1 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 31, 1997 Commission File No. 0-5813 Herman Miller, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) <TABLE> <S><C> Michigan 38-0837640 - ---------------------------------- --------------------- (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 - --------------------------- --------------------- (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 Section 12(g) of the Act: Common Stock, $.20 Par Value --------------------------------- (Title of Class) </TABLE> 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 4, 1997, was approximately $2,271,116,618 (based on $49.25 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 4, 1997: Common stock, $.20 par value--46,114,043 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on October 1, 1997, are incorporated into Part III of this report.
2 PART 1 Item 1 BUSINESS (a) General Development of Business The company is engaged primarily in the design, manufacture, and sale of furniture systems and furniture, and related products and services, for offices, and, to a lesser extent, for health-care 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 percent) 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 furniture systems and furniture, and related 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, health-care 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 and Ergon 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 74.4 percent of the company's sales (in the fiscal year ended May 31, 1997) were made to or through independent dealers. The remaining sales (25.6 percent) were made directly to end-users, including federal, state, and local governments, and several major corporations, by either the company's own sales staff or its owned dealer network, Coro. -2-
3 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 health care 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 109 active United States utility patents on various components used in its products and approximately 72 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 (TM) 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," (and (TM)) 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 3.0 percent of the company's net sales in the fiscal year ended May 31, 1997. For fiscal 1997, the largest single end-user customer accounted for approximately 7.4 percent of the company's net sales with the 10 largest of such customers accounting for approximately 13.0 percent of the 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. -3-
4 Backlog of Orders As of May 31, 1997, the company's backlog of unfilled orders was $203.1 million. At June 1, 1996, the company's backlog totaled $156.6 million. It is expected that substantially all the orders forming the backlog at May 31, 1997, 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 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 1995 through 1997. 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 $25.7 million, $24.5 million, and $31.3 million was spent by the company on design and research activities in 1997, 1996, and 1995, 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. -4-
5 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 545 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 31, 1997, the company employed 7,108 full-time and 317 part-time employees, representing a 2.1 percent increase in full-time employees and a 35.4 percent decrease in part-time employees compared with June 1, 1996. 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, Mexico, and Italy. Sales are made through wholly owned subsidiaries in Australia, Canada, France, Germany (prior to sale), 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 31, 1997, were as follows: -5-
6 <TABLE> <Caption Location Square Owned Locations Footage Use ------------------------- ------- ------------------------------------------ <S> <C> <C> Zeeland, Michigan 749,000 Manufacturing, Warehouse, and Office Spring Lake, Michigan 777,700 Manufacturing, Warehouse, and Office Holland, Michigan 355,000 Manufacturing, Distribution, and Warehouse Rocklin, California 343,600 Manufacturing and Warehouse Roswell, Georgia 220,000 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 233,500 Manufacturing, Warehouse, and Office Leased Locations ------------------------- Zeeland, Michigan 393,300 Manufacturing, Warehouse, and Office Chippenham, England, U.K. 102,100 Manufacturing and Warehouse Stone Mountain, Georgia 84,500 Manufacturing and Warehouse Mexico City, Mexico 59,400 Manufacturing, Warehouse, and Office </TABLE> 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 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 31, 1997. -6-
7 ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT Certain information relating to Executive Officers of the company is as follows: <TABLE> <CAPTION> Year Elected an Position with Name Age Executive Officer the Company <S> <C> <C> <C> James E. Christenson 50 1989 Executive Vice President, Legal Services Andrew C. McGregor 47 1988 Executive Vice President, President, Herman Miller Choices Gary S. Miller 47 1984 Senior Vice President, Product Services David E. Nelson 67 1996 Chairman of the Board Christopher A. Norman 49 1996 Executive Vice President, President, Miller SQA, Inc. Michael A. Volkema 41 1995 President and Chief Executive Officer Brian C. Walker 35 1996 Executive Vice President, Financial Services, Chief Financial Officer, and Treasurer </TABLE> 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. Mr. Norman has served as the president of Miller SQA for the past five years. 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. -7-
8 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 4, 1997, there were approximately 17,000 shareholders of record of the company's common stock. <TABLE> <CAPTION> Market Market Market Per Per Price Price Price Share Share Per Share and Unaudited High Low Close Earnings Dividends <S> <C> <C> <C> <C> <C> YEAR ENDED MAY 31, 1997 First quarter 19.125 14.938 18.763 .32 .065 Second quarter 23.750 18.500 23.500 .37 .065 Third quarter 34.000 22.531 32.875 .28 .065 Fourth quarter 37.313 28.875 35.750 .58 .073 Year 37.313 14.938 35.750 1.55 .268 YEAR ENDED JUNE 1, 1996 First quarter 13.250 10.750 13.125 .24 .065 Second quarter 16.000 12.750 15.875 .10 .065 Third quarter 17.063 13.813 16.094 .23 .065 Fourth quarter 16.125 13.766 15.438 .34 .065 Year 17.063 10.750 15.438 .91 .260 </TABLE> -8-
9 Item 6 SELECTED FINANCIAL DATA REVIEW OF OPERATIONS <TABLE> <CAPTION> (In Thousands Except Per Share Data) 1997 1996 1995 1994 1993 <S> <C> <C> <C> <C> <C> OPERATING RESULTS Net Sales $1,495,885 $1,283,931 $1,083,050 $953,200 $855,673 Gross Margin 533,924 434,946 378,269 337,138 298,501 Selling, General, and Administrative 359,601 316,024 303,621 245,189 230,219 Design and Research Expense 29,140 27,472 33,682 30,151 24,513 Operating Income 130,683 74,935 9,066 61,798 43,769 Income (Loss) Before Income Taxes 125,883 70,096 4,039 63,473 42,354 Net Income (Loss) 74,398 45,946 4,339 40,373 22,054 Cash Flow from Operating Activities 218,170 124,458 29,861 69,764 82,588 Depreciation and Amortization 47,985 45,009 39,732 33,207 31,600 Capital Expenditures 54,470 54,429 63,359 40,347 43,387 Common Stock Repurchased plus Cash Dividends Paid 110,425 38,116 13,600 38,461 21,157 KEY RATIOS Sales Growth 16.5 18.5 13.6 11.4 6.3 Gross Margin (1) 35.7 33.9 34.9 35.4 34.9 Selling, General, and Administrative (1) 24.0 24.6 28.0 25.7 26.9 Design & Research Expense (1) 1.9 2.1 3.1 3.2 2.9 Operating Income (1) 8.7 5.8 0.8 6.5 5.1 Net Income Growth 61.9 958.9 (89.3) 83.1 255.9 After-Tax Return on Net Sales 5.0 3.6 0.4 4.2 2.6 After-Tax Return on Average Assets 10.3 6.8 0.7 7.9 4.6 After-Tax Return on Average Equity 25.0 15.4 1.5 13.9 7.8 COMMON SHARE DATA Earnings per Share $1.55 $.91 $.09 $.80 $.44 Cash Dividends Declared per Share .27 .26 .26 .26 .26 Book Value per Share at Year End 5.97 6.13 5.79 5.87 5.68 Market Price per Share at Year End 35.75 15.44 10.84 12.44 12.81 Average Shares and Equivalents Outstanding 48,062 50,258 49,584 50,510 49,986 FINANCIAL CONDITION Total Assets $755,587 $694,911 $659,012 $533,746 $484,342 Working Capital 100,253 115,878 39,575 50,943 62,711 Current Ratio 1.35 1.53 1.15 1.29 1.43 Interest-Bearing Debt 127,369 131,710 144,188 70,017 39,877 Shareholders' Equity 287,062 308,145 286,915 296,325 283,942 Total Capital 414,431 439,855 431,103 366,342 323,819 Interest-Bearing Debt to Total Capital 30.7 29.9 33.4 19.1 12.3 </TABLE> (1) Shown as a percent of net sales. -9-
10 (Graph) NET SALES IN MILLIONS OF DOLLARS <TABLE> <S> <C> 1993 856 1994 953 1995 1,084 1996 1,284 1997 1,496 </TABLE> -10-
11 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 related footnotes. 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," "plan," "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 undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. OVERVIEW We had another very good year in 1997. This year followed a very strong recovery in 1996, after a year of disappointing results, leadership changes, and restructuring in 1995. We established new performance records in each of the past eight quarters. In 1997, we set new records for net sales, net income, earnings per share, and cash flow. The exceptional operating performance in 1997 enabled us to return $110.4 million to our shareholders in the form of cash dividends and share repurchases. In March of this year, we announced a 2-for-1 stock split and increased our quarterly dividend 11.5 percent to $.0725 per share. We created value for our shareholders and employee-owners through share-price appreciation and dividends. During 1997, a share of Herman Miller stock appreciated 131.6 percent (based on share price) for a total return of 135.0 percent (including dividends) versus 29.5 percent for the S&P 500 as a whole. (graph) <TABLE> <CAPTION> TOTAL RETURN TO SHAREHOLDERS AS A PERCENT S&P 500 Herman Miller <S> <C> <C> 1993 11.56% 37.61% 1994 4.25% -0.90% 1995 20.16% -9.72% 1996 28.55% 43.11% 1997 29.54% 134.95% </TABLE> Our fiscal 1997 financial results reflect the following: - - Accelerated demand for office furniture in the United States - - Increased domestic market share - - Turnaround efforts in our international business - - Improved manufacturing productivity - - Stringent cost containment - - Improved management of working capital -11-
12 REVIEW OF OPERATIONS NET SALES AND EARNINGS PER SHARE One of management's key goals is to increase net sales 15 percent per annum. We exceeded this goal in both 1997 and 1996. Net sales increased 16.5 percent in 1997 to a record $1.49 billion. Net sales increased 18.5 percent and 13.6 percent in the two previous years. Management also set a net income growth goal of 15 percent per annum, excluding unusual charges. Net income grew 50.0 percent in 1997 to a record $84.8 million, or $1.77 per share, excluding the loss on the sale of the German manufacturing operations. Net income grew 74.2 percent in 1996 to $56.5 million, or $1.13 per share, excluding the patent litigation settlement, following a decline of 19.7 percent in 1995, excluding the restructuring charges. DOMESTIC OPERATIONS The United States office furniture industry is enjoying increased sales and strong demand. The Business and Institutional Furniture Manufacturers Association ("BIFMA") reported that United States sales increased approximately 10.7 percent in the 12 months ended May 31, 1997, after increasing 4.8 percent in 1996 and 9.2 percent in 1995. We believe the accelerated demand in recent years is due to secular changes affecting work environments. In particular, new and emerging work styles and the rapid deployment of technology are causing companies to rethink completely their approach to work environments. In addition, the fast-growing high-tech and service sectors of the economy have a high concentration of knowledge workers. These companies and their employees have a higher demand for office furniture that enhances productivity and provides a safe and healthy work environment. (graph) DOMESTIC SALES GROWTH AS A PERCENT <TABLE> <S> <C> <C> BIFMA Herman Miller 1993 7.7% 7.9% 1994 6.9% 10.6% 1995 9.2% 10.1% 1996 4.8% 16.7% 1997 10.7% 19.2% </TABLE> During each of the past three years, our domestic sales have increased at a faster rate than the overall industry. As shown in the graph, our domestic sales grew 19.2 percent, 16.7 percent, and 10.1 percent in 1997, 1996, and 1995, respectively. The increased market share is attributable to: - - An industry trend of consolidation - - Our domestic business strategy announced in fiscal 1996 - - A superior product offering in the systems, seating, and filing and storage segments Over the past 10 years, the combined market share of the five largest manufacturers increased from 41 to 56 percent. This trend is due to both acquisitions and internal growth. Over this same period, our market share increased from seven to 11 percent. This trend reflects our customers' desires to do business with companies that can supply a broad range of value-creating products and services. During 1996, we began to implement a new management and business structure to enable us to focus on two broad customer categories: those with complex needs and those with convenience -12-
13 needs. A key component of this strategy is the development of a seamless distribution network and service business. Over the past three years, our newest venture, Coro, Inc., has completed the acquisition of several privately owned dealers. These dealers, along with privately owned dealers certified by Coro, will be the foundation of a network of local service organizations. Excluding these acquisitions, which were immaterial on an individual basis, our domestic sales increase would have been 16.4 percent in 1997 and 13.7 percent in 1996. Our Miller SQA (SQA stands for Simple, Quick, and Affordable) business unit is focused on our effort to serve customers who seek speed and convenience. 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 reach customers we have not previously served. The accelerated demand for office furniture in the United States reflects the need to efficiently integrate technology into the workspace. Today, this integration is most effectively achieved through the use of office furniture systems. Action Office, our series of three freestanding office partition and furnishing systems, is believed to be the first such system introduced and marketed nationally. We believe our Ethospace system, and recently introduced Q System product lines provide superior technology integration capabilities. In 1997, sales of these product lines grew at a faster rate than our total net sales. During fiscal 1995 and 1994, we invested a significant amount of research and design resources in the complete renewal of our seating lines. This renewal included updating our Equa and Ergon product lines and adding two new award-winning products, Aeron and Ambi seating. We believe based on market demand that these investments have resulted in the strongest work-chair product offering in the industry. We had significant unit volume increases in each of our core product segments in 1997. Excluding the impact of acquisitions, our domestic sales growth was primarily due to unit volume increases. We did not increase list prices in 1997, and discounts from list were comparable to the prior year. Discounts increased from 1995 to 1996, which resulted in slightly lower net prices to customers. Changes in price had an immaterial impact on 1995. INTERNATIONAL OPERATIONS AND EXPORTS FROM THE UNITED STATES One of the key objectives for 1997 was to establish a strategy and action plan for our international business that would improve profitability and provide for an appropriate return on our investment. While sales growth was modest in 1997, our turnaround efforts in Mexico, Canada, and Germany improved our operating results. In 1997, sales from international operations and exports from the United States increased 4.6 percent. The year-over-year growth in sales from international operations and exports from the United States was primarily due to strong growth in the United Kingdom and Canada, offset by the decision to restructure our German operations in the third quarter. -13-
14 (graph) INTERNATIONAL NET SALES IN MILLIONS OF DOLLARS <TABLE> <S> <C> 1993 122 1994 141 1995 189 1996 240 1997 251 </TABLE> The growth in 1996 and 1995 reflected unit volume growth and the impact of acquisitions. Excluding the impact of acquisitions, 1996 and 1995 net sales increased 9.2 percent and 15.3 percent, respectively. Excluding the loss on the disposal of our German manufacturing operations, our international operations earned $1.3 million in comparison to losses of $8.0 million in 1996 and $2.9 million in 1995. The most significant improvements were in our Mexican and Canadian operations. The improvement in our Mexican operation was primarily due to improved gross margins and operating expense reductions implemented in the fourth quarter of 1996 and first quarter of 1997. Gross margins, as a percent of sales, improved from 17.9 percent in 1996 to 35.1 percent in 1997. The improvement was principally due to increased control over project pricing. The increased profitability in our Canadian operation was due to a 29.0 percent increase in sales and the completion of our efforts to integrate an acquisition concluded in fiscal 1996. During the second quarter of fiscal 1997, declining sales and continuing losses at our German subsidiary led us, in accordance with our 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 our 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 us to reach a decision and plan for implementation, based on the results of our various evaluations of potential impairment, we 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 $.10 per share after tax) was recorded for the write-offs of the goodwill and brand-name assets of the subsidiary. During the third quarter of fiscal 1997, we authorized and committed the company to a plan to restructure the manufacturing component of our German operations. The plan involved closing the manufacturing facility in Germany which was expected to be completed in fiscal 1998. Based on the most current information available at that time, we believed that closing the facility was the most viable option. As a result, we recorded a pretax restructuring charge of $13.7 million ($5.4 million, or $.11 per share after tax). During the fourth quarter of fiscal 1997, we were able to sell 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 the end, the sale reduced our exposure to future employment liabilities and maximized the employees' chances for continued employment. -14-
15 In summary, after adjusting for the effects of the sale, the divestiture of the company's investments in its German manufacturing operations resulted in a pretax loss of $14.5 million ($10.4 million, or $.22 per share after tax) in 1997. Our Italian operations continue to be unprofitable. During the fourth quarter, external consultants were engaged to perform a stringent review of the operational costs and processes of the Italian operations. At this time, management does not believe the outcome of this review will result in recommendations that would have a material negative effect on the financial statements. The 1996 loss 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 In 1997, we achieved four consecutive quarters of improved gross margins, after declines in each of the two previous years. In 1997, gross margins improved as we continued to benefit from the manufacturing and logistical changes implemented during 1995. These changes resulted in increased throughput and decreased fixed and semifixed manufacturing costs. These improvements were coupled with a favorable product mix, value enhancement engineering initiatives, and, to a lesser extent, the previously discussed improvement in Mexico. (graph) GROSS MARGIN AS A PERCENT <TABLE> <S> <C> 1993 34.9% 1994 35.4% 1995 34.9% 1996 33.9% 1997 35.7% </TABLE> Gross margins in 1996 were comparable to the second half of 1995. Cost benefits from the manufacturing and logistics changes implemented in 1995 were offset by additional price discounts to customers. The decline in 1995 was primarily attributable to a decline in the third quarter as a result of a 3.5 percent increase in raw material prices. Raw material prices were stable in both 1996 and 1997. In 1995, the company implemented two restructuring initiatives and recorded $31.9 million in pretax restructuring charges. The first initiative reconfigured the company's manufacturing and logistical operations. The reconfiguration enabled the company to develop the capability to process and direct-ship customer orders in their entirety rather than in stages, which requires additional warehousing and transportation between stages. The manufacturing changes also included transferring production of the company's wood casegoods product line to Geiger International and closing our manufacturing facility in North Carolina. -15-
16 The manufacturing improvements were the primary factor enabling us to reduce the days sales outstanding in the sum of accounts receivable and inventory to 63.3 days, compared with 75.6 days and 91.2 days at the end of 1996 and 1995, respectively. The manufacturing improvements have also enabled us to reduce the time required between the receipt of a customer's order and the shipment of the product. This enables us to respond more quickly to changes in demand. OPERATING EXPENSES At the end of 1995, we set a goal of reducing our operating expenses as a percent of net sales to 25 percent by the end of 1998. We define operating expenses as selling, general, administrative, and research and design expenses. In 1997, the total of these expense categories was 26.0 percent of sales compared with 26.7 percent in 1996 and 30.0 percent in 1995. Please note that the 1995 percentage excludes the $12.0 million pretax charge recorded for patent litigation costs. (graph) OPERATING EXPENSES AS A PERCENT OF NET SALES <TABLE> <S> <C> 1993 29.8% 1994 28.9% 1995 29.9% 1996 26.7% 1997 26.0% </TABLE> The improvement in 1997 was the result of stringent cost containment coupled with the continuous redeployment of costs and people to our strategic priorities. The reduction in 1996 was due to restructuring initiatives implemented in 1995. The restructuring included reductions in administrative and staff employment, elimination of nonessential consulting contracts and other programs, and discontinuation of a product development program at our healthcare subsidiary, Milcare. We are pleased with our improved operating expense ratio and are confident that we can reach our goal of 25.0 percent by the end of 1998. We plan to obtain future reductions in operating expenses through continued cost containment, changes to systemic business processes, and improvements in international operations. Selling, general, and administrative expenses including design and research expenses, increased $45.2 million from $343.5 million in 1996, to $388.7 million in 1997. The increase is primarily attributable to acquisitions and new ventures ($10.7 million), a 4.0 percent year-over-year increase in compensation and benefits, and increases in compensation costs that vary with profitability and sales. Research and development costs, excluding royalty payments, were $25.7 million in 1997, compared with $24.5 million in 1996 and $31.3 million in 1995. Royalty payments made to designers of the company's product 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. As a percentage of net sales, research and development costs were 1.7 percent in 1997, 1.9 percent in 1996, and 2.9 -16-
17 percent in 1995. New product design and development has been, and continues to be, a key business strategy. The small decrease in research and development, as percent of sales, in 1997 reflects continued efforts to improve the efficiency of our processes and the timing of major projects. The decrease from 1995 to 1996 reflects a discontinued product development program at Milcare and the completion of several programs to renew our seating offering. In 1996, we introduced three new award-winning product lines. In 1997, we introduced our award-winning Systems Bridge product line. The Systems Bridge enhances a customer's current furniture system's (both ours and the competition's) ability to integrate power and technology into the work space. We expect to introduce several new products over the next 18 to 24 months. 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 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 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. 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. We are not aware of any other litigation or threatened litigation that would have a material impact on the company's financial statements. INCOME TAXES The effective tax rate was 40.9 percent in 1997, compared to 34.5 percent in 1996 and a benefit of 7.4 percent in 1995. The higher tax rate reflects the tax law change effective in 1997 that reduced the benefit of the Corporate Owned Life Insurance Program. During the third and fourth quarters of 1997, provisions were recorded for the potential cost of unwinding this program. The tax rate was also negatively impacted by the loss on the sale of the German manufacturing operations, which provided a tax benefit that was lower than our statutory rate. The 1996 effective tax rate reflects the improved operating performance in the company's domestic operations. The 1996 effective tax rate was benefited by the completion of a sale and leaseback of the company's Roswell, Georgia, facility and the sale of excess land to its captive insurance company. The completion of these transactions resulted in the recognition of certain deferred tax assets that were reserved for in previous periods. The net tax benefit in 1995 was due to relatively -17-
18 small pretax earnings in domestic operations as a result of the restructuring initiatives and poor operating results. In addition, the company generated a net tax benefit from its corporate-owned life insurance program and, to a lesser extent, improved operating results in the United Kingdom and Japan allowed net operating loss carryforwards to be used. Management expects its effective tax rate for 1998 to be in the range of 37.0 to 39.0 percent. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW AND DEBT FINANCING <TABLE> <S> <C> <C> <C> (Dollars In Thousands) 1997 1996 1995 Cash and cash equivalents $106,161 $57,053 $16,488 Cash from operating activities $218,170 $124,458 $29,861 Days sales in accounts receivable and inventory 63.3 75.6 91.2 Capital expenditures $54,470 $54,429 $63,359 Interest-bearing debt to total capital 30.7% 29.9% 33.4% </TABLE> The improved cash flow from operations reflects our increased profitability and a reduction in the cash used for working capital items. As previously mentioned, the working capital improvements are a result of the manufacturing and logistical reconfiguration implemented over the last two years and other operational improvements. (graph) CASH FLOW FROM OPERATING ACTIVITIES IN MILLIONS OF DOLLARS <TABLE> <S> <C> 1993 83 1994 70 1995 30 1996 124 1997 218 </TABLE> The 1997 capital expenditures were primarily spent for a new facility at Meridian, new product development, and machinery and equipment to improve operational performance and expand capacity. We expect capital expenditures, net of asset sales, to increase to $60-$70 million in 1998. The largest expenditures planned in 1998 are for new product development and investments in information systems. We are planning for investments in information technology that will enable us to reach our long-term cost structure and operational performance goals and network our service organizations and independent dealers. The cost of these investments is estimated to be $50-$60 million, and is expected to be made over the next two to four years. An analysis has also been performed of the work necessary to assure that the information systems will be able to deal with the advent of the year 2000. The cost associated with the year 2000 modification will be expensed in the period incurred. We believe these costs will not be material to any fiscal year. 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 $13.5 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 -18-
19 facility will enable us to consolidate the operations currently performed on our owned site with operations performed at two leased locations. As previously discussed, in 1997, we purchased a privately owned United States dealer as part of our service strategy. This local service organization was acquired for approximately $9.7 million. We expect to invest between $15 million and $30 million in acquiring additional local and regional service operations in 1998. At the end of 1997, our cash and cash equivalents were significantly higher than in previous periods. We intend to use the cash and cash equivalents to repurchase shares of the company's common stock, to fund acquisitions related to the service strategy, and to fund future capital expenditures. We believe the cash and cash equivalents, combined with cash flow from operating activities, will be adequate to fund operations, capital expenditures, acquisitions, and dividends. If necessary, the company has $100 million in available committed credit facilities and $90 million in informal credit lines. We have established a target 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 repurchase of the company's common stock subject to market conditions. COMMON STOCK TRANSACTIONS <TABLE> <S> <C> <C> <C> (Dollars In Thousands) 1997 1996 1995 Shares acquired 4,071,081 1,720,790 68,400 Cost of shares acquired $97,962 $25,101 $732 Cost per share acquired $24.06 $14.59 $10.70 Shares issued 763,443 1,463,546 521,226 Cost per share issued $16.21 $12.95 $10.75 Cash dividends $12,593 $12,999 $12,869 Dividends per share $.27 $.26 $.26 </TABLE> (graph) TOTAL CASH RETURNED TO SHAREHOLDERS IN MILLIONS OF DOLLARS <TABLE> <S> <C> 1993 21 1994 38 1995 14 1996 37 1997 110 </TABLE> 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. As a result, at the May 1997 Board of Directors' meeting, the Board authorized the company to repurchase an additional 2.0 million shares. At May 31, 1997, we had approximately 2,836,000 remaining shares under the July 1996 and May 1997 repurchase authorizations. On March 18, 1997, 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 March 31, 1997, payable on April 15, 1997. The distribution increased the number of shares outstanding from 23,657,000 to 47,314,000. All -19-
20 share and per share data, including stock plan information, are restated to reflect the split. The Board of Directors also approved an increase in the cash dividend from $.065 per share to $.0725 per share for shareholders of record on May 31, 1997. ECONOMIC VALUE ADDED One of our primary goals is to create economic value for shareholders and employee-owners. To aid and support the accomplishment of that objective, we have created and installed a performance measurement and compensation system called "Economic Valued Added" (EVA). EVA is an internal measurement of operating and financial performance that extensive independent market research has shown more closely correlates with shareholder value than any other performance measure. (graph) EVA IN MILLIONS OF DOLLARS <TABLE> <S> <C> 1993 -28 1994 -1 1995 -13 1996 10 1997 40 </TABLE> Simply put, EVA is what remains of profits after taxes 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. Herman Miller is effectively 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 sourcing the funds from our investors. As long as we are making investments that earn a return higher than the cost of capital, then our investors should earn a return in excess of their expectations and our stock is likely to command a premium in the marketplace. A critical feature of the new EVA measurement system was linking it to incentive compensation. In 1997, the incentive compensation plans of corporate officers, vice presidents, and directors at each of the business units were linked to the EVA concept. Under the terms of the EVA plan, focus is shifted 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. The improvement is set by the Board of Directors for a period of three years. During 1997, we trained 85 percent of our employee-owners in the EVA concept and developed decision tools and incentive plans that are aligned with our overall EVA goals. -20-
21 CALCULATION OF ECONOMIC VALUE ADDED <TABLE> <S> <C> <C> <C> (Dollars In Thousands) 1997 1996 1995 Operating income $130,683 $74,935 $9,066 Adjust for: Divestiture/patent litigation/restructuring 14,500 16,535 43,900 Interest expense on noncapitalized leases(1) 4,509 4,316 4,215 Goodwill amortization 4,725 4,115 1,272 Other 5,093 3,071 1,121 Increase in reserves 18,649 6,548 506 Capitalized design and research 2,819 1,984 3,450 -------- -------- --------- Adjusted operating profit 180,978 111,504 63,530 Cash taxes(2) (72,091) (34,561) (18,317) -------- -------- --------- Adjusted operating profit after taxes 108,887 76,943 45,213 Weighted average capital employed(3) 617,727 605,438 532,760 Weighted average cost of capital(4) 11% 11% 11% -------- -------- --------- Cost of capital 67,950 66,598 58,604 -------- -------- --------- Economic value added $40,937 $10,345 ($13,391) -------- -------- --------- </TABLE> (1) Imputed interest as if the total non-cancelable lease payments were capitalized. (2) The reported current tax provision is adjusted for the statutory tax impact of interest income and expense. (3) Total assets less non-interest bearing liabilities plus the LIFO, doubtful accounts and notes receivable reserves, warranty reserve, amortized goodwill, loss on sale of the German manufacturing operations, patent litigation settlement costs, 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. (R)EVA is a registered trademark of Stern, Stewart & Co. -21-
22 Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA Summary of the quarterly operating results on a consolidated basis: <TABLE> <CAPTION> May 31, 1997; June 1, 1996; June 3, 1995 (In Thousands Except Per Share Data) First Second Third Fourth Unaudited Quarter Quarter Quarter Quarter <S> <C> <C> <C> <C> <C> 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 Net income per share $.32 $.37 $.28 $.58 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 Net income per share $.24 $.10 $.23 $.34 1995 Net sales $252,831 $279,077 $259,950 $291,192 Gross margin 91,011 99,358 88,881 99,019 Net income 7,937 1,443 4,259 (9,300) Net income per share $.16 $.03 $.09 $ (.19) </TABLE> -22-
23 CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> May 31, 1997; June 1, 1996; June 3, 1995 1997 1996 1995 (In Thousands Except Per Share Data) <S> <C> <C> <C> NET SALES $1,495,885 $1,283,931 $1,083,050 COST OF SALES 961,961 848,985 704,781 ---------- ---------- ---------- GROSS MARGIN 533,924 434,946 378,269 ---------- ---------- ---------- Operating Expenses: Selling, general, and administrative 359,601 316,024 303,621 Design and research 29,140 27,472 33,682 Patent litigation settlement -- 16,515 -- Loss on divestiture/restructuring charges 14,500 -- 31,900 ---------- ---------- ---------- TOTAL OPERATING EXPENSES 403,241 360,011 369,203 ---------- ---------- ---------- OPERATING INCOME 130,683 74,935 9,066 ---------- ---------- ---------- Other Expenses: Interest expense 8,843 7,910 6,299 Interest income (8,926) (6,804) (6,154) Loss on foreign exchange 1,687 1,614 3,067 Other, net 3,196 2,119 1,815 ---------- ---------- ---------- NET OTHER EXPENSES 4,800 4,839 5,027 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 125,883 70,096 4,039 Income Taxes 51,485 24,150 (300) ---------- ---------- ---------- NET INCOME $74,398 $45,946 $4,339 ---------- ---------- ---------- NET INCOME PER SHARE $1.55 $.91 $.09 ---------- ---------- ---------- </TABLE> The accompanying notes are an integral part of these statements. -23-
24 CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> May 31, 1997, and June 1, 1996 1997 1996 (In Thousands Except Share and Per Share Data) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $106,161 $57,053 Accounts receivable, less allowances of $12,943 in 1997 and $10,423 in 1996 179,242 170,116 Inventories 53,877 65,730 Prepaid expenses and other 46,584 42,006 ---------- -------- TOTAL CURRENT ASSETS 385,864 334,905 ---------- -------- Property and Equipment: Land and improvements 26,936 27,386 Buildings and improvements 156,002 159,353 Machinery and equipment 346,653 328,690 Construction in progress 25,991 20,679 ---------- -------- 555,582 536,108 Less accumulated depreciation 290,355 267,343 ---------- -------- NET PROPERTY AND EQUIPMENT 265,227 268,765 ---------- -------- Notes Receivable, less allowances of $8,489 in 1997 and $4,415 in 1996 47,431 39,212 Other Assets 57,065 52,029 ---------- -------- TOTAL ASSETS $755,587 $694,911 ---------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Unfunded checks $25,730 $2,867 Current portion of long-term debt 173 317 Notes payable 17,109 21,148 Accounts payable 76,975 59,208 Accrued liabilities 165,624 135,487 ---------- -------- TOTAL CURRENT LIABILITIES 285,611 219,027 Long-Term Debt, less current portion above 110,087 110,245 Other Liabilities 72,827 57,494 ---------- -------- TOTAL LIABILITIES 468,525 386,766 ---------- -------- Shareholders' Equity: Preferred stock, no par value (10,000,000 shares authorized, none issued) -- -- Common stock, $.20 par value (60,000,000 shares authorized, 46,030,822 and 49,398,460 shares issued and outstanding in 1997 and 1996) 9,207 4,934 Additional paid-in capital -- 14,468 Retained earnings 292,237 303,578 Cumulative translation adjustment (10,863) (11,633) Key executive stock programs (3,519) (3,202) ---------- -------- TOTAL SHAREHOLDERS' EQUITY 287,062 308,145 ---------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $755,587 $694,911 ---------- -------- </TABLE> The accompanying notes are an integral part of these balance sheets. -24-
25 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> (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 <S> <C> <C> <C> <C> <C> <C> BALANCE MAY 28, 1994 $4,918 $16,649 $279,161 $ (3,460) $(943) $296,325 Net income -- -- 4,339 -- -- 4,339 Cash dividends ($.26 per share) -- -- (12,869) -- -- (12,869) Exercise of stock options 23 2,353 -- -- -- 2,376 Common stock issued pursuant to employee stock purchase plan 26 2,592 -- -- -- 2,618 Common stock issued 4 396 -- -- -- 400 Repurchase and retirement of 68,400 shares of common stock (7) (725) -- -- -- (732) Stock grants earned -- -- -- -- 207 207 Stock grants issued 3 299 -- -- (361) (59) Key executive stock purchase assistance plan -- -- -- -- (2,165) (2,165) Current year translation adjustment -- -- -- (3,525) -- (3,525) ------- -------- -------- --------- --------- --------- BALANCE JUNE 3, 1995 $4,967 $21,564 $270,631 $ (6,985) $ (3,262) $286,915 Net income -- -- 45,946 -- -- 45,946 Cash dividends ($.26 per share) -- -- (12,999) -- -- (12,999) Exercise of stock options 79 9,817 -- -- 31 9,927 Common stock issued pursuant to employee stock purchase plan 18 2,258 -- -- -- 2,276 Repurchase and retirement of 1,720,790 shares of common stock(172) (26,006) -- -- 1,077 (25,101) Common stock issued for acquisitions 43 6,425 -- -- -- 6,468 Stock grants earned -- -- -- -- 284 284 Stock grants forfeited (8) (639) -- -- 647 -- Stock grants issued 7 1,049 -- -- (1,467) (411) Key executive 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) $308,145 Net income -- -- 74,398 -- -- 74,398 Cash dividends ($.27 per share) -- -- (12,593) -- -- (12,593) Exercise of stock options 63 9,049 -- -- -- 9,112 Common stock issued pursuant to employee stock purchase plan 14 2,637 -- -- -- 2,651 Repurchase and retirement of 4,071,081 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 Key executive 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 ------- -------- -------- --------- --------- --------- </TABLE> The accompanying notes are an integral part of these statements. -25-
26 CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> May 31, 1997; June 1, 1996; and June 3, 1995 1997 1996 1995 (In Thousands) <S> <C> <C> <C> Cash Flows from Operating Activities: Net Income $74,398 $45,946 $4,339 --------- -------- --------- Adjustments to reconcile net income to net cash provided by operating activities 143,772 78,512 25,522 --------- -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 218,170 124,458 29,861 --------- -------- --------- Cash Flows from Investing Activities: Notes receivable repayments 449,405 455,973 428,375 Notes receivable issued (460,956) (454,261) (436,434) Property and equipment additions (54,470) (54,429) (63,359) Proceeds from sales of property and equipment 5,336 13,486 105 Net cash paid for acquisitions (9,743) (5,101) (17,721) Other, net 1,548 (212) (8,705) --------- -------- --------- NET CASH USED FOR INVESTING ACTIVITIES (68,880) (44,544) (97,739) --------- -------- --------- Cash Flows from Financing Activities: Short-term debt borrowings 236,627 517,862 303,309 Short-term debt repayments (239,417) (579,613) (270,475) Long-term debt borrowings -- 270,985 60,000 Long-term debt repayments (186) (222,772) (20,246) Dividends paid (12,463) (13,015) (12,868) Common stock issued 11,989 12,203 5,394 Common stock repurchased and retired (97,962) (25,101) (732) Capital lease obligation repayments (116) (250) (263) --------- -------- --------- NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (101,528) (39,701) 64,119 --------- -------- --------- Effect of Exchange Rate Changes on Cash and Cash Equivalents 1,346 352 (2,454) --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 49,108 40,565 (6,213) --------- -------- --------- Cash and Cash Equivalents, Beginning of Year 57,053 16,488 22,701 --------- -------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $106,161 $57,053 $16,488 --------- -------- --------- </TABLE> The accompanying notes are an integral part of these statements. -26-
27 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, manufacture, and sale of furniture and furniture systems for offices, and, to a lesser extent, for healthcare facilities. 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 31, 1997, and June 1, 1996, each contained 52 weeks. The year ended June 3, 1995, contained 53 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 U.S. 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 U.S. 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 functional 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 $85.1 million and $58.1 million as of May 31, 1997, and June 1, 1996, respectively. The company's cash equivalents are considered "available for sale." As of May 31, 1997, 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 seven 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 $4.8, $3.9, and $3.9 million in 1997, 1996, and 1995, respectively. -27-
28 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 operations (see Acquisitions and Divestitures note), such provisions were not significant in 1997, 1996, or 1995. Intangible assets included in other assets consist mainly of goodwill, patents, and other acquired intangibles, and are carried at cost, less applicable amortization of $12.1 and $9.5 million in 1997 and 1996, respectively. These assets are amortized using the straight-line method over periods of five 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 implementation of such through design, testing of product alternatives, or construction of -28-
29 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 $25.7, $24.5, and $31.3 million in 1997, 1996, and 1995, 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 February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." The new standard simplifies the computation of earnings per share (EPS) and increases comparability to international standards. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. "Diluted" EPS, which is computed similarly to fully diluted EPS, reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock. The company is required to adopt the new standard in its third quarter of fiscal 1998 financial statements. All prior-period EPS information (including interim EPS) is required to be restated at that time. Early adoption is not permitted. Pro forma EPS, as if the company had adopted SFAS No. 128 at the beginning of each fiscal year are as follows: For the Fiscal Year Ended 1997 1996 1995 Basic EPS $1.57 $.92 $.09 Diluted EPS $1.55 $.91 $.09 -29-
30 ACQUISITIONS AND DIVESTITURES During 1997, 1996, and 1995, 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 1997 and 1996, the company purchased various privately owned United States dealers. These companies were acquired for approximately $21.4 million. The consideration included 212,662 shares of Herman Miller common stock and approximately $15.0 million in cash, which resulted in approximately $14.0 million of goodwill. During 1995, the company purchased Geneal GmbH, a privately held office furniture company in Essen, Germany. The company also purchased a division of B&B Italia, a privately owned office furniture company in Milan, Italy. In addition, the company purchased various privately owned United States and Canadian dealers. These companies were acquired for approximately $21.2 million, which resulted in approximately $9.0 million in 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 $.10 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. The plan involved closing the manufacturing facility in Germany and was expected to be completed in fiscal 1998. 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 $.11 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 restructure 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 operations resulted in a pretax loss of $14.5 million ($10.4 million, or $.22 per share after tax) for fiscal 1997. -30-
31 INVENTORIES (In Thousands) 1997 1996 Finished products $23,552 $24,787 Work in process 8,074 10,896 Raw materials 22,251 30,047 ------- ------- $53,877 $65,730 ------- ------- 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 $27.5 and $30.7 million at May 31, 1997, and June 1, 1996, respectively. If all inventories had been valued using the first-in, first-out method, inventories would have been $15.6 and $16.4 million higher than reported at May 31, 1997, and June 1, 1996, respectively. -31-
32 PREPAID EXPENSES AND OTHER <TABLE> <S> <C> <C> (In Thousands) 1997 1996 Current deferred income taxes $26,382 $21,006 Other 20,202 21,000 -------- -------- $46,584 $42,006 -------- -------- ACCRUED LIABILITIES (In Thousands) 1997 1996 Compensation and employee benefits $80,778 $54,124 Restructuring reserves 3,704 7,493 Income taxes 15,802 13,942 Warranty reserves 11,048 6,510 Other taxes 12,395 11,931 Other 41,897 41,487 -------- -------- $165,624 $135,487 -------- -------- OTHER LIABILITIES (In Thousands) 1997 1996 Postretirement benefits $22,982 $20,522 Other 49,845 36,972 -------- -------- $72,827 $57,494 -------- -------- NOTES PAYABLE (In Thousands) 1997 1996 Non-U.S. dollar currencies $17,109 $21,148 </TABLE> The following information relates to short-term borrowings in 1997: <TABLE> <CAPTION> (Dollars In Thousands) Domestic Foreign <S> <C> <C> Weighted-average interest rate at May 31, 1997 -- 6.4% Weighted-average interest rate at June 1, 1996 -- 6.9% Weighted-average interest rate during 1997 -- 5.3% Unused short-term credit lines $6,000 $38,621 </TABLE> In addition to the company's formal short-term credit lines shown above, the company has available informal lines of credit totaling $90 million. LONG-TERM DEBT <TABLE> <CAPTION> (In Thousands) 1997 1996 <S> <C> <C> 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 260 562 -------- -------- $110,260 $110,562 Less current portion 173 317 -------- -------- $110,087 $110,245 -------- -------- </TABLE> 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, -32-
33 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 1997, the company had no borrowings. During 1996, the company borrowed at a negotiated rate of 6.0 percent. Provisions of the senior notes and the unsecured senior revolving credit loan limit, 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 31, 1997, 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 two-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 book value and accumulated depreciation of the facility are approximately $13.9 million and $6.7 million, respectively. Annual maturities of long-term debt for the five years subsequent to May 31, 1997, (in millions) are as follows: 1998--$.2; 1999--$.1; 2000--$10.0; 2001--$25.0; 2002--$.0; thereafter--$75.0. 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 31, 1997, are as follows: 1998--$15.1; 1999--$11.8; 2000--$9.5; 2001--$7.7; 2002--$6.3; thereafter--$11.1. Total rental expense charged to operations was $20.9, $23.9, and $18.0 million in 1997, 1996, and 1995, respectively. Substantially all such rental expense represented the minimum rental payments under operating leases. DOMESTIC RESTRUCTURING CHARGES In the fiscal year ended June 3, 1995, the company recorded $31.9 million in pretax restructuring charges, which reduced net income by $20.3 million, or $.41 per share. A charge of $15.5 million was taken in the second quarter of fiscal 1995 to account for the closure of certain of the company's manufacturing and logistics facilities prior to the relocation of their production activities to other U.S. Herman Miller facilities. In addition, the charge also included the costs associated with the closure of and discontinuance of wood casegoods manufacturing in the Sanford, North Carolina, facility and the transfer of products produced there to Geiger International of Atlanta, Georgia, a respected contract provider of quality wood casegoods. The $16.4 million charge recorded in the fourth quarter of fiscal 1995 included charges in the United States for reductions in employment and the discontinuation of a product development program at the company's healthcare subsidiary, Milcare. The $31.9 million total pretax restructuring charge consisted of facilities and equipment write-offs ($15.5 million), termination benefits ($14.1 million), and other exit costs associated with the -33-
34 restructuring ($2.3 million). Approximately 535 employees were terminated or took voluntary early retirement as a result of the facility closing and job elimination process. The closure of the manufacturing and logistics facilities was substantially complete at the end of fiscal 1995. The job elimination process was completed in July 1995. Amounts paid or charged against these reserves during fiscal 1997 were as follows: June 1, 1996 Costs Paid May 31, 1997 (In Thousands) Balance or Charged Balance Facilities and equipment $5,330 $2,575 $2,755 Termination benefits 1,885 1,015 870 Other exit costs 278 199 79 ------- ---------- ------- $7,493 $3,789 $3,704 ------- ---------- ------- 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 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. One of Herman Miller, Inc.'s wholly owned foreign subsidiaries has a defined benefit pension plan which is similar to the principal domestic plan. This plan is included in the information presented below. <TABLE> <CAPTION> Net pension cost included the following components: (In Thousands) 1997 1996 1995 <S> <C> <C> <C> Service cost benefits earned during the year $9,620 $8,688 $8,276 Interest cost on projected benefit obligation 12,683 10,588 9,239 Return on assets: Actual (40,365) (27,468) (13,391) Deferred gain 29,357 18,582 5,767 Net amortization (514) (224) 106 Cost of early retirement incentive program -- 479 1,700 -------- -------- -------- Net pension cost $10,781 $10,645 $11,697 -------- -------- -------- </TABLE> -34-
35 The following table presents a reconciliation of the funded status of the plans and the amount recorded in the accompanying balance sheets: <TABLE> <CAPTION> (In Thousands) 1997 1996 <S> <C> <C> Plan assets at fair market value $184,178 $145,678 ---------------------- -------------------- Actuarial present value of benefit obligations: Vested benefits (127,143) (102,236) Nonvested benefits (1,531) (2,271) ---------------------- -------------------- Accumulated benefit obligation (128,674) (104,507) Effect of projected future salary increases (60,069) (53,618) ---------------------- -------------------- Projected benefit obligation (188,743) (158,125) ---------------------- -------------------- Projected benefit obligation in excess of plan assets at fair market value (4,565) (12,447) Unrecognized net asset from date of adoption of SFAS No. 87 (2,506) (3,051) Unrecognized net gain from past experience different from that assumed, and changes in assumptions (18,019) (1,013) Unrecognized prior service cost (229) (218) ---------------------- -------------------- Accrued pension cost included in accrued and other liabilities $ (25,319) $(16,729) ---------------------- -------------------- </TABLE> The assumptions used in the determination of net pension cost were as follows: <TABLE> 1997 1996 1995 <S> <C> <C> <C> Discount rate 7.5% 7.5% 7.5% Rate of salary progression 5.0% 5.0% 5.0% Long-term rate of return on assets 7.5% 7.5% 7.5% </TABLE> Plan assets consist primarily of listed common stocks, mutual funds, and corporate obligations. Plan assets at May 31, 1997, and June 1, 1996, included 655,344 shares of Herman Miller, Inc., common stock. In connection with the 1995 restructuring, the company offered an early retirement incentive program to eligible participants. The results of this program are reflected in the net cost and funded status of the pension plan and postretirement benefits. 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 $6.6, $4.5, and $2.6 million in 1997, 1996, and 1995, respectively. POSTRETIREMENT BENEFITS In addition to providing pension and profit sharing benefits, the company provides healthcare and life insurance benefits for certain retired employees. The components of net postretirement benefit cost were as follows: <TABLE> <CAPTION> (In Thousands) 1997 1996 1995 <S> <C> <C> <C> Service cost $1,132 $1,140 $986 Interest cost on accumulated benefit obligation 1,653 1,496 1,305 Cost of early retirement program -- -- 400 Net amortization (44) (39) (44) ------ ------ ------ Net postretirement benefit cost $2,741 $2,597 $2,647 ------ ------ ------ </TABLE> -35-
36 The following table presents a reconciliation of the plan's funded status with amounts recognized in the accompanying balance sheets: <TABLE> <CAPTION> (In Thousands) 1997 1996 <S> <C> <C> Accumulated postretirement benefit obligation: Retirees $(9,622) $(8,823) Fully eligible, active plan participants (223) (202) Other active plan participants (14,622) (13,212) Unrecognized prior service cost (981) (1,031) Unrecognized net loss 2,359 2,250 --------- --------- Accrued postretirement benefit obligation $(23,089) $(21,018) --------- --------- </TABLE> The accumulated postretirement benefit obligation was computed using an assumed discount rate of 7.5 percent for May 31, 1997, and June 1, 1996. The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., healthcare cost trend rate) is 7.5 percent for 1998 and is assumed to decrease gradually to 6.0 percent for 2001 and remain at that level thereafter. A 1.0 percent increase in this annual trend rate would have increased the accumulated postretirement benefit obligation at May 31, 1997, by $.8 million, with an immaterial effect on 1997 postretirement benefit cost. COMMON STOCK AND PER SHARE INFORMATION On March 18, 1997, 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 March 31, 1997, payable on April 15, 1997. The distribution increased the number of shares outstanding from 23,657,000 to 47,314,000. All share and per share data, including stock plan information, are restated to reflect the split. The Board of Directors also approved an increase in the cash dividend from $.065 to $.0725 per share for shareholders of record on May 31, 1997. Earnings per share of common stock have been computed using the weighted-average number of outstanding common shares and common share equivalents to the extent they are dilutive during each of the three years in the period ended May 31, 1997 (48,062,100 in 1997; 50,257,470 in 1996; 49,584,114 in 1995). 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 31, 1997, 1,888,126 shares remained available for purchase through the plan, and there were 5,102 employees eligible to participate in the plan, of which 1,539 or 30.2 percent, were participants. During 1997, 1996, and 1995, employees purchased 118,798, 178,444 and 264,026 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 31, 1997, there were 150 employees and 11 nonemployee officers and directors eligible, all of whom were participants in the plans. At May 31, 1997, there were 1,390,942 shares available for future options. -36-
37 A summary of shares subject to options follows: <TABLE> <CAPTION> 1997 1996 Weighted- Weighted- Average Average 1997 Exercise 1996 Exercise 1995 Shares Prices Shares Prices Shares <S> <C> <C> <C> <C> <C> Outstanding at beginning of year: 2,431,920 12.95 2,578,700 11.97 2,239,350 Granted 169,000 31.00 807,800 15.14 834,560 Exercised (551,322) 11.56 (786,340) 11.78 (242,800) Terminated (35,500) 15.47 (168,240) 12.78 (252,410) --------- --------- --------- Outstanding at end of year 2,014,098 14.54 2,431,920 12.95 2,578,700 --------- --------- --------- Exercisable at end of year 1,885,098 13.35 1,680,720 11.96 1,796,740 --------- --------- --------- Weighted-average fair market value of options granted 8.84 4.16 </TABLE> -37-
38 A summary of stock options outstanding at May 31, 1997, follows: <TABLE> <CAPTION> Exercisable Stock ------------------------------- Outstanding Stock Options Options -------------------------------------------------------- ------------------------------- Weighted-Average Range of Exercise Shares Remaining Weighted-Average Shares Weighted-Average Price (In Thousands) Contractual Life Exercise Price (In Thousands) Exercise Price <S> <C> <C> <C> <C> <C> $9.31-$13.56 1,070 5.93 years $11.67 1,070 $11.67 $14.56-$35.75 944 8.47 years $17.78 815 $15.56 -------------- -------------- Total 2,014 7.12 years $14.54 1,885 $13.35 -------------- -------------- </TABLE> 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 $1.1 million, or $.02 per share in 1997, and $2.4 million, or $.05 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: 5.93% to 6.35% and 5.70% to 6.19% risk-free interest rates in 1997 and 1996, respectively; three-year expected lives in 1997 and 1996; 31% expected volatility in 1997 and 1996; and .5% expected dividend yields in 1997 and 1996. Black-Scholes is a widely accepted stock option pricing 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 1997, 50,738 shares were granted under the company's long-term incentive plan, 7,200 shares were forfeited, and the forfeiture provisions expired on 32,431 shares. As of May 31, 1997, 117,278 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 $.4, $.3, and $.2 million in 1997, 1996, and 1995, respectively. 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 -38-
39 is fully paid. The plan provides for the key executives to earn repayment of a portion of the notes, 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 31, 1997, the notes outstanding relating to the exercise of options were $.5 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 $1.5 million and are recorded in other assets. Compensation expense related to earned repayment was $3.9 million in 1997, $1.7 million in 1996, and immaterial in 1995. 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. In fiscal 1997, the Board members received 4,968 shares of the company's stock under the plan. INCOME TAXES Pretax income consisted of the following: (In Thousands) 1997 1996 1995 Domestic $141,742 $77,169 $13,418 Foreign (15,859) (7,073) (9,379) ---------- --------- -------- $125,883 $70,096 $4,039 ---------- --------- -------- The provision (credit) for income taxes consisted of the following: (In Thousands) 1997 1996 1995 Current: Domestic--Federal $66,003 $15,725 $18,104 Domestic--State 4,957 1,615 935 Foreign (2,287) (527) (1,580) ---------- --------- -------- $68,673 $16,813 $17,459 ---------- --------- -------- Deferred: Domestic--Federal (15,938) 6,115 (15,137) Domestic--State (677) 50 (1,951) Foreign (573) 1,172 (671) ---------- --------- -------- (17,188) 7,337 (17,759) ---------- --------- -------- Total income tax provision $51,485 $24,150 $ (300) ---------- --------- -------- The following table represents a reconciliation of income taxes at the United States statutory rate with the effective tax rate as follows: <TABLE> <CAPTION> (In Thousands) 1997 1996 1995 <S> <C> <C> <C> Income taxes computed at the United States statutory rate of 35% $44,059 $24,534 $1,414 Increase (decrease) in taxes resulting from: Corporate-owned life insurance 1,854 (3,302) (1,842) Changes in valuation allowance -- (2,762) -- Additional reserves provided -- 2,834 -- State taxes, net 2,782 1,082 (660) Foreign net operating losses -- -- 735 Other 2,790 1,764 53 -------- ------- ------- $51,485 $24,150 $(300) -------- ------- ------- </TABLE> -39-
40 The tax effects and types of temporary differences that give rise to significant components of the deferred tax assets and liabilities at May 31, 1997, and June 1, 1996, are presented below: <TABLE> <S> <C> <C> (In Thousands) 1997 1996 Deferred tax assets: Foreign net operating loss carryforwards $10,791 $22,475 Book over tax loss on sale of fixed assets 6,045 3,506 Compensation related accruals 13,813 11,164 Restructuring charge accruals 1,668 2,774 Accrued postretirement benefit obligation 8,044 7,410 Reserves for inventory 5,295 2,213 Reserve for uncollectible accounts and notes receivable 5,212 2,551 Other 25,540 16,348 Valuation allowance (10,791) (22,475) --------- --------- $65,617 $ 45,966 --------- --------- Deferred tax liabilities: Book basis in property in excess of tax basis $ (19,429) $(17,058) Prepaid employee benefits (2,239) (3,037) Other (8,904) (8,014) --------- --------- $ (30,572) $(28,109) --------- --------- </TABLE> The company has foreign net operating loss carryforwards, the tax benefit of which is $10.8 million, of which $8.8 million expires at various dates through 2006, 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, 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 $40.0 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 31, 1997, and June 1, 1996, 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 31, 1997, and June 1, 1996, the carrying value approximated the fair value of the company's long-term debt. -40-
41 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 1997 and 1996 were not material to the company's results of operations. At May 31, 1997, and June 1, 1996, the company had no outstanding derivative financial instruments. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION The following table presents a reconciliation of net income to net cash provided by operating activities: <TABLE> <S> <C> <C> <C> (In Thousands) 1997 1996 1995 Depreciation and amortization $47,985 $45,009 $39,732 Restructuring charges 14,500 -- 31,900 Provision for losses on accounts and notes receivable 7,302 4,635 1,405 Loss on sales of property and equipment 1,575 120 1,077 Deferred taxes (17,188) 7,337 (17,759) Other liabilities 17,070 1,468 6,587 Stock grants earned 387 284 207 Changes in current assets and liabilities: Decrease (increase) in assets: Accounts receivable (11,735) 4,295 (39,901) Inventories 11,130 11,042 (9,239) Prepaid expenses and other (4,096) (5,009) (3,912) Increase (decrease) in liabilities: Accounts payable 15,296 627 8,674 Accrued liabilities 61,546 8,704 6,751 ---------- ---------- -------- Total changes in current assets and liabilities 72,141 19,659 (37,627) ---------- ---------- -------- Total adjustments $143,772 $78,512 $25,522 ---------- ---------- -------- </TABLE> Cash payments for interest and income taxes were as follows: <TABLE> <S> <C> <C> <C> (In Thousands) 1997 1996 1995 Interest paid $8,759 $7,458 $6,296 Income taxes paid $53,185 $13,883 $16,095 </TABLE> 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 was more likely than not to prevail 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 -41-
42 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 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. 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. 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 31, 1997, June 1, 1996, and June 3, 1995. 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. -42-
43 <TABLE> <CAPTION> (In Thousands) Foreign Adjustments Operations and United States and Exports Eliminations Consolidated <S> <C> <C> <C> <C> 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 ------------ 1995 Sales to unaffiliated customers $894,455 $188,595 $ -- $1,083,050 Transfers between geographic areas 55,206 5,186 (60,392) -- ------------- ----------- ------------ ------------ Net sales $949,661 $193,781 $(60,392) $1,083,050 ------------- ----------- ------------ ------------ Net income (loss) $7,265 $ (2,926) $ -- $4,339 ------------- ----------- ------------ ------------ Identifiable assets $550,666 $91,858 $ -- $642,524 ------------- ----------- ------------ ------------ Corporate assets 16,488 ------------ Total assets $659,012 ------------ </TABLE> -43-
44 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 31, 1997, and June 1, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended May 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Herman Miller, Inc., and subsidiaries as of May 31, 1997, and June 1, 1996, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Grand Rapids, Michigan June 26, 1997 -44-
45 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 26, 1997 -45-
46 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 31, 1997. 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 25, 1997, relating to the company's 1997 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 25, 1997, relating to the company's 1997 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 25, 1997, relating to the company's 1997 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 25, 1997, relating to the company's 1997 Annual Meeting of Shareholders is incorporated by reference. -46-
47 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 Report of Independent Public Accountants 44 Management's Report on Financial Statements 45 (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 the Form 10-K -------------- Report of Independent Public Accountants on Financial Statement Schedule 49 Consent of Independent Public Accountants 50 -47-
48 Page Number in the Form 10-K -------------- Schedule II- Valuation and Qualifying Accounts and Reserves for the Years Ended May 31, 1997; 52 June 1, 1996; and June 3, 1995 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 53 through 55 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 31, 1997. -48-
49 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 26, 1997. 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 26, 1997 -49-
50 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Herman Miller, Inc.: As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement File Numbers 33-5810, 33-43234, 33-43235, 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 27, 1997 -50-
51 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 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on August 27, 1997, 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/ Charles D. Ray /s/ Ruth A. Reister ----------------------- --------------------------------- Charles D. Ray Ruth A. Reister (Director) (Director) /s/ H. Harold Chandler ----------------------- J. Harold Chandler (Director) -51-
52 HERMAN MILLER, INC., AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In Thousands) <TABLE> <CAPTION> 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 Description of period expenses losses (net) (1) Utilized (2) of period <S> <C> <C> <C> <C> <C> <C> Year ended May 31, 1997: Allowance for possible losses on accounts receivable $10,423 $4,809 $-- $2,289 $-- $12,943 Allowance for possible losses on notes receivable $4,415 $4,074 $-- $-- $-- $8,489 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 Year ended June 3, 1995: Allowance for possible losses on accounts receivable $6,742 $405 $-- $(33) $-- $7,180 Allowance for possible losses on notes receivable $2,159 $1,000 $-- $532 $-- $2,627 Valuation allowance for deferred tax asset $21,488 $-- $7,253 $-- $3,504 $25,237 </TABLE> (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. -52-
53 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. 56-69 (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 percent 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. 70-78 (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. * -53-
54 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) 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. * (h) 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. * (i) 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. * (j) 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* (k) 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 * (l) 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. 79-98 -54-
55 (m) 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. 99-100 * denotes compensatory plan or arrangement. (11) Computation of Per Share Earnings. 101 (22) Subsidiaries. 102 (27) Financial Data Schedule (exhibit available upon request) -55-