**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-K**
| **(Mark one)**                                                                                                                                                                                                     |       |                                                                                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                              | ** ** | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
| **For the fiscal year ended December 31,  2005 or**                                                                                                                                                           |
| **o**                                                                                                                                                                                                              | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| **For the transition period from                 to                 ** |
| **Commission file number I-91**                                                                                                                                                                                    |

 

**Furniture Brands International, Inc.**

(Exact Name ofregistrant as specified in its charter)
| **Delaware**                                                     |   | **43-0337683**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
| **101 South Hanley Road, St. Louis, Missouri**                   |   | **63105**                              |
| (Address  of principal executive offices)                        |   | (Zip  Code)                            |
| (Registrant’s telephone number, including area code)        |   | (314) 863-1100                         |

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:**
|                                                                          | **Title of each class** | ** **               | ** ** |  | **Name of each exchange on which registered** | ** ** |
|--------------------------------------------------------------------------|-------------------------|--------------------------|------------|--|-----------------------------------------------|------------|
| Common  Stock - $1.00 Stated Value  with Preferred Stock Purchase Rights |                    | New York  Stock Exchange |

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:**

**None**

(Title of Class)

Indicate by checkmark if the registrant is a well-known seasoned issuer as defined inRule 405 of the Securities Act.   Yes x     No o

Indicate by checkmark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.   Yes* *o     No* *x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months, and (2) has been subject to such filing requirementsfor the past 90 days.   Yes* *x     No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K   x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

LargeAccelerated Filer x       AcceleratedFiler**o       Non-AcceleratedFiler o

Indicate by checkmark whether the registrant is a shell company (as defined in rule 12b-2of the Exchange Act.).   Yes o     No**x

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant as of June 30,2005, was approximately $1,123,678,700.

Indicate thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

49,542,698 sharesas of February 28, 2006

**DOCUMENTS INCORPORATED BY REFERENCE**

| Portions of Definitive Proxy Statement  for Annual Meeting  of Stockholders on May 4, 2006 |   | Part III |
|-------------------------------------------------------------------------------------------------|--------|---------------|

 

 

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**PART I**

**Item 1.   Business**

(a)            General Development ofBusiness

On January 28,2005, the Company announced, effective February 7, 2005, the appointmentof Denise L. Ramos as Senior Vice President, Treasurer and Chief FinancialOfficer of the Company.

On April 4,2005, the Company announced the appointment of Harvey Dondero as President andChief Executive Officer of Broyhill Furniture Industries, Inc., asubsidiary of the Company.

On April 25,2005, the Company announced the appointment of Joseph P. McClelland, Jr.as Vice-President, Logistics and Supply Chain Management of the Company.

On May 23,2005, the Company announced the operations of Henredon, Drexel Heritage andMaitland-Smith would be consolidated into one reporting structure under theleadership of Jeff Young, who will serve as President and Chief ExecutiveOfficer of HDM Furniture Industries, Inc., a subsidiary of the Company.

On June 7,2005, Thomasville Furniture Industries, Inc., a subsidiary of the Company,announced the closing of a case goods manufacturing facility and severalsmaller support facilities all located in Thomasville, North Carolina. At thesame time, Broyhill Furniture Industries, Inc., a subsidiary of theCompany, announced the closing of two case goods manufacturing facilities bothlocated in Lenoir, North Carolina and the conversion of an upholstery facilityin Rutherfordton, North Carolina into a distribution center.

On July 21,2005, the Company announced the resignation of Randall C. Spak as President andChief Executive Officer of Lane Furniture Industries, Inc. a subsidiary ofthe Company. The Company also announced John T. (Tom) Foy, President and ChiefOperating Officer of the Company will oversee the day-to-day operations at Laneon an interim basis.

On August 5,2005, HDM Furniture Industries, Inc., a subsidiary of the Company,announced the consolidation of two upholstery manufacturing facilities locatedin High Point, North Carolina.

On August 18,2005, the Company announced the appointment of H. Blain Wrench as Vice-President,Retail Development of the Company.

On August 23,2005, the Company announced the appointment of Nancy W. Webster as Presidentand Chief Executive Officer of Thomasville Furniture Industries, Inc., asubsidiary of the Company. The Company also announced Thomas Tilley, who hadbeen serving as President and Chief Executive Officer of Thomasville since2003, will serve as President of Henredon Furniture Industries, Inc., alsoa subsidiary of the Company.

On November 3,2005, Broyhill Furniture Industries, Inc., a subsidiary of the Company,announced the closing of a case goods manufacturing facility and anaccompanying support plant both located in Lenoir, North Carolina.

On December 2,2005, HDM Furniture Industries, Inc., a subsidiary of the Company, announcedthe consolidation of the Drexel Heritage Hildebran plant into the HenredonMorganton plant.

(c)             NarrativeDescription of Business

**BRANDS ANDPRODUCTS**

Furniture Brandsis one of the largest residential furniture companies in the United States. Weare one company marketing our products through four operating subsidiaries:Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.;Thomasville Furniture Industries, Inc.; and HDM Furniture Industries, Inc.

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Through thesefour subsidiaries, we design, manufacture, source, market and distribute (i) casegoods, consisting of bedroom, dining room and living room furniture, (ii) stationaryupholstery products, consisting of sofas, loveseats, sectionals and chairs, (iii) occasionalfurniture, consisting of wood, metal and glass tables, accent pieces, homeentertainment centers and home office furniture, (iv) recliners, motionfurniture and sleep sofas, and (v) decorative accessories and accentpieces. Our brand names are featured in nearly every price and product categoryin the residential furniture industry.

Each Branddesigns, manufactures, sources and markets home furnishings, targeting aspecific segment of the market in terms of style and price point; however, someoverlap exists between the Brands in terms of style and price point. Broyhillhas collections of mid-priced furniture, including both wood furniture andupholstered products, in a wide range of styles. Lane focuses primarily onmid-priced upholstered furniture, reclining chairs, motion furniture, andstationary upholstered furniture. Lane also has a smaller mid-priced woodfurniture division. Thomasville has both wood furniture and upholsteredproducts in the mid- to upper-price ranges. HDM consists of three primaryoperating subsidiaries under one organizational structure: Henredon FurnitureIndustries, Inc., Drexel Heritage Furniture Industries, Inc. andMaitland-Smith Furniture Industries, Inc. Henredon specializes in bothwood furniture and upholstered products in the premium-price category, withimportant licensing arrangements with the Ralph Lauren Home Collection andBarbara Barry Realized by Henredon. Drexel Heritage has a “tri-branding”strategy, marketing both case goods and upholstered furniture under the threedistinct brands of Heritage, Drexel and dh, in categories ranging from mid- topremium-price. Drexel Heritage also has an upscale line of upholstery and casegoods under the Lillian August brand. Maitland-Smith designs andmanufactures premium hand crafted, antique-inspired furniture, accessories andlighting, utilizing a wide range of unique materials. Maitland-Smith marketsunder both the Maitland-Smith and LaBarge brand names.

In addition tothese larger Brands, we have several smaller Brands that focus on niches in thefurniture industry. Laneventure is an indoor/outdoor line of wicker, rattan,bamboo, exposed aluminum and teak furniture. HBF is a contract, officefurniture and textile business in the mid- to upper-price range. Founders andVignettes offer assembled case goods items in the promotional-price category.Creative Interiors markets RTA (ready-to-assemble) case goods furniture.Hickory Chair is a premium-price brand of wood and upholstered furniture,offering traditional styles in its James River and Mount Vernon collections,and furniture in the “warm modernist” style in the Thomas O’Brien collection.Pearson offers contemporary and traditional styles of finely tailoredupholstered furniture in the premium-price category.

**DISTRIBUTION**

Our breadth ofproduct and national scope of distribution enable us to service retailersranging in size from small, independently-owned furniture stores to nationaland regional department stores and chains. The residential furniture retailindustry has consolidated in recent years, displacing many small local andregional furniture retailers with larger chains and specialty stores. Thisconsolidation has made access to distribution channels more difficult, and webelieve our relative size and the strength of our brand names offers us animportant competitive advantage.

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

At the sametime, as the second element of our retail approach, we have developed dedicateddistribution channels by expanding our gallery programs. In this approach, oneused primarily though not exclusively by Broyhill and Lane retailers employ aconsistent concept where products are displayed in complete and fullyaccessorized room settings instead of as individual pieces. This presentationformat encourages consumers to purchase an entire room of furniture instead ofindividual pieces from different 

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manufacturers.Each of our Brands offers services to retailers to support their marketingefforts, including coordinated national advertising, merchandising and displayprograms and dealer training.

Lastly, we havefurther developed our dedicated distribution channels with an expanding networkof single-brand retail stores, such as Thomasville Home Furnishings Stores andDrexel Heritage Home Inspiration Stores, and, to a lesser extent, Lane HomeFurnishing Stores and Broyhill Home Collections Stores. These stores areprimarily dealer-owned retail locations that exclusively feature a singlebrand. We believe distributing our products through dedicated, single-brandstores strengthens brand awareness, provides well-informed and focused salespersonnel and encourages the purchase of multiple items per visit. While mostof these stores are independently-owned, as of the end of 2005 we owned andoperated 14 of these single-brand stores and 6 designer showrooms. We believethis ownership brings us closer to the consumer, gives us greater line of sightinto developing tastes and trends in the marketplace, and helps us betterunderstand the challenges facing the independent retailers with whom we do thebulk of our business.

Our strategy oftargeting these diverse distribution channels is supported by dedicated salesforces covering each of these distribution channels. We also continue toexplore opportunities to expand international sales and to distribute throughnon-traditional channels such as wholesale clubs, catalog retailers, and theInternet.

Trade showroomsare located in Thomasville and High Point, North Carolina; Atlanta, Georgia;Chicago, Illinois; Las Vegas, Nevada; and Tupelo, Mississippi.

**MANUFACTURINGAND SOURCING**

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

We operate 29manufacturing facilities, located in North Carolina, Mississippi, Virginia, thePhilippines and Indonesia. Broyhill operates six case goods and upholsteryproduction facilities totaling approximately 2.9 million square feet, alllocated in North Carolina and Virginia. Lane operates seven upholsteryproduction and component facilities in Mississippi and North Carolina totalingapproximately 3.2 million square feet. Thomasville operates seven case goodsand upholstery production facilities located in North Carolina, totalingapproximately 2.3 million square feet. HDM operates nine case goods andupholstery production facilities encompassing approximately 3.0 million squarefeet located in North Carolina, the Philippines and Indonesia.

An increasingpercentage of our products are being sourced from manufacturers locatedoffshore, primarily in China, the Philippines, Indonesia, and Vietnam. Wedesign and engineer these products, and we have them manufactured to ourspecifications by independent offshore manufacturers. We have informalstrategic alliances with several of the larger foreign manufacturers whereby wehave the ability to purchase, on a coordinated basis, a significant portion ofthe foreign manufacturers’ capacity, subject to quality control and deliverystandards. Two of these manufacturers represented 20% and 12% of importedproduct during 2005 and three other manufacturers represented in excess of 5%each.

We have anagreement with Outlook International, Ltd. (doing business as Furniture BrandsImport Services Organization), an independently owned company that providessourcing assistance, product quality control and other import-related services forus in the Far East.

**RAW MATERIALSAND SUPPLIERS**

The rawmaterials used in manufacturing our products include lumber, veneers, plywood,fiberboard, particleboard, steel, paper, hardware, adhesives, finishingmaterials, glass, mirrored glass, fabrics, 

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leathers,metals, stone, synthetics and upholstered filling material (such as syntheticfibers, foam padding and polyurethane cushioning). The various types of woodused in our products include cherry, oak, maple, pine, pecan, mahogany, alder,ash, poplar, and teak which are purchased both domestically and abroad. Wepurchase fabrics, leathers and other raw materials both domestically andabroad. We believe our supply sources for these materials are adequate.

We have nolong-term supply contracts and we have experienced no significant problems insupplying our operations. Although we have strategically selected our suppliersof raw materials, we believe there are a number of other sources available,contributing to our ability to obtain competitive pricing. Prices fluctuateover time depending upon factors such as supply, demand and weather. Increasesin prices may have a short-term impact on our profit margins. For example, in2005 shortages in foam supply resulted in price increases of approximately 40%.

We purchase themajority of raw materials for promotional and RTA products domestically,although we purchase paper and certain hardware abroad. We believe ourproximity to and relationship with suppliers is advantageous for the sourcingof such materials. In addition, by combining the purchase of various rawmaterials (such as foam, cartons, springs and fabric) and services, we havebeen able to realize cost savings.

**MARKETING ANDADVERTISING**

We useadvertising to increase consumer awareness of our brand names and motivatepurchases of our products. Our advertising is targeted to specific consumersegments through national and regional television as well as leading shelterand other popular magazines such as Better Homes and Gardens, House Beautifuland Architectural Digest. Each of our Brands uses focused advertising in majormarkets to create buying urgency around specific sale events and to providedealer location information, enabling retailers to be listed jointly inadvertisements for maximum advertising efficiency and shared costs. Each of ourBrands seeks to increase consumer buying and strengthen relationships withretailers through cooperative advertising and selective promotional programs,and focuses its marketing efforts on prime potential customers utilizinginformation from databases and from callers to each Brand’s toll-free telephonenumber. Each of our Brands maintain consumer websites to promote their productsand drive consumers to retail stores.

**USES OF CASH**

Our preferreduse of free cash is reinvestment in the business. In recent years, as free cashhas exceeded the needs of funding the business, we have instituted a dividend programand we have been repurchasing our Common Stock. Going forward we expect tocontinue to pay dividends and to consider the repurchase of our Common Stock asfree cash is available.

**MANAGEMENT ANDEMPLOYEES**

As of December 31,2005, we employed approximately 15,150 full-time employees. None of ouremployees are represented by a union.

During 2005, wemade a number of changes to our senior management team, attracting talent fromoutside the furniture industry to further strengthen our organization, tointroduce new ideas, new cultures and new attitudes, and to help us bothreflect and understand our consumer base. We are also establishing a morecomprehensive management development program within the Company to help developour future leaders.

Through regularinteraction, sharing of best practices, and cooperative efforts to reduce costsand drive value, our senior leadership team across all of our Brands operatesas a single unit. Our goal is to 

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gainthe full leverage of our size, while at the same time retaining theentrepreneurial spirit vital to the success of our Brands.

**ENVIRONMENTALMATTERS**

We are subjectto a wide-range of federal, state and local laws and regulations relating toprotection of the environment, worker health and safety and the emission,discharge, storage, treatment and disposal of hazardous materials. These lawsinclude the Clean Air Act of 1970, as amended, the Resource Conservation andRecovery Act, the Federal Water Pollution Control Act and the ComprehensiveEnvironmental, Response, Compensation and Liability Act (“Superfund”). Certainof our operations use glues and coating materials that contain chemicals thatare considered hazardous under various environmental laws. Accordingly, weclosely monitor environmental performance at all of our facilities. We believewe are in substantial compliance with all environmental laws. While we may be requiredto make capital investments from time to time at some of our facilities toensure compliance, we believe we will continue to meet all applicablerequirements in a timely fashion and that the cost required to meet theserequirements will not materially affect our financial condition or our resultsof operations.

**COMPETITION**

The residentialfurniture industry is highly competitive. Our products compete with productsmade by a number of furniture manufacturers and importers, including La-Z-BoyIncorporated, Ethan Allen Interiors Inc. and Ashley Furniture Industries, Inc.,as well as many other smaller companies. The elements of competition includepricing, styling, quality and marketing.

**BACKLOG**

The combinedbacklog of our operating companies as of December 31, 2005 wasapproximately $285 million compared to approximately $275 million as of December 31,2004.

**TRADEMARKS ANDTRADE NAMES**

We utilizetrademarks and trade names extensively to promote brand loyalty amongconsumers. We view such trademarks and tradenames as valuable assets and weaggressively protect our trademarks and trade names by taking appropriate legalaction against anyone who infringes upon or misuses them.

Our principletrademarks and tradenames are: Broyhill, Lane, Laneventure, Thomasville,Henredon, Drexel Heritage, Maitland-Smith, Hickory Chair, Pearson, HBF,Founders Furniture, Vignettes, and Creative Interiors.

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**AVAILABLEINFORMATION**

Forms 10-K,10-Q, 8-K and all amendments to those reports are available withoutcharge through our Internet web site as soon as reasonably practicable afterelectronically filed with, or furnished to, the Securities & ExchangeCommission. Our website can be accessed at www.furniturebrands.com.

**Item 1A.**   RiskFactors

Our operatingresults are subject to quarterly and annual fluctuations as a result of anumber of factors. Such factors include:

*Aneconomic downturn could result in a decrease in our sales and earnings.*

The residentialfurniture industry is subject to cyclical variations in the general economy andto uncertainty regarding future economic prospects. Economic downturns couldaffect consumer spending habits by decreasing the overall demand for homefurnishings. Such events would also impact retailers, our primary customers,resulting in a decrease in our sales and earnings.

*Failureto accomplish our strategic imperatives could result in a decrease in ourfuture sales and earnings.*

We haveestablished the following six strategic imperatives: (1) differentiatingour brands and making them more relevant to the furniture consumer; (2) ensuringproper distribution of our branded products through an intelligent focus onboth dedicated channels and traditional distribution; (3) continuing toshift the sourcing of our products to lower cost options and optimizingdistribution and warehousing; (4) leveraging our size to minimize cost byconsolidating back-office functions and maximizing our purchasing power; (5) continuingto invest our cash flow wisely; and, (6) upgrading the quality of ourmanagement team and creating a strategy that drives results. Failure toaccomplish one or more of these strategic imperatives could result in adecrease in our future sales and earnings.

*Loss ofmarket share due to competition would result in a decrease in our future salesand earnings.*

The residentialfurniture industry is highly competitive and fragmented. We compete with manyother manufacturers and retailers some of which offer widely-advertised,well-known, branded products and large retail furniture dealers who offer theirown store-branded products. The highly competitive nature of the industry meanswe are constantly subject to the risk of losing market share. As a result, wemay not be able to maintain or to raise the prices of our products in responseto such inflationary pressures as increasing costs. Also due to the largenumber of competitors and their wide range of product offerings, we may not beable to differentiate our products (through styling, finish and otherconstruction techniques) from those of our competitors. Large retail furnituredealers have the ability to obtain offshore sourcing on their own.

*Failureto forecast demand or respond to changes in consumer tastes and fashion trendsin a timely manner could result in a decrease in our future sales and earnings.*

Residentialfurniture is a highly styled product subject to fashion trends and geographicconsumer tastes. Consumer tastes and fashion trends can change rapidly. If weare unable to anticipate or respond to changes in consumer tastes and fashiontrends in a timely manner or to otherwise forecast demand accurately, we maylose sales and face excess inventory (both raw materials and finished goods).Disposal of excess inventory may result in a decrease in sales and earnings.

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*Failureto achieve our projected mix of product sales could result in a decrease in ourfuture sales and earnings.*

Some of ourproducts are sold for a higher profit than other of our products. An increasein the sales of our lower profit products at the expense of the sales of ourhigher profit products could result in a decrease in our earnings.

*Businessfailures of large dealers and customers could result in a decrease in ourfuture sales and earnings.*

Although we haveno customers who individually represent 10% or more of our total annual sales,the possibility of business failures of large customers could result in adecrease in our future sales and earnings. Also, we are either lessee on orguarantor of many leases of Company-brand stores operated by independentfurniture dealers. Defaults by any of these dealers would result in ourbecoming responsible for payments under these leases thereby reducing ourfuture earnings.

*Distributionrealignments and cost savings programs can result in a decrease in ournear-term sales and earnings.*

At times it isnecessary we discontinue certain relationships with customers (retailers) whodo not meet our growth and profitability standards. Until realignment isestablished, there can be a decrease in near-term sales and earnings. Wecontinually review relationships with our customers (retailers) and futurerealignments are possible based upon such ongoing reviews.

*Manufacturingrealignments could result in a decrease in our near-term earnings.*

We continuallyreview our domestic manufacturing operations and offshore (import) sourcingcapabilities. Effects of periodic manufacturing realignments and cost savingsprograms could result in a decrease in our near-term earnings until theexpected cost reductions are achieved. Such programs can include theconsolidation and integration of facilities, functions, systems and procedures.Certain products may also be shifted from domestic manufacturing to offshoresourcing. Such actions may not be accomplished as quickly as anticipated andthe expected cost reductions may not be achieved in full.

*Increasedreliance on offshore sourcing of our products subject us to changes in localgovernment regulations and currency fluctuations which could result in a decreasein our earnings.*

During recentyears, we have been increasing our offshore capabilities to provide flexibilityin product programs and pricing to meet competitive pressures. The mix ofproduct lines has been moving from domestically manufactured to offshoresourced. Risks included changes in local government regulations and policies,including those related to tariffs and trade barriers, investments, taxation,exchange controls and repatriation of earnings. Changes in the relative valuesof currencies could increase our costs and decrease our earnings. For example,in 2004 the U.S. Department of Commerce imposed tariffs on wooden bedroomfurniture coming into the United States from China. In this case, none of therates imposed were of significant magnitude to alter our import strategy in anymeaningful way; however, these tariffs are currently under review and could beincreased.

*Ouroperations depend increasingly on production facilities located outside theUnited States which are subject to increased risks of disrupted productionwhich could cause delays in shipments, loss of customers and decreases in salesand earnings.*

We have placedmore production in emerging markets to capitalize on market opportunities andto minimize our costs. Our international production operations could bedisrupted by a natural disaster, labor strike, war, political unrest, terroristactivity or public health concerns, particularly in emerging countries that arenot well-equipped to handle such occurrences. Our production abroad may also bemore 

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susceptibleto changes in laws and policies in host countries and economic and politicalupheaval than our domestic production. Any such disruption could cause delaysin shipments of products, the loss of customers and decreases in sales andearnings.

*Fluctuationsin the price, availability and quality of raw materials could cause delay whichcould result in a decrease in our sales and increase costs which would resultin a decrease in our earnings.*

Fluctuations inthe price, availability and quality of the raw materials we use inmanufacturing residential furniture could have a negative effect on our cost ofsales and ability to meet the demands of our customers (retailers). Inabilityto meet the demands of our customers could result in the loss of future sales.We use various types of wood, fabrics, leathers, glass, upholstered fillingmaterial, steel, and other raw materials in manufacturing furniture. The coststo manufacture furniture depend in part on the market prices of the raw materialsused to produce the furniture. We may not be able to pass along to ourcustomers all or a portion of the costs of higher raw materials due tocompetitive and marketing pressures.

*We aresubject to litigation and environmental regulations that could adversely impactour sales and earnings.*

We are, and mayin the future be, a party to legal proceedings and claims, including thoseinvolving product liability and environmental matters, some of which claimsignificant damages. We face the business risk of exposure to product liabilityclaims in the event that the use of any of our products results in personalinjury or property damage. In the event any of our products prove to bedefective, we may be required to recall or redesign such products. We maintaininsurance against product liability claims, but there can be no assurance suchcoverage will continue to be available on terms acceptable to us or suchcoverage will be adequate for liabilities actually incurred. Given the inherentuncertainty of litigation, we can offer no assurance future litigation will nothave a material adverse impact. We are also subject to various laws andregulations relating to environmental protection and the discharge of materialsinto the environment and we could incur substantial costs as a result of thenoncompliance with or liability for cleanup or other costs or damages underenvironmental laws.

*Futureacquisitions and investment could result in dilution to our earnings per shareand a decrease in the valuation of our Common Stock.*

As part of ourbusiness strategy, we may make acquisitions and investments in businesses thatoffer complementary products. Risks commonly encountered in acquisitionsinclude the possibility that we pay more than the acquired company or assetsare worth, the difficulty of assimilating the operations and personnel of theacquired business, the potential disruption of our ongoing business and thedistraction of our management from ongoing business. Consideration paid forfuture acquisitions could be in the form of cash or stock or a combinationthereof. Dilution to existing stockholders and to earnings per share may resultin connection with any such future acquisition.

*Impairmentof long-lived assets would result in a decrease in our earnings.*

Accounting rules requirethat long-lived assets be tested for impairment at least annually. We havesubstantial long-lived assets, consisting mainly of goodwill, trademarks andproperty, plant and equipment, which based upon the outcome of the annual testcould result in the write-down of all or a portion of these assets and acorresponding reduction in our earnings and net worth.

*Certainanti-takeover provisions and preferred stock issuances could result in adecrease in a potential acquirer’s valuation of our Common Stock.*

Certainprovisions of our Certificate of Incorporation could make it more difficult fora third party to acquire control of us, even if such change in control would bebeneficial to our stockholders. Also, our 

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Certificateof Incorporation allows us to issue preferred stock without stockholderapproval. Such issuances could also make it more difficult for a third party toacquire us.

*Ourgrowth strategy includes the development of new stores each year. If we and ourdealers are not able to open new stores or effectively manage the growth ofthese stores, our ability to grow and our profitability could be adverselyaffected.*

Our growth inpart depends on our ability and the ability of our dealers to open and operatenew stores successfully. We and our dealers opened a net total of 33 stores infiscal 2005. In fiscal 2006, we and our dealers plan to open a similar numberof single brand stores and we anticipate further store openings in subsequentyears. Our ability and the ability of our dealers to identify and open newstores in desirable locations and operate such new stores profitably is afactor in our ability to grow successfully. Increased demands on ouroperational, managerial and administrative resources could cause us to operateour business less effectively, which in turn could cause deterioration in ourprofitability.

*Loss offunding sources would adversely impact our business.*

Access tofunding through the financial markets is important to our business operationsand if we are unable to maintain such access we could experience an adverseeffect on our business and financial results.

**Item 1B.   Unresolved StaffComments**

None.

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**Item 2.   Properties**

We own or lease the following principal plants, offices anddistribution centers:
| Division/Location     | ** ** | ** **                                             | ** ** | **Type of Facility** | ** ** | **Floor Space  (sq.ft.)** | ** **   | **Owned or Leased** | ** ** |
|-----------------------|------------|--------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|--------------|-------------------------------|------------|
| **Furniture Brands:** |       |                                                   |       |                           |       |                           |         |                          |       |
| St. Louis, MO         |       | Headquarters                                           |       | 32,978                         |       |                           | Leased       |                          |       |
| **Broyhill:**         |       |                                                   |       |                           |       |                           |         |                          |       |
| Lenoir, NC            |       | Offices                                                |       | 136,000                        |       |                           | Owned        |                          |       |
| Lenoir, NC            |       | Case goods  plant/distribution center                  |       | 628,000                        |       |                           | Owned        |                          |       |
| Lenoir, NC            |       | Case goods  plant/distribution center                  |       | 772,757                        |       |                           | Owned/Leased |                          |       |
| Lenoir, NC            |       | Upholstery  plant/distribution center                  |       | 262,878                        |       |                           | Owned        |                          |       |
| Taylorsville, NC      |       | Upholstery  plant/distribution center                  |       | 212,754                        |       |                           | Owned        |                          |       |
| Rutherfordton, NC     |       | Distribution  center                                   |       | 1,009,253                      |       |                           | Owned        |                          |       |
| Lenoir, NC            |       | Distribution  center                                   |       | 251,210                        |       |                           | Leased       |                          |       |
| Lenoir, NC            |       | Distribution center                                    |       | 205,964                        |       |                           | Leased       |                          |       |
| Riverside, CA         |       | Distribution  center                                   |       | 202,949                        |       |                           | Leased       |                          |       |
| Appomattox, VA        |       | Case goods  plant/distribution center                  |       | 829,800                        |       |                           | Owned        |                          |       |
| Carysbrook, VA        |       | Case goods  plant                                      |       | 189,000                        |       |                           | Owned        |                          |       |
| **Lane**              |       |                                                   |       |                           |       |                           |         |                          |       |
| Tupelo, MS            |       | Offices/upholstery  plant/distribution center          |       | 715,951                        |       |                           | Owned        |                          |       |
| Saltillo, MS          |       | Upholstery  plant/distribution center                  |       | 830,200                        |       |                           | Owned        |                          |       |
| Verona, MS            |       | Upholstery  plant/distribution center                  |       | 423,392                        |       |                           | Owned        |                          |       |
| Pontotoc, MS          |       | Upholstery  plant/distribution center                  |       | 358,652                        |       |                           | Owned        |                          |       |
| Wren, MS              |       | Distribution  center                                   |       | 494,813                        |       |                           | Leased       |                          |       |
| High Point, NC        |       | Component  plant                                       |       | 187,162                        |       |                           | Owned        |                          |       |
| Conover, NC           |       | Upholstery  plant                                      |       | 351,015                        |       |                           | Owned        |                          |       |
| Conover, NC           |       | Upholstery  plant/distribution center                  |       | 347,500                        |       |                           | Owned        |                          |       |
| **Thomasville:**      |       |                                                   |       |                           |       |                           |         |                          |       |
| Thomasville, NC       |       | Offices/showroom                                       |       | 256,000                        |       |                           | Owned        |                          |       |
| Thomasville, NC       |       | Case goods  plant                                      |       | 325,000                        |       |                           | Owned        |                          |       |
| Thomasville, NC       |       | Case goods  plant                                      |       | 309,850                        |       |                           | Owned        |                          |       |
| Lenoir, NC            |       | Case goods  plant/distribution center                  |       | 828,000                        |       |                           | Owned        |                          |       |
| Troutman, NC          |       | Upholstery  plant                                      |       | 238,200                        |       |                           | Owned        |                          |       |
| Conover, NC           |       | Upholstery  plant                                      |       | 181,900                        |       |                           | Owned        |                          |       |
| Hickory, NC           |       | Upholstery  plant/distribution center                  |       | 209,800                        |       |                           | Leased       |                          |       |
| Thomasville, NC       |       | Distribution  center                                   |       | 731,000                        |       |                           | Owned        |                          |       |
| Hickory, NC           |       | Case goods  plant/upholstery plant/distribution center |       | 214,991                        |       |                           | Owned        |                          |       |
| **HDM:**              |       |                                                   |       |                           |       |                           |         |                          |       |
| Morganton, NC         |       | Upholstery  plant                                      |       | 144,869                        |       |                           | Owned        |                          |       |
| High Point, NC        |       | Upholstery  plant                                      |       | 280,650                        |       |                           | Owned        |                          |       |
| Morganton, NC         |       | Distribution  center                                   |       | 513,800                        |       |                           | Owned        |                          |       |
| High Point, NC        |       | Offices/showroom                                       |       | 100,000                        |       |                           | Owned        |                          |       |
| Longview, NC          |       | Upholstery  plant                                      |       | 260,000                        |       |                           | Leased       |                          |       |
| Morganton, NC         |       | Offices/casegoods  plant                               |       | 898,690                        |       |                           | Owned        |                          |       |
| Mt. Airy, NC          |       | Upholstery  plant                                      |       | 102,500                        |       |                           | Owned        |                          |       |
| Hickory, NC           |       | Case goods  plant/upholstery plant/distribution center |       | 519,011                        |       |                           | Owned        |                          |       |
| High Point, NC        |       | Upholstery  plant/distribution center                  |       | 178,500                        |       |                           | Owned        |                          |       |
| Marion, NC            |       | Distribution  center                                   |       | 400,000                        |       |                           | Leased       |                          |       |
| High Point, NC        |       | Offices/distribution  center                           |       | 220,000                        |       |                           | Leased       |                          |       |
| Cebu, Philippines     |       | Case goods  plant                                      |       | 418,367                        |       |                           | Owned        |                          |       |
| Semarang,  Indonesia  |       | Plant/distribution center                              |       | 176,413                        |       |                           | Leased       |                          |       |

 

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The Tupelo,Mississippi facility is encumbered by a mortgage and first lien securingrevenue bonds.

We believe ourproperties are generally well maintained, suitable for our present operationsand adequate for current production requirements. Productive capacity andextent of utilization of our facilities are difficult to quantify withcertainty because in any one facility maximum capacity and utilization variesperiodically depending upon the product being manufactured, the degree ofautomation and the utilization of the labor force in the facility. In thiscontext, we estimate the overall production capacity, in conjunction with ourimport capabilities, we have the capacity, if necessary, to expand productionto meet anticipated or unanticipated demand.

**Item 3.   LegalProceedings**

We are or maybecome a defendant in a number of pending or threatened legal proceedings inthe ordinary course of business. In our opinion, our ultimate liability, ifany, from all such proceedings will not have a material adverse effect upon ourconsolidated financial position or results of operations or those of oursubsidiaries.

We are alsosubject to regulation regarding environmental matters, and are a party tocertain actions related thereto. For information regarding environmental matters,see “Item 1. Business—Environmental Matters.”

**Item 4.   Submissionof Matters to a Vote of Security Holders**

Not applicable.

**PART II**

**Item 5.   Market for The Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**

(a)            Market Information

Shares of ourCommon Stock are traded on the New York Stock Exchange. The reported high andlow sale prices for our Common Stock on the New York Stock Exchange areincluded in Note 13 to the consolidated financial statements of the Company.

Holders

As of February 28,2006, there were approximately 1,500 holders of record of Common Stock.

Dividends

We paiddividends at the rate of $0.15 per share per quarter during 2005. The dividendrate was increased to $0.16 per share per quarter in January 2006.Additional information concerning dividends may be found in the followingsections of this Form 10-K, which are incorporated into this Item 5.by reference: “Consolidated Statement of Cash Flows”, “Consolidated Statementof Shareholders’ Equity and Comprehensive Income”, and Note 13, “Quarterly FinancialInformation (Unaudited)” in Item 8. Financial Statements and SupplementaryData.

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EquityCompensation Plan Information

The following table sets forth aggregate information regarding theCompany’s equity compensation plans as of December 31, 2005:

| ** **                                                    | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **Number of securities**      | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **remaining available for**   | ** ** |
| ** **                                                    | ** ** | **Number of securities to** | ** ** | **Weighted-average**              | ** ** | **future issuance under**     | ** ** |
| ** **                                                    | ** ** | **be issued upon exercise** | ** ** | **exercise price of**   | ** ** | **equity compensation plans** | ** ** |
| ** **                                                    | ** ** | **of outstanding options,**      | ** ** | **outstanding options,**     | ** ** | **(excluding securities**          | ** ** |
| **Plan Category**                                        | ** ** | ** **                                 | ** ** | **warrants and rights** | ** ** | **warrants and rights**       | ** ** | **reflected in column (a)** | ** ** |
| ** **                                                    | ** ** | **(a)**                                    | ** ** | **(b)**                           | ** ** | **(c)**                                 | ** ** |
| Equity  compensation plans approved by security holders(1)    |       |                                       | 3,823,841  |                              |       |                                    | $          | 23.91 |   |   |   | 1,322,375 |   |   |
| Equity  compensation plans not  approved by security  holders |       |                                       | —     |                              |       |                                    | —     |   |   |   | — |   |   |
| Total                                                         |       |                                       | 3,823,841  |                              |       |                                    | $          | 23.91 |   |   |   | 1,322,375 |   |   |
|                                                               |            |                                            |            |                                   |            |                                         |            |  |  |  |  |  |  |  |  |  |

 

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(1)           Includes the Company’s1992 Stock Option Plan and 1999 Long-Term Incentive Plan. Included in column (a) are52,166 shares of restricted Common Stock that have been awarded and that vestover a period from 3 to 5 years. These shares of restricted Common Stock weredisregarded for purposes of computing the weighted-average exercise price incolumn (b).

Annually, theBoard of Directors determines the amount of fees to be paid to non-employeeDirectors, including an award of restricted shares of Company Common Stock, asdescribed under “Compensation of Board of Directors” in the 2006 ProxyStatement, hereby incorporated by reference. These shares are purchased inopen-market transactions.

Annually, LaneFurniture Industries, Inc., a subsidiary of the Company, awards a limitednumber of shares of Company Common Stock to a few of its truck drivers assafety awards. 568 shares of the Company’s Common Stock were issued as safetyawards in 2005. These shares are purchased in open-market transactions.

Informationregarding the 1992 Stock Option Plan and 1999 Long-Term Incentive Plan setforth in Note 7 of Notes to Consolidated Financial Statements is herebyincorporated by reference.

(c)             RepurchaseOf Equity Securities

| ** **                     | ** ** | ** **         | ** ** | ** **          | ** ** | **Total Number of** | ** ** | **Approximate Dollar**        | ** ** |
|--------------------------------|------------|--------------------|------------|---------------------|------------|-------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **Total**          | ** ** | ** **          | ** ** | **Shares Purchased**     | ** ** | **Value of Shares**      | ** ** |
| ** **                     | ** ** | **Number of** | ** ** | **Average**         | ** ** | **as Part of**      | ** ** | **that May Yet Be** | ** ** |
| ** **                     | ** ** | **Shares**         | ** ** | **Price Paid** | ** ** | **Publicly Announced**   | ** ** | **Purchased Under the**  | ** ** |
| **Period**                     | ** ** | ** **         | ** ** | **Purchased**       | ** ** | **per Share**            | ** ** | **Plans or Programs**    | ** ** | **Plans or Programs** | ** ** |
| October 1 - 31  |       |               | 352,351    |                |       |                          | $          | 17.76                              |       |   |   | 352,351 |   |   |   | $ | 71,659,617 |   |   |
| November 1 - 30 |       |               | 689,000    |                |       |                          | 19.05      |                               |       |   | 689,000 |   |   |   | $ | 58,533,060 |   |   |
| December 1 - 31 |       |               | 506,480    |                |       |                          | 22.26      |                               |       |   | 506,480 |   |   |   | $ | 47,258,190 |   |   |
| Total                          |       |               | 1,547,831  |                |       |                          | $          | 19.81                              |       |   |   | 1,547,831 |   |   |   |   |   |   |
|                                |            |                    |            |                     |            |                               |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

On July 28,2005 the Board of Directors authorized the repurchase of up to $100 million ofits Common Stock over the next 12 month period. As of December 31, 2005,2,711,921 shares have been purchased, leaving $47,258,190 available under thisauthorization.

On January 26,2006 the Board of Directors authorized the repurchase of an additional $50million of Common Stock over the next 12 month period.

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**Item 6.   SelectedFinancial Data**

**FIVE-YEAR CONSOLIDATED FINANCIAL REVIEW**

| ** **                                                    | ** ** | **Year Ended December 31,**                                     | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of  operations:                                       |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net sales                                                     |       | $                                                                              | 2,386,774  |   | $ | 2,447,430 |   | $ | 2,434,130 |   | $ | 2,458,836 |   | $ | 1,940,515 |   |
| Gross profit(1)                                               |       | 539,951                                                                        |       | 579,816 |   | 565,336 |   | 587,352 |   | 433,406 |   |
| Interest expense                                              |       | 11,877                                                                         |       | 15,314 |   | 19,384 |   | 21,732 |   | 21,984 |   |
| Earnings  before income tax                                   |       |                                                                           |       |   |   |   |   |   |   |   |   |
| expense                                                       |       | 91,994                                                                         |       | 142,640 |   | 149,224 |   | 184,424 |   | 87,694 |   |
| Income tax expense                                            |       | 30,558                                                                         |       | 51,073 |   | 54,651 |   | 65,593 |   | 29,664 |   |
| Net earnings                                                  |       | $                                                                              | 61,436     |   | $ | 91,567 |   | $ | 94,573 |   | $ | 118,831 |   | $ | 58,030 |   |
| Per share of  Common Stock  —diluted:                    |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net earnings                                                  |       | $                                                                              | 1.18       |   | $ | 1.66 |   | $ | 1.68 |   | $ | 2.11 |   | $ | 1.13 |   |
| Dividends                                                     |       | $                                                                              | 0.60       |   | $ | 0.525 |   | $ | 0.125 |   | — |   | — |   |
| Weighted  average common shares  —diluted (in thousands) |       | 52,104                                                                         |       | 55,220 |   | 56,256 |   | 56,387 |   | 51,325 |   |
| Other  information:                                           |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Working capital                                               |       | $                                                                              | 718,183    |   | $ | 711,115 |   | $ | 703,233 |   | $ | 652,095 |   | $ | 603,420 |   |
| Property, plant and equipment, net                            |       | 250,817                                                                        |       | 284,973 |   | 310,563 |   | 333,371 |   | 321,640 |   |
| Capital expenditures                                          |       | 28,541                                                                         |       | 30,593 |   | 41,451 |   | 50,214 |   | 22,991 |   |
| Total assets                                                  |       | 1,582,224                                                                      |       | 1,587,759 |   | 1,578,259 |   | 1,567,402 |   | 1,503,489 |   |
| Long-term debt                                                |       | 301,600                                                                        |       | 302,400 |   | 303,200 |   | 374,800 |   | 454,400 |   |
| Shareholders’  equity                                    |       | $                                                                              | 903,952    |   | $ | 957,483 |   | $ | 966,902 |   | $ | 869,515 |   | $ | 759,659 |   |

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(1)           Amounts reflect thereclassification of certain warehouse expenses from selling, general andadministrative expense to cost of goods sold. Reclassifications were $48,851,$48,727, $49,440, $46,206 and $33,388 for 2005 through 2001. Thesereclassifications had no impact on earnings from operations or net earnings.

On December 28,2001, we acquired through a wholly-owned subsidiary—HDM Furniture Industries, Inc.—substantiallyall of the assets and liabilities of Henredon Furniture Industries, DrexelHeritage Furnishings and Maitland-Smith. Because the acquisition occurred priorto the last business day of 2001, it was reflected in our consolidated balancesheet as of December 31, 2001; however, our consolidated results ofoperations for 2001 do not include any of the operations of the acquiredcompanies.

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**Item 7.   Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITION**

**Overview**

Furniture Brandsis one of the largest residential furniture companies in the United States. Weare one company marketing our products through four operating subsidiaries:Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.;Thomasville Furniture Industries, Inc. and HDM Furniture Industries, Inc.

Through thesefour subsidiaries, we design, manufacture, source, market and distribute (i) casegoods, consisting of bedroom, dining room and living room furniture, (ii) stationaryupholstery products, consisting of sofas, loveseats, sectionals and chairs, (iii) occasionalfurniture, consisting of wood, metal and glass tables, accent pieces, homeentertainment centers and home office furniture, (iv) recliners, motionfurniture and sleep sofas, and (v) decorative accessories and accentpieces.

Our brand namesinclude Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Maitland-Smith,Laneventure, HBF, Creative Interiors, Founders, Vignettes, Hickory Chair andPearson. These brand names cover nearly every price and product category in theresidential furniture industry.

Our breadth ofproduct and national scope of distribution enable us to service retailersranging in size from small, independently-owned furniture stores to nationaland regional department stores and chains. The residential furniture retailindustry has consolidated in recent years, displacing many small local andregional furniture retailers with larger chains and specialty stores. Thisconsolidation has made access to distribution channels more difficult, and webelieve our relative size and the strength of our brand names offers us animportant competitive advantage.

We have athree-tiered approach to our distribution efforts. Our primary avenue ofdistribution continues to be through a diverse network of independently owned,full-line furniture retailers. The second element of our retail approach isdedicated distribution channels in the form of gallery programs. In thisapproach retailers employ a concept where products are displayed in completeand fully accessorized room settings. This presentation format encouragesconsumers to purchase an entire room of furniture instead of individual piecesfrom different manufacturers. Lastly, we have further developed our dedicateddistribution channels with an expanding network of single-brand retail stores.These stores are primarily dealer-owned retail locations that exclusivelyfeature a single brand, such as Thomasville, Drexel Heritage, Lane or Broyhill.We believe distributing our products through dedicated, single-brand storesstrengthens brand awareness, provides well-informed and focused sales personneland encourages the purchase of multiple items per visit.

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

We have closedor announced the closing of 31 domestic case goods and upholstery manufacturingfacilities since the start of 2001, though we still own and operate 27 suchfacilities, located in North Carolina, Mississippi, and Virginia.

An increasingpercentage of our products are being sourced from manufacturers locatedoffshore, primarily in China, the Philippines, Indonesia, and Vietnam. Wedesign and engineer these products, and we have them manufactured to ourspecifications by independent offshore manufacturers. We also own and operate 2offshore manufacturing facilities located in the Philippines and Indonesia.

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**Results ofOperations**

As an aid to understanding the our results of operations on acomparative basis, the following table has been prepared to set forth certainstatement of operations and other data for 2005, 2004, and 2003:

| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | **Net** | ** ** | ** ** | ** ** | **Net** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                    | ** ** | **Dollars**                                | ** ** | **Sales** | ** ** | **Dollars** | ** ** | **Sales** | ** ** | **Dollars** | ** ** | **Sales** | ** ** |
| ** **                                    | ** ** | **(Dollars in millions)**        | ** ** |
| Net  sales                                    |       | $                                          | 2,386.8    |   | 100.0 | % | $ | 2,447.4 |   | 100.0 | % | $ | 2,434.1 |   | 100.0 | % |
| Cost of  sales                                |       | 1,846.8                                    |       | 77.4 |   | 1,867.6 |   | 76.3 |   | 1,868.8 |   | 76.8 |   |
| Gross  Profit                                 |       | 540.0                                      |       | 22.6 |   | 579.8 |   | 23.7 |   | 565.3 |   | 23.2 |   |
| Selling,  general and administrative expenses |       | 440.7                                      |       | 18.4 |   | 424.1 |   | 17.4 |   | 400.2 |   | 16.4 |   |
| Earnings  from operations                     |       | 99.3                                       |       | 4.2 |   | 155.7 |   | 6.3 |   | 165.1 |   | 6.8 |   |
| Interest  expense                             |       | 11.9                                       |       | 0.5 |   | 15.3 |   | 0.6 |   | 19.4 |   | 0.8 |   |
| Other  income, net                            |       | 4.6                                        |       | 0.2 |   | 2.3 |   | 0.1 |   | 3.5 |   | 0.1 |   |
| Earnings  before income tax expense           |       | 92.0                                       |       | 3.9 |   | 142.7 |   | 5.8 |   | 149.2 |   | 6.1 |   |
| Income  tax expense                           |       | 30.6                                       |       | 1.3 |   | 51.1 |   | 2.1 |   | 54.6 |   | 2.2 |   |
| Net  earnings                                 |       | $                                          | 61.4       |   | 2.6 | % | $ | 91.6 |   | 3.7 | % | $ | 94.6 |   | 3.9 | % |
| Earnings per  common share—  diluted     |       | $                                          | 1.18       |   | — |   | $ | 1.66 |   | — |   | $ | 1.68 |   | — |   |

 

**YearEnded December 31, 2005 Compared to Year Ended December 31, 2004**

Net sales for2005 were $2,386.8 million compared to $2,447.4 million in 2004, a decrease of$60.6 million or 2.5%. The decrease reflects weakness at our mid-priced brands,resulting from the decline in domestic case goods shipments in anticipation ofimported products and a loss of sales to certain major customers. The decreasewas partially offset by revenue increases at the high-end due to improvedservice positions and product differentiation. Increased revenues were alsoachieved from additional Company-owned stores, 14 stores at the end of 2005versus 9 stores at the end of 2004.

Gross profit for2005 was $540.0 million compared to $579.8 million in 2004. Gross margindecreased from 23.7% in 2004 to 22.6% in 2005. The decrease in gross margin wasdue to raw material price increases (foam increased 42% in the fourth quarterof 2005) which were only partially offset with wholesale price increases andsurcharges, manufacturing inefficiencies resulting from plant closures,additional restructuring charges and pricing pressures at Brands doing businesswith large discount chains.

Selling, generaland administrative expenses increased to $440.7 million in 2005 from $424.1million in 2004. As a percentage of net sales these expenses increased from17.4% in 2004 to 18.4% in 2005. The increase was due to increased expensesassociated with additional Company-owned retail stores ($14.6 million),increased restructuring charges ($10.7 million) and increased pension expense($4.4 million due primarily to changes in actuarial assumptions), partiallyoffset by reduced advertising costs ($5.9 million) and bad debt expense ($7.4million).

Interest expensefor 2005 totaled $11.9 million compared to $15.3 million in 2004. The decreasein interest expense reflects a lower effective interest rate due to the fullyear impact of the interest rate swaps entered into in May 2004.

Other income,net for 2005 totaled $4.6 million compared to $2.3 million for 2004. For 2005,other income consisted of interest on short-term investments and notesreceivable of $2.6 million compared to $1.1 million in 2004, and othermiscellaneous income and expense items totaling $2.0 million (including 

16

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proceedsreceived from an anti-trust lawsuit settlement) in 2005 compared with $1.2million in 2004. The increased interest income reflects increased levels ofinvested funds and higher interest rates.

Income tax expensefor 2005 totaled $30.6 million, producing an effective tax rate of 33.2%compared with an effective tax rate of 35.8% for 2004. The decrease in theeffective tax rate for 2005 was primarily the result of the Federal DomesticManufacturing deductions enacted under the American Job Creations Act andfederal and state income tax credits.

Earnings percommon share on a diluted basis were $1.18 in 2005 and $1.66 in 2004. Weightedaverage shares outstanding used in the calculation of earnings per common shareon a diluted basis were 52,103,975 in 2005 and 55,219,572 in 2004. Thereduction in average shares outstanding was due to the repurchase of 4,125,588shares during the year.

Year Ended December 31,2004 Compared to Year Ended December 31, 2003

Net sales for2004 were $2,447.4 million, essentially unchanged from $2,434.1 millionreported for 2003. We were negatively impacted by the bankruptcy of a majorcustomer at mid-year which resulted in the loss of over $40.0 million in annualsales volume.

Gross profit for2004 was $579.8 million compared to $565.3 million in 2003. Gross marginincreased from 23.2% for 2003 to 23.7% for 2004. The increase in gross marginwas due to an increase in imported product partially offset by a decrease indomestic capacity utilization and increases in raw material prices.

Selling, generaland administrative expenses increased to $424.1 million in 2004 from $400.2million in 2003. As a percentage of net sales, these expenses increased from16.4% in 2003 to 17.4% in 2004. The increase was due to additional bad debtexpense ($12.6 million of which $8.3 million related to a major customerbankruptcy),increased expenses associated with additional Company-owned retailstores ($8.3 million), increases in pension expense ($6.3 million due primarilyto actuarial assumption changes), advertising ($5.0 million) and professionalfees ($3.2 million), partially offset by reduced asset impairment andrestructuring charges ($8.6 million).

Interest expensefor 2004 totaled $15.3 million compared to $19.4 million in 2003. The decreasein interest expense reflects our long-term debt reduction program and lowerinterest rates.

Other income,net for 2004 totaled $2.3 million compared to $3.5 million for 2003. For 2004,other income consisted of interest on short-term investments and notesreceivable of $1.1 million compared with $0.7 million in 2003 and othermiscellaneous income and expense items totaling $1.2 million compared with $2.8million in 2003.

Income taxexpense for 2004 totaled $51.1 million, producing an effective tax rate of35.8% compared with an effective tax rate of 36.6% for 2003. The decrease inthe effective tax rate for 2004 was the result of increased federal researchand development credits and reduced state income taxes.

Earnings percommon share on a diluted basis were $1.66 in 2004 and $1.68 in 2003. Weightedaverage shares outstanding used in the calculation of earnings per common shareon a diluted basis were 55,219,572 in 2004 and 56,255,788 in 2003. Thereduction in average shares outstanding was due to the impact of stockrepurchases during 2004. We did not repurchase stock in 2003.

**FinancialCondition and Liquidity**

**Liquidity**

Cash and cashequivalents at December 31, 2005 totaled $114.3 million compared to $51.2million at December 31, 2004. For 2005, net cash provided by operatingactivities totaled $189.0 million of which $72.0 million resulted from changesin operating assets and liabilities. Net cash used by investing 

17

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activitiestotaled $18.7 million. Net cash used by financing activities totaled $107.2million and was primarily for dividends and Common Stock repurchases.

Working capitalwas $718.2 million at December 31, 2005 compared to $711.1 million at December 31,2004. The current ratio was 4.4-to-1 at December 31, 2005compared to 4.6-to-1 at December 31, 2004.

At December 31,2005, long-term debt totaled $301.6 million compared to $302.4 million at December 31,2004. Our funded debt-to-capitalization ratio was 25.0% at December 31,2005 compared to 24.0% at December 31, 2004.

**FinancingArrangements**

To meetshort-term capital and other financial requirements, we maintain a $450.0million revolving credit facility with a group of financial institutions. Therevolving credit facility allows for the issuance of letters of credit and cashborrowings. Letters of credit outstanding are limited to no more than $150.0million, with cash borrowings limited only by the facility’s maximumavailability less outstanding letters of credit. On December 31, 2005,there were $300.0 million in cash borrowings and $16.3 million in letters ofcredit outstanding, leaving an excess of $133.7 million available under thefacility for future liquidity needs.

Cash borrowingsunder the revolving credit facility bear interest at a base rate or at anadjusted Eurodollar rate plus an applicable margin which varies depending uponthe type of loan we execute. The applicable margin over the base rate andEurodollar rate is subject to adjustment based upon achieving certain creditratings. At December 31, 2005, loans outstanding under the revolvingcredit facility consisted of $300.0 million based on the adjusted Eurodollarrate which in conjunction with the interest rate swaps described below, under “MarketRisk”, have a weighted average interest rate of 3.74%.

We believe that our revolving credit facility, together with ourhistorically strong cash generation from operations, will be adequate to meetliquidity requirements for the foreseeable future. These requirements wouldinclude normal, historical capital expenditure levels as well as our cashdividend program. The following table summarizes the cash payments related toour outstanding contractual obligations:

| ** **                                      | ** ** | **Less**        | ** ** | ** ** | ** ** | ** ** | ** ** | **More**        | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-----------------|------------|------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                                      | ** ** | **than 1** | ** ** | **1-3**    | ** ** | **4-5**    | ** ** | **than 5** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **year**        | ** ** | **years**  | ** ** | **years**  | ** ** | **years**       | ** ** | **Total**  | ** ** |
| Long-term  debt obligations                     |       | $               | 0.8        |       | $          | 301.6      |       | $               | —     |       | $          | — |   | $ | 302.4 |   |
| Operating  lease obligations (net of subleases) |       | 31.9            |       | 53.3       |       | 40.6       |       | 52.0            |       | 177.8      |       |
| Purchase  obligations(1)                        |       | —          |       | —     |       | —     |       | —          |       | —     |       |
|                                            |       | $               | 32.7       |       | $          | 354.9      |       | $               | 40.6       |       | $          | 52.0 |   | $ | 480.2 |   |

 

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(1)           Weare not a party to any long-term supply contracts. We do, in the normal courseof business, initiate purchase orders for the procurement of finished goods,raw materials and other services. All purchase orders are based upon currentrequirements and are fulfilled within a short period of time.

**Other**

**MarketRisk**

We have exposureto market risk from changes in interest rates. Our exposure to interest raterisk consists of interest expense on our floating rate revolving creditfacility and interest income on our cash equivalents. Interest expense ismanaged using interest rate swaps to fix our floating rate long-term debt.Currently interest rate swaps fix the rate on the entire outstanding balance ofthe revolving credit facility; therefore, an increase in interest rates wouldhave no impact on our interest expense.

18

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**FundedStatus of the Defined Benefit Pension Plan**

As of December 31,2005, the accumulated benefit obligation of our defined benefit pension planexceeded the fair value of the plan’s assets. As a result, the minimum pensionliability increased by $19.3 million. Total minimum pension liability at December 31,2005 was $74.0 million, $46.6 million, net of income tax benefit. The after taxcharge is recorded as a component of other comprehensive income (expense).

**CriticalAccounting Policies**

The preparationof financial statements in conformity with U.S. generally accepted accountingprinciples requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Actual results arelikely to differ from those estimates, but, based upon information presentlyavailable, we believe such differences will not be significant.

**RevenueRecognition**

Revenues (sales)are recognized when the following criteria are met: (1) persuasiveevidence of an arrangement exists; (2) there is a fixed or determinableprice; (3) delivery has occurred; and (4) collectibility isreasonably assured. These criteria are satisfied and revenue recognizedprimarily upon shipment of product. Appropriate provisions for customer returnsand discounts are recorded based upon historical results.

**Allowancefor Doubtful Accounts**

We maintain anallowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. The allowance fordoubtful accounts is based upon the review of specific customer account balances,historical experience and an overall aging of the accounts receivable.

**Inventories**

Inventories arestated at the lower of cost (first-in, first-out) or market. Inventories areregularly reviewed for excess quantities and obsolescence based upon historicalexperience, specific identification of discontinued items, future demand andmarket conditions and appropriate adjustments are recorded. If actual demand ormarket conditions are less favorable than estimated then additional inventorywrite-downs would be required.

**Long-livedAssets**

Long-livedassets, which consist primarily of goodwill, trademarks and property, plant andequipment, are reviewed for impairment whenever events or changes in businesscircumstances indicate the carrying values of the assets may not berecoverable. If we determine the carrying value of the long-lived asset may notbe recoverable an impairment charge would be recorded in the amount by whichthe long-lived asset exceeds fair value. Fair value is determined based ondiscounted cash flow using a discount rate commensurate with the risk inherentin our business. Impairment losses are recognized if expected future cash flowsof the related assets are less than the carrying value.

**RetirementPlans**

Defined benefitplan expense and obligation calculations are dependent on various assumptions.These assumptions include discount rate, expected return on plan assets andrate of compensation increase. The discount rate used to calculate theretirement obligations at December 31, 2005 was 

19

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5.75% and wasdetermined using Moody’s aa bond index customized to the plan’s projectedbenefit cash flow. In 2005, retirement plan expense was calculated using anexpected return on plan assets of 7.5% and the rate of compensation increases of3.5%. The expected return on plan assets was developed through analysis ofhistorical market returns by asset class, current market conditions and thetrust fund’s past experience. The rate of compensation increases was based uponhistorical experience. We believe these assumptions to be reasonable; however,differences in assumptions would impact the calculated obligation and futureexpense. For example, a 0.25% change in the discount rate would result in a $15million change in the pension obligation and a 0.25% change in the expectedreturn on plan assets would result in a $0.9 million change in pension expense.

On December 31,2005 the defined benefit plans were amended, freezing and ceasing futurebenefits as of that date. Certain transition benefits will be provided toparticipants who have attained age 50 and have completed 10 years of servicesas of December 31, 2005. We will provide future retirement benefits to ouremployees by increasing the match in the defined contribution plan. Estimated2006 expense for the defined benefit plans is expected to decrease by $7.0million and expense for the defined contribution plan is expected to increaseby $12.0 million. This net increase of $5.0 million approximates what the twoplans combined would have experienced without the amendment.

**RecentlyIssued Statements of Financial Accounting Standards**

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment.This statement is a revision of SFAS No. 123, Accounting for Stock-BasedCompensation and supersedes APB Opinion No. 25, Accounting for StockIssued to Employees. SFAS No. 123 (revised 2004) establishes standards forthe accounting for transactions in which an entity exchanges its equityinstruments for goods or services. The statement is effective as of thebeginning of the annual reporting period that begins after June 15, 2005.The impact of adopting SFAS No. 123 (revised 2004) is not expected to bematerially different than the effects disclosed in Note 2 in the Notes toConsolidated Financial Statements.

**Outlook**

Businessconditions remain relatively unchanged from the end of January when welast commented on current trends. Orders are tracking up in the mid-singledigits and sales are slightly positive versus the year ago period. We reaffirmthe guidance we gave at the end ot January—net earnings per common share of 43to 47 cents including the effect of 2 cents of previously disclosedrestructuring, asset impairment and severance charges.

**Forward-LookingStatements**

We have madeforward-looking statements within the meaning of the “safe harbor” provisionsof the Private Securities Litigation Reform Act of 1995. These forward-lookingstatements include our expected sales, earnings per share, profit margins, andcash flows, the effects of certain manufacturing realignments and otherbusiness strategies, the prospects for the overall business environment, andother statements containing the words “expects,” “anticipates,” “estimates,” “believes,”and words of similar import. We caution investors any such forward-lookingstatements are not guarantees of future performance and certain factors maycause actual results to differ materially from those in the forward-lookingstatements. Such factors include, but are not limited to: changes in economicconditions; failure to accomplish our strategic imperatives; loss of marketshare due to competition; failure to forecast demand or anticipate or respondto changes in consumer tastes and fashion trends; failure to achieve projectedmix of product sales; business failures of large customers; distribution andcost savings programs; manufacturing realignments; increased reliance onoffshore (import) sourcing of various products; fluctuations in the cost,availability and quality of raw materials; product liability uncertainty;environmental regulations; future acquisitions; impairment of goodwill andother intangible assets; anti-takeover provisions which could 

20

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resultin a decreased valuation of our Common Stock; loss of funding sources and ourability to open and operate new retail stores successfully. Other risk factorsmay be listed from time to time in our future public releases and SEC reports.

**Item 7A.   Quantitativeand Qualitative Disclosures About Market Risk**

We have exposureto market risk from changes in interest rates. Our exposure to interest raterisk consists of interest expense on our floating rate revolving creditfacility and interest income on our cash equivalents. Interest expense ismanaged using interest rate swaps to fix our floating rate long-term debt.Currently interest rate swaps fix the rate on the entire outstanding balance ofthe revolving credit facility; therefore, an increase in interest rates wouldhave no impact on our interest expense.

21

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**Item 8.   FinancialStatements and Supplementary Data**

**CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                    | ** ** | **December 31,**                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2005**                             | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Assets                                                                                                                                                        |       |                                 |       |                  |       |   |   |   |   |
| Current  assets:                                                                                                                                              |       |                                 |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                     |       |                                 | $          | 114,322               |       |   |   | $ | 51,248 |   |   |
| Receivables, less allowances of $23,368 ($20,919 at  December 31, 2004)                                                                                  |       |                                 | 349,202    |                  |       |   | 374,733 |   |   |
| Inventories (Note 4)                                                                                                                                          |       |                                 | 432,814    |                  |       |   | 444,828 |   |   |
| Deferred income taxes                                                                                                                                         |       |                                 | 25,540     |                  |       |   | 28,044 |   |   |
| Prepaid expenses and other current assets                                                                                                                     |       |                                 | 9,790      |                  |       |   | 9,272 |   |   |
| Total current assets                                                                                                                                          |       |                                 | 931,668    |                  |       |   | 908,125 |   |   |
| Property,  plant and equipment:                                                                                                                               |       |                                 |       |                  |       |   |   |   |   |
| Land                                                                                                                                                          |       |                                 | 19,682     |                  |       |   | 20,711 |   |   |
| Buildings and improvements                                                                                                                                    |       |                                 | 258,369    |                  |       |   | 258,493 |   |   |
| Machinery and equipment                                                                                                                                       |       |                                 | 388,028    |                  |       |   | 403,392 |   |   |
|                                                                                                                                                          |       |                                 | 666,079    |                  |       |   | 682,596 |   |   |
| Less accumulated depreciation                                                                                                                                 |       |                                 | 415,262    |                  |       |   | 397,623 |   |   |
| Net property, plant and equipment                                                                                                                             |       |                                 | 250,817    |                  |       |   | 284,973 |   |   |
| Goodwill  (Note 5)                                                                                                                                            |       |                                 | 182,507    |                  |       |   | 183,097 |   |   |
| Other  intangible assets (Note 5)                                                                                                                             |       |                                 | 169,671    |                  |       |   | 169,671 |   |   |
| Other  assets                                                                                                                                                 |       |                                 | 47,561     |                  |       |   | 41,893 |   |   |
|                                                                                                                                                          |       |                                 | $          | 1,582,224             |       |   |   | $ | 1,587,759 |   |   |
| Liabilities  and Shareholders’ Equity                                                                                                                    |       |                                 |       |                  |       |   |   |   |   |
| Current  liabilities:                                                                                                                                         |       |                                 |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                              |       |                                 | $          | 101,860               |       |   |   | $ | 85,363 |   |   |
| Accrued employee compensation                                                                                                                                 |       |                                 | 30,605     |                  |       |   | 28,521 |   |   |
| Other accrued expenses                                                                                                                                        |       |                                 | 81,020     |                  |       |   | 83,126 |   |   |
| Total current liabilities                                                                                                                                     |       |                                 | 213,485    |                  |       |   | 197,010 |   |   |
| Long-term  debt (Note 6)                                                                                                                                      |       |                                 | 301,600    |                  |       |   | 302,400 |   |   |
| Deferred  income taxes                                                                                                                                        |       |                                 | 60,668     |                  |       |   | 78,305 |   |   |
| Other  long-term liabilities                                                                                                                                  |       |                                 | 102,519    |                  |       |   | 52,561 |   |   |
| Shareholders’  equity:                                                                                                                                   |       |                                 |       |                  |       |   |   |   |   |
| Preferred stock, authorized 10,000,000 shares, no  par value—issued, none                                                                                |       |                                 | —     |                  |       |   | — |   |   |
| Common stock, authorized 200,000,000 shares, $1.00  stated value—issued 56,482,541 shares at December 31, 2005 and  December 31, 2004 (Note 7) |       |                                 | 56,483     |                  |       |   | 56,483 |   |   |
| Paid-in capital                                                                                                                                               |       |                                 | 221,754    |                  |       |   | 226,602 |   |   |
| Retained earnings                                                                                                                                             |       |                                 | 820,025    |                  |       |   | 789,856 |   |   |
| Accumulated other comprehensive income (expense)  (Note 10)                                                                                                   |       |                                 | (41,382    | )                     |       |   | (31,076 | ) |   |
| Treasury stock at cost  6,814,963 shares at December 31, 2005 and  3,266,456 shares at December 31, 2004)                                           |       |                                 | (152,928   | )                     |       |   | (84,382 | ) |   |
| Total shareholders’ equity                                                                                                                               |       |                                 | 903,952    |                  |       |   | 957,483 |   |   |
|                                                                                                                                                          |       |                                 | $          | 1,582,224             |       |   |   | $ | 1,587,759 |   |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                       | ** ** | **Year Ended December 31,**                                     | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Net  sales                                       |       | $                                                                              | 2,386,774  |   | $ | 2,447,430 |   | $ | 2,434,130 |   |
| Cost of  sales                                   |       | 1,846,823                                                                      |       | 1,867,614 |   | 1,868,794 |   |
| Gross  profit                                    |       | 539,951                                                                        |       | 579,816 |   | 565,336 |   |
| Selling,  general and administrative expenses    |       | 440,603                                                                        |       | 424,160 |   | 400,210 |   |
| Earnings  from operations                        |       | 99,348                                                                         |       | 155,656 |   | 165,126 |   |
| Interest  expense                                |       | 11,877                                                                         |       | 15,314 |   | 19,384 |   |
| Other  income, net                               |       | 4,523                                                                          |       | 2,298 |   | 3,482 |   |
| Earnings  before income tax expense              |       | 91,994                                                                         |       | 142,640 |   | 149,224 |   |
| Income  tax expense (Note 8)                     |       | 30,558                                                                         |       | 51,073 |   | 54,651 |   |
| Net  earnings                                    |       | $                                                                              | 61,436     |   | $ | 91,567 |   | $ | 94,573 |   |
| Earnings  per common share—basic (Note 7)   |       | $                                                                              | 1.18       |   | $ | 1.68 |   | $ | 1.70 |   |
| Earnings per  common share—diluted (Note 7) |       | $                                                                              | 1.18       |   | $ | 1.66 |   | $ | 1.68 |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                           | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash flows  from operating activities:                                               |       |                                       |       |   |   |   |   |
| Net earnings                                                                         |       | $                                          | 61,436     |   | $ | 91,567 |   | $ | 94,573 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 45,240                                     |       | 49,050 |   | 50,923 |   |
| Other, net                                                                           |       | 10,337                                     |       | 2,048 |   | 10,352 |   |
| Changes  in operating assets and liabilities:                                        |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                  |       | 25,531                                     |       | (8,285 | ) | 8,602 |   |
| Inventories                                                                          |       | 12,014                                     |       | (30,144 | ) | 17,420 |   |
| Prepaid expenses and intangible and other assets                                     |       | (6,903                                     | )          | (13,616 | ) | 4,003 |   |
| Accounts payable, other accrued expenses                                             |       | 28,872                                     |       | 12,574 |   | (12,243 | ) |
| Deferred tax liabilities, net                                                        |       | (11,989                                    | )          | 6,018 |   | 736 |   |
| Other long-term liabilities                                                          |       | 24,445                                     |       | (1,875 | ) | (1,913 | ) |
| Net cash provided by operating activities                                            |       | 188,983                                    |       | 107,337 |   | 172,453 |   |
| Cash  flows from investing activities:                                               |       |                                       |       |   |   |   |   |
| Proceeds from the disposal of assets                                                 |       | 9,829                                      |       | 8,103 |   | 2,495 |   |
| Additions to property, plant and equipment                                           |       | (28,541                                    | )          | (30,593 | ) | (41,451 | ) |
| Net cash used by investing activities                                                |       | (18,712                                    | )          | (22,490 | ) | (38,956 | ) |
| Cash  flows from financing activities:                                               |       |                                       |       |   |   |   |   |
| Payments for debt issuance costs                                                     |       | —                                     |       | — |   | (1,709 | ) |
| Additions to long-term debt                                                          |       | —                                     |       | — |   | 300,000 |   |
| Payments of long-term debt                                                           |       | (800                                       | )          | (800 | ) | (371,600 | ) |
| Proceeds from issuance of common stock                                               |       | —                                     |       | 4,230 |   | — |   |
| Payments of cash dividends                                                           |       | (31,267                                    | )          | (28,643 | ) | (6,975 | ) |
| Proceeds from the issuance of treasury stock                                         |       | 7,552                                      |       | 8,747 |   | 3,381 |   |
| Payments for the purchase of treasury stock                                          |       | (82,682                                    | )          | (88,801 | ) | — |   |
| Net cash used by financing activities                                                |       | (107,197                                   | )          | (105,267 | ) | (76,903 | ) |
| Net increase (decrease) in cash and cash equivalents                                 |       | 63,074                                     |       | (20,420 | ) | 56,594 |   |
| Cash  and cash equivalents at beginning of period                                    |       | 51,248                                     |       | 71,668 |   | 15,074 |   |
| Cash  and cash equivalents at end of period                                          |       | $                                          | 114,322    |   | $ | 51,248 |   | $ | 71,668 |   |
| Supplemental  Disclosure:                                                            |       |                                       |       |   |   |   |   |
| Cash payments for income taxes, net                                                  |       | $                                          | 40,570     |   | $ | 32,577 |   | $ | 53,296 |   |
| Cash  payments for interest expense                                                  |       | $                                          | 11,954     |   | $ | 16,202 |   | $ | 20,192 |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

| ** **                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                          | ** ** | **(Dollars in thousands)**       | ** ** |
| Common Stock:                                                                       |       |                                       |       |   |   |   |   |
| Beginning balance                                                                   |       | $                                          | 56,483     |   | $ | 56,277 |   | $ | 56,277 |   |
| Stock plans activity (Note 7)                                                       |       | —                                     |       | 206 |   | — |   |
| Ending balance                                                                      |       | $                                          | 56,483     |   | $ | 56,483 |   | $ | 56,277 |   |
| Paid-In  Capital:                                                                   |       |                                       |       |   |   |   |   |
| Beginning balance                                                                   |       | $                                          | 226,602    |   | $ | 221,388 |   | $ | 221,696 |   |
| Stock plans activity (Note 7)                                                       |       | (4,848                                     | )          | 5,214 |   | (308 | ) |
| Ending balance                                                                      |       | $                                          | 221,754    |   | $ | 226,602 |   | $ | 221,388 |   |
| Retained  Earnings:                                                                 |       |                                       |       |   |   |   |   |
| Beginning balance                                                                   |       | $                                          | 789,856    |   | $ | 726,932 |   | $ | 639,334 |   |
| Net earnings                                                                        |       | 61,436                                     |       | 91,567 |   | 94,573 |   |
| Cash dividends   (per share 2005-$0.60, 2004-$0.525, 2003-$0.125)                   |       | (31,267                                    | )          | (28,643 | ) | (6,975 | ) |
| Ending balance                                                                      |       | $                                          | 820,025    |   | $ | 789,856 |   | $ | 726,932 |   |
| Accumulated  Other Comprehensive Income (Expense): (Note 10)                   |       |                                       |       |   |   |   |   |
| Beginning balance                                                                   |       | $                                          | (31,076    | ) | $ | (31,446 | ) | $ | (35,917 | ) |
| Other comprehensive income (expense)                                                |       | (10,306                                    | )          | 370 |   | 4,471 |   |
| Ending balance                                                                      |       | $                                          | (41,382    | ) | $ | (31,076 | ) | $ | (31,446 | ) |
| Treasury  Stock:                                                                    |       |                                       |       |   |   |   |   |
| Beginning balance                                                                   |       | $                                          | (84,382    | ) | $ | (6,249 | ) | $ | (11,875 | ) |
| Stock plans activity (Note 7)                                                       |       | 14,136                                     |       | 10,668 |   | 5,626 |   |
| Purchase of treasury stock (4,125,588 shares in 2005  and 3,431,600 shares in 2004) |       | (82,682                                    | )          | (88,801 | ) | — |   |
| Ending balance                                                                      |       | $                                          | (152,928   | ) | $ | (84,382 | ) | $ | (6,249 | ) |
| Total  Shareholders’ Equity                                                    |       | $                                          | 903,952    |   | $ | 957,483 |   | $ | 966,902 |   |
| Comprehensive  Income (Expense):                                                    |       |                                       |       |   |   |   |   |
| Net earnings                                                                        |       | $                                          | 61,436     |   | $ | 91,567 |   | $ | 94,573 |   |
| Other  comprehensive income, net of tax:                                            |       |                                       |       |   |   |   |   |
| Financial instruments accounted for as hedges                                       |       | 1,655                                      |       | 6,646 |   | 6,342 |   |
| Minimum pension liability                                                           |       | (12,516                                    | )          | (5,922 | ) | (1,658 | ) |
| Foreign currency translation                                                        |       | 555                                        |       | (354 | ) | (213 | ) |
| Other comprehensive income (expense)                                                |       | (10,306                                    | )          | 370 |   | 4,471 |   |
|                                                                                |       | $                                          | 51,130     |   | $ | 91,937 |   | $ | 99,044 |   |

 

See accompanying notes to consolidated financial statements.

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars inthousands except per share data)**

**1. The Company**

Furniture BrandsInternational, Inc. is one of the largest furniture companies in theUnited States. We are one company marketing our products through four operatingsubsidiaries: Broyhill Furniture Industries, Inc.; Lane FurnitureIndustries, Inc.; Thomasville Furniture Industries, Inc., and HDMFurniture Industries, Inc. Through these four subsidiaries, we design,manufacture, source, market and distribute a full-line of branded productsconsisting of both wood and upholstered furniture.

Substantiallyall of our sales are made to unaffiliated furniture retailers. We have adiversified customer base with no one customer accounting for 10% or more ofconsolidated net sales and no particular concentration of credit risk in oneeconomic sector. Foreign operations and foreign net sales are not material.

**2. Significant Accounting Policies**

Our significantaccounting policies are set forth below.

**Use of Estimates**

The preparationof financial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of sales and expenses during the reported period. Actual results arelikely to differ from those estimates, but management believes such differencesare not significant.

**Principles ofConsolidation**

The consolidatedfinancial statements include the Furniture Brands accounts and those of oursubsidiaries. All material intercompany transactions are eliminated inconsolidation. The Company’s fiscal year ends on December 31. The subsidiariesincluded in the consolidated financial statements report their results ofoperations as of the Saturday closest to December 31. Accordingly, theresults of operations will periodically include a 53-week fiscal year.Fiscal years 2005 and 2004 were 52-week years and fiscal year 2003 was a53-week year.

**Cash and CashEquivalents**

We consider allshort-term investments with an original maturity of three months or less to becash equivalents.

**Inventories**

Inventories arestated at the lower of cost (first-in, first-out) or market. Inventories areregularly reviewed for excess quantities and obsolescence based upon historicalexperience, specific identification of discounted items, future demand andmarket conditions and appropriate adjustments are recorded in the periodidentified.

**Property, Plantand Equipment**

Property, plantand equipment are recorded at cost when acquired. Depreciation is calculatedusing both accelerated and straight-line methods based on the estimated usefullives of the respective assets, which generally range from 3 to 45 years forbuildings and improvements and from 3 to 12 years for 

26

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machineryand equipment. Long-lived assets are reviewed for impairment whenever events orchanges in business circumstances indicate the carrying value of the assets maynot be recoverable. Impairment losses are recognized if expected future cashflows of the related assets are less than their carrying value.

**IntangibleAssets**

Intangibleassets consist of goodwill and trademarks. In accordance with Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and OtherIntangible Assets,” goodwill and intangible assets with indefinite lives are nolonger amortized, but instead tested for impairment. Intangible assets arereviewed for impairment annually or whenever events or changes in businesscircumstances indicate the carrying value of the assets may not be recoverable.Impairment losses are recognized if future cash flows of the related assets areless than their carrying values.

**Fair Value of FinancialInstruments**

We consider thecarrying amounts of cash and cash equivalents, receivables, and accountspayable to approximate fair value because of the short maturity of thesefinancial instruments.

Amountsoutstanding under long-term debt agreements are considered to be carried in thefinancial statements at their estimated fair values because they accrueinterest at rates which generally fluctuate with interest rate trends.

We periodicallyuse interest rate swap agreements (derivative financial instruments) to hedgerisk associated with our floating rate long-term debt. Under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, each derivativeinstrument is recorded on the balance sheet at fair value as an asset orliability with any gain or loss recorded as a component of accumulated othercomprehensive income (expense) until recognized in earnings. The fair value ofthe swap agreements is based upon quoted market prices. The net amount to bepaid or received under the interest rate swap agreements is recorded as acomponent of interest expense. The fair value of the interest rate swapagreements is included in other assets as of December 31, 2005 and December 31,2004.

**RevenueRecognition**

Revenues (sales)are recognized when the following criteria are met: (1) persuasiveevidence of an arrangement exists; (2) there is a fixed or determinableprice; (3) delivery has occurred; and (4) collectibility isreasonably assured. These criteria are satisfied and revenue recognized primarilyupon shipment of product. Appropriate provisions for customer returns anddiscounts are recorded based upon historical experience.

**AdvertisingCosts**

Advertisingproduction costs are expensed when advertisements are first aired ordistributed. Total advertising costs were $76,183 for 2005, $82,089 for 2004,and $77,124 for 2003.

**Income Taxes**

Deferred taxassets and liabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates in effect for theyear in which those temporary differences are expected to be recovered orsettled. The effect of a change in tax rates on deferred tax assets andliabilities is recognized as income tax expense (benefit) in the period thatincludes the enactment date.

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**Stock-BasedCompensation**

We account for stock-based compensation using the intrinsic valuemethod as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees. Had compensation cost for ourstock-based compensation plan been determined consistent with SFAS No. 123,Accounting for Stock-Based Compensation, our net earnings and net earnings pershare would have been as follows:

| ** **                                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Earnings:                                                                                                           |       |                                       |       |   |   |   |   |
| As reported                                                                                                             |       | $                                          | 61,436     |   | $ | 91,567 |   | $ | 94,573 |   |
| Deduct: Stock based employee compensation expense  determined under fair value based method, net of income tax benefits |       | 4,212                                      |       | 4,729 |   | 5,276 |   |
| Pro  forma                                                                                                              |       | $                                          | 57,224     |   | $ | 86,838 |   | $ | 89,297 |   |
| Earnings per  share—basic:                                                                                         |       |                                       |       |   |   |   |   |
| As reported                                                                                                             |       | $                                          | 1.18       |   | $ | 1.68 |   | $ | 1.70 |   |
| Pro forma                                                                                                               |       | $                                          | 1.10       |   | $ | 1.59 |   | $ | 1.60 |   |
| Earnings per  share—diluted:                                                                                       |       |                                       |       |   |   |   |   |
| As reported                                                                                                             |       | $                                          | 1.18       |   | $ | 1.66 |   | $ | 1.68 |   |
| Pro  forma                                                                                                              |       | $                                          | 1.10       |   | $ | 1.58 |   | $ | 1.60 |   |

 

The weighted average fair value of options granted is estimated as ofthe date of grant using the Black-Scholes option pricing model with thefollowing weighted average assumptions:

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk  free interest rate |       | 3.8      | %          | 3.2      | %          | 3.0      | %          |
| Expected  dividend yield |       | 2.6      | %          | 1.7      | %          | 0.0      | %          |
| Expected  life (years)   |       | 6.0      |       | 6.0      |       | 6.0      |       |
| Expected  volatility     |       | 42.6     | %          | 50.8     | %          | 50.0     | %          |

 

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123(revised 2004), Share-Based Payment. This statement is a revision of SFAS No. 123,and supersedes APB Opinion No. 25. SFAS No. 123 (revised 2004)establishes standards for the accounting for transactions in which an entity exchangesits equity instruments for goods or services. The statement is effective as ofthe beginning of the first annual reporting period that begins after June 15,2005 (first quarter 2006 for us). We believe the annual impact of adopting SFASNo. 123 will not be materially different than the pro forma disclosureabove.

**Reclassification**

Certainwarehouse costs have been reclassified from selling, general and administrativeexpenses to cost of sales for all years presented. Reclassified amounts were$48,851 for 2005, $48,727 for 2004, and $49,440 for 2003.

**3. Restructuring and Asset Impairment Charges**

In 2001 we beganimplementing a plan to reduce our domestic manufacturing capacity. As of December 31,2005, this plan included the closing, consolidation or reconfiguration of 31manufacturing facilities. Restructuring activity included the closing or therealignment of eight manufacturing facilities in 2005, the closing of threemanufacturing facilities in 2004 and the closing of three manufacturing facilitiesand the realignment of two additional facilities in 2003.

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Asset impairmentcharges were recorded to reduce the carrying value of all idle facilities andrelated machinery and equipment to their net realizable value. Thedetermination of the impairment charges were based primarily upon (i) consultationswith real estate brokers retained to assist in disposal efforts and (ii) proceedsfrom recent sales of Company facilities and the market prices being obtainedfor similar long-lived assets.

Restructuring and asset impairment charges were as follows:

| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Restructuring  charges:                                       |       |                                       |       |   |   |   |   |
| Costs to shutdown, cleanup and vacate facilities              |       | $                                          | 3,793      |   | $ | 1,848 |   | $ | 4,787 |   |
| One-time termination benefits (includes executive  severance) |       | 7,628                                      |       | 669 |   | 2,331 |   |
| Inventory write-downs                                         |       | —                                     |       | 4,678 |   | 434 |   |
|                                                          |       | 11,421                                     |       | 7,195 |   | 7,552 |   |
| Impairment  charges                                           |       | 9,988                                      |       | 2,054 |   | 10,301 |   |
|                                                          |       | $                                          | 21,409     |   | $ | 9,249 |   | $ | 17,853 |   |
| Statement of  Operations classification:                      |       |                                       |       |   |   |   |   |
| Cost of operations                                            |       | $                                          | 7,427      |   | $ | 5,953 |   | $ | 7,151 |   |
| Selling, general and administrative expenses                  |       | 13,982                                     |       | 3,296 |   | 10,702 |   |
|                                                          |       | $                                          | 21,409     |   | $ | 9,249 |   | $ | 17,853 |   |

 

Real estate heldfor sale with a carrying value of $603 and $3,301 was included in other assetsas of December 31, 2005 and 2004. There were no restructuring chargesincluded in other accrued expenses at December 31, 2005 and 2004.

**4. Inventories**

Inventories are summarized as follows:

| ** **         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Finished  products |       |                  | $          | 275,985               |       |   |   | $ | 268,170 |   |   |
| Work-in-process    |       |                  | 43,747     |                  |       |   | 49,362 |   |   |
| Raw  materials     |       |                  | 113,082    |                  |       |   | 127,296 |   |   |
|               |       |                  | $          | 432,814               |       |   |   | $ | 444,828 |   |   |

 

The decrease inraw materials and work in process is a result of the reduction in domesticmanufacturing capacity and is partially offset by increased finished goods dueto an effort to improve service levels and the impact of inventory in transitfrom the Far East.

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**5. Goodwill and Other Intangible Assets**

Goodwill and other intangible assets include the following:

| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Goodwill                        |       |                  | $          | 265,245               |       |   |   | $ | 265,835 |   |   |
| Less:  accumulated amortization |       |                  | 82,738     |                  |       |   | 82,738 |   |   |
| Goodwill                        |       |                  | $          | 182,507               |       |   |   | $ | 183,097 |   |   |
| Trademarks  and trade names     |       |                  | $          | 206,179               |       |   |   | $ | 206,179 |   |   |
| Less:  accumulated amortization |       |                  | 36,508     |                  |       |   | 36,508 |   |   |
| Other  intangible assets        |       |                  | $          | 169,671               |       |   |   | $ | 169,671 |   |   |

 

SFAS No. 142,“Goodwill and Other Intangible Assets”, requires that goodwill and other intangible assets with indefinite livesno longer be amortized, but instead be tested annually for impairment orwhenever events or changes in business circumstances indicate the carryingvalue of the assets may not be recoverable. No impairment was recorded in 2005or 2004. Our other intangible assets consist of trademarks and trade names allhaving indefinite lives.

**6. Long-TermDebt**

Long-term debt consists of the following:

| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Revolving  credit facility (unsecured) |       |                  | $          | 300,000               |       |   |   | $ | 300,000 |   |   |
| Other                                  |       |                  | 1,600      |                  |       |   | 2,400 |   |   |
|                                   |       |                  | $          | 301,600               |       |   |   | $ | 302,400 |   |   |

 

The followingdiscussion summarizes certain provisions of the long-term debt:

**RevolvingCredit Facility**

We have arevolving credit facility with a group of financial institutions. The facilityis an unsecured revolving credit facility with a commitment of $450,000(reduced from $550,000 on December 9, 2005) and a maturity date of June 7,2008. The facility allows for issuance of letters of credit and cashborrowings. Letters of credit outstanding are limited to no more than $150,000,with cash borrowings limited only by the facility’s maximum availability lessletters of credit outstanding.

Cash borrowingsunder the revolving credit facility bear interest at a base rate or at anadjusted Eurodollar rate plus an applicable margin which varies depending uponthe type of loan we execute. The applicable margin over the base rate andadjusted Eurodollar rate is subject to adjustment based upon achieving certaincredit ratings. At December 31, 2005, loans outstanding under therevolving credit facility consisted of $300,000 based on the adjustedEurodollar rate, which in conjunction with the interest rate swaps have aweighted average interest rate of 3.74%.

At December 31,2005, there were $300,000 of cash borrowings and $16,341 in letters of creditoutstanding under the revolving credit facility, leaving an excess of $133,659available for future liquidity needs.

The revolvingcredit facility has no mandatory principal payments; however, the commitmentmatures on June 7, 2008. The facility requires us to meet certainfinancial covenants including a minimum consolidated net worth and maximumleverage ratio as defined in the credit agreement. In addition, the 

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facilityrequires repayment upon the occurrence of a change of control of the Company.As of December 31, 2005, we were in compliance with all financialcovenants.

**Other**

Other long-termdebt consists of industrial revenue bonds with an interest rate of 7.0%.

**InterestRate Swap Agreements**

In May 2004,in order to reduce the impact of changes in interest rates on its floating ratelong-term debt, we entered into three interest rate swap agreements each havinga notional amount of $100,000 and a termination date in May 2007. We paythe counterparties a fixed rate of 2.55% per annum and receive payments basedupon the floating three-month LIBOR rate.

**7. Common Stock**

The Company’srestated certificate of incorporation includes authorization to issue up to 200million shares of Common Stock with a $1.00 per share stated value. As of December 31,2005, 56,482,541 shares of Common Stock were issued.

The Company hasbeen authorized by its Board of Directors to repurchase our Common Stock fromtime to time in open market or privately negotiated transactions. Common Stockrepurchases are recorded as treasury stock and may be used for generalcorporate purposes. As of December 31, 2005, we have Board of Directors’authorization for the repurchase of an additional $47,258 of our Common Stock.On January 26, 2006 an additional authorization of $50,000 was approved.

Shares of Common Stock were reserved for the following purposes at December 31,2005:

| ** **             | ** ** | **Number of Shares** | ** ** |
|------------------------|------------|--------------------------------|------------|
| Common stock  options: |       |                           |       |   |   |
| Granted                |       |                           | 3,771,675  |   |   |
| Available  for grant   |       |                           | 1,322,375  |   |   |
|                   |       |                           | 5,094,050  |   |   |

 

We haveoutstanding option grants pursuant to the 1992 Stock Option Plan and the 1999Long-Term Incentive Plan. These plans are administered by the ExecutiveCompensation and Stock Option Committee of the Board of Directors and permitcertain key employees to be granted nonqualified options, performance-basedoptions, restricted stock, or combinations thereof. Options must be issued atmarket value on the date of grant and expire in a maximum of ten years.

In 2005 and 2004we issued 23,500 and 9,000 shares of restricted stock. The restricted sharesvest over various periods from three to five years. The deferred compensationcost is amortized to expense over the period of time the restrictions are inplace and the unamortized portion is classified as a reduction ofpaid-in-capital in our consolidated balance sheets.

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Changes in options granted and outstanding are summarized as follows:

| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | ** **                                 | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Shares**                                 | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Beginning  of period                            |       | 3,918,481                                  |       | $ | 22.70 |   | 4,172,909 |   | $ | 21.16 |   | 3,610,984 |   | $ | 20.36 |   |
| Granted                                         |       | 799,900                                    |       | 22.88 |   | 574,100 |   | 29.96 |   | 988,300 |   | 21.54 |   |
| Exercised                                       |       | (560,581                                   | )          | 13.47 |   | (692,028 | ) | 18.75 |   | (299,475 | ) | 11.29 |   |
| Cancelled                                       |       | (386,125                                   | )          | 24.58 |   | (136,500 | ) | 26.15 |   | (126,900 | ) | 24.80 |   |
| End of  period                                  |       | 3,771,675                                  |       | $ | 23.91 |   | 3,918,481 |   | $ | 22.70 |   | 4,172,909 |   | $ | 21.16 |   |
| Exercisable  at end of period                   |       | 2,204,413                                  |       |   |   | 2,365,656 |   |   |   | 2,252,259 |   |   |   |
| Weighted  average fair value of options granted |       |                                       |       | $ | 8.19 |   |   |   | $ | 13.28 |   |   |   | $ | 10.89 |   |

 

Summarized information regarding stock options outstanding andexercisable at December 31, 2005 follows:

| ** **                                  | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|---------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                  | ** ** | ** **      | ** ** | **Average**     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **      | ** ** | **Contractual** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise Prices** | ** ** | ** **      | ** ** | **Shares**      | ** ** | **Life (Years)** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| $10 -  $20                                  |       | 566,350         |       |            | 4.1        |   |   | 16.75 |   | 476,350 |   | 16.36 |   |
| $20 -  $30                                  |       | 2,876,425       |       |            | 6.3        |   |   | 24.15 |   | 1,469,063 |   | 23.68 |   |
| Over  $30                                   |       | 328,900         |       |            | 4.5        |   |   | 34.18 |   | 259,000 |   | 34.05 |   |
|                                        |       | 3,771,675       |       |            | 5.8        |   |   | $ | 23.91 |   | 2,204,413 |   | $ | 22.31 |   |
|                                             |            |                 |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Weighted average shares used in the computation of basic and dilutedearnings per common share for 2005, 2004, and 2003 are as follows:

| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted  average shares used for basic earnings per common share   |       | 51,976,417                                 |       | 54,653,995 |   | 55,736,871 |   |
| Effect of  dilutive securities:                                     |       |                                       |       |   |   |   |   |
| Stock options                                                       |       | 127,558                                    |       | 565,577 |   | 518,917 |   |
| Weighted  average shares used for diluted earnings per common share |       | 52,103,975                                 |       | 55,219,572 |   | 56,255,788 |   |

 

Excluded fromthe computation of diluted earnings per common share were options to purchase3,008,825 and 948,449 shares at an average price of $25.30 and $31.72 per shareduring 2005 and 2004. These options have been excluded from the dilutedearnings per share calculation because their inclusion would be antidilutive.

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**8. Income Taxes**

Income tax expense is comprised of the following:

| ** **      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------|------------|--------------------------------------------|------------|
| ** **      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:        |       |                                       |       |   |   |   |   |
| Federal         |       | $                                          | 39,557     |   | $ | 40,899 |   | $ | 49,124 |   |
| State and local |       | 2,331                                      |       | 3,443 |   | 4,633 |   |
| Foreign         |       | 659                                        |       | 713 |   | 158 |   |
|            |       | 42,547                                     |       | 45,055 |   | 53,915 |   |
| Deferred        |       | (11,989                                    | )          | 6,018 |   | 736 |   |
|            |       | $                                          | 30,558     |   | $ | 51,073 |   | $ | 54,651 |   |

 

The following table reconciles the differences between the federalcorporate statutory rate and our effective income tax rate:

| ** **                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal  corporate statutory rate                         |       | 35.0                                       | %          | 35.0 | % | 35.0 | % |
| State  and local income taxes, net of federal tax benefit |       | 1.2                                        |       | 1.8 |   | 2.1 |   |
| Non  taxable income                                       |       | (1.6                                       | )          | (0.5 | ) | (0.5 | ) |
| Other                                                     |       | (1.4                                       | )          | (0.5 | ) | — |   |
| Effective  income tax rate                                |       | 33.2                                       | %          | 35.8 | % | 36.6 | % |

 

The sources of the tax effects for temporary differences that give riseto the deferred tax assets and liabilities were as follows:

| ** **                                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Deferred tax  assets attributable to:      |       |                  |       |                  |       |   |   |   |   |
| Expense accruals                           |       |                  | $          | 19,503                |       |   |   | $ | 15,994 |   |   |
| Valuation allowances                       |       |                  | 14,755     |                  |       |   | 15,172 |   |   |
| Asset impairment charges                   |       |                  | 3,118      |                  |       |   | 2,872 |   |   |
| Employee pension and other benefit plans   |       |                  | 27,147     |                  |       |   | 14,207 |   |   |
| Other                                      |       |                  | 1,679      |                  |       |   | 1,622 |   |   |
| Total deferred tax assets                  |       |                  | 66,202     |                  |       |   | 49,867 |   |   |
| Deferred tax  liabilities attributable to: |       |                  |       |                  |       |   |   |   |   |
| Fair value adjustments                     |       |                  | (45,150    | )                     |       |   | (43,239 | ) |   |
| Other intangible assets                    |       |                  | (30,374    | )                     |       |   | (28,973 | ) |   |
| Depreciation                               |       |                  | (7,263     | )                     |       |   | (15,840 | ) |   |
| Inventory costs capitalized                |       |                  | (3,555     | )                     |       |   | (2,253 | ) |   |
| Qualifying prepaid expenses                |       |                  | (1,195     | )                     |       |   | — |   |   |
| Deferred foreign taxable income            |       |                  | (5,415     | )                     |       |   | (871 | ) |   |
| Other                                      |       |                  | (8,378     | )                     |       |   | (8,952 | ) |   |
| Total deferred tax liabilities             |       |                  | (101,330   | )                     |       |   | (100,128 | ) |   |
| Net  deferred tax liabilities              |       |                  | $          | (35,128               | )          |   |   | $ | (50,261 | ) |   |

 

Theundistributed cumulative earnings of foreign subsidiaries that are consideredpermanently reinvested outside the U.S. were $17.3 million at December 31,2005. Foreign withholding taxes have not been provided on these earnings.

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**9. EmployeeBenefits**

We sponsor orcontribute to retirement plans covering substantially all employees. The totalcost of all plans was $21,558 in 2005, $16,947 in 2004, and $10,678 in 2003.

**Company-SponsoredDefined Benefit Plans**

Through 2005,employees are covered primarily by noncontributory plans, funded by Companycontributions to trust funds, which are held for the sole benefit of employees.Cash contributions to the trust funds during 2004 were $15,000 with nocontributions made in 2005. We do not expect to make any cash contributionduring 2006. Monthly retirement benefits are based upon service and pay withemployees becoming vested upon completion of five years of service. Futureretirement benefits will be provided to employees through increased Companymatch to the defined contribution plan. Annual plan benefit payments toretirees and/or beneficiaries are expected to average $24,700 for the next tenyears.

As of December 31,2005 we amended the defined benefit plans, freezing and ceasing future benefitsas of that date. Certain transition benefits will be provided to participantswho have attained age 50 and have completed 10 years of service. We willprovide future retirement benefits to our employees by increasing the match inthe defined contribution plan.

The investmentobjective of the trust funds is to ensure, over the long-term life of thetrusts, an adequate asset balance to support the benefit obligations toparticipants, retirees and beneficiaries. In meeting this objective, we seek toachieve investment returns at or above selected benchmarks consistent with aprudent level of diversification. We retain registered investment advisors tomanage specific asset classes. Investment advisors are selected fromestablished and financially sound organizations with proven records in managingfunds in the appropriate asset class. Investment advisors are given strictinvestment guidelines and performance benchmarks. The assets of the variousplans include corporate equities, government securities, corporate debtsecurities and insurance contracts.

Annual cost fordefined benefit plans is determined using the projected unit credit actuarialmethod. Prior service cost is amortized on a straight-line basis over theaverage remaining service period of employees expected to receive benefits.

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It is our practice to fund pension costs to the extent such costs aretax deductible and in accordance with ERISA. The assets of the various plansinclude corporate equities, government securities, corporate debt securitiesand insurance contracts. The table below summarizes the funded status of oursponsored defined benefit plans.

| ** **                                          | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **Qualified**                   | ** ** | **Non-Qualified**               | ** ** | **Qualified** | ** ** | **Non-Qualified** | ** ** |
| ** **                                          | ** ** | **Plan**                        | ** ** | **Plan**                        | ** ** | **Plan** | ** ** | **Plan** | ** ** |
| Change in  projected benefit obligation:            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Projected benefit obligation—beginning of year |       | $                               | 391,041    |                            |       | $ | 27,273 |   |   | $ | 360,641 |   |   | $ | 25,212 |   |   |
| Service cost                                        |       | 12,302                          |       |                            | 667        |   |   | 11,666 |   |   | 745 |   |   |
| Interest cost                                       |       | 23,500                          |       |                            | 1,557      |   |   | 22,823 |   |   | 1,606 |   |   |
| Plan amendments                                     |       | —                          |       |                            | —     |   |   | — |   |   | 1,377 |   |   |
| Actuarial loss                                      |       | 20,087                          |       |                            | (729       | ) |   | 15,225 |   |   | (392 | ) |   |
| Benefits paid                                       |       | (20,518                         | )          |                            | (1,352     | ) |   | (19,313 | ) |   | (1,276 | ) |   |
| Curtailments                                        |       | (22,632                         | )          |                            | (721       | ) |   | — |   |   | — |   |   |
| Projected benefit obligation—end of year       |       | $                               | 403,780    |                            |       | $ | 26,695 |   |   | $ | 391,042 |   |   | $ | 27,272 |   |   |
| Change in plan  assets:                             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Fair value of plan assets—beginning of year    |       | $                               | 348,450    |                            |       | — |   |   | $ | 327,643 |   |   | — |   |   |
| Actual return on plan assets                        |       | 20,548                          |       |                            | —     |   |   | 25,119 |   |   | — |   |   |
| Employer contributions                              |       | —                          |       |                            | 1,352      |   |   | 15,000 |   |   | 1,276 |   |   |
| Benefits paid                                       |       | (20,518                         | )          |                            | (1,352     | ) |   | (19,313 | ) |   | (1,276 | ) |   |
| Fair value of plan assets—end of year          |       | $                               | 348,480    |                            |       | — |   |   | $ | 348,449 |   |   | — |   |   |
| Funded  status                                      |       | $                               | (55,300    | )                               |       | $ | (26,695 | ) |   | $ | (42,593 | ) |   | $ | (27,272 | ) |   |
| Fair  value adjustment                              |       | (9,818                          | )          |                            | —     |   |   | (11,309 | ) |   | — |   |   |
| Recognition  of minimum liability                   |       | (73,982                         | )          |                            | —     |   |   | (54,634 | ) |   | — |   |   |
| Unrecognized  net actuarial loss                    |       | 89,795                          |       |                            | 3,221      |   |   | 92,824 |   |   | 5,035 |   |   |
| Unrecognized  prior service cost                    |       | 75                              |       |                            | 510        |   |   | 682 |   |   | 1,445 |   |   |
| Accrued pension cost                                |       | $                               | (49,230    | )                               |       | $ | (22,964 | ) |   | $ | (15,030 | ) |   | $ | (20,792 | ) |   |
| Accumulated  benefit obligation                     |       | $                               | 396,948    |                            |       | $ | 26,080 |   |   | $ | 362,012 |   |   | $ | 24,591 |   |   |

 

The fair valueadjustment relates to our 1992 reorganization.

The asset allocations for our defined benefit plans are as follows:

| ** **         | ** ** | **Percentage of Plan Assets** | ** ** |
|--------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | ** **                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **         | ** ** | **Target**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity  securities |       | 55.0                                         | %          |   | 58.7 | % |   |   | 53.4 | % |   |
| Debt  securities   |       | 45.0                                         | %          |   | 41.3 | % |   |   | 46.6 | % |   |
|               |       | 100.0                                        | %          |   | 100.0 | % |   |   | 100.0 | % |   |

 

35

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Net periodic pension expense for 2005, 2004, and 2003 included thefollowing components:

| ** **                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service  cost-benefits earned during the period    |       | $                                          | 12,969     |   | $ | 12,411 |   | $ | 11,521 |   |
| Interest  cost on the projected benefit obligation |       | 25,057                                     |       | 24,429 |   | 23,795 |   |
| Expected  return on plan assets                    |       | (26,007                                    | )          | (27,004 | ) | (28,725 | ) |
| Net  amortization and deferral                     |       | 6,503                                      |       | 3,706 |   | 355 |   |
| Curtailment  charge                                |       | 1,345                                      |       | — |   | — |   |
| Net periodic  pension expense                      |       | $                                          | 19,867     |   | $ | 13,542 |   | $ | 6,946 |   |

 

Actuarial assumptions used to determine costs and benefit obligationsare as follows:

| ** **                                                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Assumptions  used to determine net pension expense:                       |       |     |       |     |       |     |       |
| Expected long-term rate of return on plan assets                          |       | 7.50     | %          | 7.50     | %          | 8.00     | %          |
| Average discount rate                                                     |       | 6.00     | %          | 6.25     | %          | 6.75     | %          |
| Long-term rate of compensation increase                                   |       | 3.50     | %          | 3.50     | %          | 4.00     | %          |
| Assumptions  used to determine benefit obligation as of December 31: |       |     |       |     |       |     |       |
| Average discount rates                                                    |       | 5.75     | %          | 6.00     | %          | 6.25     | %          |
| Long-term  rate of compensation increase                                  |       | 3.50     | %          | 3.50     | %          | 4.00     | %          |

 

The expectedlong-term rate of return assumption was developed through analysis ofhistorical market returns by asset class, current market conditions and thetrust fund’s past experience.

**OtherRetirement Plans and Benefits**

In addition todefined benefit plans, the Company provides other benefits through definedcontribution plans. The cost of these plans is included in the total cost forall plans reflected above.

**10. Other Comprehensive Income (Expense)**

Other comprehensive income (expense) consists of the following:

| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Change  in fair value of financial instruments accounted for as hedges |       | $                                          | 2,547      |   | $ | 10,225 |   | $ | 9,757 |   |
| Minimum  pension liability                                             |       | (19,348                                    | )          | (9,490 | ) | (2,658 | ) |
| Foreign  currency translation                                          |       | 555                                        |       | (354 | ) | (213 | ) |
|                                                                   |       | (16,246                                    | )          | 381 |   | 6,886 |   |
| Income  tax expense (benefit)                                          |       | (5,940                                     | )          | 11 |   | 2,415 |   |
|                                                                   |       | $                                          | (10,306    | ) | $ | 370 |   | $ | 4,471 |   |

 

The components of accumulated other comprehensive income (expense),each presented net of tax, are as follows:

| ** **                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Fair  value of financial instruments accounted for as hedges |       |                  | $          | 5,663                 |       |   |   | $ | 4,008 |   |   |
| Minimum  pension liability                                   |       |                  | (46,608    | )                     |       |   | (34,092 | ) |   |
| Foreign  currency translation                                |       |                  | (437       | )                     |       |   | (992 | ) |   |
|                                                         |       |                  | $          | (41,382               | )          |   |   | $ | (31,076 | ) |   |

** **

36

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**11. Leases**

Certain of our real properties and equipment are operated under leaseagreements. Rental expense under operating leases was as follows:

| ** **        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Rent  expense     |       | $                                          | 51,660     |   | $ | 34,716 |   | $ | 31,954 |   |
| Sublease  income  |       | (11,882                                    | )          | (4,106 | ) | (1,413 | ) |
| Net rent  expense |       | $                                          | 39,778     |   | $ | 30,610 |   | $ | 30,541 |   |

 

Annual minimum payments under operating leases are as follows:

| ** ** | ** ** | **Minimum** | ** ** | ** **   | ** ** | **Net Minimum** | ** ** |
|------------|------------|-------------|------------|--------------|------------|----------------------|------------|
| ** ** | ** ** | **Lease**   | ** ** | **Sublease** | ** ** | **Lease**            | ** ** |
| **Year**   | ** ** | ** **  | ** ** | **Payments** | ** ** | **Income**           | ** ** | **Payments** | ** ** |
| 2006       |       | $           | 47,672     |         | $          | 15,793               |       |   | $ | 31,879 |   |   |
| 2007       |       | 43,552      |       | 15,893       |       |                 | 27,659     |   |   |
| 2008       |       | 41,777      |       | 16,124       |       |                 | 25,653     |   |   |
| 2009       |       | 38,222      |       | 16,025       |       |                 | 22,197     |   |   |
| 2010       |       | 35,082      |       | 16,692       |       |                 | 18,390     |   |   |
| thereafter |       | 128,549     |       | 76,519       |       |                 | 52,030     |   |   |
|       |       | $           | 334,854    |         | $          | 157,046              |       |   | $ | 177,808 |   |   |
|            |            |             |            |              |            |                      |            |  |  |  |  |  |  |  |

 

We have providedguarantees related to store leases for certain independent dealers openingCompany-brand stores (e.g., Thomasville Home Furnishings Stores). Theguarantees range from rolling 5-year guarantees (approximately 80%) tofull-term guarantees (usually 10 years) and generally require us to make leasepayments in the event of default by the dealer. In the event of default, wehave the right to assign or assume the lease. The total future lease paymentsguaranteed at December 31, 2005 were $89,009.

**12. ContingentLiabilities**

We are or maybecome a defendant in a number of pending or threatened legal proceedings inthe ordinary course of business. In our opinion, our ultimate liability, ifany, from all such proceedings will not have a material adverse effect upon theconsolidated financial position or results of operations of Furniture Brands orthose of our subsidiaries.

**13. OtherIncome, Net**

Other income,net for 2005, 2004 and 2003 consisted of interest on short-term investments andnotes receivable of $2,562, $1,135, and $718 and other miscellaneous income andexpense items totaling $1,961, $1,163 and $2,764.

37

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**14. Quarterly Financial Information (Unaudited)**

Following is a summary of unaudited quarterly information:

| ** **                          | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Year ended  December 31, 2005: |       |        |       |        |       |        |       |        |       |
| Net sales                           |       | $           | 593,529    |        | $          | 557,927     |       | $           | 593,753    |   | $ | 641,565 |   |
| Gross profit                        |       | 136,940     |       | 119,778     |       | 133,296     |       | 149,937     |       |
| Net earnings                        |       | $           | 17,142     |        | $          | 9,919       |       | $           | 9,591      |   | $ | 24,784 |   |
| Earnings  per common share:         |       |        |       |        |       |        |       |        |       |
| Basic                               |       | $           | 0.34       |        | $          | 0.19        |       | $           | 0.18       |   | $ | 0.47 |   |
| Diluted                             |       | $           | 0.34       |        | $          | 0.19        |       | $           | 0.18       |   | $ | 0.46 |   |
| Dividends declared per common share |       | $           | 0.15       |        | $          | 0.15        |       | $           | 0.15       |   | $ | 0.15 |   |
| Common  stock price range:          |       |        |       |        |       |        |       |        |       |
| High                                |       | $           | 23.77      |        | $          | 22.44       |       | $           | 23.01      |   | $ | 25.40 |   |
| Low                                 |       | $           | 16.07      |        | $          | 17.25       |       | $           | 18.81      |   | $ | 21.62 |   |
| Year  ended December 31, 2004: |       |        |       |        |       |        |       |        |       |
| Net sales                           |       | $           | 601,981    |        | $          | 574,800     |       | $           | 593,088    |   | $ | 677,561 |   |
| Gross profit(1)                     |       | 140,845     |       | 133,420     |       | 140,239     |       | 165,312     |       |
| Net earnings                        |       | $           | 22,333     |        | $          | 19,423      |       | $           | 16,602     |   | $ | 33,209 |   |
| Earnings  per common share:         |       |        |       |        |       |        |       |        |       |
| Basic                               |       | $           | 0.42       |        | $          | 0.36        |       | $           | 0.30       |   | $ | 0.59 |   |
| Diluted                             |       | $           | 0.42       |        | $          | 0.36        |       | $           | 0.30       |   | $ | 0.58 |   |
| Dividends declared per common share |       | $           | 0.150      |        | $          | 0.125       |       | $           | 0.125      |   | $ | 0.125 |   |
| Common  stock price range:          |       |        |       |        |       |        |       |        |       |
| High                                |       | $           | 25.75      |        | $          | 25.37       |       | $           | 33.90      |   | $ | 35.09 |   |
| Low                                 |       | $           | 20.75      |        | $          | 21.10       |       | $           | 22.75      |   | $ | 28.15 |   |

 

----

(1)           Gross profit reflectsreclassification of certain warehouse expenses from selling, general andadministrative expenses to cost of sales.

Earnings percommon share were computed independently for each of the quarters presented.The sum of the quarters may not equal the total year amount due to the impactof computing average quarterly shares outstanding for each period.

The closingmarket price of the Common Stock on December 31, 2005 was $22.33 pershare.

38

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**Item 9.   Changes in and Disagreements With Accountants onAccounting and Financial Disclosure**

None

**Item 9A. Controlsand Procedures**

**Disclosurecontrols and procedures**

Our chief executive officer and chief financial officer have conductedan evaluation of the Company’s disclosure controls and procedures and haveconcluded that disclosure controls and procedures were effective based on theirevaluation of these controls and procedures as of December 31, 2005.

**Internal Control over FinancialReporting**

(a)           Management’s Report onInternal Control over Financial Reporting

Our managementreport on internal control over financial reporting as of December 31,2005 is set forth on page 50 and is incorporated herein by reference.

(b)           Attestation Report ofthe Independent Registered Public Accounting Firm

Management’sreport on internal control over financial reporting as of December 31,2005 has been audited by KPMG LLP, the independent registered public accountingfirm that also audited our consolidated financial statements. KPMG LLP’sattestation report on our internal control over financial reporting is setforth on page 51.

(c)            Changes in internalcontrol over reporting.

There was nochange in our internal control over financial reporting during the fourthfiscal quarter ended December 31, 2005 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting

**Item 9B.   OtherInformation**

None

39

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**PART III**

**Item 10.   Directorsand Executive Officers of the Registrant**

The sectionsentitled “Nominees” and “Section 16(a) Beneficial Ownership ReportingCompliance” of our Definitive Proxy Statement for the Annual Meeting ofStockholders on May 4, 2006 are incorporated herein by reference.

**ExecutiveOfficers of the Registrant**
|                      | ** ** | ** ** | ** ** | ** **                                                       | ** ** | **Current**  | ** ** | **Appointed** |
|----------------------|------------|------------|------------|------------------------------------------------------------------|------------|--------------|------------|---------------|
| Name                 | ** ** | ** ** | ** ** | **Age**                                                          | ** ** | **Position** | ** ** | **Positions** | ** ** | **or Elected** |
| *Wilbert G. Holliman |       | 68         |       | President  of the Subsidiary—  Action Industries, Inc. |       |         |       | 1989          |
|                      |       |       |       | Chief  Executive Officer of the Subsidiary—                 |       |         |       |          |
|                      |       |       |       | Action  Industries, Inc.                                    |       |         |       | 1994          |
|                      |       |       |       | Director                                                         |       | X            |       | 1996          |
|                      |       |       |       | President                                                        |       |         |       | 1996          |
|                      |       |       |       | Chief  Executive Officer                                         |       | X            |       | 1996          |
|                      |       |       |       | Chairman  of the Board                                           |       | X            |       | 1998          |
| John T. Foy          |       | 58         |       | President  and Chief Executive                                   |       |         |       |          |
|                 |       |       |       | Officer  of the Operating Company—                          |       |         |       |          |
|                 |       |       |       | Lane  Furniture Industries, Inc.                            |       |         |       | 1996          |
|                 |       |       |       | Director                                                         |       | X            |       | 2004          |
|                 |       |       |       | President                                                        |       | X            |       | 2004          |
|                 |       |       |       | Chief  Operating Officer                                         |       | X            |       | 2004          |
| Nancy W. Webster     |       | 52         |       | President  and Chief Executive                                   |       |         |       |          |
|                      |       |       |       | Officer  of the Operating Company—                          |       |         |       |          |
|                      |       |       |       | Thomasville  Furniture Industries, Inc.                     |       | X            |       | 2005          |
| Harvey Dondero       |       | 57         |       | President  and Chief Executive                                   |       |         |       |          |
|                 |       |       |       | Officer  of the Operating Company—                          |       |         |       |          |
|                 |       |       |       | Broyhill  Furniture Industries, Inc.                        |       | X            |       | 2005          |
| C. Jeffrey Young     |       | 55         |       | President  and Chief Executive                                   |       |         |       |          |
|                      |       |       |       | Officer  of the Operating Company—                          |       |         |       |          |
|                      |       |       |       | Drexel  Heritage                                                 |       |         |       | 2002          |
|                      |       |       |       | HDM  Furniture Industries, Inc.                             |       | X            |       | 2005          |
| Lynn Chipperfield    |       | 54         |       | General  Counsel                                                 |       |         |       | 1993          |
|                 |       |       |       | Vice-President                                                   |       |         |       | 1996          |
|                 |       |       |       | Secretary                                                        |       |         |       | 1996          |
|                 |       |       |       | Senior  Vice President                                           |       | X            |       | 2000          |
|                 |       |       |       | Chief  Administrative Officer                                    |       | X            |       | 2000          |
| Denise L. Ramos      |       | 49         |       | Senior  Vice President                                           |       | X            |       | 2005          |
|                      |       |       |       | Treasurer                                                        |       |         |       | 2005          |
|                      |       |       |       | Chief  Financial Officer                                         |       | X            |       | 2005          |
| Steven W. Alstadt    |       | 51         |       | Controller                                                       |       | X            |       | 1994          |
|                 |       |       |       | Chief  Accounting Officer                                        |       | X            |       | 1994          |
|                      |            |            |            |                                                                  |            |              |            |               |  |  |

 

----

*                    Member of theExecutive Committee

There are nofamily relationships between any of the executive officers of the Registrant.

40

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The executive officers are elected at the organizational meeting of theBoard of Directors which follows the annual meeting of stockholders and servefor one year or until their successors are elected and qualified.

Each of theexecutive officers has held the same position or other positions with the sameemployer during the past five years, except Denise L. Ramos, who became SeniorVice President, Treasurer and Chief Financial Officer of the Company in 2005and prior thereto was Chief Financial Officer of the KFC division of YUM!Brands, Inc. and Senior Vice President and Treasurer of YUM! Brands, Inc.;C. Jeffrey Young who became President and Chief Executive Officer of DrexelHeritage in 2002 and prior thereto was a participant in a joint venture now knownas Fine Furniture Design and Marketing; Harvey Dondero, who became Presidentand Chief Executive Officer of Broyhill in 2005 and prior thereto was Presidentand Chief Executive Officer of Universal Furniture International, which iscurrently part of Lacquer Craft Manufacturing Co. Ltd.; and Nancy W. Webster,who became President and Chief Executive Officer of Thomasville in 2005 andprior thereto was Vice President of Hardlines Product Design and Developmentfor Target Corporation and Senior Vice President Creative Development forSprings Industries, Inc.

**Code of Corporate Conduct**

We have adopted a code of business conduct for directors, officers(including the Company’s principal executive officer, principal financialofficer and controller) and employees, known as the Code of Corporate Conduct.Any person may request a free copy of the Code of Corporate Conduct from:

Furniture BrandsInternational, Inc.101 S. Hanley RoadSt. Louis, MO 63105

Attn: CorporateSecretary314-863-1100

**AuditCommittee and Audit Committee Financial Expert**

The sectionsentitled “Board of Directors and Committees” and “Principal Auditor Fees andServices” of our Proxy Statement for the Annual Meeting of Stockholders on May 4,2006 are incorporated herein by reference.

**Item 11.   Executive Compensation**

The sectionsentitled “Executive Compensation”, “Executive Compensation and Stock OptionCommittee Report on Executive Compensation”, “Stock Options”, “Long-TermIncentive Plan”, “Retirement Plans”, “Incentive Agreements” and “PerformanceGraph” of our Definitive Proxy Statement for the Annual Meeting of Stockholderson May 4, 2006 are incorporated herein by reference.

**Item 12.   Security Ownership of Certain Beneficial Owners andManagement and Related Stockholders Matters**

The sectionentitled “Security Ownership” of our Definitive Proxy Statement for the AnnualMeeting of Stockholders on May 4, 2006 is incorporated herein byreference.

**Item 13.   Certain Relationships and Related Transactions**

The section “CertainRelationships and Related Transactions” of our Definitive Proxy Statement forthe Annual Meeting of Stockholders on May 4, 2006 is incorporated hereinby reference.

**Item 14.   Principal Accountant Fees and Services**

The section “Principal Auditor Fees and Services” of our DefinitiveProxy Statement for the Annual Meeting of Stockholders on May 4, 2006 isincorporated herein by reference.

41

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**PART IV**

**Item 15.   Exhibitsand Financial Statement Schedules**

(a)            List of documentsfiled as part of this report:

1.              FinancialStatements:

Consolidatedbalance sheets, December 31, 2005 and 2004

Consolidatedstatements of operations for each of the years in the three-year period ended December 31,2005

Consolidatedstatements of cash flows for each of the years in the three-year period ended December 31,2005

Consolidatedstatements of shareholders’ equity and comprehensive income (expense) for eachof the years in the three-year period ended December 31, 2005

Notes toconsolidated financial statements

Report ofIndependent Registered Public Accounting Firm

2.              Financial StatementSchedules:

Valuation andqualifying accounts (Schedule II).

All otherschedules are omitted as the required information is presented in theconsolidated financial statements or related notes or are not applicable.

3.              Exhibits:

The following exhibits are filed herewith or are incorporated byreference to exhibits previously filed with the SEC. We shall furnish copies ofexhibits for a reasonable fee (covering the expense of furnishing copies) uponrequest.
|        |   | 3(a) |   | Restated Certificate of Incorporation of the  Company, as amended (Incorporated by reference to Exhibit 3(a) to  Furniture Brands International, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002)                                                         |
|--------|--------|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 3(b) |   | By-Laws of the  Company revised and amended to May 6, 1998 (Incorporated by reference to  Exhibit 3(a) to Furniture Brands International, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended March 31,  1998)                                                          |
|   |   | 3(c) |   | Rights  Agreement, dated as of July 30, 1998, between the Company and Bank of  New York, as Rights Agent (Incorporated by reference to Exhibit 4  (b) to Furniture Brands International, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 1998)             |
|   |   | 3(d) |   | Certificate of  Designations, Preferences and Rights of Series A Junior Participating  Preferred Stock of the Company (Incorporated by reference to  Exhibit 4(c) to Furniture Brands International, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1998) |

42

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|        |   | 4(a)  |   | Credit  Agreement, dated December 18, 2003, among the Company, Broyhill  Furniture Industries, Inc., Drexel Heritage Furniture  Industries, Inc., Henredon Furniture Industries, Inc., Lane  Furniture Industries, Inc., Maitland-Smith Furniture  Industries, Inc. and Thomasville Furniture Industries, Inc. as  Borrowers, Various Lenders, The Bank of Tokyo-Mitsubishi, Ltd., Chicago  Branch and The Bank of New York, as Co-Documentation Agents, Suntrust Bank  and Wachovia Bank, National Association, as Co-Syndication Agents, Deutsche  Bank AG, New York Branch, as Administrative Agent, and Deutsche Bank  Securities, Inc., as Sole Lead Arranger and Sole Book Manager  (Incorporated by reference to Exhibit 4 to Furniture Brands  International, Inc.’s Current Report on Form 8-K, dated  January 21, 2004) |
|--------|--------|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10(a) |   | Furniture  Brands International, Inc. 1992 Stock Option Plan, as amended (Incorporated  by reference to Exhibit 10 (a) to Furniture Brands  International, Inc.’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2000) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | 10(b) |   | Furniture  Brands International, Inc. 1999 Long-Term Incentive Plan, as amended  (Incorporated by reference to Exhibit 4(f) to Furniture Brands  International, Inc.’s Registration Statement on Form S-8,  File No. 333-100133) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | 10(c) |   | Furniture  Brands Internal, Inc. 2005 Long-Term Performance Bonus Plan  (Incorporated by reference to Exhibit 10(a) to Furniture Brands  International, Inc.’s Current Report on Form 8-K, dated  May 3, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | 10(d) |   | Form of  Stock Option Grant Letter (Incorporated by reference to  Exhibit 10(b) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated February 2, 2005)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | 10(e) |   | Form of  Restricted Stock Grant Letter (Incorporated by reference to  Exhibit 10(c) to Furniture Brands International, Inc’s. Current  Report on Form 8-K, dated February 11, 2005)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | 10(f) |   | Form of  Indemnification Agreement between the Company and the Company’s directors  (Incorporated by reference to Exhibit 10(c) to Furniture Brands  International Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2001) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | 10(g) |   | Furniture  Brands International, Inc. Amended and Restated Restricted Stock Plan  for Outside Directors, dated as of January 27, 2005 (Incorporated by  reference to Exhibit 10(b) to Furniture Brands  International, Inc.’s Current Report on Form 8-K, dated  May 3, 2005 *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | 10(h) |   | Retirement  Plan for Directors (Incorporated by reference to Exhibit 10 (g) to  Furniture Brands International, Inc.’s Annual Report on Form 10-K  for the year ended December 31, 1994) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | 10(i) |   | First  Amendment to Retirement Plan for Directors (Incorporated by reference to  Exhibit 10 (e) to Furniture Brands International, Inc.’s  Annual Report on Form 10-K for the year ended December 31,  1994) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10(j) |   | Furniture  Brands International, Inc. Executive Incentive Plan, as amended on  October 25, 2001 (Incorporated by reference to Exhibit 10(g) to  Furniture Brands International Inc.’s Annual Report on Form 10-K  for the year ended December 31, 2001) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

43

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|        |   | 10(k) |   | Thomasville  Furniture Industries, Inc. Executive Incentive Plan, as amended on  January 24, 2002 (Incorporated by reference to Exhibit 10(i) to  Furniture Brands International Inc.’s Annual Report on Form 10-K  for the year ended December 31, 2001) *                                    |
|--------|--------|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10(l) |   | Henredon  Furniture Industries, Inc. Executive Incentive Plan, dated  January 24, 2002 (Incorporated by reference to Exhibit 10(j) to  Furniture Brands International Inc.’s Annual Report on Form 10-K  for the year ended December 31, 2001) *                                               |
|   |   | 10(m) |   | Drexel  Heritage Furniture Industries, Inc. Executive Incentive Plan, dated  January 24, 2002 (Incorporated by reference to Exhibit 10(k) to  Furniture Brands International Inc.’s Annual Report on Form 10-K  for the year ended December 31, 2001) *                                        |
|   |   | 10(n) |   | Form of  Executive Incentive Plan Grant Letter to Company Executives (Incorporated by  reference to Exhibit 10(a) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated February 2, 2005) *                                                                             |
|   |   | 10(o) |   | Form of  Executive Incentive Plan Grant Letter to Operating Company Executives  (Incorporated by reference to Exhibit 10(q) to Furniture Brands  International, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 2004) *                                                     |
|   |   | 10(p) |   | Employment  Agreement, dated as of January 1, 2000, between the Company and Wilbert  G. Holliman (Incorporated by reference to Exhibit 10 (j) to  Furniture Brands International, Inc.’s Annual Report on Form 10-K  for the year ended December 31, 1998) *                                   |
|   |   | 10(q) |   | Employment  Agreement, dated as of February 10, 2004, between the Company and John  T. Foy (Incorporated by reference to Exhibit 10 (o) to Furniture Brands  International, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 2003) *                                              |
|   |   | 10(r) |   | Employment  Agreement, dated as of February 7, 2005, between the Company and Denise  L. Ramos (Incorporated by reference to Exhibit 10(a) to Furniture  Brands International, Inc.’s Current Report On Form 8-K,  dated February 11, 2005) *                                                   |
|   |   | 10(s) |   | Employment  Agreement, dated as of April 16, 2004, between Thomasville Furniture  Industries, Inc. and Thomas G. Tilley, Jr. (Incorporated by  reference to Exhibit 10 (s) to Furniture Brands International, Inc.’s  Annual Report on Form 10-K for the year ended December 31,  2003) * |
|   |   | 10(t) |   | Form of  Agreement Not To Compete between the Company and Wilbert G. Holliman and John  T. Foy (Incorporated by reference to Exhibit 10 (r) to Furniture  Brands International, Inc.’s Annual Report on Form 10-K for  the year ended December 31, 1998) *                                     |
|   |   | 10(u) |   | Furniture  Brands Supplemental Executive Retirement Plan, dated as of January 1,  2002 (Incorporated by reference to Exhibit 10(v) to Furniture  Brands International, Inc.’s Annual Report on Form 10-K for  the year ended December 31, 2002) *                                              |
|   |   | 10(v) |   | Form of  Deferred Executive Compensation Agreement (Incorporated by reference to  Exhibit 10(a) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated December 9, 2004) *                                                                                               |

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|        |   | 10(w) |   | Form of  Cash Option Deferred Executive Compensation Agreement (Incorporated by  reference to Exhibit 10 (b) to Furniture Brands  International, Inc.’s Current Report on Form 8-K, dated  December 9, 2004). *             |
|--------|--------|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10(x) |   | Furniture  Brands International, Inc. Deferred Compensation Plan, effective  January 1, 2006 (Incorporated by reference to Furniture Brands  International, Inc.’s Registration Statement on Form S-8,  File No. 333-130322)     |
|   |   | 10(y) |   | Form of  Long-Term Performance Cash Bonus Letter (Incorporated by reference to  Exhibit 10(c) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated February 2, 2005) *                              |
|   |   | 14    |   | Code of  Corporate Conduct (Incorporated by reference to Exhibit 14 to Furniture  Brands International, Inc.’s Annual Report of Form 10-K for  the year ended December 31, 2003).                                                     |
|   |   | 21    |   | List of  Subsidiaries of the Company                                                                                                                                                                                                                           |
|   |   | 23    |   | Consent of  Independent Registered Public Accounting Firm                                                                                                                                                                                                      |
|   |   | 31    |   | Certifications  of W.G. Holliman, Chief Executive Officer of the Company, and Denise L.  Ramos, Chief Financial Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a),  as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   | 32    |   | Certifications  of W.G. Holliman, Chief Executive Officer of the Company, and Denise L.  Ramos, Chief Financial Officer of the Company, Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.  |

 

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*                    Indicatesmanagement contact or compensatory plan, contract or arrangement

45

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**FURNITURE BRANDSINTERNATIONAL, INC. AND SUBSIDIARIES**

**Index to Consolidated Financial Statements and Schedules**

|                                                                                                                                                             | ** ** | **Page No.** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| Consolidated  Financial Statements:                                                                                                                         |       |              |       |   |   |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                                                          |       |              | 22         |   |   |
| Consolidated Statements of Operations for each of the  years in the three-year period ended December 31, 2005                                          |       |              | 23         |   |   |
| Consolidated Statements of Cash Flows for each of the  years in the three-year period ended December 31, 2005                                          |       |              | 24         |   |   |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for each of the years in the three-year period ended  December 31, 2005 |       |              | 25         |   |   |
| Notes to Consolidated Financial Statements                                                                                                                  |       |              | 26         |   |   |
| Financial Statement Schedule                                                                                                                                |       |              | 42         |   |   |
| Report of Independent Registered Public Accounting  Firm                                                                                                    |       |              | 49         |   |   |
| Consolidated  Financial Statement Schedules:                                                                                                                |       |              |       |   |   |
| **Schedule II**                                                                                                                                             |       |
| Valuation and  qualifying accounts                                                                                                                          |       |              | 47         |   |   |

 

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**Schedule II**

**FURNITURE BRANDSINTERNATIONAL, INC. AND SUBSIDIARIES**

**Valuation and Qualifying Accounts**

| ** **                                              | ** ** | ** **                           | ** ** | **Additions**       | ** ** | ** **     | ** ** | ** **          | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
| ** **                                              | ** ** | **Balance at**                  | ** ** | **Charged to** | ** ** | **Deductions** | ** ** | **Balance at** | ** ** |
| ** **                                              | ** ** | **Beginning**                        | ** ** | **Costs and**  | ** ** | **From**       | ** ** | **End of**     | ** ** |
| **Description**                                         | ** ** | ** **                           | ** ** | **of Period**  | ** ** | **Expenses**   | ** ** | **Reserves**        | ** ** | **Period** | ** ** |
| ** **                                              | ** ** | **(Dollars in Thousands)** | ** ** |                |
| Year Ended  December 31, 2005                      |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowances  deducted from receivables on balance sheet: |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                                 | $          | 15,390              |       |           |       | 9,047               |       |   |   | (8,384 | )(a) |   |   | 16,053 |   |   |   |
| Allowance for cash discounts/chargebacks/other          |       |                                 | 5,529      |                |       |           | 3,127      |                |       |   | (1,341 | )(b) |   |   | 7,315 |   |   |   |
|                                                    |       |                                 | 20,919     |                |       |           | 12,174     |                |       |   | (9,725 | ) |   |   | 23,368 |   |   |   |
| Year Ended  December 31, 2004                      |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowances  deducted from receivables on balance sheet: |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                                 | $          | 13,287              |       |           |       | $                   | 16,425     |   |   |   | $ | (14,322 | )(a) |   |   | $ | 15,390 |   |   |   |
| Allowance for cash discounts/chargebacks/other          |       |                                 | 6,091      |                |       |           | 554        |                |       |   | (1,116 | )(b) |   |   | 5,529 |   |   |   |
|                                                    |       |                                 | $          | 19,378              |       |           |       | $                   | 16,979     |   |   |   | $ | (15,438 | ) |   |   | $ | 20,919 |   |   |   |
| Year Ended  December 31, 2003                      |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowances  deducted from receivables on balance sheet: |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                                 | $          | 13,717              |       |           |       | $                   | 3,830      |   |   |   | $ | (4,260 | )(a) |   |   | $ | 13,287 |   |   |   |
| Allowance for cash discounts/chargebacks/other          |       |                                 | 7,034      |                |       |           | 978        |                |       |   | (1,921 | )(b) |   |   | 6,091 |   |   |   |
|                                                    |       |                                 | $          | 20,751              |       |           |       | $                   | 4,808      |   |   |   | $ | (6,181 | ) |   |   | $ | 19,378 |   |   |   |
|                                                         |            |                                      |            |                     |            |                |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)            Uncollectible accountswritten off, net of recoveries.

(b)            Cash discounts takenby customers and claims allowed to customers.

 

See accompanying Report of Independent Registered Public Accounting Firm.

47

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**Management’sReport on Internal Control Over Financial Reporting**

Management ofFurniture Brands International, Inc. is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in the Securities Exchange Act of 1934 Rule 13a-15(f). Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005 as required by the SecuritiesExchange Act of 1934 Rule 13a-15(c). In making this assessment, weused the criteria set forth in the framework in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control-Integrated Framework*our management concluded that our internal control over financial reporting waseffective as of December 31, 2005.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2005 has been audited by KPMG LLP, anindependent registered public accounting firm, as stated in their report whichis set forth on page 51.

Furniture BrandsInternational, Inc.

St. Louis,MissouriMarch 14, 2006

48

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**Report of Independent Registered Public Accounting Firm**

The Board ofDirectors and ShareholdersFurniture Brands International, Inc.:

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting*,*thatFurniture Brands International, Inc. maintained effective internal controlover financial reporting as of December 31, 2005, based on the criteriaestablished in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion,management’s assessment that Furniture Brands International, Inc.maintained effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on the criteria establishedin *Internal Control—Integrated Framework*issuedby COSO. Also, in our opinion, Furniture Brands International, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based the on the criteria established in *InternalControl—Integrated Framework*issued by COSO.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Furniture Brands International, Inc. and subsidiaries as of December 31,2005 and 2004, and the related consolidated statements of operations,shareholders’ equity and comprehensive income, and cash flows for each of theyears in the three-year period ended December 31, 2005, and our reportdated March 14, 2006 expressed an unqualified opinion on thoseconsolidated financial statements.

/s/ KPMG LLPSt. Louis, MissouriMarch 14, 2006

49

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**Report ofIndependent Registered Public Accounting Firm**

The Board ofDirectors and ShareholdersFurniture Brands International, Inc.:

We have auditedthe accompanying consolidated balance sheets of Furniture Brands International, Inc.and subsidiaries as of December 31, 2005 and 2004, and the relatedconsolidated statements of operations, shareholders’ equity and comprehensiveincome, and cash flows for each of the years in the three-year period ended December 31,2005. In connection with our audits of the consolidated financial statements,we have also audited the accompanying financial statement schedule. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Furniture Brands International, Inc.and subsidiaries as of December 31, 2005 and 2004, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles. Also in our opinion, the related financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness ofinternal control over financial reporting of Furniture Brands International, Inc.as of December 31, 2005, based on the criteria established in *Internal Control—Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 14, 2006 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.

/s/ KPMG LLPSt. Louis, MissouriMarch 14, 2006

50

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**SIGNATURES**

Pursuant to the requirements of Section 13 of 15 (d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|        |   | Furniture Brands International, Inc.     (Registrant) |
|--------|--------|----------------------------------------------------------------------|
|   |   |                                                                 |   |   |
|   |   | By:                                                                  |   | /s/ WILBERT G.  HOLLIMAN |
|   |   |                                                                 |   | *Chairman of the Board and* |
|   |   |                                                                 |   | *Chief Executive Officer* |

 

**Date: March 14, 2006**

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities indicated on March 00, 2006.
|                              | **Signature** | ** **                    | ** ** |  | **Title** | ** ** |
|------------------------------|---------------|-------------------------------|------------|--|-----------|------------|
|                         |          |                          |
| /s/ WILBERT G. HOLLIMAN      |          | Chairman of the Board         |
| Wilbert  G. Holliman         |          | (Principal Executive Officer) |
|                         |          |                          |
| /s/ JOHN T. FOY              |          | Director and President        |
| John T.  Foy                 |          |                          |
|                         |          |                          |
| /s/ KATHERINE BUTTON BELL    |          | Director                      |
| Katherine  Button Bell       |          |                          |
|                         |          |                          |
| /s/ JOHN R. JORDAN, JR. |          | Director                      |
| John R.  Jordan, Jr.    |          |                          |
|                         |          |                          |
| /s/ DONALD E. LASATER        |          | Director                      |
| Donald  E. Lasater           |          |                          |
|                         |          |                          |
| /s/ LEE M. LIBERMAN          |          | Director                      |
| Lee M.  Liberman             |          |                          |
|                         |          |                          |
| /s/ RICHARD B. LOYND         |          | Director                      |
| Richard  B. Loynd            |          |                          |
|                         |          |                          |
| /s/ BOB L. MARTIN            |          | Director                      |
| Bob L.  Martin               |          |                          |
|                         |          |                          |
| /s/ AUBREY B. PATTERSON      |          | Director                      |
| Aubrey  B. Patterson         |          |                          |
|                         |          |                          |
| /s/ ALBERT E. SUTER          |          | Director                      |
| Albert  E. Suter             |          |                          |
|                         |          |                          |

51

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|                       |   |                           |
|-----------------------|--------|--------------------------------|
| /s/ DENISE L. RAMOS   |   | Senior Vice-President          |
| Denise  L. Ramos      |   | (Principal Financial Officer)  |
|                  |   |                           |
| /s/ STEVEN W. ALSTADT |   | Controller                     |
| Steven  W. Alstadt    |   | (Principal Accounting Officer) |

 

 

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