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Article by DailyStocks_admin    (03-10-08 05:54 AM)

Filed with the SEC from Feb 21 to Feb 27:

Furniture Brands International (FBN)
SCSF Equities has made a "non-binding proposal" to acquire all the furniture company's shares for a "substantial premium" to its recent stock price of $10.18 a share. SCSF said its "strong preference" is to retain management under the private-equity firm's ownership, "although the proposal is not contingent or predicated on management's participation." SCSF didn't detail the exact terms of the proposal, but said it is interested in acquiring the company for cash. SCSF has 4.58 million shares (9.45%).

BUSINESS OVERVIEW

Business

BRANDS AND PRODUCTS

Furniture Brands is a vertically integrated operating company that is one of the nation's leading designers, manufacturers, sourcers, and retailers of home furnishings. We market through a wide range of retail channels, from mass merchant stores to single-branded and independent dealers to specialized interior designers. We serve customers through some of the best known and most respected brands in the furniture industry, including Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Pearson, Hickory Chair, Laneventure, and Maitland-Smith (the "Brands").

Through these Brands, we design, manufacture, source, market and distribute (i) case goods, consisting of bedroom, dining room and living room furniture, (ii) stationary upholstery products, consisting of sofas, loveseats, sectionals and chairs, (iii) occasional furniture, consisting of wood, metal and glass tables, accent pieces, home entertainment centers and home office furniture, (iv) recliners, motion furniture and sleep sofas, and (v) decorative accessories and accent pieces. Our Brands are featured in nearly every price and product category in the residential furniture industry.

Each Brand designs, manufactures, sources and markets home furnishings, targeting a specific segment of the market in terms of style and price point.

•
Broyhill has collections of mid-priced furniture, including both wood furniture and upholstered products, in a wide range of styles.

•
Lane focuses primarily on mid-priced upholstered furniture, reclining chairs, motion furniture, and stationary upholstered furniture and mid-priced wood furniture.

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Laneventure markets a premium-priced indoor/outdoor line of wicker, rattan, bamboo, exposed aluminum and teak furniture.

•
Thomasville has both wood furniture and upholstered products in the mid- to upper-price ranges. Thomasville's Virginia Operations division manufactures and markets promotional-priced case goods and RTA (ready-to-assemble) furniture.

•
Henredon specializes in both wood furniture and upholstered products in the premium-price category.

•
Drexel Heritage has a "tri-branding" strategy, marketing both case goods and upholstered furniture under the three distinct brands of Heritage, Drexel and dh, in categories ranging from mid- to premium-priced.

•
Maitland-Smith designs and manufactures premium hand crafted, antique-inspired furniture, accessories and lighting, utilizing a wide range of unique materials. Maitland-Smith markets under both the Maitland-Smith and LaBarge brand names.

•
Hickory Chair manufactures a premium-priced brand of wood and upholstered furniture, offering traditional and modern styles.

•
Pearson offers contemporary and traditional styles of finely tailored upholstered furniture in the premium-price category.

On October 16, 2007, we announced our intent to divest Hickory Business Furniture (HBF), a wholly-owned subsidiary that designs and manufactures business furniture in the mid- to upper-price range. We believe this transaction will be completed by the end of the first quarter of 2008; therefore, this business unit is reflected as a discontinued operation.

DISTRIBUTION

Our breadth of product and national scope of distribution enable us to service retailers ranging in size from small, independently-owned furniture stores to national and regional department stores and chains. The residential furniture retail industry has consolidated in recent years, displacing many small local and regional furniture retailers with larger chains and specialty stores. This consolidation has made access to distribution channels more difficult, and we believe our relative size and the strength of our brand names offers us an important competitive advantage.

We have a three-tiered approach to our distribution efforts. Our primary avenue of distribution continues to be through a diverse network of independently owned, full-line furniture retailers. Although a number of these retailers have been displaced in recent years, this network remains an important part of our distribution base.

At the same time, as the second element of our distribution strategy, we have developed dedicated distribution channels by expanding our gallery programs. In this approach, retailers employ a consistent concept where products are displayed in complete and fully accessorized room settings instead of as individual pieces. This presentation format encourages consumers to purchase an entire room of furniture instead of individual pieces from different manufacturers. Each of our Brands offer services to retailers to support their marketing efforts, including coordinated national advertising, merchandising and display programs and dealer training.

Lastly, we have further developed our dedicated distribution channel of single-brand retail stores, such as Thomasville Home Furnishings Stores and Drexel Heritage Home Inspiration Stores, and, to a lesser extent, Henredon Stores. These stores are primarily dealer-owned retail locations that exclusively feature a single brand. We believe distributing our products through dedicated, single-brand stores strengthens brand awareness, provides well-informed and focused sales personnel and encourages the purchase of multiple items per visit. While most of these stores are independently-owned, as of the end of 2007 we owned and operated 28 of these single-brand stores and 6 designer showrooms. We believe this ownership brings us closer to the consumer, gives us greater line of sight into developing tastes and trends in the marketplace, and helps us better understand the challenges facing the independent retailers with whom we do the majority of our business.

Our strategy of targeting these diverse distribution channels is supported by dedicated sales forces covering each of these distribution channels. We also continue to explore opportunities to expand international sales and to distribute through non-traditional channels such as wholesale clubs, catalog retailers, and the Internet.

Trade showrooms are located in Thomasville and High Point, North Carolina; Chicago, Illinois; Las Vegas, Nevada; and Tupelo, Mississippi.

MANUFACTURING AND SOURCING

There has been a significant change in recent years in the manner by which we bring products to market. Where we have traditionally been a domestic furniture manufacturer, we have shifted to a blended strategy, mixing domestic production with products sourced from offshore.

We operate 21 case goods, upholstery and component manufacturing facilities, located in North Carolina, Mississippi, Virginia, the Philippines and Indonesia totaling approximately 8.0 million square feet. (See Item 2—Properties for a listing of our principal facilities.)

An increasing percentage of our products are being sourced from manufacturers located offshore, primarily in China, the Philippines, Indonesia, and Vietnam. We design and engineer these products, and then have them manufactured to our specifications by independent offshore manufacturers. We have informal strategic relationships with several of the larger foreign manufacturers whereby we have the ability to purchase, on a coordinated basis, a significant portion of the foreign manufacturers' capacity, subject to quality control and delivery standards. Two of these manufacturers represented 20% and 17% of imported product during 2007 and four other manufacturers represented in excess of 5% each.

We have an agreement with an independently-owned company that provides sourcing assistance, product quality control and other import-related services for us in Asia. This agreement has been terminated, effective June 30, 2008, at which time these functions will be assumed internally.

RAW MATERIALS AND SUPPLIERS

The raw materials used in manufacturing our products include lumber, veneers, plywood, fiberboard, particleboard, steel, paper, hardware, adhesives, finishing materials, glass, mirrored glass, fabrics, leathers, metals, stone, synthetics and upholstered filling material (such as synthetic fibers, foam padding and polyurethane cushioning). The various types of wood used in our products include cherry, oak, maple, pine, pecan, mahogany, alder, ash, poplar, and teak which are purchased both domestically and abroad. We purchase fabrics, leathers and other raw materials both domestically and abroad. We believe our supply sources for these materials are adequate.

We have no long-term supply contracts and we have experienced no significant problems in supplying our operations. Although we have strategically selected our suppliers of raw materials, we believe there are a number of other sources available, contributing to our ability to obtain competitive pricing. Prices fluctuate over time depending upon factors such as supply, demand and weather. Increases in prices may have a short-term impact on our profit margins.

We purchase the majority of raw materials for promotional and RTA products domestically, although we purchase paper and certain hardware abroad. We believe our proximity to and relationship with suppliers is advantageous for the sourcing of such materials. In addition, by consolidating our purchasing of various raw materials (such as foam, cartons, springs and fabric) and services, we have been able to realize cost savings.

MARKETING AND ADVERTISING

We use advertising to increase consumer awareness of our brand names and motivate purchases of our products. Our advertising is targeted to specific consumer segments through national and regional television as well as leading shelter and other popular magazines such as Better Homes and Gardens, House Beautiful and Architectural Digest. Each of our Brands uses focused advertising in major markets to create buying urgency around specific sale events and to provide dealer location information, enabling retailers to be listed jointly in advertisements for maximum advertising efficiency and shared costs. Each of our Brands seeks to increase consumer buying and strengthen relationships with retailers through cooperative advertising and selective promotional programs, and focuses its marketing efforts on prime potential customers utilizing information from databases and from callers to each Brand's toll-free telephone number. Each of our Brands maintains consumer websites to promote their products and drive consumers to retail stores.

USES OF CASH

Our preferred use of free cash is reinvestment in the business. In recent years, as free cash has exceeded the needs of funding the business, we have made dividend payments, repaid debt and repurchased our Common Stock. Going forward we expect to continue to pay dividends and will consider debt repayments and the repurchase of our Common Stock as authorized and as free cash is available. Our revolving credit facility contains restrictions on dividend payments and common stock repurchases if the excess availability falls below certain thresholds.

MANAGEMENT AND EMPLOYEES

As of December 31, 2007, we employed approximately 11,900 full-time employees. None of our employees is represented by a union.

During the past three years, we made a number of changes to our senior management team, attracting talent from outside the furniture industry to further strengthen our organization, to introduce new ideas, new cultures and new attitudes, and to help us both reflect and understand our consumer base. We are also establishing a more comprehensive management development program within the Company to help develop our future leaders.

Through regular interaction, sharing of best practices, and cooperative efforts to reduce costs and drive value, our senior leadership team across all of our Brands operates as a single unit. Our goal is to gain the full leverage of our size, while at the same time retaining the entrepreneurial spirit vital to the success of our Brands.

ENVIRONMENTAL MATTERS

We are subject to a wide range of federal, state and local laws and regulations relating to protection of the environment, worker health and safety and the emission, discharge, storage, treatment and disposal of hazardous materials. These laws include the Clean Air Act of 1970, as amended, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act and the Comprehensive Environmental, Response, Compensation and Liability Act ("Superfund"). Certain of our operations use glues and coating materials that contain chemicals that are considered hazardous under various environmental laws. Accordingly, we closely monitor environmental performance at all of our facilities. We believe we are in substantial compliance with all environmental laws. In our opinion, our ultimate liability, if any, under all such laws is not reasonably likely to have a material adverse effect upon our consolidated financial position or results of operations other than potential exposures with respect to which monitoring or cleanup requirements may change over time.

COMPETITION

The residential furniture industry is highly competitive. Our products compete against domestic manufacturers, importers and foreign manufacturers entering the United States market; as well as increased direct importing by some larger retailers. Our competitors include: Ashley Furniture Industries, Inc.; La-Z-Boy Incorporated; Ethan Allen Interiors Inc. and many other home furnishings retailers and manufacturers. The elements of competition include price, style, quality, service and marketing.

BACKLOG

The combined backlog of our operating companies as of December 31, 2007 was approximately $236 million compared to approximately $248 million as of December 31, 2006. Backlog consists of orders believed to be firm for which a customer purchase order has been received. Since orders may be rescheduled or canceled, backlog does not necessarily reflect future sales levels.

TRADEMARKS AND TRADE NAMES

We utilize trademarks and trade names extensively to promote brand loyalty among consumers. We view such trademarks and trade names as valuable assets and we aggressively protect our trademarks and trade names by taking appropriate legal action against anyone who infringes upon or misuses them.

Our principle trademarks and trade names are: Broyhill, Lane, Laneventure, Thomasville, Henredon, Drexel Heritage, Maitland-Smith, Hickory Chair, Pearson, HBF, Vignettes, and Creative Interiors.

WORKING CAPITAL

For information regarding working capital items, see the description of "Financial Condition and Liquidity—Liquidity" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on Page 14.

INTERNET ACCESS

Forms 10-K, 10-Q, 8-K and all amendments to those reports are available without charge through our website as soon as reasonably practicable after being electronically filed with, or furnished to, the Securities and Exchange Commission. Our website can be accessed at www.furniturebrands.com. Information on our website does not constitute part of this Annual Report on Form 10-K.

CEO BACKGROUND

Katherine Button Bell, 48 Vice President and Chief Marketing Officer of Emerson Electric Co., a manufacturer of electrical, electromechanical and electronic products and systems.

John T. Foy, 59 President and Chief Operating Officer of the Company Director of Renasant Corporation.

Wilbert G. Holliman, 69, Chief Executive Officer of the Company Director of BancorpSouth, Inc.

John R. Jordan, Jr., 68 ,Retired, formerly Vice Chairman of Price Waterhouse (now PricewaterhouseCoopers) Director of Fiduciary Counseling, Inc.

Lee M. Liberman, 85 Chairman Emeritus and currently a consultant to Laclede Gas Company, a gas public utility, of which he was formerly Chairman of the Board and Chief Executive Officer

Richard B. Loynd, 79, President of Loynd Capital Management and currently Chairman of the Executive Committee of the Board Director of Joy Global Inc.

Richard B. Loynd, 79 President of Loynd Capital Management and currently Chairman of the Executive Committee of the Board Director of Joy Global Inc.

Aubrey B. Patterson, 64 Chairman of the Board and Chief Executive Officer of BancorpSouth, Inc., a bank holding company Director of BancorpSouth, Inc.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Furniture Brands is a vertically integrated operating company that is one of the nation's leading designers, manufacturers, sourcers, and retailers of home furnishings. We market through a wide range of retail channels, from mass merchant stores to single-branded and independent dealers to specialized interior designers. We serve customers through some of the best known and most respected brands in the furniture industry, including Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Pearson, Hickory Chair, Laneventure, and Maitland-Smith (the "Brands").

Through these Brands, we design, manufacture, source, market and distribute (i) case goods, consisting of bedroom, dining room and living room furniture, (ii) stationary upholstery products, consisting of sofas, loveseats, sectionals and chairs, (iii) occasional furniture, consisting of wood, metal and glass tables, accent pieces, home entertainment centers and home office furniture, (iv) recliners, motion furniture and sleep sofas, and (v) decorative accessories and accent pieces. These Brand names cover nearly every price and product category in the residential furniture industry.

Our breadth of product and national scope of distribution enable us to service retailers ranging in size from small, independently-owned furniture stores to national and regional department stores and chains. The residential furniture retail industry has consolidated in recent years, displacing many small local and regional furniture retailers with larger chains and specialty stores. This consolidation has made access to distribution channels more difficult, and we believe our relative size and the strength of our Brand names offer us an important competitive advantage.

We have a three-tiered approach to our distribution efforts. Our primary avenue of distribution continues to be through a diverse network of independently owned, full-line furniture retailers. The second element of our retail approach is dedicated distribution channels in the form of gallery programs. In this approach retailers employ a concept where products are displayed in complete and fully accessorized room settings. This presentation format encourages consumers to purchase an entire room of furniture instead of individual pieces from different manufacturers. Lastly, we have further developed our dedicated distribution channels with an expanding network of single-brand retail stores. These stores are primarily dealer-owned retail locations that exclusively feature a single brand, such as Thomasville, Drexel Heritage or Henredon. We believe distributing our products through dedicated, single-brand stores strengthens brand awareness, provides well-informed and focused sales personnel and encourages the purchase of multiple items per visit.

There has been a significant change in recent years in the manner by which we bring products to market. Where we have traditionally been a domestic furniture manufacturer, we have shifted to a blended strategy, mixing domestic production with products sourced from offshore.

We have closed or announced the closing of 38 domestic case goods and upholstery manufacturing facilities since the start of 2001, though we still own and operate 21 such facilities, located in North Carolina, Mississippi, and Virginia.

An increasing percentage of our products are being sourced from manufacturers located offshore, primarily in China, the Philippines, Indonesia, and Vietnam. We design and engineer these products, and then have them manufactured to our specifications by independent offshore manufacturers. We also own and operate 2 offshore manufacturing facilities located in the Philippines and Indonesia.

On October 16, 2007 we announced our intent to divest Hickory Business Furniture (HBF) a wholly owned subsidiary that designs and manufactures business furniture in the mid- to upper-price range. We believe this transaction will be completed by the end of the first quarter of 2008; therefore this business unit is reflected as a discontinued operation.

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net sales for 2007 were $2,082.1 million compared to $2,361.7 million in 2006, a decrease of $279.6 million or 11.8%. The decrease in net sales was driven by weak retail conditions for all brands resulting in higher price discounts and lower sales volume, partially offset by the sales impact of additional Company-owned stores in 2007. The number of Company-owned stores reached 46 in 2007 prior to the closure of 18 stores in December 2007. Company-owned stores totaled 28 at December 31, 2007 versus 21 stores at December 31, 2006.

Gross profit for 2007 was $416.1 million compared to $507.9 million in 2006. Gross margin decreased from 21.5% in 2006 to 20.0% in 2007. The decline in gross profit is attributable to the lower sales volume, increased price discounting, reduced capacity utilization and increased costs associated with the higher inventory levels, partially offset by higher gross profits at retail and cost savings within our supply chain. Restructuring, asset impairment and severance charges included in cost of sales were $5.8 million in 2007 and $5.3 million in 2006.

Selling, general and administrative expenses increased to $469.4 million in 2007 from $432.3 million in 2006. As a percentage of net sales selling, general and administrative expenses increased from 18.3% in 2006 to 22.6% in 2007. Included in selling, general and administrative expenses were restructuring, asset impairment and severance charges of $29.2 million in 2007 and $2.1 million in 2006. Also contributing to the increase in selling, general and administrative expenses were costs associated with the operations of the additional Company-owned retail stores ($17.4 million) and an increase in bad debt expense ($13.6 million) partially offset by decreases in stock option expense ($2.8 million), retirement costs ($2.6 million) and advertising costs ($1.7 million).

Interest expense for 2007 totaled $37.4 million compared to $17.7 million in 2006. The increase in interest expense resulted from increased interest rates, amortization of waiver fees for amendments to our prior debt facilities, the payment of a make-whole premium related to the refinancing of the prior debt facilities and the write off of deferred financing fees associated with the prior debt facilities.

The increase in interest income is due to the increase in short-term investments and notes receivable in 2007. In the second quarter of 2007, in anticipation of refinancing the Note Purchase Agreement, we discontinued hedge accounting treatment on a treasury lock agreement and recorded a gain of $4.1 million. In the second quarter of 2006, in anticipation of refinancing our revolving credit facility, we discontinued hedge accounting treatment on an interest rate swap agreement and recorded a gain of $8.9 million.

Income tax benefit for 2007 totaled $29.3 million, producing an effective tax rate of 36.4%. Income tax expense for 2006 totaled $22.8 million, producing an effective tax rate of 31.3%. The increase in the effective tax rate for 2007 resulted from a lower proportion of income subject to tax in lower marginal rate foreign tax jurisdictions in 2007, a higher proportion of domestic income (loss) in states with higher marginal rates, reduced federal benefits due to the expiration of extra-territorial income exclusion and the non-availability of the domestic manufacturing deduction due to domestic losses.

Earnings (loss) from continuing operations per common share on a diluted basis were ($1.06) in 2007 and $1.02 in 2006. Weighted average shares outstanding used in the calculation of earnings per common share on a diluted basis were 48.4 million in 2007 and 48.8 million in 2006. The reduction in weighted average shares was due to the full year impact of stock repurchases during the first six months of 2006.

Net sales from discontinued operations were $63.6 million in 2007 compared with $56.5 million in 2006. Net earnings were $5.6 million in 2007 compared with $5.1 million in 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Furniture Brands International, Inc. is one of the largest furniture companies in the United States. We market our products through four operating subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc. and HDM Furniture Industries, Inc. (which includes the operations of Henredon, Drexel Heritage and Maitland-Smith). Through these four subsidiaries, we design, manufacture, source, market and distribute a full line of branded products consisting of both wood and upholstered furniture. Also, included in these four operating subsidiaries are 43 Company-owned retail locations

On October 16, 2007, we announced our intent to divest Hickory Business Furniture (HBF), a wholly owned subsidiary that designs and manufacturers business furniture. The decision to divest HBF allows us to focus on residential furniture. We believe this transaction will be completed within six to nine months.

On October 31, 2007, we announced the completion of a thorough analysis of all Company-owned stores. Those stores whose operations failed to meet certain financial benchmarks will be closed in the fourth quarter of 2007. These store closures will result in an estimated charge in the fourth quarter of 2007 related to contract termination costs, one-time termination benefits, fixed asset costs and other associated costs of between $0.18 and $0.22 per common share.

Comparison of Three and Nine months Ended September 30, 2007 and 2006

Net sales for the three months ended September 30, 2007 were $516.3 million, compared to $568.9 million in the three months ended September 30, 2006, a decrease of $52.6 million or 9.2%. For the nine months ended September 30, 2007, net sales decreased $206.3 million or 11.3%, to $1,625.3 million from $1,831.6 million for the nine months ended September 30, 2006. The decrease in net sales for both the three and nine month periods were driven by weak retail conditions for all brands resulting in higher price discounts and lower sales volume, partially offset by the impact of additional Company-owned stores, 43 at September 30, 2007 versus 21 at September 30, 2006.

Gross profit for the three months ended September 30, 2007 was $109.1 million compared to $122.8 million for the three months ended September 30, 2006. Gross margin decreased from 21.6% for the three months ended September 30, 2006 to 21.1% for the three months ended September 30, 2007. Gross profit for the nine months ended September 30, 2007 was $349.1 million compared to $412.9 million for the nine months ended September 30, 2006. Gross margin decreased from 22.5% for the nine months ended September 30, 2006 to 21.5% for the nine months ended September 30, 2007. The decline in gross profit is attributable to lower sales volume, increased price discounting, reduced capacity utilization and increased costs associated with the higher inventory levels, partially offset by higher gross profits at retail and cost savings within our supply chain. Restructuring, asset impairment and severance charges included in cost of sales were $1.1 million and $2.7 million for the three and nine months ended September 30, 2007 and $2.6 million and $4.2 million for the three and nine months ended September 30, 2006.

Selling, general and administrative expenses for the three months ended September 30, 2007 were $110.8 million compared to $109.8 million in the three months ended September 30, 2006. Selling, general and administrative expenses were $331.5 million for the nine months ended September 30, 2007 and $332.4 million for the nine months ended September 30, 2006. Included in selling, general and administrative expenses for the three months and nine months ended September 30, 2007 is a $7.1 million impairment charge to adjust the book value of certain trade names to fair value. While selling, general and administrative expenses for the three months and nine months ending September 30, 2007 remained relatively flat with the comparable periods of 2006, the 2007 periods included lower variable costs such as reductions in sales commissions, compensation costs, stock option expense, royalty costs, and retirement plan costs, and the gain on the sale of an airplane. These reductions were offset by the asset impairment charge previously disclosed, increased professional fees, and increased operating expenses from the additional company-owned retail stores. The decrease in our compensation cost resulted from our workforce reduction in the second quarter of 2007. On April 27, 2007 we announced the elimination of approximately 80 executive and administrative positions; the closure of three manufacturing facilities, resulting in the elimination of approximately 150 positions; and the elimination of approximately 100 positions related to ongoing manufacturing operations. The eliminated executive and administrative positions represented approximately five percent of our non-manufacturing workforce. Restructuring, asset impairment and severance charges were $0.1 million and $1.1 million for the three months and nine months ended September 30, 2007 and $2.0 million and $2.1 million for the three months and nine months ended September 30, 2006.

Interest expense totaled $20.6 million and $31.9 million for the three months and nine months ended September 30, 2007 compared to $4.9 and $12.6 million in the comparable prior periods. The increase in interest expense resulted from increased interest rates, amortization of waiver fees for amendments to our prior debt facilities and amortization of a make-whole payment related to our prior debt facility applicable to the three months and nine months ended September 30, 2007. (See “Financial Condition—Financing Arrangements” for further discussion of our debt refinancing.)

Interest income is received on short-term investments and notes receivable. In the second quarter of 2007, we discontinued hedge accounting treatment on a treasury lock agreement, in anticipation of refinancing our Note Purchase Agreement and recorded a gain of $4.1 million. In the second quarter of 2006, we discontinued hedge accounting treatment on an interest rate swap agreement, in anticipation of refinancing our revolving credit facility and recorded a gain of $8.5 million.

The effective income tax rate was 34.0% and 35.2% for the three months ended September 30, 2007 and 2006, respectively, and 19.9% and 34.9% for the nine months ended September 30, 2007 and 2006, respectively. The decrease in the effective tax rate for the three months and nine months ended September 30, 2007 was primarily related to the benefit of pretax losses offset by the impact of permanent tax differences.

Net earnings (loss) per common share were $(0.28) and $(0.10) for the three months and nine months ended September 30, 2007 compared to $0.12 and $1.08 for the same periods last year. Weighted average common shares outstanding used in the calculation of net earnings (loss) per common share were 48,498 for the three months ended September 30, 2007 and 48,321 for the three months ended September 30, 2006 and 48,427 for the nine months ended September 30, 2007 and 48,894 for the nine months ended September 30, 2006. The reduction in weighted average shares for the nine month period in 2006 was due to the full year impact of stock repurchases during the first six months of 2006.

FINANCIAL CONDITION

Working Capital

Cash and cash equivalents at September 30, 2007 were $92.2 million, compared to $26.6 million at December 31, 2006. For the nine months ended September 30, 2007 net cash provided by operating activities totaled $103.4 million compared to net cash used by operating activities of $9.6 million in the nine months ended September 30, 2006. Cash flow from operations increased due to reductions in working capital versus the working capital increases in the prior year partially offset by a net loss in the nine months ended September 30, 2007. Net cash used by investing activities totaled $0.3 million for the nine months ended September 30, 2007 compared to $14.7 million for the nine months ended September 30, 2006. This decrease is attributed to lower property, plant, and equipment additions and increased proceeds from the disposal of assets, primarily related to the sale of an aircraft. Net cash used by financing activities totaled $37.4 million for the nine months ended September 30, 2007 compared to $48.4 million in the prior year period. Financing activities in the current year included debt payments, net of borrowings, of $10.8 million and dividend payments of $23.3 million. Financing activities in the same period of the prior year included stock repurchases of $40.1 million, dividend payments of $23.5 million partially offset by proceeds from the exercise of stock options (including income tax benefits) of $8.6 million and proceeds from the termination of cash flow hedges of $8.6 million.

Working capital was $747.8 million at September 30, 2007, compared to $752.6 million at December 31, 2006. The current ratio was 4.8-to-1 at September 30, 2007, compared to 5.0-to-1 at December 31, 2006. The decrease in working capital was due to decreases in accounts receivable and inventories, and an increase in accounts payable, partially offset by the payment of current maturities of long-term debt and an increase in cash and cash equivalents.

Financing Arrangements

On August 9, 2007 we refinanced our revolving credit facility with a group of financial institutions. The new facility is a 5-year secured revolving credit facility with a commitment of $550.0 million and is subject to a borrowing base of certain eligible accounts receivable and inventory. The new facility allows for the issuance of letters of credit and cash borrowings. Letters of credit are limited to no more than $100.0 million, with cash borrowings limited by the facilities borrowing base amount less letters of credit outstanding. As of September 30, 2007, there were $300.0 million of cash borrowings, $13.0 million in letters of credit outstanding and approximately $51.0 million of excess availability under the revolving credit facility. An additional $75.0 million would have been available had we been able to met certain financial covenants including a fixed charge coverage ratio.

Cash borrowings under the secured revolving credit facility will be at either (i) a base rate (the greater of the prime rate and the Federal Funds Effective Rate plus ½%) or (ii) an adjusted Eurodollar rate plus an applicable margin, depending upon the type of loan we select. The applicable margin over the adjusted Eurodollar rate is 1.25% for the first six months of the facility and thereafter will fluctuate with excess availability. As of September 30, 2007, loans outstanding under the secured revolving credit facility consisted of $300,000 based on the adjusted Eurodollar rate at a weighted average interest rate of 7.0%.

The revolving credit facility is guaranteed by all of our domestic subsidiaries and is secured primarily by all of our accounts receivable, inventory and cash. Availability under the facility will fluctuate based upon a borrowing base calculation consisting of eligible accounts receivable and inventory. Certain covenants and restrictions, including a fixed charge coverage ratio, will become effective if excess availability falls below certain thresholds.

Funds borrowed under the secured revolving credit facility were used to repay in full the existing indebtedness in the amount of $150.0 million owed pursuant to the terms of the unsecured revolving credit facility dated April 21, 2006, which terminated upon payment. We also repaid in full the $150.0 million of senior notes issued under the Note Purchase Agreement dated May 17, 2006. In connection with the termination of the Note Purchase Agreement, we paid and charged to interest expense a make-whole premium of $17.0 million. In order to mitigate the risk associated with the make-whole premium we entered into a derivative to offset changes in the interest rate and recognized a gain of $2.8 million. This gain was recorded as a reduction of interest expense. In addition, due to the extinguishment of these two credit facilities, deferred financing fees of $1.0 million were charged to interest expense. The impact of these items related to the refinancing of the prior debt facilities to interest expense was $14.6 million and $15.2 million for the three months and nine months ending September 30, 2007, respectively.

Contractual Obligations and Other Commitments

Off-Balance Sheet Arrangement - We have provided guarantees related to store leases for certain independent dealers opening Company-branded stores. The guarantees have remaining terms ranging from one to ten years and generally require us to make lease payments in the event of default by the dealer. In the event of default, we have the right to assign or assume the lease. The total future lease payments guaranteed at September 30, 2007 were $74.7 million. We consider the estimated loss on these guarantees to be insignificant; therefore, as of September 30, 2007 we have not recorded any contingent liability for lease guarantees.


Recently Issued Accounting Pronouncement

In February 2007, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing whether fair value accounting is appropriate for any of our eligible items and have not yet determined the impact, if any, on our consolidated financial statements.

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