Based upon borrowing rates currently available to the Company, the fair value of the Company's debt approximates the carrying value.
In fiscal year 1999, the Company established a five year revolving credit facility that provides for up to $100 million in borrowings. The Company uses this facility for acquisitions and general corporate purposes. A commitment fee is payable on the unused portion of the credit facility. The interest rate applicable to borrowings under the agreement is based on the London Interbank Offered Rate (LIBOR) plus a margin. The Company is in compliance with debt covenants requiring it to maintain certain debt-to-total capitalization, interest coverage ratio, minimum net worth, and other terms and conditions. At June 30, 2000, the Company had $35.4 million of short-term borrowings outstanding under this facility. No debt was outstanding under this agreement at June 30, 1999.
NOTE 7 RETIREMENT PLANS
The Company has a trusteed defined contribution Retirement Plan in effect for substantially all domestic employees meeting the eligibility requirements. Company contributions are based on a percent of net income as defined in the plan; the percent of contribution is determined by the Board of Directors up to specific maximum limits. The plan includes a 401(k) feature, thereby permitting participants to make additional voluntary contributions on a pretax basis. Payments by the Company to the trusteed plan are vested and held for the sole benefit of participants. Total contributions to the Retirement Plans for 2000, 1999 and 1998 were approximately, in millions, $9.1, $10.8, and $10.1, respectively.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans. Annual expense and accumulated benefits of these foreign plans are not significant to the consolidated financial statements.
NOTE 8 STOCK OPTIONS
On August 11, 1987, the Board of Directors adopted the 1987 Stock Incentive Program, which was approved by the Company's Share Owners on October 13, 1987. Under this plan, 3,600,000 shares of Class B Common Stock were reserved for incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, and performance share awards available for grant to officers and other key employees of the Company, and to members of the Board of Directors who are not employees. This Stock Incentive Program expired in August 1997, with prior year grants expiring annually through July 2001.
On June 11, 1996, the Board of Directors adopted the 1996 Stock Incentive Program, which was approved by the Company's Share Owners on October 22, 1996. Under this plan, 4,200,000 shares of Class B Common Stock were reserved, in addition to the approximately 2 million remaining shares currently reserved under the 1987 plan, for incentive stock options, nonqualified stock options, stock appreciation rights, and performance share awards available for grant to officers and other key employees of the Company, and to members of the Board of Directors who are not employees. The 1996 Stock Incentive Program is a ten year plan. The number of employees participating in the program was 270 in fiscal year 2000 and 290 in fiscal years 1999 and 1998.
Stock options are priced at the fair market value of the stock at the date of grant. Options granted under the plans generally are exercisable from six months to two years after the date of grant and expire five to ten years after the date of grant. Stock options are forfeited when employment terminates, except in case of retirement, death or permanent disability.
There are 250,000 additional shares reserved for issuance under the Directors' Stock Compensation and Option Plan which is available to all members of the Board of Directors. Under terms of the plan, Directors electing to receive all, or a portion, of their fees in the form of Company stock will also be granted a number of stock options equal to 50% of the number of shares received for compensation of fees. Option prices and vesting are similar to those of the 1996 Stock Incentive Program. The plan is in effect through October 2006.
The Company adopted the disclosure requirements of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). The Company has elected to continue to follow the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations; accordingly, no compensation cost has been reflected in the financial statements for its incentive stock options. Had compensation cost for the Company's incentive stock options been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
The weighted average fair value at date of grant for options granted during the years ended June 30, 2000, 1999 and 1998 was $5.49, $3.72 and $4.84 per option, respectively.
The fair value of the options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility of 38.5% in 2000, 34.0% in 1999 and 31.7% in 1998; risk-free interest rates of 5.9% in 2000, 5.4% in 1999 and 6.2% in 1998; dividend yield of 3.9% in 2000, 3.7% in 1999 and 2.9% in 1998; and an expected life of 3.5 years for all years.
NOTE 9 INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation reserve is provided for deferred tax assets relating to foreign net operating losses and U.S. capital loss carryforward benefits, due to uncertainty surrounding the utilization of these deferred tax assets. Income tax benefits associated with the foreign net operating losses have no expiration period under current tax laws, while benefits associated with the U.S. capital loss carryforward all expire during the 2002 fiscal year.
Cash payments for income taxes, net of refunds, were in thousands, $29,826, $28,884 and $28,183 in 2000, 1999 and 1998, respectively.
NOTE 10 COMMON STOCK
On a fiscal year basis, shares of Class B Common Stock are entitled to an additional $.02 per share dividend more than the dividends paid on Class A Common Stock, provided that dividends are paid on the Company's Class A Common Stock. The owners of both Class A and Class B Common Stock are entitled to share pro-rata, irrespective of class, in the distribution of the Company's available assets upon dissolution.
Owners of Class B Common Stock are entitled to elect, as a class, one member of the Company's Board of Directors. In addition, owners of Class B Common Stock are entitled to full voting powers, as a class, with respect to any consolidation, merger, sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the Company's fixed assets, or dissolution of the Company. Otherwise, except as provided by statute with respect to certain amendments to the Articles of Incorporation, the owners of Class B Common Stock have no voting rights, and the entire voting power is vested in the Class A Common Stock, which has one vote per share. The Habig family owns directly or shares voting power in excess of 50% of the Class A Common Stock of Kimball International, Inc. The owner of a share of Class A Common Stock may, at their option, convert such share into one share of Class B Common Stock at any time.
If any dividends are not paid on shares of the Company's Class B Common Stock for a period of thirty-six consecutive months, or if at any time the number of shares of Class A Common Stock issued and outstanding is less than 15% of the total number of issued and outstanding shares of both Class A and Class B Common Stock, then all shares of Class B Common Stock shall automatically have the same rights and privileges as the Class A Common Stock, with full and equal voting rights and with equal rights to receive dividends as and if declared by the Board of Directors.
NOTE 11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
NOTE 12 SHORT-TERM INVESTMENTS
The Company's short-term investment portfolio consists of available-for-sale securities in fiscal year 2000 and both available-for-sale and held-to-maturity securities in fiscal year 1999. Fair values are estimated based upon the quoted market values of those, or similar instruments. Carrying costs reflect the original purchase price, with discounts and premiums amortized over the life of the security.
Available-for-sale securities are reported at fair value and consist primarily of government and municipal obligations with fair values and carrying costs of, in thousands, $79,366 and $79,852 at June 30, 2000, compared to $114,597, and $114,523 at June 30, 1999, respectively. Unrealized holding gains and losses at June 30, 2000 were, in thousands, $22 and ($508), compared to $277 and ($203) at June 30, 1999, respectively. All available-for-sale securities mature within a four year period.
Proceeds from sales of available-for-sale securities were, in thousands, $73,087 and $17,273 for the years ended June 30, 2000 and 1999, respectively. Gross realized gains and losses on the sale of available-for-sale securities at June 30, 2000 were, in thousands, $107 and ($283) respectively, compared to gross realized gains and losses of, in thousands, $172 and ($2) respectively, at June 30, 1999. The cost was determined on each individual security in computing the realized gain.
Held-to-maturity securities are reported at carrying cost and consist primarily of government obligations with fair value equal to carrying cost. The Company did not have any held-to-maturity securities at June 30, 2000. At June 30, 1999 held-to-maturity securities were, in thousands, $399. Unrealized holding gains and losses were immaterial at June 30, 1999.
NOTE 13 ACCRUED EXPENSES
NOTE 14 SEGMENT AND GEOGRAPHIC AREA INFORMATION
Effective for the year ended June 30, 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. The adoption of SFAS 131 requires the presentation of segment information which is consistent with information utilized by management for purposes of allocating resources and assessing performance. Management organizes the Company into segments based upon differences in products and services offered in each segment. The segments and their principal products and services are as follows:
The Furniture and Cabinets Segment manufactures furniture for the office, residential, lodging and healthcare industries and store display fixtures, all sold under the Company's family of brand names. Other products produced by the Furniture and Cabinets Segment on an original equipment manufacturer basis include store fixtures, television cabinets and stands, audio speaker systems, residential furniture and furniture components. Intersegment sales are insignificant.
The Electronic Contract Assemblies Segment is a global provider of design engineering, manufacturing, packaging and distribution of electronic assemblies, circuit boards, multi-chip modules and semiconductor components on a contract basis to customers in the transportation, industrial, telecommunications, computer, and medical industries. Intersegment sales are insignificant. Included in the Electronic Contract Assemblies Segment are sales to one customer totaling in millions, $205.0, $178.9 and $168.2 in 2000, 1999 and 1998, respectively, representing 17%, 16% and 16% of consolidated net sales.
The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" with additional explanation of segment allocations as follows. Corporate operating costs are allocated to the segments based on the extent to which each segment uses a centralized function, where practicable. However, certain common costs have been allocated among segments less precisely than would be required for stand alone financial information prepared in accordance with generally accepted accounting
principles. Unallocated corporate assets include cash and cash equivalents, short-term investments and other assets not allocated to segments.
The Company evaluates segment performance based upon several financial measures, although the two most common include economic profit, which incorporates a segment's cost of capital when evaluating financial performance, and net income. Pursuant to SFAS 131, net income is reported for each segment as it is the measure most consistent with the measurement principles used in the Company's consolidated financial statements.
Geographic Area
NOTE 15 EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, Earnings Per Share. Earnings per share are computed using the two-class common stock method due to the dividend preference of Class B Common Stock. Basic earnings per share are based on the weighted average number of shares outstanding during the period. Diluted earnings per share are based on the weighted average number of shares outstanding plus the assumed issuance of common shares for all potentially dilutive securities. Earnings per share of Class A and Class B Common Stock are as follows:
NOTE 16 COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income, which establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption had no impact on the Company's net income or Share Owners' Equity. Comprehensive income includes all changes in equity during a period except those resulting from investments by, and distributions to, Share Owners. Comprehensive income consists of net income and other comprehensive income, which includes the net change in unrealized gains and losses on securities, and foreign currency translation adjustments. The Company has elected to disclose comprehensive income in the Consolidated Statements of Share Owners' Equity. Accumulated balances of other comprehensive income are as follows:
Item 9.
Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
PART III
Item 10.
Item 10. - Directors and Executive Officers of the Registrant
Directors The information called for by this item with respect to Directors is incorporated by reference to the material contained in the Registrant's Proxy Statement for its annual meeting of Share Owners to be held October 17, 2000 under the captions - "Election of Directors"; "Information Concerning the Board of Directors and Committees"; and "Compensation of Executive Officers."
Executive Officers of the Registrant The information called for by this item with respect to Executive Officers of the Registrant is included at the end of Part I and is incorporated herein by reference.
Item 11.
Item 11. - Executive Compensation The information called for by this item is incorporated by reference to the material contained in the Registrant's Proxy Statement for its annual meeting of Share Owners to be held October 17, 2000 under the caption "Compensation of Executive Officers."
Item 12.
Item 12. - Security Ownership of Certain Beneficial Owners and Management The information called for by this item is incorporated by reference to the material contained in the Registrant's Proxy Statement for its annual meeting of Share Owners to be held October 17, 2000 under the caption "Share Ownership Information."
Item 13.
Item 13. - Certain Relationships and Related Transactions The information called for by this item is incorporated by reference to the material contained in the Registrant's Proxy Statement for its annual meeting of Share Owners to be held October 17, 2000 under the caption "Compensation Committee Interlocks and Insider Participation."
PART IV
3. Exhibits See the Exhibit Index on page 54 for a list of the exhibits filed or incorporated herein as a part of this report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of the 2000 fiscal year.
SIGNATURES
Pursuant to the requirements 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.
KIMBALL INTERNATIONAL, INC.
by Robert F. Schneider ROBERT F. SCHNEIDER Executive Vice President, Chief Financial Officer and Assistant Treasurer September 4, 2000
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:
Douglas A. Habig DOUGLAS A. HABIG Chief Executive Officer September 6, 2000
James C. Thyen JAMES C. THYEN President September 5, 2000
Robert F. Schneider ROBERT F. SCHNEIDER Executive Vice President, Chief Financial Officer and Assistant Treasurer September 4, 2000
Roy W. Templin ROY W. TEMPLIN Vice President, Finance Chief Accounting Officer September 5, 2000
Signature Signature
THOMAS L. HABIG* DOUGLAS A. HABIG* Director Director
JOHN B. HABIG* JAMES C. THYEN* Director Director
JOHN T. THYEN* JACK R. WENTWORTH* Director Director
GARY P. CRITSER* BRIAN K. HABIG* Director Director
CHRISTINE M. VUJOVICH* POLLY B. KAWALEK* Director Director
HARRY ("HANK") W. BOWMAN* Director
* The undersigned does hereby sign this document on my behalf pursuant to powers of attorney duly executed and filed with the Securities and Exchange Commission, all in the capacities as indicated:
Date
September 6, 2000 Ronald J. Thyen RONALD J. THYEN Director
September 8, 2000 Alan B. Graf, Jr. ALAN B. GRAF, JR. Director
Attorneys-In-Fact