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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT UNDER 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 Fiscal Year Ended May 30, 1998 Commission File No. 0-5813
Herman Miller, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-0837640
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
855 East Main Avenue
PO Box 302
Zeeland, Michigan 49464-0302
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (616) 654 3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Common Stock, $.20 Par Value
Section 12(g) of the Act: ----------------------------
(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 .
The aggregate market value of the voting stock held by "nonaffiliates" of the
registrant (for this purpose only, the affiliates of the registrant have been
assumed to be the executive officers and directors of the registrant and their
associates) as of August 3, 1998, was approximately $2,312,793,615 (based on
$27.50 per share which was the closing sale price in the over-the-counter market
as reported by NASDAQ).
The number of shares outstanding of the registrant's common stock, as of August
3, 1998: Common stock, $.20 par value--86,202,922 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on September 29, 1998, are incorporated into Part III of
this report.
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PART 1
Item 1 BUSINESS
(a) General Development of Business
The company is engaged primarily in the design, manufacture, and sale of office
systems, products, and services principally for offices and, to a lesser extent,
for healthcare facilities and other uses. Through research, the company seeks to
define and clarify customer needs and problems existing in its markets and to
design, through innovation where feasible, products and systems as solutions to
such problems.
Herman Miller, Inc., was incorporated in Michigan in 1905. One of the company's
major plants and its corporate offices are located at 855 East Main Avenue, PO
Box 302, Zeeland, Michigan, 49464-0302, and its telephone number is (616) 654
3000. Unless otherwise noted or indicated by the context, the term "company"
includes Herman Miller, Inc., its predecessors and subsidiaries.
(b) Financial Information About Industry Segments
A dominant portion (more than 90%) of the company's operations is in a single
industry segment--the design, manufacture, and sale of office furniture systems
and furniture, and related products and services. Accordingly, no separate
industry segment information is presented.
(c) Narrative Description of Business
The company's principal business consists of the research, design, development,
manufacture, and sale of office systems, products and services. Most of these
systems and products are coordinated in design so that they may be used both
together and interchangeably. The company's products and services are purchased
primarily for offices, and, to a lesser extent, healthcare facilities and other
uses.
The company is a leader in design and development of furniture and furniture
systems. This leadership is exemplified by the innovative concepts introduced by
the company in its modular systems known as Action Office, Q System, and
Ethospace. Action Office, the company's series of three freestanding office
partition and furnishing systems, is believed to be the first such system to be
introduced and nationally marketed and as such popularized the "open plan"
approach to office space utilization. Ethospace interiors is a system of movable
full- and partial-height walls, with panels and individual wall segments that
interchangeably attach to wall framework. It includes wall-attached work
surfaces and storage/display units, electrical distribution, lighting,
organizing tools, and freestanding components. The company also offers a broad
array of seating (including Aeron, Equa, Ergon, and Ambi office chairs), storage
(including Meridian filing products), and freestanding furniture products.
The company's products are marketed worldwide by its own sales staff. These
sales persons work with dealers, the design and architectural community, as well
as directly with end users. Seeking and strengthening the various distribution
channels within the marketplace is a major focus of the company. Independent
dealerships concentrate on the sale of Herman Miller products and a few
complementary product lines of other manufacturers. Approximately 74.8 percent
of the company's sales (in the fiscal year ended May 30, 1998) were made to or
through independent dealers. The remaining sales (25.2 percent) were made
directly to end-users, including federal,
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state, and local governments, and several major corporations, by either the
company's own sales staff or its owned dealer network, Coro.
The company's furniture systems, seating, storage, and freestanding furniture
products, and related services are used in (1) office/institution environments
including offices and related conference, lobby and lounge areas, and general
public areas including transportation terminals; (2) health/science environments
including hospitals and other healthcare facilities; (3) clinical, industrial,
and educational laboratories; and (4) other environments.
New Product and Industry Segment Information
During the past 12 months, the company has not made any public announcement of,
or otherwise made public information about, a new product or a new industry
segment which would require the investment of a material amount of the company's
assets or which would otherwise result in a material cost.
Raw Materials
The company's manufacturing materials are available from a significant number of
sources within the United States, Canada, Europe, and the Far East. To date, the
company has not experienced any difficulties in obtaining its raw materials. The
raw materials used are not unique to the industry nor are they rare.
Patents, Trademarks, Licenses, Etc.
The company has approximately 205 active United States utility patents on
various components used in its products and approximately 125 active United
States design patents. Many of the inventions covered by the United States
patents also have been patented in a number of foreign countries. Various
trademarks, including the name and style "Herman Miller," and the "Y" trademark,
are registered in the United States and many foreign countries. The company does
not believe that any material part of its business is dependent on the continued
availability of any one or all of its patents or trademarks, or that its
business would be materially adversely affected by the loss of any thereof,
except the "Herman Miller," "Action Office," "Aeron," "Ambi," "Ergon," "Equa,"
"Ethospace," "1:1," "Q" (and "Y") trademarks.
Seasonal Nature of Business
The company does not consider its business to be seasonal in nature.
Working Capital Practices
The company does not believe that it or the industry in general has any special
practices or special conditions affecting working capital items that are
significant for an understanding of the company's business.
Customer Base
No single dealer, excluding the company's owned dealer network, Coro, accounted
for more than 3.5 percent of the company's net sales in the fiscal year ended
May 30, 1998. For fiscal 1998, the largest single end-user customer accounted
for approximately 7.6 percent of the company's net sales with the 10 largest of
such customers accounting for approximately 16.6 percent of the
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company's sales. The company does not believe that its business is dependent on
any single or small number of customers, the loss of which would have a
materially adverse effect upon the company.
Backlog of Orders
As of May 30, 1998, the company's backlog of unfilled orders was $229.1 million.
At May 31, 1997, the company's backlog totaled $203.1 million. It is expected
that substantially all the orders forming the backlog at May 30, 1998, will be
filled during the current fiscal year. Many orders received by the company are
filled from existing raw material inventories and are reflected in the backlog
for only a short period while other orders specify delayed shipments and are
carried in the backlog for up to one year. Accordingly, the amount of the
backlog at any particular time is not necessarily indicative of the level of net
sales for a particular succeeding period.
Government Contracts
Other than standard price reduction and other provisions contained in contracts
with the United States government, the company does not believe that any
significant portion of its business is subject to material renegotiation of
profits or termination of contracts or subcontracts at the election of various
government entities.
Competition
All aspects of the company's business are highly competitive. The principal
methods of competition utilized by the company include design, product and
service quality, speed of delivery, and product pricing. The company believes
that it is the second largest publicly held office furniture manufacturer in the
United States. However, in several of the markets served by the company, it
competes with over 400 smaller companies and with several manufacturers that
have significantly greater resources and sales. Price competition remained
relatively stable in 1996 through 1998.
Research, Design and Development
One of the competitive strengths of the company is its research, design and
development programs. Accordingly, the company believes that its research and
design activities are of significant importance. Through research, the company
seeks to define and clarify customer needs and problems and to design, through
innovation where feasible, products and services as solutions to these customer
needs and problems. The company utilizes both internal and independent research
and design resources. Exclusive of royalty payments, approximately $29.0
million, $25.7 million, and $24.5 million was spent by the company on design and
research activities in 1998, 1997, and 1996, respectively. Royalties are paid to
designers of the company's products as the products are sold and are not
included in research and development costs as they are considered to be a
variable cost of the product.
Environmental Matters
The company does not believe, based on existing facts known to management, that
existing environmental laws and regulations have had or will have any material
effects upon the capital expenditures, earnings, or competitive position of the
company. Further, the company continues to rigorously reduce, recycle, and reuse
the solid wastes generated by its manufacturing processes. Its accomplishments
and these efforts have been widely recognized.
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Human Resources
The company considers another of its major competitive strengths to be its human
resources. The company stresses individual employee participation and
incentives, and believes that this emphasis has helped to attract and retain a
capable work force. The company has a human resources group to provide employee
recruitment, education and development, and compensation planning and
counseling. There have been no work stoppages or labor disputes in the company's
history, and its relations with its employees are considered good. Approximately
595 of the company's employees are represented by collective bargaining agents,
most of whom are employees of its Integrated Metal Technology, Inc., and Herman
Miller, Limited (U.K.) subsidiaries. As such, these subsidiaries are parties to
collective bargaining agreements with these employees.
As of May 30, 1998, the company employed 7,567 full-time and 357 part-time
employees, representing a 6.5 percent increase in full-time employees and a 12.6
percent increase in part-time employees compared with May 31, 1997. In addition
to its employee work force, the company uses purchased labor to meet uneven
demand in its manufacturing operations.
(d) Information About International Operations
The company's sales in international markets primarily are made to
office/institution customers. Foreign sales mostly consist of office furniture
products such as Ethospace and Action Office systems, seating, and storage
products. The company segments its internal operations into the following major
markets: Canada, Europe, Latin America, and the Asia/Pacific region. In certain
other foreign markets, the company's products are offered through licensing of
foreign manufacturers on a royalty basis.
At the present time, the company's products sold in international markets are
manufactured by wholly owned subsidiaries in the United States, United Kingdom,
and Mexico. Sales are made through wholly owned subsidiaries in Australia,
Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, and the United
Kingdom. The company's products are offered in the Middle East through dealers.
In several other countries, the company licenses manufacturing and selling
rights. Historically, these licensing arrangements have not required a
significant investment of funds or personnel by the company, and, in the
aggregate, have not produced material net income for the company.
Additional information with respect to operations by geographic area appears in
the note "Segment Information" of the Notes to Consolidated Financial Statements
set forth on page 42. Fluctuating exchange rates and factors beyond the control
of the company, such as tariff and foreign economic policies, may affect future
results of international operations.
Item 2 PROPERTIES
The company owns or leases facilities which are located throughout the United
States and several foreign countries, including Australia, Canada, France,
Germany, Italy, Japan, Mexico, and the United Kingdom. The location, square
footage, and use of the most significant facilities at May 30, 1998, were as
follows:
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Location
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Square
Owned Locations Footage Use
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Zeeland, Michigan 749,000 Manufacturing, Warehouse, and Office
Spring Lake, Michigan 921,700 Manufacturing, Warehouse, and Office
Holland, Michigan 355,000 Manufacturing, Distribution, and Warehouse
Rocklin, California 338,100 Manufacturing and Warehouse
Roswell, Georgia 227,000 Manufacturing and Warehouse
Holland, Michigan 216,700 Design Center
Holland, Michigan 200,000 Manufacturing and Warehouse
Grandville, Michigan 214,800 Manufacturing and Warehouse
Holland, Michigan 293,100 Manufacturing, Warehouse, and Office
Leased Locations
- ----------------
Zeeland, Michigan 306,100 Manufacturing, Warehouse, and Office
Chippenham, England, U.K. 168,900 Manufacturing and Warehouse
Stone Mountain, Georgia 84,500 Manufacturing and Warehouse
Mexico City, Mexico 59,400 Manufacturing, Warehouse, and Office
The company also maintains showrooms or sales offices near most major
metropolitan areas throughout North America, Europe, the Middle East,
Asia/Pacific, and South America. The company considers its existing facilities
to be in excellent condition, efficiently utilized, well suited, and adequate
for its design, production, distribution, and selling requirements.
Item 3 PENDING LEGAL PROCEEDINGS
The company, for a number of years, has sold various products to the United
States Government under General Services Administration (GSA) multiple award
schedule contracts. The GSA is permitted to audit the company's compliance with
the GSA contracts. As a result of its audits, the GSA has asserted a refund
claim under the 1982 contract for approximately $2.7 million and has other
contracts under audit review. Management has been notified that the GSA has
referred the 1988 contract to the Justice Department for consideration of a
potential civil False Claims Act case. Management disputes the audit result for
the 1982 contract and does not expect resolution of that matter to have a
material adverse effect on the company's consolidated financial statements.
Management does not have information that would indicate a substantive basis for
a civil False Claims Act case under the 1988 contract.
The company is also involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending will not materially affect the
company's consolidated financial statements.
Item 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended May 30, 1998.
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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to Executive Officers of the company is as follows:
Year Elected an Position with
Name Age Executive Officer the Company
James E. Christenson 51 1989 Executive Vice President, Legal Services, and Secretary
Andrew C. McGregor 48 1988 Executive Vice President, President, Herman Miller Choices
Gary S. Miller 48 1984 Executive Vice President, Product Services
David E. Nelson 68 1996 Chairman of the Board
Christopher A. Norman 50 1996 Executive Vice President, Information Services, and Chief
Information Officer
Michael A. Volkema 42 1995 President and Chief Executive Officer
Brian C. Walker 36 1996 Executive Vice President, Financial Services, Chief Financial
Officer, and Treasurer
Except as discussed in this paragraph, each of the named officers has served the
company in an executive capacity for more than five years. From February 1995 to
May 1995, Mr. Volkema was president and chief executive officer of Coro, Inc.,
and prior to May 1993 to September 1994, was president and chairman of the board
of Meridian, Inc. Mr. Nelson was vice president, customer support, at Asea Brown
Boveri. Prior to May 1993, to January 1998, Mr. Norman was the president of
Miller SQA. Mr. Walker was the vice president of finance for Herman Miller,
Inc., from May 1995 to March 1996, vice president of finance and management
information systems of Milcare, Inc., from July 1994 to May 1995, and vice
president of finance for Herman Miller Europe from December 1991 to July 1994.
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PART II
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
SHARE PRICE, EARNINGS, AND DIVIDENDS SUMMARY
Herman Miller, Inc., common stock is quoted in the NASDAQ-National Market System
(NASDAQ-NMS Symbol: MLHR). As of August 3, 1998, there were approximately 29,000
shareholders of record of the company's common stock.
Per Share and Unaudited Market Market Market Earnings Dividends
Price Price Price Per Share- Per
High Low Close Diluted Share
YEAR ENDED MAY 30, 1998
First quarter 25.875 17.344 25.875 .30 .03625
Second quarter 28.406 22.000 25.375 .33 .03625
Third quarter 31.750 23.250 30.625 .36 .03625
Fourth quarter 35.563 26.030 27.688 .40 .03625
Year 35.563 17.344 27.688 1.39 .14500
YEAR ENDED MAY 31, 1997
First quarter 9.563 7.469 9.381 .16 .03250
Second quarter 11.875 9.250 11.750 .18 .03250
Third quarter 17.000 11.265 16.437 .14 .03250
Fourth quarter 18.657 14.437 17.875 .29 .03625
Year 18.657 7.469 17.875 .77 .13375
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Item 6 SELECTED FINANCIAL DATA
REVIEW OF OPERATIONS
(In Thousands, Except Per Share Data) 1998 1997 1996 1995 1994
OPERATING RESULTS
Net Sales $1,718,595 $1,495,885 $1,283,931 $1,083,050 $953,200
Gross Margin 638,839 533,924 434,946 378,269 337,138
Selling, General, and Administrative 396,698 359,601 316,024 303,621 245,189
Design and Research Expense 33,846 29,140 27,472 33,682 30,151
Operating Income 208,295 130,683 74,935 9,066 61,798
Income Before Income Taxes 209,531 125,883 70,096 4,039 63,473
Net Income 128,331 74,398 45,946 4,339 40,373
Cash Flow from Operating Activities 268,723 218,170 124,458 29,861 69,764
Depreciation and Amortization 50,748 47,985 45,009 39,732 33,207
Capital Expenditures 73,561 54,470 54,429 63,359 40,347
Common Stock Repurchased plus
Cash Dividends Paid 215,498 110,425 38,116 13,600 38,461
KEY RATIOS
Sales Growth 14.9 16.5 18.5 13.6 11.4
Gross Margin (1) 37.2 35.7 33.9 34.9 35.4
Selling, General, and Administrative (1) 23.1 24.0 24.6 28.0 25.7
Design & Research Expense (1) 2.0 1.9 2.1 3.1 3.2
Operating Income (1) 12.1 8.7 5.8 0.8 6.5
Net Income Growth 72.5 61.9 958.9 (89.3) 83.1
After-Tax Return on Net Sales 7.5 5.0 3.6 0.4 4.2
After-Tax Return on Average
Assets 16.7 10.3 6.8 0.7 7.9
After-Tax Return on Average
Equity 49.5 25.0 15.4 1.5 13.9
SHARE AND PER SHARE DATA (2)
Earnings per Share-Diluted $1.39 $0.77 $0.46 $0.04 $0.40
Cash Dividends Declared per Share 0.15 0.13 0.13 0.13 0.13
Book Value per Share at Year End 2.51 2.99 3.07 2.89 2.93
Market Price per Share at Year End 27.69 17.88 7.72 5.42 6.22
Weighted Average Shares Outstanding-
Diluted 92,039 96,124 100,515 99,168 101,020
FINANCIAL CONDITION
Total Assets $784,346 $755,587 $694,911 $659,012 $533,746
Working Capital 21,803 100,253 115,878 39,575 50,943
Current Ratio 1.06 1.35 1.53 1.15 1.29
Interest-Bearing Debt 130,655 127,369 131,710 144,188 70,017
Shareholders' Equity 231,002 287,062 308,145 286,915 296,325
Total Capital 361,657 414,431 439,855 431,103 366,342
Interest-Bearing Debt
to Total Capital 36.1 30.7 29.9 33.4 19.1
(1) Shown as a percent of net sales.
(2) Retroactively adjusted to reflect two-for-one stock splits occurring in 1998
and 1997.
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Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The issues discussed in management's discussion and analysis should be read in
conjunction with the company's consolidated financial statements and the notes
to the consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of operations,
as well as other sections of our Annual Report, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, that are
based on management's beliefs, assumptions, current expectations, estimates, and
projections about the office furniture industry, the economy, and about the
company itself. Words such as "anticipates," "believes," "confident,"
"estimates," "expects," "forecasts," "likely," "plans," "projects," "should,"
variations of such words, and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions that are
difficult to predict with regard to timing, extent, likelihood, and degree of
occurrence. Therefore, actual results and outcomes may materially differ from
what may be expressed or forecasted in such forward-looking statements.
Furthermore, Herman Miller, Inc., undertakes no obligation to update, amend, or
clarify forward-looking statements, whether as a result of new information,
future events, or otherwise.
(graph)
EARNINGS PER SHARE
in dollars
1994 $0.40
1995 $0.04
1996 $0.46
1997 $0.77
1998 $1.39
OVERVIEW
Let us begin our overview by stating that we had another record-setting year at
Herman Miller, Inc. We set records in "Economic Value Added" (EVA), net sales,
new orders, net income, earnings per share, cash flow from operating activities,
and cash returned to shareholders.
If you have been following our company for the past few years, you will remember
that two years ago we adopted EVA as our measurement tool to determine whether
or not we had created value for both our external shareholders and our
employee-owners. Extensive independent market research has shown that EVA more
closely correlates with shareholder value than any other performance measure.
Simply put, EVA is what remains of profits after tax once a charge for the
capital employed in the business is deducted. As an operating discipline, the
main advantage of EVA is that it focuses management's attention on the balance
sheet as well as on the income statement. Our company is, in effect, competing
for scarce capital resources. Management's task is to put this scarce resource
to work and earn the best possible return for our shareholders. This means
investing in projects that earn a return greater than the cost of the funds
sourced from our investors. As long as we are
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making investments that earn a return higher than the cost of capital, then our
investors should earn a return in excess of their expectations.
(graph)
EVA
in millions of dollars
1994 ($1.0)
1995 ($13.4)
1996 $10.3
1997 $40.9
1998 $78.4
We took EVA a step further by linking our incentive-based compensation to it.
All of our executive incentive compensation plans as well as all of our employee
gain-sharing programs at each of the business units have been linked to this
measure. Using EVA-based plans shifts the focus from budget performance to
long-term continuous improvements in shareholder value. The EVA target is raised
each year by an improvement factor, so that increasingly higher EVA targets must
be attained in order to earn the same level of incentive pay. Our Board of
Directors has set the EVA improvement factor for a period of three years.
This year, we decided to present our results to you by discussing what changes
in our business have driven our EVA improvement. We believe this is important
because EVA is utilized not only to measure our results, but also to evaluate
potential business opportunities. In addition, we hope you will get a clearer
picture of what will drive future improvements in both net income and in EVA and
ultimately the value of your investment in our company. Let's begin by reviewing
our EVA results.
CALCULATION OF ECONOMIC VALUE ADDED
(In Thousands) 1998 1997 1996
Operating income $208,295 $130,683 $74,935
Adjust for:
Divestiture/patent litigation -- 14,500 16,535
Interest expense on noncapitalized leases(1) 4,166 4,509 4,316
Goodwill amortization 6,161 4,725 4,115
Other 13,765 5,093 3,071
Increase in reserves 1,290 18,649 6,548
Capitalized design and research 2,101 2,819 1,984
----- ----- -----
Adjusted operating profit 235,778 180,978 111,504
Cash taxes(2) (90,703) (72,091) (34,561)
------ ------ ------
Net operating profit after taxes (NOPAT) 145,075 108,887 76,943
Weighted-average capital employed(3) 606,018 617,727 605,438
Weighted-average cost of capital(4) 11% 11% 11%
----- ------ -----
Cost of capital 66,662 67,950 66,598
------ ------ ------
Economic value added $78,413 $40,937 $10,345
------ ------ ------
(1) Imputed interest as if the total noncancelable lease payments were
capitalized.
(2) The reported current tax provision is adjusted for the
statutory tax impact of interest expense.
(3) Total assets less noninterest bearing liabilities plus the LIFO, doubtful
accounts and notes receivable reserves, warranty reserve, amortized
goodwill, loss on sale of the German
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manufacturing operation, patent litigation settlement costs, deferred
taxes, restructuring costs, and capitalized design and research expense.
Design and research is capitalized and amortized over 5 years.
(4) Management's estimate of the weighted average of the minimum equity and
debt returns required by the providers of capital.
As you can see, we generated $78.4 million of EVA this year, compared to $40.9
million last year, and just $10.3 million in 1996. In 1998, our EVA increased
91.5 percent after increasing nearly 300 percent in 1997. Let's take a look at
the drivers behind this improvement.
KEY DRIVERS
NET SALES One of our key goals is to increase net sales by 15 percent per annum.
We know that we will not achieve this goal in each and every year. But we intend
to develop strategies which, in the long run, are designed to enable us to meet
or to exceed this goal. In the current year, we missed that goal by a very small
margin. In 1998, net sales increased 14.9 percent to a record $1.72 billion. We
exceeded the goal in both of the prior two years with increases of 16.5 percent
and 18.5 percent, respectively. Of course, growth is only good if it is
profitable growth. As you will read later in this document, not only did we
increase our top line, we improved our operating margin on every dollar of
sales. In 1998, the increase in net sales of $222.7 million contributed
approximately $16.3 million to EVA and net income, which represents
approximately 44 percent of the increase in EVA from 1997.
(graph)
NET SALES
in millions of dollars
1994 $953.2
1995 $1,083.1
1996 $1,283.9
1997 $1,495.9
1998 $1,718.6
DOMESTIC OPERATIONS The United States office furniture industry has experienced
very strong demand over the past two years. The Business and Institutional
Furniture Manufacturers Association (BIFMA) reported that United States sales
grew approximately 12.5 percent in the twelve months ended May 1998 after
increasing 10.7 percent in 1997, and 4.8 percent in 1996. As we explained last
year, we believe that the strong demand has been driven by secular changes
affecting work environments. The primary drivers were new and emerging work
styles, the rapid deployment of technology, and the fast-growing population of
knowledge workers. Because of these drivers, companies have been completely
rethinking their approach to providing work environments for their employees. In
addition, the favorable economic climate and healthy corporate profits in the
U.S. have enabled companies to reinvest in their infrastructure.
We believe these secular changes will continue to drive industry dynamics for
the foreseeable future. This should enable the industry to grow at a higher rate
than the general economy. However, industry growth rates are expected to decline
from the very fast pace of the past two years. BIFMA is currently estimating
that industry sales will increase 8 percent in calendar 1998 and 6 percent for
calendar 1999, or approximately 7 percent for our fiscal year 1999. This is
somewhat less than had been previously predicted. While our domestic sales
continued to grow at a very rapid rate during our fourth quarter of 1998,
industry growth rates for the same period were
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significantly less than those experienced during the previous two years. Our
ability to continue to grow at a multiple of the industry will depend on a
variety of factors.
In 1998, our domestic sales increased by 16.7 percent, compared to 19.2 percent
in 1997, and 16.7 percent in 1996. Given that our growth has exceeded the
industry's growth, we believe we have gained market share in each of the past
three fiscal years. Our domestic growth has been primarily driven by unit volume
increases during the past three years. We have not materially changed list
prices during the past three years and discounts have remained relatively stable
during the past two years, after a slight increase in 1996. Individually, none
of our acquisitions were material. Excluding acquisitions, our domestic sales
increased 15.9 percent in 1998, 16.4 percent in 1997, and 13.7 percent in 1996.
These growth statistics are nice, but what has enabled us to grow faster than
our competition? The five key factors that have enabled us (and should continue
to allow us to increase our share of the domestic market) are an industry trend
of consolidation, our capability to serve two focused customer segments,
development of a service business, an expanded product offering, and new
channels created to reach out to customers not previously served by us.
Over the past 11 years, the combined market share of the five largest domestic
manufacturers increased from 41 percent to 59 percent. This trend has been the
result both of acquisitions and internal growth. We have benefited from this
trend as our market share has increased significantly over this time period. We
believe the trend reflects our customers' desire to do business with companies
that can supply a broad range of value-creating products and services.
We understand that the key to our success with customers who have more complex
needs lies in our ability to develop and maintain effective, long-term
relationships with them. Such customers typically ask us to provide bundled
solutions--products and services--that are both comprehensive and tailored to
their needs. In response, our standard product offering is being expanded, as is
our ability to cost-effectively design, specify, and manufacture custom
products. Design and installation services traditionally provided by dealerships
continue to be a mainstay; to these we are adding speciality services focused on
helping customers manage their own work environments and furniture assets. To
support this growing demand, we have begun to develop a strong, national network
of service providers and managers through the recent acquisition of several
privately owned dealerships and the training and certification of other,
affiliated dealers.
While the development of our service capability will enable us to sell more of
our products, we also believe this will enable us to expand our potential market
beyond our traditional hardware focus. The industry does not track or report the
size of the market for services. However, based on internal estimates, we
believe the domestic market for services is approximately the same size as the
$11.4 billion product market.
Herman Miller has always stood for great design and innovation and it still
does. Design and innovation will continue to be a key component of our strategy
to expand our product offering. Our success in developing breakthrough products
is unquestioned and is demonstrated by the recent success of our award-winning
Aeron and Ambi seating lines. In the future, we will continue to focus our
internal resources on the design and development of products in the systems,
seating, and filing and storage categories. We will pursue OEM relationships,
alliances, and acquisitions to expand our product offering in other segments of
the market. In June of 1998, we made a significant step toward the
implementation of this strategy with the largest introduction of new products in
our company's history. The introductions included products which removed gaps in
our offering, such as tables and desking, as well as breakthrough designs. In
the end, three of our
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introductions won gold awards for best new products in their market segment,
including an award for the most innovative product at NeoCon.
(graph)
DOMESTIC SALES GROWTH
as a percent
BIFMA Herman Miller
1994 6.9% 10.6%
1995 9.2% 10.1%
1996 4.8% 16.7%
1997 10.7% 19.2%
1998 12.5% 16.7%
Our Miller SQA (SQA stands for simple, quick, and affordable) business unit is
focused on our effort to serve customers who value speed and convenience. These
customers tend to be small, emerging companies, and in the past, this was a
market segment that we did not target. We believe the new products developed for
this segment, including Q System and Limerick seating, coupled with our
electronic selling platform, are enabling us to better reach and service these
customers.
Last, we intend to develop new channels for reaching out to customers we have
not previously served. Our most recent effort has been the introduction of the
Herman Miller internet store. We believe this new channel will enable us to more
effectively reach out to the growing number of home-office users.
INTERNATIONAL OPERATIONS AND EXPORTS FROM THE UNITED STATES During the past
couple of years, one of management's key objectives has been to establish and
execute an action plan to improve the profitability of our international
business. To date, execution of this plan can be seen in the turnaround effort
in Mexico, the sale of our German manufacturing operation in 1997, and the
realignment of our Italian operation in 1998. We are not finished yet but
believe our results show that progress is being made.
In 1998, sales from international operations and exports from the United States
increased 6.2 percent. The year-over-year growth in sales was primarily due to
strong growth in the United Kingdom, Canada, and Mexico. Each of these regions
had very good demand for products and made significant contributions to our
improved international results. We have, however, felt the impact of the weak
Asian economy with softening demand for our products in that region. The
weakness in Asia, combined with the absence of large projects in other regions,
resulted in a decrease of 6.7 percent in international sales in the fourth
quarter of 1998. Keep in mind that our international business is very sensitive
to large projects. In the fourth quarter of 1997, we had two very large projects
which made the comparison unusually difficult.
The sales growth in 1998 and the prior year (4.6 percent) reflect increased unit
volume growth. Fiscal 1996 sales growth (27.3 percent) was partially
attributable to unit volume growth, but was impacted by acquisitions. Excluding
the acquisitions, unit volume growth was 9.2 percent in that year.
More importantly, our international operations continued to show improvements in
earnings. Earnings have increased from a loss in 1996 of $8.0 million, to income
of $1.3 million (excluding the sale of our German manufacturing operation) in
1997, to income of $11.2 million in 1998. Starting with the fourth quarter of
fiscal 1997, we have had five consecutive quarters of operating
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profits in our international business. While we are not generating positive EVA
in our international operations, we are pleased with the progress we have made
over the past two years. The improvement in 1998 reflects the higher sales
volume levels in Canada and the United Kingdom and the sale of the German
manufacturing operation. This followed a year of substantial improvements in our
Mexican operation.
(graph)
INTERNATIONAL NET SALES
in millions of dollars
1994 $141.0
1995 $188.6
1996 $240.1
1997 $251.2
1998 $266.7
In the fourth quarter of fiscal 1997, due to continued losses, we engaged
external consultants to perform a stringent review of the operational costs and
processes of our Italian operations. Their work led to a reduction of our
Italian workforce and the outsourcing of nonvalue-adding activities in the third
quarter of 1998. This realignment did not result in any significant charges to
income or EVA. While we have not yet benefited from this action, we expect to
see improvements in our Italian operations in fiscal 1999.
In the fourth quarter of 1997, we sold our German manufacturing operation to an
independent third party. The sale resulted in a pretax loss of $14.5 million
($10.4 million, or $.11 per diluted share after tax).
In 1996, our loss from international operations included pretax charges for the
discontinuation of two product lines in Europe ($1.6 million) and provisions for
unrealizable barter receivables in Mexico ($2.5 million). In addition, a charge
of approximately $1.0 million was recorded to reserve for deferred tax assets
associated with our Mexican operations.
GROSS MARGIN During 1998, we achieved our second consecutive year of improved
gross margin. Gross margin, as a percent of sales, increased to 37.2 percent for
the year, compared to 35.7 percent in the prior year, and 33.9 percent in 1996.
This improvement contributed approximately $13.5 million to EVA and net income
in the current year.
Historically, one of our weaknesses was manufacturing operations, not due to
lack of good people, but due to lack of focus. This began to change in 1995,
when we performed an assessment of our manufacturing and distribution capacity
and processes. This assessment led to the decision to reengineer certain
manufacturing processes, to change our logistics operations, and to close
nonvalue-adding facilities. These efforts resulted in increased throughput,
decreased fixed and semifixed manufacturing costs, and, ultimately, increased
levels of gross margin.
Additionally, the gross margin improvements in both 1998 and 1997 were
attributable to a more favorable product mix, value enhancement engineering
projects in our domestic activities, and, to a lesser extent, improvements in
Mexico and Germany. Gross margins in 1996 were comparable to the second half of
1995. Cost benefits from the manufacturing and logistics changes were offset by
additional price discounts given to customers. The manufacturing improvements
were also a primary driver of a reduction in our days sales outstanding in the
sum of
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accounts receivable and inventory. At the end of 1998, this statistic had
improved to 56.2 days, compared to 63.3 days and 75.6 days at the end of 1997
and 1996, respectively.
(graph)
GROSS MARGIN
as a percent of net sales
1994 35.4%
1995 34.9%
1996 33.9%
1997 35.7%
1998 37.2%
During the past three years, we have begun to introduce lean manufacturing
techniques into our operations. These techniques are a process of continuous
improvement that focuses on the elimination of waste in all aspects of our
business. We are in the very early stages of this work. Therefore, the benefits
derived to date have not been significant. We are also in the process of
implementing a new Enterprise Resource Planning (ERP) system in most of our U.S.
operations. Internally, we refer to this as Project Renaissance. In total, we
will spend over $80 million on this project. As part of this project, we are
reengineering most of our operating processes. In the long run, we believe the
implementation of Project Renaissance, coupled with the implementation of lean
manufacturing techniques will improve our quality, reduce lead-times and the
cost of producing product, and improve our usage of both fixed assets and
working capital. We are very confident of the long-term benefits we expect from
both of these initiatives. However, we need to be realistic about the risks.
Many companies are negatively impacted by disruptions during the implementation
phase of projects like Renaissance. We are taking reasonable precautions to
avoid disruptions, but it is important to consider the risks. In the end,
assuming no significant change in competitive pricing, we believe that gross
margins should remain at approximately the same level as we have experienced
over the past two years.
OPERATING EXPENSES At the beginning of 1996, we set a goal to reduce operating
expenses as a percent of net sales to 25.0 percent by the end of 1998. Our
definition of operating expenses was selling, general, administrative, and
research and design expenses. This goal may not sound aggressive today, but we
had just completed a year in which these costs had ballooned to 30.0 percent. We
are proud to state that we reached our goal in the fourth quarter of 1998 with
operating expenses of 24.3 percent of net sales and narrowly missed the target
for the whole year with annual operating expenses of 25.1 percent. This compares
to 26.0 percent and 26.7 percent in 1997 and 1996, respectively. Over the next
three years, our goal is to further reduce operating expenses as a percent of
sales to 23.0 percent.
(graph)
OPERATING EXPENSES
as a percent of net sales
1994 28.8%
1995 30.0%
1996 26.7%
1997 26.0%
1998 25.1%
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Much of the improvement in 1998 stems from our ability to contain costs while
redeploying resources, both people and dollars, to our strategic priorities. The
improvement in operating expenses contributed approximately $8.1 million to EVA
and net income in the current year.
Selling, general, and administrative expenses, including design and research
expenses, increased $41.8 million to $430.5 million in 1998. The increase is
primarily due to investments in and maintenance of information systems, an
average 4.0 percent year-over-year increase in compensation and benefits,
increases in compensation plans that vary with sales and EVA, and acquisitions.
Research and development costs, excluding royalty payments, were $29.0 million
in 1998, compared to $25.7 million in 1997 and $24.5 million in 1996. Royalty
payments made to designers of the company's products as the products are sold
are not included in research and development costs, since they are considered to
be a variable cost of the product. As a percentage of net sales, research and
development costs were 1.7 percent in 1998, 1.7 percent in 1997, and 1.9 percent
in 1996. As discussed earlier, new product design and development has been, and
continues to be, a key business strategy. The increased expenditures in 1998 are
directly related to the increased number of new products introduced in June of
1998.
OPERATING INCOME The combination of improved gross margins and lower operating
expenses has resulted in significant improvements in operating income. As a
percent of sales, operating income improved to 12.1 percent in 1998, after
improving to 9.7 percent in 1997, and 7.1 percent in 1996. The 1997 and 1996
amounts exclude the charges for the sale of our German manufacturing operation
and the patent litigation settlement, respectively. The 12.1 percent recorded in
1998 was the highest reported for a fiscal year in over five years.
(graph)
OPERATING INCOME
as a percent of net sales
1994 6.6%
1995 4.9%
1996 7.1%
1997 9.7%
1998 12.1%
INCOME TAXES The effective tax rate was 38.8 percent in 1998, compared to 40.9
percent and 34.5 percent in 1997 and 1996, respectively. The higher tax rates in
1998 and 1997 reflect the tax-law change effective in 1997 that reduced the
benefit of the Corporate Owned Life Insurance Program. Provisions were recorded
in 1997 and 1998 for the potential cost of unwinding this program.
The 1997 tax rate was also negatively impacted by the loss on the sale of the
German manufacturing operation, which provided a tax benefit that was lower than
our statutory rate.
The 1996 effective tax rate was lowered by the completion of a sale and
leaseback of our Roswell, Georgia, facility and by the sale of excess land to
our captive insurance company. The completion of these transactions resulted in
the recognition of certain deferred tax assets that were reserved for in
previous periods.
Management expects its effective tax rate for 1999 to be in the range of 37.0 to
39.0 percent.
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LIQUIDITY AND CAPITAL RESOURCES The table below shows certain key cash flow and
capital highlights:
(In Thousands) 1998 1997 1996
Cash and cash equivalents $115,316 $106,161 $57,053
Cash from operating activities $268,723 $218,170 $124,458
Days sales in accounts receivable and inventory 56.2 63.3 75.6
Capital expenditures $73,561 $54,470 $54,429
Interest-bearing debt to total capital 36.1% 30.7% 29.9%
EVA capital $543,789 $615,120 $605,438
NOPAT to EVA capital 26.7% 17.7% 12.7%
In 1998, we continued to improve the cash flow generated from operating
activities. This was primarily due to increased profitability and our ability to
better leverage working capital. As previously discussed, working capital from
accounts receivable and inventory improved 7.1 days in 1998. This improvement
translates to a reduction of capital of approximately $26.0 million or a
reduction in our capital charge, for EVA purposes, of approximately $2.9
million. We believe that the lean initiatives, combined with Project
Renaissance, should allow us to gain further improvements in working capital.
The 1998 capital expenditures were primarily for investments in Project
Renaissance, the development of our electronic selling platform, new products,
and machinery and equipment to improve operational performance and expand
capacity. At the end of the fiscal year, $10.3 million of capital was committed
for future expenditures.
We expect capital expenditures, net of redeployments, to increase to $125-$150
million in 1999. The largest expenditures planned in 1999 will be for the
continued implementation of Project Renaissance, our electronic selling
platform, and new products.
During 1996, we began to redeploy cash invested in nonproductive or nonessential
assets. We are currently in the process of selling the facilities and land at
our Grandville, Michigan, and Roswell, Georgia, sites. The net book value of
these sites is approximately $12.9 million, and we anticipate a selling price in
excess of current net book value. The Grandville site is no longer needed and
will not be replaced. The Georgia facility will be replaced by a new facility.
The facility will enable us to consolidate the operations currently performed on
our owned site with operations performed at two leased locations, thus lowering
our operating costs at this location.
(graph)
CASH FLOW FROM OPERATING ACTIVITIES
in millions of dollars
1994 $69.8
1995 $29.9
1996 $124.5
1997 $218.2
1998 $268.7
In 1998, we acquired three privately owned North American dealers as part of our
service strategy. These local service organizations were acquired for
approximately $4.1 million. We expect to invest between $15 million and $25
million in acquiring additional local and regional service operations in 1999.
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At the end of 1998, we continued to have a high level of cash and cash
equivalents. Frankly, we had more nonoperating cash than we would like. The high
level of cash was the result of better-than-expected improvements in working
capital, coupled with a reduced level of investment in capital expenditures and
acquisitions. We intend to utilize the cash to repurchase shares of the
company's stock, to fund acquisitions related to the service strategy, and to
fund future capital expenditures. If necessary, we have $100 million in
available committed credit facility and $50 million in informal credit lines.
We have established a target debt-to-capital structure with a
debt-to-total-capital ratio of 30 to 35 percent. Cash in excess of requirements
for capital expenditures, acquisitions, and dividends will be used to fund the
purchase of the company's common stock subject to market conditions. Due to the
large amount of company stock repurchased during 1998, our debt-to-capital ratio
exceeded our target and was 36.1 percent at May 1998. In the future, we expect
to remain at the upper end of our target range.
COMMON STOCK TRANSACTIONS
(In Thousands, Except Per Share Data) 1998 1997 1996
Shares acquired 5,222,361 2,765,984 860,395
Cost of shares acquired $201,982 $97,962 $25,101
Cost per share acquired $38.68 $35.42 $29.17
Shares issued 1,347,483 470,082 731,773
Cost per share issued $21.23 $28.13 $24.95
Cash dividends $13,361 $12,593 $12,999
Dividends per share $.15 $.13 $.13
The Board of Directors first authorized the company to repurchase its common
stock in 1984 and has periodically renewed its authorization. Management and the
Board of Directors believe the share repurchase program is an excellent means of
returning value to our shareholders and preventing dilution from
employee-ownership programs. During 1998, we repurchased 5,222,361 shares of
common stock for $202.0 million.
(graph)
TOTAL CASH RETURNED TO SHAREHOLDERS
in millions of dollars
1994 $38.5
1995 $13.6
1996 $38.1
1997 $110.4
1998 $215.5
On January 20, 1998, the Board of Directors approved a 2-for-1 stock split
effected in the form of a 100 percent dividend to shareholders of record on
February 27, 1998, payable on March 16, 1998. The distribution increased the
number of shares outstanding from 44,831,103 to 89,662,206. All appropriate
share and per share data, including stock plan information, are restated to
reflect the split.
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(graph)
TOTAL RETURN TO SHAREHOLDERS
as a percent
Herman Miller S&P500
1994 (0.90%) 4.25%
1995 (9.72%) 20.16%
1996 43.11% 28.55%
1997 133.33% 29.54%
1998 55.71% 30.61%
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, or in some cases even earlier, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
We understand the risk that this problem poses not only to our internal
operations, but also to our suppliers and dealers. Management has developed and
implemented an action plan to address internal Year 2000 issues and to ensure
that any key suppliers and dealers are also addressing the problem on a timely
basis. Through the end of 1998, $3.1 million has been spent on these issues. We
do not expect significant costs in fiscal 1999 related to Year 2000 compliance.
As discussed earlier, most of the domestic operations are implementing a new ERP
system. While this system would have corrected many Year 2000 issues, management
was not comfortable with its dependence on the implementation of this system to
correct the Year 2000 issues. Instead, we have insisted that existing internal
systems be modified for Year 2000 issues no later than early 1999. We know this
may result in some additional costs which have a very short life-cycle, but we
believe the risk of not taking prompt action is much higher than any duplicate
costs.
While we believe the modifications will be made on a timely basis and will not
have a material effect on the company's operating results, there is no guarantee
that the company, its suppliers, or dealers will be able to make all of the
modifications on a timely basis. This could have a material adverse effect on
the company's business, financial condition, and results of operations.
PATENT LITIGATION SETTLEMENT AND OTHER CONTINGENCIES
In 1992, Haworth, Inc., (Haworth) filed a lawsuit against the company, alleging
that the electrical systems used in creation of the company's products infringed
one or more of Haworth's patents. In 1996, the company and Haworth agreed to
terms of a settlement. We continue to believe, based upon written opinion of
counsel, that our products did not infringe Haworth's patents and we would, more
likely than not, have prevailed on the merits. However, based on the mounting
legal costs, distraction of management focus, and the uncertainty present in any
litigation, we concluded that settlement was in the best interest of our
shareholders. The settlement included a one-time cash payment of $44.0 million
in exchange for a complete release. The companies also exchanged limited
covenants not to sue with respect to certain existing and potential patent
designs. We simultaneously reached a settlement with one of our suppliers, who
agreed to pay the company $11.0 million and, over the next seven years, to
rebate a percentage of its sales to Herman Miller that are in excess of then
current levels. These rebates are recorded when earned. Accordingly, we recorded
a net litigation settlement expense of $16.5 million after applying previously
recorded reserves and the settlement with the supplier.
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The company for a number of years has sold various products to the United States
Government under General Services Administration (GSA) multiple award schedule
contracts. The GSA is permitted to audit the company's compliance with the GSA
contracts. As a result of its audits, the GSA has asserted a refund claim under
the 1982 contract for approximately $2.7 million and has other contracts under
audit review. Management has been notified that the GSA has referred the 1988
contract to the Justice Department for consideration of a potential civil False
Claims Act case. Management disputes the audit result for the 1982 contract and
does not expect resolution of the matter to have a material adverse effect on
the company's consolidated financial statements. Management does not have
information that would indicate a substantive basis for a civil False Claims Act
case under the 1988 contract.
We are not aware of any other litigation or threatened litigation that would
have a material impact on the company's consolidated financial statements.
CONCLUSION
In conclusion, we have shared with you the key elements of our strategy,
including how we intend to increase our market opportunity and improve our
operational performance. Each of these elements played a key role in our EVA and
net income improvement over the past three years and, we believe, will continue
to enable us to improve EVA and net income and provide superior returns to our
shareholders in the future. We also hope you have gained some insight into the
risks and challenges we face.
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Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for fiscal year 1998 because the company's market capitalization
was less than $2.5 billion as of January 28, 1997.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA
Summary of the quarterly operating results on a consolidated basis:
May 30, 1998; May 31, 1997; June 1, 1996 First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
1998 Net sales $401,545 $415,086 $436,708 $465,256
Gross margin 147,001 151,643 164,896 175,299
Net income(1) 27,807 30,446 32,639 37,439
Earnings per share-diluted(1) $.30 $.33 $.36 $.40
1997 Net sales $342,484 $377,137 $365,060 $411,204
Gross margin 118,272 134,300 131,933 149,419
Net income 15,586 17,852 13,535 27,425
Earnings per share-diluted $.16 $.18 $.14 $.29
1996 Net sales $301,088 $328,393 $312,915 $341,535
Gross margin 102,879 112,653 103,415 115,999
Net income 12,014 4,955 11,900 17,077
Earnings per share-diluted $.12 $.05 $.12 $.17
(1) Amounts have been restated for the adoption of Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."
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CONSOLIDATED STATEMENTS OF INCOME
May 30, 1998; May 31, 1997; June 1, 1996 1998 1997 1996
(In Thousands, Except Per Share Data)
NET SALES $1,718,595 $1,495,885 $1,283,931
COST OF SALES 1,079,756 961,961 848,985
---------- ---------- ----------
GROSS MARGIN 638,839 533,924 434,946
---------- ---------- ----------
Operating Expenses:
Selling, general, and administrative 396,698 359,601 316,024
Design and research 33,846 29,140 27,472
Patent litigation settlement -- -- 16,515
Loss on divestiture -- 14,500 --
---------- ---------- ----------
TOTAL OPERATING EXPENSES 430,544 403,241 360,011
---------- ---------- ----------
OPERATING INCOME 208,295 130,683 74,935
---------- --------- ----------
Other Expenses:
Interest expense 8,300 8,843 7,910
Interest income (11,262) (8,926) (6,804)
Loss on foreign exchange 270 1,687 1,614
Other, net 1,456 3,196 2,119
---------- ---------- ----------
NET OTHER EXPENSES (1,236) 4,800 4,839
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 209,531 125,883 70,096
Income Taxes 81,200 51,485 24,150
---------- ---------- ----------
NET INCOME $ 128,331 $ 74,398 $ 45,946
---------- ---------- ----------
EARNINGS PER SHARE--BASIC $ 1.42 $ .79 $ .46
---------- ---------- ----------
EARNINGS PER SHARE--DILUTED $ 1.39 $ .77 $ .46
---------- ---------- ----------
The accompanying notes are an integral part of these statements.
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CONSOLIDATED BALANCE SHEETS
May 30, 1998, and May 31, 1997 1998 1997
(In Thousands, Except Share and Per Share Data)
ASSETS
Current Assets:
Cash and cash equivalents $115,316 $106,161
Accounts receivable, less allowances of $13,792 in 1998 and
$12,943 in 1997 192,384 179,242
Inventories 47,657 53,877
Prepaid expenses and other 44,778 46,584
-------- --------
TOTAL CURRENT ASSETS 400,135 385,864
-------- --------
Property and Equipment:
Land and improvements 27,279 26,936
Buildings and improvements 156,605 156,002
Machinery and equipment 364,817 346,653
Construction in progress 47,171 25,991
-------- --------
595,872 555,582
Less accumulated depreciation 305,208 290,355
-------- --------
NET PROPERTY AND EQUIPMENT 290,664 265,227
-------- --------
Notes Receivable, less allowances of $8,430 in 1998 and $8,489 in 1997 27,522 47,431
Other Assets 66,025 57,065
-------- --------
TOTAL ASSETS $784,346 $755,587
-------- --------
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Unfunded checks $35,241 $25,730
Current portion of long-term debt 10,203 173
Notes payable 19,542 17,109
Accounts payable 92,241 76,975
Accrued liabilities 221,105 165,624
-------- -------
TOTAL CURRENT LIABILITIES 378,332 285,611
Long-Term Debt, less current portion above 100,910 110,087
Other Liabilities 74,102 72,827
-------- -------
TOTAL LIABILITIES 553,344 468,525
-------- -------
Shareholders' Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued) -- --
Common stock, $.20 par value (120,000,000 shares authorized, 86,986,957
and 46,030,822 shares issued and outstanding in 1998 and 1997) 17,397 9,207
Additional paid-in capital -- --
Retained earnings 227,464 292,237
Cumulative translation adjustment (9,360) (10,863)
Key executive stock programs (4,499) (3,519)
TOTAL SHAREHOLDERS' EQUITY 231,002 287,062
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $784,346 $755,587
-------- --------
The accompanying notes are an integral part of these balance sheets.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Common Additional Retained Cumulative Key Exec. Total
Except Share and Stock Paid-In Earnings Translation Stock Shareholders'
Per Share Data) Capital Adjustment Programs Equity
BALANCE JUNE 3, 1995 $4,967 $21,564 $270,631 $(6,985) $(3,262) $286,915
Net income -- -- 45,946 -- -- 45,946
Cash dividends ($.130 per share) -- -- (12,999) -- -- (12,999)
Exercise of stock options 79 9,817 -- -- 31 9,927
Employee stock purchase plan 18 2,258 -- -- -- 2,276
Repurchase and retirement of
860,395 shares of common stock (172) (26,006) -- -- 1,077 (25,101)
Stock issued for acquisitions 43 6,425 -- -- -- 6,468
Stock grants earned (forfeited) (8) (639) -- -- 931 284
Stock grants issued 7 1,049 -- -- (1,467) (411)
Stock purchase assistance plan -- -- -- -- (512) (512)
Current year translation adjustment -- -- -- (4,648) -- (4,648)
------- ------- -------- -------- ------- --------
BALANCE JUNE 1, 1996 $4,934 $14,468 $303,578 $(11,633) $(3,202) $308,145
Net income -- -- 74,398 -- -- 74,398
Cash dividends ($.134 per share) -- -- (12,593) -- -- (12,593)
Exercise of stock options 63 9,049 -- -- -- 9,112
Employee stock purchase plan 14 2,637 -- -- -- 2,651
Repurchase and retirement of
2,765,984 shares of common stock (553) (29,374) (68,414) -- 379 (97,962)
Stock dividend 4,732 -- (4,732) -- -- --
Directors' fees 1 225 -- -- -- 226
Stock grants earned -- -- -- -- 387 387
Stock grants issued 16 2,995 -- -- (1,776) 1,235
Stock purchase assistance plan -- -- -- -- 693 693
Current year translation adjustment -- -- -- 770 -- 770
------- ----- -------- -------- ------- --------
BALANCE MAY 31, 1997 $9,207 $ -- $292,237 $(10,863) $(3,519) $287,062
Net income -- -- 128,331 -- -- 128,331
Cash dividends ($.145 per share) -- -- (13,361) -- -- (13,361)
Exercise of stock options 246 14,105 -- -- -- 14,351
Employee stock purchase plan 21 3,831 -- -- -- 3,852
Tax benefit relating to employee
stock plans -- 10,074 -- -- -- 10,074
Repurchase and retirement of
5,222,361 shares of common stock (1,044) (30,161) (170,777) -- -- (201,982)
Stock dividend 8,966 -- (8,966) -- -- --
Directors' fees 1 325 -- -- -- 326
Stock grants earned -- -- -- -- 718 718
Deferred compensation plan -- 1,826 -- -- (1,826) --
Stock purchase assistance plan -- -- -- -- 128 128
Current year translation adjustment -- -- -- 1,503 -- 1,503
------- ----- -------- ------- ------- --------
BALANCE MAY 30, 1998 $17,397 $ -- $227,464 $(9,360) $(4,499) $231,002
------- ---- -------- ------- ------- --------
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
May 30, 1998; May 31, 1997; and June 1, 1996 1998 1997 1996
(In Thousands)
Cash Flows from Operating Activities:
Net Income $128,331 $ 74,398 $ 45,946
-------- -------- --------
Adjustments to reconcile net income
to net cash provided by operating activities 140,392 143,772 78,512
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 268,723 218,170 124,458
-------- -------- --------
Cash Flows from Investing Activities:
Notes receivable repayments 561,923 449,405 455,973
Notes receivable issued (544,182) (460,956) (454,261)
Property and equipment additions (73,561) (54,470) (54,429)
Proceeds from sales of property and equipment 870 5,336 13,486
Net cash paid for acquisitions (4,076) (9,743) (5,101)
Other, net (7,102) 1,548 (212)
-------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES (66,128) (68,880) (44,544)
-------- -------- --------
Cash Flows from Financing Activities:
Short-term debt borrowings 192,808 236,627 517,862
Short-term debt repayments (189,619) (239,417) (579,613)
Long-term debt borrowings -- -- 270,985
Long-term debt repayments (7) (186) (222,772)
Dividends paid (13,516) (12,463) (13,015)
Common stock issued 18,529 11,989 12,203
Common stock repurchased and retired (201,982) (97,962) (25,101)
Capital lease obligation repayments (172) (116) (250)
-------- -------- --------
NET CASH USED FOR FINANCING ACTIVITIES (193,959) (101,528) (39,701)
-------- -------- --------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 519 1,346 352
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,155 49,108 40,565
-------- -------- --------
Cash and Cash Equivalents, Beginning of Year 106,161 57,053 16,488
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $115,316 $106,161 $ 57,053
-------- -------- --------
The accompanying notes are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The following is a summary of significant accounting and reporting policies not
reflected elsewhere in the accompanying financial statements.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Herman Miller, Inc., and its wholly owned domestic and foreign
subsidiaries (the company). All significant intercompany accounts and
transactions have been eliminated.
DESCRIPTION OF BUSINESS The company is engaged in the design, manufacturing, and
sale of office systems, products, and services principally for offices and, to a
lesser extent, for health care facilities and other uses. The company's products
are sold primarily to or through independent contract office furniture dealers.
Accordingly, accounts and notes receivable in the accompanying balance sheets
principally are amounts due from the dealers.
FISCAL YEAR The company's fiscal year ends on the Saturday closest to May 31.
The years ended May 30, 1998, May 31, 1997, and June 1, 1996, each contained 52
weeks.
FOREIGN CURRENCY TRANSLATION The functional currency for most foreign
subsidiaries is the local currency. The cumulative effects of translating the
balance sheet accounts from the functional currency into the United States
dollar at current exchange rates and revenue and expense accounts using average
exchange rates for the period are included as a separate component of
shareholders' equity. The United States dollar is used as the functional
currency for subsidiaries in highly inflationary foreign economies, and the
financial results are translated using a combination of current and historical
exchange rates, and the resulting translation adjustments are included along
with gains or losses arising from remeasuring all foreign currency transactions
into the appropriate currency in determining net income.
CASH EQUIVALENTS The company invests in certain debt and equity securities as
part of its cash management function. Due to the relative short-term maturities
and high liquidity of these securities (consisting primarily of Euro overnight
investments), they are included in the accompanying consolidated balance sheets
as cash equivalents at market value and totaled $67.3 million and $85.1 million
as of May 30, 1998, and May 31, 1997, respectively. The company's cash
equivalents are considered "available for sale." As of May 30, 1998, the market
value approximated the securities' cost. All cash and cash equivalents are
high-credit quality financial instruments, and the amount of credit exposure to
any one financial institution or instrument is limited.
PROPERTY, EQUIPMENT, AND DEPRECIATION Property and equipment are stated at cost.
The cost is depreciated over the estimated useful lives of the assets using the
straight-line method. The average useful lives of the assets are 32 years for
buildings and 7 years for all other property and equipment.
NOTES RECEIVABLE The notes receivable are primarily from certain independent
contract office furniture dealers. The notes are collateralized by the assets of
the dealers and bear interest based on the prevailing prime rate. Interest
income relating to these notes was $4.3, $4.8, and $3.9 million in 1998, 1997,
and 1996, respectively.
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LONG-LIVED ASSETS The company assesses the recoverability of its long-lived
assets whenever events or circumstances such as current and projected future
operating losses or changes in the business climate indicate that the carrying
amount may not be recoverable. Assets are grouped and evaluated at the lowest
level for which there are independent and identifiable cash flows. The company
considers historical performance and future estimated results in its evaluation
of potential impairment and then compares the carrying amount of the asset to
the estimated future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset. If the carrying amount of the
asset exceeds the expected future cash flows, the company measures and records
an impairment loss for the excess of the carrying value of the asset over its
fair value. The estimation of fair value is made by discounting the expected
future cash flows at the rate the company uses to evaluate similar potential
investments based on the best information available at that time. If the assets
being tested for recoverability were acquired in a purchase business
combination, the goodwill that arose in that transaction is included in the
asset group's carrying values on a pro-rata basis using the relative fair
values.
In situations where goodwill and intangible balances remain after applying the
impairment measurements to business unit asset groupings under Statement of
Financial Accounting Standards (SFAS) No. 121, the company assesses the
recoverability of the remaining balances at the enterprise level under the
provisions of APB Opinion 17. Applying these provisions, when the estimated
undiscounted future operating income (before interest and amortization) for
individual business units is not sufficient to recover the remaining carrying
value over the remaining amortization period, the company recognizes an
impairment loss for the excess.
Excluding the impairment incurred in connection with the divestiture of the
company's German manufacturing operation in 1997 (see Acquisitions and
Divestitures note), such provisions were not significant in 1998, 1997, or 1996.
Intangible assets included in other assets consist mainly of goodwill, patents,
and other acquired intangibles, and are carried at cost, less applicable
amortization of $16.0 and $12.1 million in 1998 and 1997, respectively. These
assets are amortized using the straight-line method over periods of 5 to 15
years.
UNFUNDED CHECKS As a result of maintaining a consolidated cash management
system, the company utilizes controlled disbursement bank accounts. These
accounts are funded as checks are presented for payment, not when checks are
issued. The resulting book overdraft position is included in current liabilities
as unfunded checks.
SELF-INSURANCE The company is partially self-insured for general liability,
workers' compensation, and certain employee health benefits. The general and
workers' compensation liabilities are managed through a wholly owned insurance
captive; the related liabilities are included in the accompanying financial
statements. The company's policy is to accrue amounts equal to the actuarially
determined liabilities. The actuarial valuations are based on historical
information along with certain assumptions about future events. Changes in
assumptions for such matters as legal actions, medical costs, and changes in
actual experience could cause these estimates to change in the near term.
RESEARCH, DEVELOPMENT, ADVERTISING, AND OTHER RELATED COSTS Research,
development, advertising materials, preproduction and start-up costs are
expensed as incurred. Research and development costs consist of expenditures
incurred during the course of planned search and investigation aimed at
discovery of new knowledge that will be useful in developing new products or
processes, or significantly enhancing existing products or production processes,
and the
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implementation of such through design, testing of product alternatives, or
construction of prototypes. Royalty payments made to designers of the company's
products as the products are sold are not included in research and development
costs, as they are considered to be a variable cost of the product. Research and
development costs, included in design and research expense in the accompanying
statements of income, were $29.0, $25.7, and $24.5 million in 1998, 1997, and
1996, respectively.
INCOME TAXES Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse.
REVENUE RECOGNITION Revenues are recorded when product is shipped and invoiced
or performance of services is complete.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NEW ACCOUNTING STANDARDS In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The company
adopted this SOP during the third quarter of fiscal 1998, retroactive to the
beginning of the fiscal year. The adoption of this SOP did not have a material
effect on the financial statements. The company is also in compliance with
Emerging Issues Task Force (EITF) Issue 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract that Combines Business Process
Reengineering and Information Technology Transformation."
Beginning in the third quarter of fiscal 1998, the company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This statement
establishes standards for computing and presenting "basic" and "diluted"
earnings per share (EPS). Basic EPS excludes the dilutive effect of common
shares that could potentially be issued (i.e., primarily stock options in the
case of Herman Miller) and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
is computed by dividing net income by the weighted-average number of shares
outstanding plus all shares that could potentially be issued. All prior period
EPS data has been restated to conform to this statement.
In fiscal 1998, the company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits." All information in the Employee Benefit Plans note has been presented
accordingly.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting
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criteria are met. Statement 133 is effective in fiscal year 2000. The company
has not yet determined the timing or method of adoption of Statement 133;
however, the Statement is not expected to have a material impact on the
company's consolidated financial statements.
ACQUISITIONS AND DIVESTITURES
During 1998, 1997, and 1996, the company made several acquisitions, all of which
were recorded using the purchase method of accounting. Accordingly, the purchase
price of these acquisitions has been allocated to the assets acquired and
liabilities assumed based on the estimated fair values at the date of the
acquisition. The cost of the acquisitions in excess of net identifiable assets
acquired has been recorded as goodwill.
During 1998, 1997, and 1996, the company purchased various privately owned North
American dealers. These companies were acquired for approximately $25.5 million.
The consideration included 212,662 shares of Herman Miller common stock and
approximately $19.0 million in cash, which resulted in approximately $16.0
million of goodwill. The results of the acquisitions were not material to the
company's consolidated operating results.
During the second quarter of fiscal 1997, declining sales and continuing losses
at the company's German subsidiary led the company, in accordance with its
accounting policies, to assess the realizability of the subsidiary's long-lived
assets. At that time, estimates of expected future cash flows under various
options to improve the company's operating results in Germany were evaluated to
determine if any potential impairment existed. Although none of the options was
developed to the extent required to enable the company to reach a decision and
plan for implementation, based on the results of its various evaluations of
potential impairment, the company determined at the enterprise level, the
goodwill and intangibles associated with the acquisition were no longer
recoverable. As a result, a pretax charge of $5.5 million ($4.5 million, or $.05
per share after tax) was recorded for the write-off of the goodwill and
brand-name assets of the subsidiary.
During the third quarter of fiscal 1997, management authorized and committed the
company to a plan to restructure the manufacturing component of its German
operations. Based on the most current information available at that time,
management believed that closing the facility was the most viable option. As a
result, the company recorded a pretax restructuring charge of $13.7 million
($5.4 million, or $.06 per share after tax).
During the fourth quarter of fiscal 1997, the company sold the German
manufacturing operations. The sale had the effect of reducing both the pretax
restructuring costs recorded in the third quarter by $4.7 million and the
anticipated tax benefit by $5.2 million.
In summary, after adjusting for the effects of the sale, the divestiture of the
company's investments in its German manufacturing operation resulted in a pretax
loss of $14.5 million ($10.4 million, or $.11 per share after tax) for fiscal
1997.
INVENTORIES
(In Thousands) 1998 1997
Finished products $19,807 $23,552
Work in process 8,844 8,074
Raw materials 19,006 22,251
------- -------
$47,657 $53,877
------- -------
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Inventories are valued at the lower of cost or market and include material,
labor, and overhead. The inventories of Herman Miller, Inc., are valued using
the last-in, first-out (LIFO) method. The inventories of the company's
subsidiaries are valued using the first-in, first-out method. Inventories valued
using the LIFO method amounted to $25.2 and $27.5 million at May 30, 1998, and
May 31, 1997, respectively.
If all inventories had been valued using the first-in, first-out method,
inventories would have been $13.6 and $15.6 million higher than reported at May
30, 1998, and May 31, 1997, respectively.
PREPAID EXPENSES AND OTHER
(In Thousands) 1998 1997
Current deferred income taxes $ 27,154 $26,382
Other 17,624 20,202
-------- ------
$44,778 $46,584
-------- ------
ACCRUED LIABILITIES
(In Thousands) 1998 1997
Compensation and employee benefits $110,684 $80,778
Income taxes 22,809 15,802
Other 87,612 69,044
-------- ------
$221,105 $165,624
OTHER LIABILITIES
(In Thousands) 1998 1997
Pension benefits $ 41,898 $25,319
Postretirement benefits 9,618 23,089
Other 22,586 24,419
-------- ------
$ 74,102 $72,827
-------- ------
NOTES PAYABLE
(In Thousands) 1998 1997
Non-U.S. dollar currencies $19,542 $17,109
The following information relates to short-term borrowings in 1998:
(In Thousands) Domestic Foreign
Weighted-average interest rate at May 30, 1998 -- 4.8%
Weighted-average interest rate at May 31, 1997 -- 6.4%
Weighted-average interest rate during 1998 -- 4.6%
Unused short-term credit lines $ 6,000 $ 44,824
In addition to the company's formal short-term credit lines shown
above, the company has available informal lines of credit totaling
$50.0 million.
LONG-TERM DEBT
(In Thousands) 1998 1997
Series A senior notes, 6.37%, due March 5, 2006 $ 70,000 $ 70,000
Series B senior notes, 6.08%, due March 5, 2001 15,000 15,000
Series C senior notes, 6.52%, due March 5, 2008 15,000 15,000
Finance lease obligation 10,000 10,000
Other 1,113 260
-------- --------
$111,113 $110,260
Less current portion 10,203 173
-------- --------
$100,910 $110,087
-------- --------
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During the third quarter of 1996, the company entered into a private placement
of $100.0 million of senior notes with seven insurance companies. The Series A,
B, and C notes have interest-only payments until March 5, 2000, March 5, 2001,
and March 5, 2004, respectively.
The company has available an unsecured revolving credit loan that provides for a
$100.0 million line of credit. The loan permits borrowings in multi-currencies
and matures on February 28, 2002. Outstanding borrowings bear interest, at the
option of the company, at rates based on the prime rate, certificates of
deposit, LIBOR, or negotiated rates. Interest is payable periodically throughout
the period a borrowing is outstanding. During 1998, the company borrowed at the
LIBOR contractual rate as other negotiated rates. During 1997, the company had
no borrowings.
Provisions of the senior notes and the unsecured senior revolving credit loan
restrict, without prior consent, the company's borrowings, long-term leases, and
sale of certain assets. In addition, the company has agreed to maintain certain
financial performance ratios. At May 30, 1998, the company was in compliance
with all of these provisions.
During May 1996, the company entered into an agreement for the sale and
leaseback of its Roswell, Georgia, facility. The company has an early buyout
option at the end of one-and-one-half years at an amount equal to approximately
103.03 percent of the lessor's cost. The company also has a purchase option at
the end of five years at an amount equal to the facility's then fair market
value. If the purchase option is not exercised, the lease automatically renews
for an additional 30 months. The company has guaranteed a residual value of 59.0
percent of the lessor's cost. The lease has been accounted for as a financing
lease in accordance with SFAS No. 98. The company is currently negotiating an
earlier buyout option with the lessor; therefore, the lease has been classified
as current. The book value and accumulated depreciation of the facility are
approximately $19.4 million and $11.8 million, respectively.
Annual maturities of long-term debt for the five years subsequent to May 30,
1998, (in millions) are as follows: 1999--$10.2; 2000--$10.1; 2001--$25.1;
2002--$10.1; 2003--$10.1; thereafter--$45.5.
OPERATING LEASES
The company leases real property and equipment under agreements that expire on
various dates. Certain leases contain renewal provisions and generally require
the company to pay utilities, insurance, taxes, and other operating expenses.
Future minimum rental payments (in millions) required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
as of May 30, 1998, are as follows: 1999--$14.7; 2000--$12.7; 2001--$9.9;
2002--$7.7; 2003--$5.9; thereafter--$10.2.
Total rental expense charged to operations was $20.4, $20.9, and $23.9 million
in 1998, 1997, and 1996, respectively. Substantially all such rental expense
represented the minimum rental payments under operating leases.
EMPLOYEE BENEFIT PLANS
The company maintains plans which provide retirement benefits for substantially
all employees.
PENSION PLANS The principal domestic plan is a noncontributory defined-benefit
pension plan. Benefits under this plan are based upon an employee's years of
service and the average earnings for the five highest consecutive years of
service during the 10 years immediately preceding
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retirement. Domestically, the company's policy is to fund its plan to the
maximum amount currently deductible for federal income tax purposes, which
equals or exceeds the minimum amount required by the Employee Retirement Income
Security Act.
In 1998, the Board of Directors approved the redesign of the company's domestic
benefit plans. The redesign will result in the conversion of the defined-benefit
pension plan from the existing benefit calculation to a cash-balance
calculation. As part of the redesign, the company will buy out the
postretirement healthcare obligation for active employees through a one-time,
lump-sum transfer contribution to the cash-balance plan.
The amendment converting the plan to the cash-balance formula was the primary
reason for the $43.9 million change in the projected benefit obligation.
In addition to the domestic pension plan and the retiree healthcare and life
insurance plan, one of Herman Miller, Inc.'s wholly owned foreign subsidiaries
has a defined-benefit pension plan which is similar to the principal domestic
plan. The plan has not been amended and is included in the following
information:
Pension Benefits Retirement Benefits
---------------- -------------------
1998 1997 1998 1997
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year $188,743 $158,125 $ 24,467 $ 22,237
Service cost 11,722 9,620 1,168 1,132
Interest cost 14,678 12,683 1,713 1,653
Transfer of obligations 15,822 -- (15,822) --
Actuarial effects of plan redesign (43,878) -- -- --
Actuarial (gain) loss 10,018 12,509 (480) 213
Benefits paid (4,387) (4,194) (721) (768)
Other 1,005 -- 62 --
-------- -------- -------- --------
Benefit obligations at end of year 193,723 188,743 10,387 24,467
-------- -------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of year 184,178 145,678 -- --
Actual return on plan assets 47,692 40,365 -- --
Employer contribution 9,085 2,329 721 768
Benefits paid (4,387) (4,194) (721) (768)
-------- -------- -------- --------
Fair value of plan assets at end of year 236,568 184,178 -- --
-------- -------- -------- --------
Funded status 42,845 (4,565) (10,387) (24,467)
Unrecognized transition amount (1,975) (2,506) -- --
Unrecognized net actuarial (gain) loss (38,651) (18,019) 769 2,359
Unrecognized prior service cost (44,117) (229) -- (981)
-------- -------- -------- --------
Prepaid (accrued) benefit cost (41,898) (25,319) (9,618) (23,089)
-------- -------- -------- --------
Weighted average assumptions
Discount rate 7.25% 7.50% 7.25% 7.50%
Expected return on plan assets 9.00% 7.50% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
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For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1999. The rate was
assumed to decrease gradually to 6.0 percent for 2001 and remain at that level
thereafter.
Pension Benefit Other Benefits
--------------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 11,722 $ 9,620 $8,688 $1,168 $1,132 $1,140
Interest cost 14,678 12,683 10,588 1,713 1,653 1,496
Expected return on plan assets (16,913) (11,008) (8,886) -- -- --
Amortization (532) (514) (224) (50) (44) (39)
Cost of early retirement incentive
program -- -- 479 -- -- --
-------- -------- ------- ------ ------- ------
Net periodic benefit cost $ 8,964 $ 10,781 $10,645 $2,831 $2,741 $2,597
-------- -------- ------- ------ ------- ------
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
healthcare cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
Increase Decrease
-------- --------
Effect on total of service and interest cost
components $ 68 $(85)
Effect on postretirement benefit obligation $306 $367
Plan assets consist primarily of listed common stocks, mutual funds, and
corporate obligations. Plan assets at May 30, 1998, and May 31, 1997,
respectively included 888,346 and 1,310,668 shares of Herman Miller, Inc.,
common stock.
PROFIT SHARING PLAN Herman Miller, Inc., and three of its subsidiaries have a
trusteed profit sharing plan that covers substantially all employees who have
completed one year of employment. The plan provides for discretionary
contributions (payable in the company's common stock) of not more than 6.0
percent of pretax income of the participating companies, or such other lesser
amounts as may be established by the Board of Directors. The cost of the plan
charged against operations was $8.1, $6.6, and $4.5 million in 1998, 1997, and
1996, respectively.
As part of the plan redesign, the profit sharing plan's discretionary
contributions were converted to an EVA-based calculation computed using the
company's consolidated results. In addition, participants will now be eligible
to begin participating at the beginning of the quarter following the date of
hire.
COMMON STOCK AND PER SHARE INFORMATION
On January 20, 1998, the Board of Directors approved a 2-for-1 stock split
effected in the form of a 100 percent dividend to shareholders of record on
February 27, 1998, payable on March 16, 1998. The distribution increased the
number of shares outstanding from 44,831,103 to 89,662,206. All share and per
share data, including stock plan information, are restated to reflect the split.
The
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Board of Directors also approved an increase in the cash dividend from $.03250
to $.03625 per share for shareholders of record on May 31, 1997.
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted EPS for each of the last three years:
(Dollars in Thousands) 1998 1997 1996
Numerators:
Numerators for both basic and diluted EPS,
net income $ 128,331 $ 74,398 $ 45,946
----------- ----------- ------------
Denominators:
Denominators for basic EPS,
weighted average common shares outstanding
90,240,102 94,627,772 100,006,240
Potentially dilutive shares resulting from
stock option plans 1,799,067 1,496,428 508,700
----------- ----------- -------------
Denominator for diluted EPS 92,039,169 96,124,200 100,514,940
----------- ----------- ------------
The following exercisable stock options were not included in the computation of
diluted EPS because the option prices were greater than average quarterly market
prices.
Exercise Price 1998 1997 1996
$32.50 132,368 -- --
STOCK PLANS
Under the terms of the company's 1987 Employee Stock Purchase Plan, 4.1 million
shares of authorized common stock were reserved for purchase by plan
participants at 85.0 percent of the market price. At May 30, 1998, 3,610,056
shares remained available for purchase through the plan, and there were 7,305
employees eligible to participate in the plan, of which 2,143 or 29.3 percent,
were participants. During 1998, 1997, and 1996, employees purchased 107,182;
71,213; and 89,222 shares, respectively.
The company has stock option plans under which options are granted to employees
and nonemployee officers and directors at a price not less than the market price
of the company's common stock on the date of grant. All options become
exercisable one year from date of grant and expire ten years from date of grant.
At May 30, 1998, there were 170 employees and 11 nonemployee officers and
directors eligible, all of whom were participants in the plans. At May 30, 1998,
there were 1,549,391 shares available for future options.
The company's Long-Term Incentive Plan, along with the Nonemployee Officer and
Director Stock Option Plan, authorize reload options. Reload options provide for
the purchase of shares equal to the number of shares delivered upon exercise of
the original options plus the number of shares delivered to satisfy the tax
liability incurred in the exercise. The reload options retain the expiration
date of the original option; however, the exercise price must equal the fair
market value on the date the reload options are granted. During fiscal 1998,
435,266 reload options were automatically granted.
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36
A summary of shares subject to options follows:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
1998 Exercise 1997 Exercise 1996 Exercise
Shares Prices Shares Prices Shares Prices
Outstanding at
beginning of year: 4,028,196 $ 7.27 4,863,840 $ 6.48 5,157,400 $5.99
Granted 1,599,152 $22.12 338,000 $15.92 1,615,600 $7.57
Exercised (2,081,834) $ 6.90 (1,102,644) $ 5.78 (1,572,680) $5.89
Terminated (81,700) $17.60 (71,000) $ 7.74 (336,480) $6.39
--------- --------- ---------
Outstanding at
end of year: 3,463,814 $14.19 4,028,196 $ 7.27 4,863,840 $6.48
--------- --------- ---------
Exercisable at
end of year: 1,921,162 $ 7.58 3,770,196 $ 6.68 3,361,440 $5.98
--------- --------- ---------
Weighted-average
fair-market value
of options
granted $ 6.54 $ 4.42 $2.08
A summary of stock options outstanding at May 30, 1998, follows:
Exercisable Stock
Outstanding Stock Options Options
---------------------------------------------------- ----------------------------------
Weighted-
Average Weighted Weighted-
Range of Shares Remaining Average Shares Average
Exercise (In Contractual Exercise (In Exercise
Price Thousands) Life Price Thousands) Price
$4.66 - $7.28 1,266 4.99 years $ 6.20 1,266 $ 6.20
$7.56-$19.88 1,692 8.67 years $16.14 655 $10.23
$24.44-$32.50 506 7.89 years $27.63 0 $ 0
----- -----
Total 3,464 7.21 years $14.19 1,921 $ 7.58
----- -----
The company accounts for its employee stock purchase plan and its stock option
plans under APB Opinion 25; therefore, no compensation costs are recognized when
employees purchase stock or when stock options are authorized, granted, or
exercised. If compensation costs had been computed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the company's net income and earnings
per share would have been reduced by approximately $10.4 million, or $.08 per
share in 1998, and $1.1 million, or $.01 per share in 1997, and $2.4 million, or
$0.02 per share in 1996.
For purposes of computing compensation costs of stock options granted, the fair
value of each stock option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: 5.39% to 6.26% (in 1998) and 5.93% to 6.35% (in 1997) and 5.70% to
6.19% (in 1996) risk-free interest rates; three-year expected lives in 1998,
1997, and 1996; 34% (in 1998) and 31% (in 1997 and 1996) expected volatility;
and .5% expected dividend yields in 1998, 1997, and 1996. Black-Scholes is a
widely accepted stock option pricing
-36-
37
model; however, the ultimate value of stock options granted will be determined
by the actual lives of options granted and future price levels of the company's
common stock.
KEY EXECUTIVE AND DIRECTOR STOCK PROGRAMS
RESTRICTED STOCK GRANTS The company has granted restricted common shares to
certain key employees. Shares were awarded in the name of the employee, who has
all rights of a shareholder, subject to certain restrictions on transferability
and a risk of forfeiture. The forfeiture provisions on the awards expire
annually, over a period not to exceed six years, as certain financial goals are
achieved. During fiscal 1998, no shares were granted under the company's
long-term incentive plan, no shares were forfeited, and the forfeiture
provisions expired on 52,917 shares. As of May 30, 1998, 176,154 shares remained
subject to forfeiture provisions and restrictions on transferability.
The remaining shares subject to forfeiture provisions have been recorded as
unearned stock grant compensation and are included as a separate component of
shareholders' equity under the caption Key Executive Stock Programs. The
unearned compensation is being charged to selling, general, and administrative
expense over the five-year vesting period and was $.7, $.4, and $.3 million in
1998, 1997, and 1996, respectively.
KEY EXECUTIVE DEFERRED COMPENSATION PLAN During fiscal 1997, the company
established the Herman Miller, Inc., Key Executive Deferred Compensation Plan,
which allows certain executives to defer receipt of all or a portion of their
EVA cash incentive. The company may make a matching contribution of 30% of the
executive's contribution up to 50% of the deferred EVA cash incentive. The
company matching contribution vests at the rate of 33 1/3% annually. In
accordance with the terms of the plan, the executive deferral and company
matching contribution have been placed in a "Rabbi" trust, which invests solely
in the company's common stock. These Rabbi trust arrangements offer the
executive a degree of assurance for ultimate payment of benefits without causing
constructive receipt for income tax purposes. Distributions to the executive
from the Rabbi trust can only be made in the form of the company's common stock.
The assets in the Rabbi trust remain subject to the claims of creditors of the
company and are not the property of the executive and are, therefore, included
as a separate component of shareholders' equity.
KEY EXECUTIVE STOCK PURCHASE ASSISTANCE PLAN In October 1994, the company
adopted a key executive stock purchase assistance plan whereby the company may
extend credit to officers and key executives to purchase the company's stock
through the exercise of options or on the open market. These loans are secured
by the shares acquired and are repayable under full recourse promissory notes.
The sale or transfer of shares is restricted for five years after the loan is
fully paid. The plan provides for the key executives to earn repayment of a
portion of the notes, including interest, based on meeting annual performance
objectives as set forth by the Executive Compensation Committee of the Board of
Directors. The notes bear interest at 7.0 percent per annum. Interest is payable
annually and principal is due on various dates through September 1, 2007. As of
May 30, 1998, the notes outstanding relating to the exercise of options were $.4
million and are included as a separate component of shareholders' equity under
the caption Key Executive Stock Programs. Notes outstanding related to
open-market purchases were $.8 million and are recorded in other assets.
Compensation expense related to earned repayment was $2.5 million in 1998, $3.9
million in 1997, and $1.7 million in 1996.
DIRECTOR FEES During fiscal 1997, the Board of Directors approved a plan that
allows the Board members to elect to receive their director fees in the form of
unrestricted company stock at the then fair market value rather than in cash.
Under this plan, the Board members received 7,510 and 4,968 shares of the
company's stock in fiscal 1998 and 1997, respectively.
-37-
38
INCOME TAXES
Pretax income consisted of the following:
(In Thousands) 1998 1997 1996
Domestic $186,266 $141,742 $77,169
Foreign 23,265 (15,859) (7,073)
-------- -------- -------
$209,531 $125,883 $70,096
-------- -------- -------
The provision for income taxes consisted of the following:
(In Thousands) 1998 1997 1996
Current: Domestic--Federal $77,161 $66,003 $15,725
Domestic--State 4,430 4,957 1,615
Foreign 6,184 (2,287) (527)
------- -------- -------
$87,775 $68,673 $16,813
------- ------- -------
Deferred: Domestic--Federal (7,019) (15,938) 6,115
Domestic--State 321 (677) 50
Foreign 123 (573) 1,172
------- ------- -------
(6,575) (17,188) 7,337
------- ------- -------
Total income tax provision $81,200 $51,485 $24,150
------- ------- -------
The following table represents a reconciliation of income taxes at the United
States statutory rate with the effective tax rate as follows:
(In Thousands) 1998 1997 1996
Income taxes computed at the United States
statutory rate of 35% $73,336 $44,059 $24,534
Increase (decrease) in taxes resulting from:
Corporate-owned life insurance 3,915 1,854 (3,302)
Changes in valuation allowance, net -- -- (2,762)
Additional reserves provided -- -- 2,834
State taxes, net 3,088 2,782 1,082
Other 861 2,790 1,764
------- ------- -------
$81,200 $51,485 $24,150
------- ------- -------
The tax effects and types of temporary differences that give rise to significant
components of the deferred tax assets and liabilities at May 30, 1998, and May
31, 1997, are presented below:
(In Thousands) 1998 1997
Deferred tax assets:
Foreign net operating loss carryforwards $ 8,114 $10,791
Book over tax loss on sale of fixed assets 5,845 6,045
Compensation-related accruals 9,475 4,186
Accrued pension and postretirement benefit obligations 21,743 17,671
Reserves for inventory 4,317 5,295
Reserve for uncollectible accounts and notes receivable 5,756 5,212
Other 31,703 27,208
Valuation allowance (8,114) (10,791)
------- -------
$78,839 $65,617
------- -------
-38-
39
Deferred tax liabilities:
Book basis in property in excess of tax basis $(19,828) $(19,429)
Capitalized software costs (5,340) --
Prepaid employee benefits (2,665) (2,239)
Other (9,386) (8,904)
-------- --------
$(37,219) $(30,572)
The company has foreign net operating loss carryforwards, the tax benefit of
which is $8.1 million, of which $6.1 million expires at various dates through
2008, and of which $2.0 million has unlimited expiration. For financial
statement purposes, the tax benefit of the foreign net operating loss
carryforward has been recognized as a deferred tax asset, subject to a valuation
allowance.
Changes in the valuation allowance during 1996 reflect the utilization of the
company's capital loss carryforwards which served to offset capital gains
recognized on the sale and leaseback of the Roswell, Georgia, facility (see the
Long-Term Debt note for a description of the lease) and on certain excess land
sold to the company's captive insurance company. In addition, in each of the
years presented, the allowance reflects changes in the net operating loss
carryforwards at the company's foreign subsidiaries, which in 1997 primarily
reflects the divestiture of the German manufacturing operations.
The company has not provided for United States income taxes on undistributed
earnings of foreign subsidiaries totaling $50.3 million. Recording of deferred
income taxes on these undistributed earnings is not required, since these
earnings have been permanently reinvested. These amounts would be subject to
possible U.S. taxation only if remitted as dividends. The determination of the
hypothetical amount of unrecognized deferred U.S. taxes on undistributed
earnings of foreign entities is not practicable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the company's financial instruments included in current
assets and current liabilities approximates their fair value due to their
short-term nature. The fair value of the notes receivable is estimated by
discounting expected future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit ratings and
remaining maturities. As of May 30, 1998, and May 31, 1997, the fair value of
the notes receivable approximated the carrying value. The company intends to
hold these notes to maturity and has recorded allowances to reflect the terms
negotiated for carrying value purposes. As of May 30, 1998, and May 31, 1997,
the carrying value approximated the fair value of the company's long-term debt.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The company utilizes derivative financial instruments to manage its exposure to
foreign currency volatility at the transactional level. The majority of these
contracts relate to major currencies such as the Japanese yen, the Australian
dollar, and the British pound. The exposure to credit risk is minimal, since the
counterparties are major financial institutions. The market risk exposure is
essentially limited to currency rate movements. The gains or losses arising from
these financial instruments are applied to offset exchange gains or losses on
related hedged exposures. Realized gains or losses in 1998, 1997, and 1996 were
not material to the company's results of operations. At May 30, 1998, and May
31, 1997, the company had no outstanding derivative financial instruments.
-39-
40
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following table presents a reconciliation of net income to net cash provided
by operating activities:
(In Thousands) 1998 1997 1996
Depreciation and amortization $ 50,748 $47,985 $45,009
Loss on divestiture -- 14,500 --
Provision for losses on accounts
and notes receivable 5,245 7,302 4,635
Loss on sales of property and equipment 2,243 1,575 120
Deferred taxes (6,575) (17,188) 7,337
Other liabilities 2,815 17,070 1,468
Stock grants earned 718 387 284
Changes in current assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (12,706) (11,735) 4,295
Inventories 5,237 11,130 11,042
Prepaid expenses and other 3,715 (4,096) (5,009)
Increase in liabilities:
Accounts payable 13,691 15,296 627
Accrued liabilities 75,261 61,546 8,704
-------- -------- ------
Total changes in current assets and liabilities 85,198 72,141 19,659
-------- -------- ------
Total adjustments $140,392 $143,772 $78,512
-------- -------- -------
Cash payments for interest and income taxes were as follows:
(In Thousands) 1998 1997 1996
Interest paid $ 7,709 $ 8,759 $ 7,458
Income taxes paid $66,023 $53,185 $13,883
CONTINGENCIES
In fiscal 1992, Haworth, Inc. ("Haworth") filed a lawsuit against the company,
alleging that the electrical systems used in creation of the company's products
infringed one or more of Haworth's patents. In fiscal 1996, the company and
Haworth agreed to terms of a settlement. The company continues to believe, based
upon written opinion of counsel, that its products did not infringe Haworth's
patents and that it would, more likely than not, have prevailed on the merits.
However, based on the mounting legal costs, distraction of management focus, and
the uncertainty present in any litigation, the company concluded settlement was
in the best interest of its shareholders. The settlement included a one time
cash payment of $44.0 million in exchange for a complete release. The companies
also exchanged limited covenants not to sue with respect to certain existing and
potential patent designs. Herman Miller simultaneously reached a settlement with
one of its suppliers, who agreed to pay the company $11.0 million and, over the
next seven years, to rebate a percentage of its sales to Herman Miller that are
in excess of then current levels. The $11.0 million, plus interest, will be paid
in annual installments over seven years and, the rebates will be recorded when
earned. Accordingly, the company recorded a net litigation settlement expense of
$16.5 million after applying previously recorded reserves and the settlement
with the supplier.
-40-
41
The company, for a number of years, has sold various products to the United
States Government under General Services Administration (GSA) multiple award
schedule contracts. The GSA is permitted to audit the company's compliance with
the GSA contracts. As a result of its audits, the GSA has asserted a refund
claim under the 1982 contract for approximately $2.7 million and has other
contracts under audit review. Management has been notified that the GSA has
referred the 1988 contract to the Justice Department for consideration of a
potential civil False Claims Act case. Management disputes the audit result for
the 1982 contract and does not expect resolution of the matter to have a
material adverse effect on the company's consolidated financial statements.
Management does not have information that would indicate a substantive basis for
a civil False Claims Act case under the 1988 contract.
The company is also involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending will not materially affect the
company's consolidated financial statements.
-41-
42
SEGMENT INFORMATION
The company operates on a worldwide basis in a single industry consisting of the
design, manufacture, and sale of office furniture systems, products, and related
services. The following information is presented with respect to the company's
operations in different geographic areas for the fiscal years ended May 30,
1998, May 31, 1997, and June 1, 1996. Transfers between geographic areas
represent the selling price of sales to affiliates, which is generally based on
cost plus a markup. Net income of foreign operations and exports includes
royalty income from licensee sales and reflects the gain or loss on foreign
currency exchange. The cash and cash equivalents accounts of the company are
considered to be corporate assets. All other assets have been identified with
domestic or foreign operations. No single customer accounted for more than 10.0
percent of consolidated net sales.
(In Thousands) United States Foreign Adjustments Consolidated
Operations and
and Exports Eliminations
1998
Sales to unaffiliated customers $1,451,885 $266,710 $ -- $1,718,595
Transfers between geographic areas 20,765 20,255 (41,020) --
--------- ------- ------ ---------
Net sales $1,472,650 $286,965 $(41,020) $1,718,595
--------- ------- ------ ---------
Net income $117,091 $11,240 $ -- $128,331
------- ------ ------ -------
Identifiable assets $599,810 $69,220 $ -- $669,030
------- ------ ------ -------
Corporate assets 115,316
-------
Total assets $784,346
-------
1997
Sales to unaffiliated customers $1,244,645 $251,240 $ -- $1,495,885
Transfers between geographic areas 23,723 15,732 (39,455) --
--------- ------- ------- ---------
Net sales $1,268,368 $266,972 $ (39,455) $1,495,885
--------- ------- ------- ---------
Net income (loss) $83,497 $(9,099) $ -- $74,398
------ ------ --------- ------
Identifiable assets $554,044 $95,382 $ -- $649,426
------- ------ --------- -------
Corporate assets 106,161
-------
Total assets $755,587
-------
1996
Sales to unaffiliated customers $1,043,850 $240,081 $ -- $1,283,931
Transfers between geographic areas 34,667 13,176 (47,843) --
--------- ------- ------ ---------
Net sales $1,078,517 $253,257 $(47,843) $1,283,931
--------- ------- ------- ---------
Net income (loss) $53,977 $(8,031) $ -- $45,946
------ ------ --------- ------
Identifiable assets $532,371 $105,487 $ -- $637,858
------- ------- --------- -------
Corporate assets 57,053
-------
Total assets $694,911
-------
-42-
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Herman Miller, Inc.:
We have audited the accompanying consolidated balance sheets of Herman Miller,
Inc. (a Michigan corporation) and subsidiaries as of May 30, 1998, and May 31,
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended May 30, 1998.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Herman Miller, Inc., and
subsidiaries as of May 30, 1998, and May 31, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
May 30, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Grand Rapids, Michigan
June 25, 1998
-43-
44
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements of Herman Miller, Inc., and subsidiaries
were prepared by, and are the responsibility of, management. The statements have
been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are based on
management's best estimates and judgments.
The company maintains systems of internal accounting controls designed to
provide reasonable assurance that all transactions are properly recorded in the
company's books and records, that policies and procedures are adhered to, and
that assets are protected from unauthorized use. The systems of internal
accounting controls are supported by written policies and guidelines and are
complemented by a staff of internal auditors and by the selection, training, and
development of professional financial managers.
The consolidated financial statements have been audited by the independent
public accounting firm Arthur Andersen LLP, whose appointment is ratified
annually by shareholders at the annual shareholders' meeting. The independent
public accountants conduct a review of internal accounting controls to the
extent required by generally accepted auditing standards and perform such tests
and related procedures as they deem necessary to arrive at an opinion on the
fairness of the financial statements.
The Financial Audit Committee of the Board of Directors, composed solely of
directors from outside the company, regularly meets with the independent public
accountants, management, and the internal auditors to satisfy itself that they
are properly discharging their responsibilities. The independent public
accountants have unrestricted access to the Financial Audit Committee, without
management present, to discuss the results of their audit and the quality of
financial reporting and internal accounting control.
Michael A. Volkema, President and Chief Executive Officer
Brian C. Walker, Executive Vice President, Financial Services, and Chief
Financial Officer
June 25, 1998
-44-
45
Item 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------
No changes in, or disagreements with, accountants referenced in Item 304 of
Regulation S-K occurred during the 24-month period ended May 30, 1998.
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Directors of Registrant
- -----------------------
Information relating to directors and director nominees of the registrant is
contained under the caption "Director and Executive Officer Information," in the
company's definitive Proxy Statement, dated August 18, 1998, relating to the
company's 1998 Annual Meeting of Shareholders and the information within that
section is incorporated by reference. Information relating to Executive Officers
of the company is included in Part I hereof entitled "Executive Officers of the
Registrant."
There are no family relationships between or among the above-named executive
officers. There are no arrangements or understandings between any of the
above-named officers pursuant to which any of them was named an officer.
Item 11 EXECUTIVE COMPENSATION
- -------------------------------
Information relating to management remuneration is contained under the tables
and discussions on pages 10-12 in the company's definitive Proxy Statement,
dated August 18, 1998, relating to the company's 1998 Annual Meeting of
Shareholders, and the information within those sections is incorporated by
reference.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- --------------
The sections entitled "Voting Securities and Principal Shareholders" and
"Director and Executive Officer Information" in the definitive Proxy Statement,
dated August 18, 1998, relating to the company's 1998 Annual Meeting of
Shareholders and the information within those sections is incorporated by
reference.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information concerning certain relationships and related transactions contained
under the captions "Director and Executive Officer Information" and
"Compensation of Board Members and Non-Employee Officers" in the definitive
Proxy Statement, dated August 18, 1998, relating to the company's 1998 Annual
Meeting of Shareholders is incorporated by reference.
-45-
46
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
- -------------------
(a) 1. Financial Statements
--------------------
The following consolidated financial statements of the company are
included in this Form 10-K on the pages noted:
Page Number in
the Form 10-K
-------------
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Shareholders' Equity 25
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27-42
Report of Independent Public Accountants 43
Management's Report on Financial Statements 44
(a) 2. Financial Statement Schedule
----------------------------
The following financial statement schedule and related Report of
Independent Public Accountants on the Financial Statement Schedule are
included in this Form 10-K on the pages noted:
Page Number in
this Form 10-K
--------------
Report of Independent Public Accountants 48
on Financial Statement Schedule
-46-
47
Page Number in
this Form 10-K
--------------
Schedule II- Valuation and Qualifying
Accounts and Reserves for
the Years Ended May 30,
1998; May 31, 1997; and
June 1, 1996 50
All other schedules required by Form 10-K Annual Report have been
omitted because they were inapplicable, included in the notes to
consolidated financial statements, or otherwise not required under
instructions contained in Regulation S-X.
(a) 3. Exhibits
--------
Reference is made to the Exhibit Index which is found on pages 51
through 53 of this Form 10-K Annual Report.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of
the year ended May 30, 1998.
-47-
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
- ------------------------------------------------------------------------
To the Shareholders and Board of Directors of Herman Miller, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Herman Miller, Inc., and subsidiaries
included in this Form 10-K, and have issued our report thereon dated June 25,
1998. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed at Item 14(a)2 above 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 financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic 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 financial statements taken as a
whole.
/s/Arthur Andersen LLP
-----------------------
Grand Rapids, Michigan
June 25, 1998
-48-
49
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.
HERMAN MILLER, INC.
/s/ Michael A. Volkema and /s/ Brian C. Walker
- ------------------------------------------------- ------------------------------------
By Michael A. Volkema Brian C. Walker
(President and Chief Executive Officer) (Chief Financial Officer)
Date: August 21, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on August 21, 1998, by the following persons on behalf of
the Registrant in the capacities indicated. Each Director of the Registrant,
whose signature appears below, hereby appoints Michael A. Volkema as his
attorney-in-fact, to sign in his name and on his behalf, as a Director of the
Registrant, and to file with the Commission any and all amendments to this
Report on Form 10-K.
/s/ David L. Nelson /s/ Michael A. Volkema
-------------------------- ----------------------
David L. Nelson Michael A. Volkema
(Chairman of the Board) (President, Chief Executive
Officer and Director)
/s/ William K. Brehm /s/ E. David Crockett
-------------------------- ---------------------
William K. Brehm E. David Crockett
(Director) (Director)
/s/ James R. Carreker /s/ Lord Griffiths of Fforestfach
-------------------------- ---------------------------------
James R. Carreker Lord Griffiths of Fforestfach
(Director) (Director)
/s/ Richard H. Ruch /s/ C. William Pollard
-------------------------- ----------------------
Richard H. Ruch C. William Pollard
(Director) (Director)
/s/ Dorothy A. Terrell /s/ Ruth A. Reister
-------------------------- -------------------
Dorothy A. Terrell Ruth A. Reister
(Director) (Director)
/s/ H. Harold Chandler
--------------------------
J. Harold Chandler
(Director)
-49-
50
HERMAN MILLER, INC., AND SUBSIDIARIES
-------------------------------------
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------
(In Thousands)
Column A Column B Column C Column D Column E
- -------- -------- ---------------------- ------------------------ --------
Additions Increased Uncollectible
Balance at charged to net accounts Balance
beginning costs and operating written off Losses at end
of period expenses losses (net) (1) Utilized (2) of period
--------- -------- ------ ---------- ----------- ---------
Description
- -----------
Year ended May 30, 1998:
Allowance for possible losses
on accounts receivable $12,943 $ 4,558 $ -- $ 3,709 $ -- $13,792
Allowance for possible losses
on notes receivable $ 8,489 $ 2,881 $ -- $ 2,940 $ -- $ 8,430
Valuation allowance for deferred tax asset $10,791 $ -- $ 378 $ -- $ 3,055 $ 8,114
Year ended May 31, 1997:
Allowance for possible losses $10,423 $ 4,809 $ -- $ 2,289 $ -- $12,943
on accounts receivable
Allowance for possible losses $ 4,415 $ 4,074 $ -- $ -- $ -- $ 8,489
on notes receivable
Valuation allowance for deferred tax asset $22,475 $ -- $ 1,034 $ -- $12,718 $10,791
Year ended June 1, 1996:
Allowance for possible losses
on accounts receivable $ 7,180 $ 3,816 $ -- $ 573 $ -- $10,423
Allowance for possible losses
on notes receivable $ 2,627 $ 2,573 $ -- $ 785 $ -- $ 4,415
Valuation allowance for deferred tax asset $25,237 $ -- $ 3,856 $ -- $ 6,618 $22,475
(1) Includes effects of foreign currency translation.
(2) Includes utilization of capital and net operating losses. In 1997,
this includes the write-off related to the German divestiture.
-50-
51
HERMAN MILLER, INC., AND SUBSIDIARIES
-------------------------------------
Exhibit Index
-------------
Page
----
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation are incorporated by reference to
Exhibit 3(a) and 3(b) of the Registrant's 1986 Form 10-K
Annual Report.
(b) Certificate of Amendment to the Articles of Incorporation,
dated October 15, 1987, are incorporated by reference to
Exhibit 3(b) of the Registrant's 1988 Form 10-K Annual Report.
(c) Certificate of Amendment to the Articles of Incorporation,
dated May 10, 1988, are incorporated by reference to Exhibit
3(c) of the Registrant's 1988 Form 10-K Annual Report.
(d) Amended and Restated Bylaws, dated January 6, 1997, are
incorporated by reference to Exhibit 3(d) of the Registrant's
1997 Form 10-K Annual Report.
(4) Instruments Defining the Rights of Security Holders
(a) Specimen copy of Herman Miller, Inc., common stock is
incorporated by reference to Exhibit 4(a) of Registrant's 1981
Form 10-K Annual Report.
(b) Note Purchase Agreement dated March 1, 1996, is incorporated
by reference to Exhibit 4(b) of the Registrant's 1996 Form
10-K Annual Report.
(c) Other instruments which define the rights of holders of
long-term debt individually represent debt of less than 10% of
total assets. In accordance with item 601(b)(4)(iii)(A) of
regulation S-K, the Registrant agrees to furnish to the
Commission copies of such agreements upon request.
(d) Dividend Reinvestment Plan for Shareholders of Herman Miller,
Inc., dated January 6, 1997, is incorporated by reference to
Exhibit 4(d) of the Registrant's 1997 Form 10-K Annual Report.
(10) Material Contracts
(a) Description of Officers Executive Incentive Plan is
incorporated by reference to Exhibit 10(e) of the Registrant's
1981 Form 10-K Annual Report. *
(b) Officers' Supplemental Retirement Income Plan is incorporated
by reference to Exhibit 10(f) of the Registrant's 1986 Form
10-K Annual Report. *
-51-
52
Page
----
Exhibit Index (continued)
(c) Officers' Salary Continuation Plan is incorporated by
reference to Exhibit 10(g) of the Registrant's 1982 Form 10-K
Annual Report.*
(d) Herman Miller, Inc., Plan for Severance Compensation after
Hostile Takeover is incorporated by reference to Exhibit 10(f)
of the Registrant's 1986 Form 10-K Annual Report.*
(e) Amended Herman Miller, Inc., Plan for Severance Compensation
after Hostile Takeover, dated January 17, 1990, is
incorporated by reference to Exhibit 10(n) of the Registrant's
1990 Form 10-K Annual Report.*
(f) Herman Miller, Inc., 1994 Key Executive Stock Purchase
Assistant Plan, dated October 6, 1994, is incorporated by
reference to Appendix C of the Registrant's 1994 Proxy
Statement.*
(g) First Amendment to the Herman Miller, Inc., 1994 Key Executive
Stock Purchase Assistant Plan, dated April 28, 1998, is
incorporated by reference to Exhibit 10(g) of the Registrant's
1998 Form 10-K Annual Report.* 54-56
(h) Incentive Share Grant Agreement, dated October 4, 1995,
between the company and Michael A. Volkema is incorporated by
reference to Exhibit 10(g) of the Registrant's 1996 Form 10-K
Annual Report.*
(i) Incentive Share Grant Agreement, dated May 15, 1996, between
the company and Michael A. Volkema is incorporated by
reference to Exhibit 10(h) of the Registrant's 1996 Form 10-K
Annual Report.*
(j) Termination and Mutual Release Agreement, dated March 27,
1996, between the company and Hansjorg Broser is incorporated
by reference to Exhibit 10(i) of the Registrant's 1996 Form
10K Annual Report.*
(k) Herman Miller, Inc., Long-Term Incentive Plan, dated October
6, 1994, is incorporated by reference to Exhibit 4 of the
Registrant's May 22, 1996, Form S-8 Registration No. 33-04369.*
(l) Herman Miller, Inc., 1994 Nonemployee Officer and Director
Stock Option Plan, dated October 6, 1994, is incorporated by
reference to Exhibit 4 of the Registrant's May 22, 1996, Form
S-8 Registration No. 33-04367.*
(m) First Amendment to Herman Miller, Inc., 1994 Nonemployee
Officer and Director Stock Option Plan, dated January 7, 1997,
is incorporated by reference to Exhibit 10(m) of the
Registrant's 1998 Form 10-K Annual Report.* 57-59
-52-
53
(n) Herman Miller, Inc., Key Executive Deferred Compensation Plan
and form of Deferred Compensation Agreement, dated February
28, 1997, is incorporated by reference to Exhibit 10(l) of the
Registrant's 1997 Form 10-K Annual Report.
(o) First Amendment to the Herman Miller, Inc., Key Executive
Deferred Compensation Plan, dated January 20, 1998, is
incorporated by reference to Exhibit 10(o) of the Registrant's
1998 Form 10-K Annual Report. 60
(p) Consulting Agreement, dated October 2, 1996, between the
company and Dr. Alan Fern is incorporated by reference to
Exhibit 10(m) of the registrant's 1997 Form 10-K Annual
Report.
(q) Herman Miller, Inc., Incentive Cash Bonus Plan, dated
September 29, 1998, is incorporated by reference to Appendix A
of the Registrant's 1998 Proxy Statement.*
* denotes compensatory plan or arrangement.
(21) Subsidiaries. 61
(23) Consent of Independent Public Accountants 62
(27) Financial Data Schedule (exhibit available upon request)
-53-
1
EXHIBIT 10(g)
FIRST AMENDMENT TO THE
HERMAN MILLER, INC.
1994 KEY EXECUTIVE STOCK PURCHASE ASSISTANCE PLAN
FIRST AMENDMENT TO THE HERMAN MILLER, INC., 1994 KEY EXECUTIVE STOCK PURCHASE
ASSISTANCE PLAN, is adopted by the Board of Directors of Herman Miller, Inc.
(the "Company"), the 28th day of April, 1998, with reference to the following:
A. The Herman Miller, Inc., 1994 Key Executive Stock Purchase Assistance
Plan (the "Plan") was approved by the Company's shareholders on October
6, 1994, and is administered by the Executive Compensation Committee of
the Board of Directors ("Committee").
B. Under Section 8 of the Plan, the Board of Directors has the authority,
subject to certain conditions, to amend the Plan, from time to time.
C. The Board of Directors has elected to amend the Plan to authorize the
Committee to establish or extend the maturity of the Initial Period of
loans under the Plan for up to eight (8) years from the first interest
payment date, to allow for earned repayment based upon performance in
excess of annual performance objectives for any year prior to loan
maturity, and to broaden the authority of the Committee in administering
the Plan.
NOW, THEREFORE, the Plan is amended as follows:
1. The definition of "Extended Period of the Loan" in Section 2 of the
Plan, is hereby amended to read as follows:
"Extended Period of the Loan" means a period beginning at the end of the
Initial Period of the Loan and ending not later than the eighth
anniversary of the first interest payment date.
2. Subsection 4(d) of the Plan is hereby amended, in its entirety, to read
as follows:
(d) Interest Rate and Maturity. Each Loan shall bear interest at the
Applicable Rate. The first interest payment date shall be the
first day of September next following the day of the Loan, and
thereafter interest payments shall be due annually on September 1
of each year until the maturity of the Loan. Each Loan shall
mature on September 1 of each year until the maturity of the
Loan. Each Loan shall mature and the principal and unpaid
interest shall become immediately due and payable in full upon
the earlier of:
(i) the anniversary date (not later than the eighth
anniversary date, as determined by the Committee) of the
first interest payment date;
(ii) the default by the Key Executive on any Loan made to him
or her under the Plan:
(iii) the termination of employment (whether voluntary or
involuntary) or death of the Key Executive;
(iv) the date as of which 80 percent of the original principal
amount of the loan has been paid; or
-54-
2
(v) such other date as is determined by the Committee at the time
the Loan is made.
The Committee may, in its discretion, authorize the extension of the
time for repayment of a Loan upon such terms and conditions as the
Committee may determine, but not to a date later than the eighth
anniversary of the first payment date of the loan.
3. Subsection 6(a) is hereby amended, in its entirety, to read as follows:
(a) Earned Repayment--Annual Performance Objectives. As of the
beginning of each fiscal year of the Company, the Committee
in its discretion shall establish corporate or personal
performance objectives applicable to each Key Executive to whom a
Loan is outstanding or is then being made, and shall provide that
in such year the Key Executives may earn repayment of (i) all or
a portion of the principal amount of such Loans, and (ii) all or
a portion of the interest accrued on such Loans to the interest
payment date following the end of such year, if such objectives
have been met as of the end of such year. Likewise, the Committee
may, in its discretion, provide the Key Executives may earn
repayment of a lesser or greater portion of a Loan if,
respectively, less or more than 100 percent of such objectives
are met. No Key Executive, however, shall be entitled to earn
repayment of more than 80 percent of the original principal
amount of any Loan to him or her, plus interest accrued on the
Loan, prior to the maturity of the loan.
4. Section 6(b)(i) of the Plan is hereby amended, in its entirety, to read
as follows:
(b) Alternatives as of End of Initial Period on Loan. If a Loan to a
Key Executive is not paid in full at or before the end of the
Initial Period of the Loan, the Committee, in its discretion, may
proceed in accordance with any one or more of the following, as
it shall determine in its discretion:
(i) if the Initial Period of the Loan is less than eight (8)
years from the first interest payment date, to extend the
maturity of the Loan up to the end of such eight (8) year
period, and provide that during the Extended Period of the
Loan the Key Executive may earn repayment of all or a
portion of the original principal amount of any Loan to
him or her, plus accrued interest, in the same manner and
subject to the same limitations as is provided in (a)
above;
5. Section 6(b)(iv) is deleted, and Section 6(b)(v) is renumbered to be
Section 6(b)(iv).
6. In all other respects, the Plan shall continue in full force and effect.
-55-
3
CERTIFICATION
The foregoing First Amendment to the Plan was duly adopted by the Board of
Directors of the Company on April 28, 1998.
HERMAN MILLER, INC.
By: James E. Christenson
------------------------------
Its: Secretary
------------------------------
-56-
1
EXHIBIT 10(m)
FIRST AMENDMENT TO THE AMENDED AND RESTATED
HERMAN MILLER, INC.
1994 NONEMPLOYEE OFFICER AND DIRECTOR
STOCK OPTION PLAN
FIRST AMENDMENT TO THE AMENDED AND RESTATED HERMAN MILLER, INC, 1994 NONEMPLOYEE
OFFICER AND DIRECTOR STOCK OPTION PLAN adopted by the Board of Directors of
Herman Miller, Inc. (the "Company") the 20th day of January, 1998, with
reference to the following:
A. The Herman Miller, Inc., 1994 Nonemployee Officer and Director Stock
Option Plan, as Amended and Restated on January 7, 1997 (the "Plan") was
approved by the Company's shareholders on October 6, 1994.
B. Under Section 9 of the Plan, "Amendment of the Plan," the Board of
Directors has the authority, subject to certain conditions, to amend the
Plan from time to time.
C. Effective January 7, 1997, the Plan was amended and restated to
eliminate the "formula" provisions of the Plan and authorize the Plan
Committee to select the number of shares subject to each option granted
under the Plan, the time of option grants and such other matters
consistent with the terms of the Plan.
D. The Board of Directors has elected to further amend the Plan to
authorize the Committee to grant Reload Options (as defined in the Plan
as amended by this First Amendment), subject to certain conditions.
NOW, THEREFORE, the Plan is amended as follows:
1. Section 6 of the plan is hereby amended by adding the following
subsection (e), to read as follows:
(e) Reload Options. Without in any way limiting the authority of the
Committee to make grants under the Plan, and in order
to induce Plan participants to retain ownership of Shares, the
Committee shall have the authority (but not an obligation) to
include within any option agreement (including any option
agreement evidencing (i) an option granted before this subsection
(e) became effective, and (ii) a Reload Option provision
entitling the participant to a further option (a "Reload Option")
in the event the participant exercises the option evidenced by
such option agreement, in whole or in part, by surrendering
shares previously owned by the participant, in accordance with
this Plan and the terms and conditions of the option agreement. A
Reload Option shall entitle a participant to purchase a number of
shares equal to the number of such shares so surrendered upon
exercise of the original option and, in the discretion of the
Committee, the number of shares, if any, which the participant
would be required to sell at the date of exercise to satisfy all
or a portion of the tax liability arising in connection with the
exercise of the original option. A Reload Option shall: (a) have
an option price of not less than one hundred percent (100%) of
the per share fair market value of the common stock on the date
of grant of such Reload Option, as determined under Section 7(c)
of this Plan; (b) have a term not longer than the remaining term
of this original option at the time of exercise thereof; (c)
become exercisable in the event the shares acquired upon exercise
of the original option are held for not less than a minimum
period of time established by the
-57-
2
Committee; and (d) be subject to such other terms and conditions as
the Committee may determine.
2. In all other respects, the Plan shall continue in full force and
effect.
CERTIFICATION
The foregoing Amendment to the Plan was duly adopted by the Board of Directors
of the Company on January 18, 1998.
HERMAN MILLER, INC.
By: James E. Christenson
---------------------------
Its: Secretary
---------------------------
-58-
3
EXHIBIT 10(m)
(continued)
HERMAN MILLER, INC.
AMENDMENT TO DIRECTOR STOCK OPTION AGREEMENT
AMENDMENT TO OPTION AGREEMENT, effective the 20th day of January 1998 between
HERMAN MILLER, INC. (the "Company") and the nonemployee officer or director
identified in attached Annex I (the "Participant"), pursuant to the Herman
Miller, Inc., 1994 Nonemployee Officer and Director Stock Option Plan (the
"Plan").
RECITALS:
A. Under the terms of the Plan, Participant was granted options to acquire
shares of the Company's stock upon the conditions of the Stock Option
Agreements between Participant and the Company identified in attached
Annex I (the "Original Options").
B. The Plan Committee has the authority to include a Reload Option, as
defined in Section 6(e) of the Plan, as part of the Original Options.
C. The Plan Committee has elected to include such a Reload Option as part
of the Original Options identified in Annex I and hereby agrees to amend
the Original Options in the manner provided in this Amendment.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. Paragraph 2 of each of the Original Options is hereby amended by adding
new subparagraph (d), to read as follows:
d. Reload Option. Grantee shall be granted a further option
("Reload Option") if Grantee exercises this Option, in whole
or in part, by surrendering shares of common stock of the Company
owned by Grantee to pay the purchase price for the exercise of
the Option. The Reload Option shall entitle Grantee to purchase a
number of shares of common stock of the Company equal to the
number of shares delivered upon exercise of this Option plus the
number of shares which Grantee would be required to sell to
satisfy all or a portion of the tax liability incurred from the
exercise of this Option. The purchase price for the shares
subject to the Reload Option shall equal one hundred percent
(100%) of the per share market value of the common stock of the
Company on the date of grant of the Reload Option, and the Reload
Option shall have a term not longer than the term of this Option.
The Reload Option may not be exercised until the shares acquired
upon exercise of this Option are held for a period of at least
one year, and the Reload Option shall not be granted unless this
Option is exercised during the time or times specified by the
Company during which the grant of Reload Options is authorized.
IN WITNESS WHEREOF, this Amendment has been executed as of the date written
above.
HERMAN MILLER, INC.
By: James E. Christenson
----------------------------
Its: Secretary
----------------------------
-59-
1
EXHIBIT 10(o)
FIRST AMENDMENT TO THE
HERMAN MILLER, INC.
KEY EXECUTIVE DEFERRED COMPENSATION PLAN
FIRST AMENDMENT TO THE HERMAN MILLER, INC., KEY EXECUTIVE DEFERRED COMPENSATION
PLAN (the "First Amendment") adopted by the Board of Directors of Herman Miller,
Inc. (the "Company") the 20th day of January, 1998, with reference to the
following:
A. Under Section 11, subsection (a), of the Herman Miller, Inc., Key
Executive Deferred Compensation Plan (the "Plan"), "Termination of
Amendment of Plan, (a) In General," the Board of Directors of the
Company may, at any time by resolution, subject to certain conditions,
amend the Plan.
B. The Board of Directors has elected to amend the Plan to address and
clarify when payment of vested Stock Units will be made to a Participant
who voluntarily or involuntarily terminates his or her employment with
the Company.
C. Certain capitalized terms not otherwise defined elsewhere in the text
of this First Amendment shall be as defined in the Plan.
NOW, THEREFORE, the Plan is amended as follows:
1. Section 7, subsection (a), of the Plan, "Payment of Accounts, (a) Time
of Distribution," is hereby amended by adding the following to the end
of such Section 7, subsection (a):
In the event a Participant terminates employment with the Company,
whether voluntarily or involuntarily, before the Participant's Stock
Unit Account has been fully distributed, the Committee shall have the
option, in its sole discretion, to make an immediate lump sum
distribution of the vested Stock Units or to commence payment of the
vested Stock Units to the Participant in accordance with the
Participant's Deferral Election.
2. In all other respects, the Plan shall continue in full force and effect.
CERTIFICATION
The foregoing Amendment to the Plan was duly adopted by the Board of Directors
of the Company on January 20, 1998.
HERMAN MILLER, INC.
By: James E. Christenson
--------------------------
Its: Secretary
--------------------------
-60-
1
EXHIBIT 21
HERMAN MILLER, INC., SUBSIDIARIES
---------------------------------
Subsidiaries
------------
The Company's principal subsidiaries are as follows:
Jurisdiction
Name Ownership of Incorporation
- ---- --------- ----------------
Coro, Inc. 100% Company Michigan
Herman Miller (Australia) Pty., Ltd. 100% Company Australia
Herman Miller B.V. (Netherlands) 100% Company Netherlands
Herman Miller Canada, Inc. 100% Company Canada
Herman Miller Ltd. Niederlassung Deutschland, Inc. 100% Company Germany
Herman Miller Et Cie 100% Company France
Herman Miller Italia S.p.A. 100% Company Italy
Herman Miller Japan, Ltd. 100% Company Japan
Herman Miller Limited 100% Company England, U.K.
Herman Miller Mexico S.A. de C.V. 100% Company Mexico
Herman Miller Transportation Company 100% Company Michigan
Integrated Metal Technology, Inc. 100% Company Michigan
Meridian Incorporated 100% Company Michigan
Milcare, Inc. 100% Company Michigan
Milsure Insurance Limited 100% Company Barbados
Miller SQA, Inc. 100% Company Michigan
Powder Coat Technology, Inc. 100% Company Michigan
The Resource Alliance, Inc. 100% Company Canada
-61-
1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Herman Miller, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated June 15, 1998, included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statement File Numbers 33-5810, 33-43234,
33-45812, 2-84202, 33-04369, 33-04367, and 33-04365 and Form S-3 Registration
Statement File Number 33-19525.
/s/ Arthur Andersen LLP
-----------------------
Grand Rapids, Michigan
August 21, 1998
-62-
5
1000
YEAR
MAY-30-1998
JUN-01-1997
MAY-30-1998
115,316
0
206,176
13,792
47,657
400,135
595,872
305,208
784,346
378,332
0
0
0
17,397
213,605
784,346
1,718,595
1,718,595
1,079,756
1,079,756
415,763
5,245
8,300
209,531
81,200
128,331
0
0
0
128,331
1.42
1.39
