Item 1. Business
GENERAL
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") is the largest manufacturer and marketer of home furnishing products. The Company markets a comprehensive selection of quality products under well-known brand names through an extensive worldwide distribution network. The Company offers products in price categories ranging from "promotional" to "premium," with a primary concentration in the "good," "better" and "best" categories. The Company's products enjoy an international reputation for quality, craftsmanship, style and value.
Fine Furniture. The Company designs, manufactures and markets a full range of quality wood and upholstered furniture to furnish any room of a home in virtually any style, under such well-known brand names as Henredon(R), Drexel Heritage(R), Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a wide range of furniture accessories under the Maitland-Smith(TM) and La Barge(R) brand names.
Decorative Home Furnishing Fabrics. The Company designs, markets and distributes over 25,000 decorative home furnishing fabrics, such as fabrics for upholstery and draperies, under such well-known brand names as Robert Allen(TM), Sunbury(TM) and Beacon Hill(R).
The Company was incorporated under the laws of Delaware in May 1996 for the purpose of acquiring the Home Furnishings Group (the "Predecessor") of Masco Corporation ("Masco"). FURNISHINGS INTERNATIONAL INC., a Delaware corporation ("Holdings"), subscribed for 100 shares of the common stock, par value $.01 per share, of the Company and is the Company's sole stockholder. On August 5, 1996, Holdings acquired the Predecessor from Masco pursuant to an acquisition agreement (the "Acquisition Agreement") for a purchase price of approximately $1.1 billion and contributed substantially all of the businesses acquired to the Company.
PRODUCTS
The Company is the largest manufacturer and marketer of home furnishing products. It believes it offers the most comprehensive product line in the home furnishings industry, including (i) bedroom, dining room, living room, family room and home office casegoods; (ii) stationary upholstered products such as sofas, love seats, sectionals and chairs; (iii) upholstered recliners, motion furniture and sleep sofas; (iv) occasional furniture such as home entertainment centers, lamps, chairs, tables, mirrors and other accent items; and (v) decorative home furnishing fabrics.
FINE FURNITURE
The product category "Fine Furniture" includes wood and upholstered residential furniture (other than "ready-to-assemble" products), as well as occasional tables, decorative mirrors, lighting and other related furnishing accessories. The Company designs, manufactures and markets a full range of quality wood and upholstered furniture to furnish any room of a home in virtually any style, under such well-known brand names as Henredon(R), Drexel Heritage(R), Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a wide range of furniture accessories under the Maitland-Smith(TM) and La Barge(R) brand names. The Company offers these products across all major price categories, from "promotional" to "premium," and in every major style category, including American Traditional, Country, Eighteenth Century, European Country, European Traditional, Casual, Contemporary, Home Office, Youth and Oriental. By offering such a broad product line, the Company can supply up to 75% of the product demands of most furniture retailers, and more easily satisfy retailers who increasingly prefer to buy from a smaller number of larger suppliers.
The following table illustrates the product and price category coverage of the Company's fine furniture brands. The residential furniture industry generally classifies its products by several price categories ranging from "promotional" to "premium." Products in successively higher price categories are made using more expensive raw materials, have higher quality finishes, and often involve higher labor costs.
Shaded area indicates product category does not exist.
Henredon(R)
Henredon designs and manufactures wood, upholstered and occasional furniture for the bedroom, dining room, living room, family room and home office. Its products are in the "best" and "premium" price categories and are aimed at the "replacement" market, where customers typically trade up in price and quality and demand superior design, materials and craftsmanship. Product design and development represent an important element of Henredon's success, and Henredon is considered to be one of the premier names in design for furniture in the high-end price categories. Henredon currently sells 17 collections, and designs and develops approximately four new product collections each year. Henredon's products cover all major style categories within the high-end niche, including Eighteenth Century, European Traditional, Transitional, Contemporary, Sophisticated Country and Casual. Since 1993, Henredon has manufactured and marketed products for the Ralph Lauren Home Collection(TM) under a special licensing relationship with the Polo Ralph Lauren organization. Henredon believes this line of high-end wood and upholstered furniture is an excellent complement to its other product lines.
Drexel Heritage(R)
Drexel Heritage designs and manufactures wood, upholstered, motion and occasional furniture for the bedroom, dining room, living room, family room and home office in the "better" and "best" price categories. It currently produces 26 collections of wood and upholstered furniture. Approximately four to six new collections are offered each year. Drexel Heritage's product styles include American Traditional, Country, Eighteenth Century, European Traditional, Contemporary and Transitional. Drexel Heritage also produces furniture for sale to the hospitality and government markets.
Lexington(R)
Lexington designs and manufactures wood, upholstered and occasional furniture for the bedroom, dining room, living room, family room and home office in the "good" and "better" price categories. Lexington currently produces over 40 collections of furniture and designs and develops four to six new collections each year. The Company believes that Lexington's merchandising and design teams, which have received several industry awards for product design and marketing in recent years, are among the industry's best. Product design and development represent an integral part of Lexington's success. Lexington pioneered "Lifestyle" and designer collections, and its collections currently include the popular The World of Bob Timberlake(TM), The Palmer Home Collection(TM), Weekend Retreat(TM), Seaside Retreat(TM), American Country West(TM), American Mix(TM), Vestiges(TM), Pacific Overtures(TM), Atlantic Overtures(TM), and Nautica. These collections have become an important part of Lexington's offerings. Product styles include Traditional, Eighteenth Century, Country and Casual.
Universal(R)
Universal's products include dining room, bedroom, upholstered and occasional furniture in the "promotional," "good" and "better" price categories. Universal products are manufactured in part in Asia, where the Company is the largest United States based residential furniture manufacturer, with access to a low-cost work force, highly-skilled in such areas as intricate veneering and hand carving, and access to scarce raw materials such as Chinese oak, and certain exotic woods. Universal currently sells 60 collections of furniture, including styles such as Eighteenth Century, Traditional, Transitional, Oriental and Country, and introduces four to six new collections a year. Universal's Alexander Julian Home Colours(TM) and American Generations(TM) collections are among the industry's best sellers.
Berkline(R)
Berkline designs and manufactures a wide range of recliners, motion furniture and sleep sofas, primarily in the "good" and "better" price categories. The Berkline(R) brand name is well known in the rapidly growing market for upholstered modular and motion furniture and freestanding recliners. Berkline offers a wide range of styles, fabrics and leathers for these products, as well as popular innovative features such as hidden cup holders and built-in tables.
BenchCraft(R)
BenchCraft designs and manufactures a comprehensive line of upholstered furniture, including stationary, motion, leather, wicker and rattan. BenchCraft's products are in the "promotional," "good," and "better" price categories and are marketed as fashionable, affordable furniture for "casual living."
Maitland-Smith
Maitland-Smith designs and manufactures an innovative line of "best" and "premium" hand-crafted, antique-inspired furniture, accessories and lighting, utilizing a wide range of unique materials, including leather, fancy faced veneer, stone and hand-painted metal.
La Barge(R)
La Barge designs and sells decorative mirrors, metal and glass occasional tables, bedroom, dining room and casegoods statement pieces, decorative lighting and related accessories under three brand names: La Barge(R), Marbro(R) and Entree(TM) in the "best" and "premium" price categories. La Barge designs its products, and contracts their manufacture with established suppliers around the world who it believes can produce high quality, specialty products with decorative style.
Beacon Hill(R)
The Company's Beacon Hill(R) showrooms sell primarily "best" and "premium" fine furniture products manufactured by the Company and third parties, including certain products under the Beacon Hill(R) brand name, exclusively to interior design professionals and their clients.
DECORATIVE HOME FURNISHING FABRICS
The Company designs, markets and distributes over 25,000 decorative home furnishing fabrics, such as fabrics for upholstery and draperies, under such well-known brand names as Robert Allen(TM), Sunbury(TM) and Beacon Hill(R). The Company offers decorative home furnishing fabrics (including trim and finished products) in the "good," "better," "best" and "premium" price categories. The following table illustrates the price category coverage of the Company's decorative home furnishing fabric brands:
- ------------------------------------------------------------------------- PRICE CATEGORY BRAND - ------------------------------------------------------------------------- Premium Beacon Hill(R) Ramm, Son & Crocker(TM) - ------------------------------------------------------------------------- Best Beacon Hill(R) Ramm, Son & Crocker(TM) Sunbury(TM) - ------------------------------------------------------------------------- Better Ametex(TM) Robert Allen(TM) Sunbury(TM) - ------------------------------------------------------------------------- Good Ametex(TM) Robert Allen(TM) - -------------------------------------------------------------------------
The Robert Allen Group
The Robert Allen Group consists of Beacon Hill, Robert Allen, Ametex, and Ramm Son & Crocker. Beacon Hill(R) presents a high-end collection of exclusive prints, wovens and silks, sourced worldwide. Robert Allen features Color Library(TM), Essentials(TM), Editions(TM), and Passementerie(TM), its unique way of organizing product for the design community. Ametex designs prints and wovens for furniture manufacturers, window and bedding product manufacturers, fabric retailers and ancillary industries. Robert Allen and Ametex Contract service the hospitality and contract industries utilizing flame retardent and durable construction fabrics. Ramm, Son & Crocker produces traditional furnishing fabrics in the "best" and "premium" price categories.
Sunbury
Sunbury designs and weaves proprietary decorative jacquard home furnishing fabrics in the "better" and "best" price categories. Fabrics are woven in traditional, transitional, contemporary, sophisticated country and custom designs. Sunbury produces fabrics that allow furniture manufacturers to differentiate their products from those of their competitors. Most of Sunbury's woven designs are protected by exclusive copyright, and all of its products are woven to order.
DISTRIBUTION
The Company distributes its fine furniture products through an extensive worldwide distribution network that includes (i) more than 25,000 independent retail locations, including national and regional chains, department stores, specialty stores and more than 570 galleries within retail stores; (ii) more than 90 independent dedicated stores exclusively selling Company products and (iii) 14 Company-operated Beacon Hill(R) decorator showrooms. Outside the United States, the Company sells its fine furniture products primarily through approximately 580 commissioned independent representatives. The Company also sells its fine furniture domestically and internationally to the hospitality and government markets, and has recently begun offering product information through non-traditional channels such as the Internet. The Company distributes over 25,000 different decorative home furnishing fabrics through numerous distribution channels, including the Beacon Hill(R) showrooms, to an extensive customer base consisting of over 30,000 retailers, decorators and designers worldwide. The Company also sells decorative home furnishing fabrics to furniture manufacturers. The Company's extensive distribution network provides limited dependence on any one customer. In 1997, the Company's 20 largest customers represented approximately 20% of net sales, with no single customer representing more than 3.5%. The Company believes it has more active accounts than any other manufacturer in the home furnishings industry.
FINE FURNITURE
The Company believes that it is the most comprehensive and complete resource in the residential furniture industry, capable of supplying up to 75% of the product demands of most furniture retailers, whether local, regional or national in scope. This, in turn, enables the Company to secure additional display space from retailers, who increasingly are relying on a smaller number of larger suppliers. The Company offers substantial services to retailers to support their marketing efforts, including national advertising, merchandising and display programs. The Company also displays its fine furniture products at the semi-annual International Home Furnishings Market in High Point, North Carolina.
The following table illustrates the distribution of the Company's fine furniture products by brand:
DISTRIBUTION CHANNEL - ------------------------------------------------------------------------------- INDEPENDENT DEDICATED DESIGNER RETAILERS GALLERIES STORES SHOWROOMS - ------------------ ------------------ ------------------- ------------------ BenchCraft(R) Berkline(R) Drexel Heritage (R) Beacon Hill(R) Berkline(R) Drexel Heritage(R) Drexel Heritage(R) Drexel Heritage(R) Henredon(R) Henredon(R) Henredon(R) La Barge(R) La Barge(R) La Barge(R) Lexington(R) Lexington(R) Lexington(R) Maitland-Smith(TM) Maitland-Smith(TM) Maitland-Smith(TM) Universal(R)
Furniture retailers remain the most significant distribution channel in the industry, and the Company is committed to maintaining these important relationships. The Company's diverse product offerings and national distribution enable it to effectively service national retailers such as Federated Department Stores, Heilig-Meyers, J.C. Penney, Levitz, Montgomery Ward and Sears, and large regional retailers such as Baers Furniture, Breunners, Homestead House, Kittles Furniture and Wayside Furniture, as well as independent single store retailers nationwide. As the furniture retailing industry consolidates, large retailers are commanding an increasing presence, and management believes that the Company is better positioned than its competitors to meet their needs.
The Company has developed gallery programs for its Henredon(R), Drexel Heritage(R), Lexington(R), Berkline(R), Maitland-Smith(TM) and La Barge(R) product lines with more than 570 retailers. Galleries are dedicated space within a larger retail store that display products in complete and fully accessorized room settings instead of as individual pieces. This presentation format encourages consumers to purchase an entire room of furniture instead of individual pieces from different manufacturers. The Company believes that stores with galleries result in higher sales per square foot than furniture stores without galleries.
The Company also sells its products through dedicated stores that exclusively offer the Company's products. Drexel Heritage(R) products are sold through Drexel Heritage(R) showcase stores and Drexel Home Inspirations(TM) Stores, a group of more than 90 independently owned and operated stores which sell Drexel Heritage(R) products exclusively in a gallery format. Each store employs a consistent, but not identical, lifestyle concept, with products displayed in complete rooms and eclectic settings, which include furnishings, wall decor, window treatments and accessories.
The Company operates the Beacon Hill(R) Showrooms, a national network of 14 showrooms for the sale of primarily "best" and "premium" price category products to interior design professionals and their clients. The showrooms are located in Atlanta, Boston, Chicago, Cleveland, Dallas, Dania (Florida), Houston, Los Angeles, New York, Philadelphia, San Francisco, Seattle, Troy (Michigan) and Washington, D.C. Approximately 45% of Beacon Hill's sales are of the Company's fine furniture products, primarily Henredon(R), Maitland-Smith(TM), Drexel Heritage(R) and Lexington(R).
DECORATIVE HOME FURNISHING FABRICS
The Company distributes its Robert Allen(TM) products through numerous distribution channels, including its own showroom and approximately 54 commissioned, independent representatives, to over 30,000 retailers, decorators and designers worldwide. The Company sells its Ametex(TM) products through approximately 26 commissioned independent representatives, primarily to furniture manufacturers, bedding and drapery manufacturers and contract purchasing agents. Sunbury(TM) products are sold to furniture manufacturers and distributors of decorative home furnishing fabrics in the United States and Canada by eight commissioned sales representatives. The Company's decorative home furnishing fabrics are also sold to decorators and designers through the Company's Beacon Hill(R) Showrooms, which offer Robert Allen(TM) and Ramm, Son & Crocker(TM) fabrics on a commission basis.
MARKETING AND ADVERTISING
In partnership with its selected retailers, the Company works to strengthen its brand equity with consumers and increase their purchases of Company products. These consumers are carefully profiled through marketing research and are then targeted through advertising programs on the national and local levels, comprehensive cataloging, education through focused marketing events and selected promotional programs.
Retailers are also carefully selected to market the Company's products to a wide range of consumers. These retailers, in turn, are supported with innovative training for their sales people, design assistance for their retail displays of Company products, noted speakers and planning support for their focused marketing events, visually stimulating point of purchase materials, catalogs and sales materials, direct communications linkage to the manufacturers for timely stock and status information and promotional support.
Architects, designers and decorators who specify and sell Company products receive exclusive sales support through Beacon Hill(R) showrooms. Value added services such as continuing education and special events with shelter publications draw new designers into the showrooms and build designer loyalty.
Contract, government and hospitality specifiers and purchasers receive specialized services through Holdings' contract division. A global sales and marketing network is well-supported from initial presentation through project completion, with extensive cataloging, on-line and customized products, and specialized delivery services.
The Company builds brand equity and increases consumer awareness through editorial coverage and advertising in leading shelter magazines. Targeting specific consumer demographics, advertisements are placed in publications which include Architectural Digest, Country Home, Country Living, Elle Decor, House Beautiful, House & Garden, Martha Stewart Living, Metropolitan Home, Traditional Home and Victoria. The combined volume of advertising from all product lines gives the Company leverage in purchasing advertising. Innovative products continue to draw the attention of editors for major shelter magazines. Their valuable editorial coverage favorably positions products with consumers at no cost to the Company.
Responding to consumers' desire for home furnishings information, the Company has created interactive sites on the Internet which allow users to browse its product lines, learn more about the Company and be directed to local retailers.
MANUFACTURING
The Company believes that it has a modern and efficient manufacturing base that will enable it to meet the manufacturing requirements of its business strategy over the next several years without the necessity of making significant additional capital expenditures to expand capacity. Management has adopted a continuous improvement philosophy with particular emphasis on improving customer and consumer satisfaction. Pursuant to this continuous improvement philosophy, the Company is committed to achieving significant improvements in productivity, quality and service levels to benefit its retailer partners and consumers.
As of December 31, 1997, the Company manufactured its products worldwide through 82 manufacturing and distribution facilities, with more than 22 million square feet, including over 18.5 million square feet of manufacturing space. These facilities are strategically located to efficiently supply the Company's worldwide distribution network. The Company's facilities have benefited from investment in state-of-the-art equipment and other capital expenditures
in excess of $260 million over the past five years. The Company is also beginning to realize the benefits from its continuous improvement programs directed at manufacturing methods and process improvements incorporating just-in-time logistics, cellular concepts, quality circles, reduced cycle times, laser cutting methodologies, computerization and related modern production methods.
The Company utilizes certain specialized facilities dedicated to manufacturing a limited number of products, as well as sub-contracted manufacturing facilities. The Company also promotes inter-company sourcing of products and components. These steps have helped the Company balance its global manufacturing capacity and increase its operating efficiency.
The Company's fine furniture lines are produced in domestic manufacturing and distribution facilities located in North Carolina, Tennessee, Michigan, Massachusetts, South Carolina, Mississippi, Georgia, Illinois, and California, and internationally in facilities located in Canada, China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore Sweden, Taiwan and the United Kingdom. Substantially all of the Company's Robert Allen(TM) and Ramm, Son & Crocker(TM) decorative home furnishing fabrics are manufactured for the Company by third parties.
The Company has taken a $58.5 million charge in 1997 to restructure its worldwide operations principally focusing on its Universal Furniture business unit. The majority of Universal's restructuring activity will take place in the Far East where approximately 4,000,000 square feet will be rationalized to improve quality, reduce order-to-ship times and enhance product values.
RAW MATERIALS AND SUPPLIERS
The principal raw materials used by the Company in the manufacture of its products include: lumber, finishing products (stains, sealants and lacquers), glue, steel, leather, cotton, wool, synthetic and vinyl fabrics, polyester batting and polyurethane foam. The various types of wood used in the Company's products are purchased both domestically and internationally. Management believes that its supply sources of those materials are adequate. The Company has experienced no significant problems in supplying its operations. Although the Company has ongoing relationships with certain suppliers of raw materials, the Company believes that there are a number of reliable vendors available contributing to its ability to obtain competitive pricing for raw materials. Raw material prices fluctuate over time depending on supply, demand and other factors. Increases in raw material prices may have a short-term impact on the Company's financial performance. Under the provisions of the Clean Air Act of 1970, as amended, (the "CAA"), in December 1995, the United States Environmental Protection Agency promulgated hazardous air emission standards, National Emission Standards for Hazardous Air Pollutants ("NESHAPS"), applicable to the wood furniture industry. The furniture industry and its suppliers have developed finishing materials to comply with these standards. See "Environmental Regulations."
COMPETITION
The furniture manufacturing industry is highly competitive and includes a large number of domestic and foreign manufacturers. The industry is highly fragmented, and no one company is dominant. Competition is generally based on product quality, brand name recognition, price and service. The Company's furniture products compete with products made by a number of furniture manufacturers, including Furniture Brands International, Inc., La-Z-Boy Incorporated, Klaussner Furniture Industries Inc., LADD Furniture, Inc. and Bassett Furniture Industries, Inc., as well as numerous smaller producers. In decorative home furnishing fabrics, competition is based upon design, price, style and quality, and competitors include Schumacher/Waverly, Richloom and Mastercraft.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 31,900 persons. Virtually all are non-union, although approximately 30%, most of whom are employed in Asia, are subject to certain government-mandated terms of employment. The Company believes it has good relations with its employees.
INTELLECTUAL PROPERTY
The Company considers its intellectual property to be among its most valuable assets. These rights include trademarks, trade names, copyrights, patents and rights licensed from third parties. The Company believes that these intellectual property rights are important to the Company because they are well recognized and associated with quality and value in the home furnishings industry. The Company aggressively protects its intellectual property rights.
ENVIRONMENTAL REGULATIONS
The Company is subject to a wide range of federal, state and local environmental laws and regulations relating to the protection of the environment, worker health and safety and the emission, discharge, storage, treatment and disposal of hazardous materials. These laws include the CAA, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, and the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund" or "CERCLA"). The Company believes that it is in material compliance with applicable federal, state, local and foreign environmental regulations. Compliance with these regulations has not in the past had any material effect on the Company's earnings, capital expenditures or competitive position; however, the effect of such compliance on the Company in the future cannot be determined. The Company does not anticipate making any material capital expenditures for environmental control facilities in the foreseeable future.
Under the provisions of the CAA, in December 1995, the United States Environmental Protection Agency promulgated hazardous air emission standards for the wood furniture industry. NESHAPs required the Company to reduce emissions of certain hazardous air pollutants by November 1997. In order to comply with NESHAPs, the Company has reformulated certain furniture finishes as well as instituted process changes. The furniture industry and its suppliers have developed finishing materials to comply with these standards. While the initial cost of compliance required an investment in new spray equipment, worker training and the application of reformulated materials, the cost impact on operations was not material. The Company does not believe that these regulations will materially impact its future financial performance or the quality or the durability of its products.
As the result of historical operations, spills and releases of hazardous substances may have occurred at several of the Company's facilities. These releases are under investigation, including soil and groundwater sampling. If hazardous substances are detected in the soil or groundwater, the Company would be required under CERCLA or its state analogues to incur expenses relating to the investigation and remediation of these releases. The Company does not believe that the costs associated with investigating or remediating these releases will have a material adverse effect on the Company's financial condition, operating expenses or earnings. Furthermore, pursuant to the Acquisition Agreement, Masco will indemnify the Company for certain liabilities in excess of specified amounts relating to the existence of hazardous substances at certain of the facilities.
The Company has been named as a potentially responsible party at a total of seven non-owned contaminated sites, including Superfund sites. The Company presently believes that any potential liability relating to these sites will not have a material adverse effect on the Company's earnings, capital expenditures or competitive position. Actual resolution of these matters, however, could differ from management's estimates and assumptions.
OTHER GOVERNMENT REGULATIONS
The Company's operations must meet extensive federal, state, and local regulatory standards in the areas of health and safety. Historically, these standards have not had any material adverse effect on the Company's sales or operations.
BACKLOG
The combined backlog of the Company as of December 31, 1997 aggregated approximately $332 million, compared to approximately $315 million as of December 31, 1996.
Item 2.
Item 2. Properties
The following list includes the Company's principal manufacturing facilities by location as of December 31, 1997:
California City of Industry and Whittier Georgia Atlanta Illinois Alsip Massachusetts Holyoke Michigan Holland Mississippi Baldwin, Blue Mountain, New Albany and Ripley(2) North Carolina Black Mountain, Drexel, Goldsboro, Hickory, High Point(3), Hildebran(2), Lexington(5), Linwood, Longview, Marion(2), Mocksville, Morganton(4), Mt. Airy, Shelby, and Spruce Pine(2) Pennsylvania Sunbury South Carolina Kingstree Tennessee Lenoir City, Livingston, Morristown(6) and Rockwood Canada Mississauga, Ontario; and Ville D'Anjou, Quebec China (P.R.C.) Fuzhou, Guang Dong, Guangzhou, Tianjin and Xian Great Britain Silsden, England; and Aberdare, Wales Indonesia Semarang Malaysia Johor and Kedah(2) Philippines Cebu Singapore Singapore(2) Sweden Skene Taiwan Kaohsiung, Ping Tung and Tao Yuan Hsian
Note: The parentheticals denote multiple facilities in that location.
The Company operates manufacturing and distribution facilities, showrooms, and retail and office space with a total area of approximately 26 million square feet. The Company owns approximately 19 million square feet and leases approximately 7 million square feet.
The Company's corporate headquarters is currently located in Thomasville, North Carolina and is owned by the Company. The Company plans to relocate its corporate headquarters in 1998 to 4000 Lineage Court, High Point, N.C. 27265
The Company's buildings, machinery and equipment have been generally well-maintained, are in good operating condition, and are adequate for current production requirements.
Item 3.
Item 3. Legal Proceedings
From time to time, the Company is a party to various legal actions in the normal course of its business. The Company is not currently a party to any litigation which, if adversely determined, would have a material adverse effect on the liquidity or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Holdings, the sole shareholder of the Company, executed consents, whereby Holdings elected David L. Johnston and Robert C. Larson as Directors of the Company.
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Information contained herein contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other similar terminology, or by discussions of strategy. The Company's actual results could differ materially from those anticipated by any such forward-looking statements as a result of certain factors, including matters discussed herein and factors affecting the home furnishings industry in general, fluctuations in the price and supply of raw materials, competition and the dependence of the Company on its managerial, manufacturing and sales and marketing personnel.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the common stock of the Company.
As of December 31, 1997, Holdings was the only holder of the common stock of the Company. Holdings is a privately owned company, the capital stock of which is held by members of management, Masco, 399 Ventures, Inc. and other private investors.
On December 12, 1997, the Company declared a cash dividend, payable January 1998, of $23.3 million to Holdings.
Item 6.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA (Dollars in millions)
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(1) Results include The Berkline Corporation, which was acquired in April 1994 in a pooling-of-interests transaction. The financial information of the Predecessor includes certain businesses of Holdings.
(2) Included in selling, general and administrative expenses of the Predecessor are general corporate expenses which represent certain corporate staff support and administrative services provided by Masco. These expenses, which were charged to the Predecessor by Masco, consisted of $10.5, $12.7 and $16.0 in 1993 through 1995, respectively, and $9.4 for the period January 1, 1996 to August 5, 1996.
(3) Interest expense of the Predecessor consists primarily of interest on advances from Masco.
(4) Other, net, includes receivables securitization costs of $4.4 and $9.8 and amortization of deferred charges of $1.7 and $3.9 for the period August 6, 1996 to December 31, 1996 and the year ended 1997, respectively.
(5) EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization expense (including amortization of sample book expenditures), extraordinary items and certain other non-cash charges. Such other non-cash charges were $0.7, $3.8, $6.7 for 1993 through 1995, respectively, $1.0 for the period January 1, 1996 to August 5, 1996, $(0.2) for the period August 6, 1996 to December 31, 1996, and $45.1 for 1997. The Company believes that EBITDA provides additional information for determining its ability to meet debt service requirements. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles, and EBITDA does not necessarily indicate whether cash flow will be sufficient for cash requirements. Not every company calculates EBITDA in exactly the same fashion. As a result, EBITDA as presented above may not necessarily be comparable to similarly titled measures of other companies.
(6) Working capital is defined as total current assets (excluding cash and cash investments) less total current liabilities (excluding current maturities of long-term debt and dividends payable).
(7) Advances from Masco were $1,091.0, $1,192.0, and $1,195.0 at December 31, 1993 through 1995, respectively.
(8) Non-recurring charges were incurred to rationalize and restructure certain worldwide operations. Excluding these charges, gross profit was $506.0 or 25.8%, operating profit was $158.5 or 8.1%, and EBITDA was $198.5 or 10.1% for the year ended December 31, 1997. The Note to the Financial Statements captioned "Restructuring Initiatives" should be read in conjunction with this section.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The Company is the largest manufacturer and marketer of home furnishing products. Approximately 86% of net sales are derived from residential furniture, which includes decorative accessories ("fine furniture"). Decorative home furnishing fabrics accounted for the remaining 14% of net sales.
The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
THE ACQUISITION TRANSACTIONS
The Company was formed in May 1996 for the purpose of acquiring the Predecessor. On August 5, 1996, Holdings acquired the Predecessor from Masco for approximately $1.1 billion and contributed substantially all of the businesses acquired to the Company. The purchase price of $1.1 billion was financed by: (i) senior bank facilities ($325.0 million); (ii) senior subordinated notes ($200.0 million); (iii) equity contribution ($421.0 million); and (iv) proceeds from sale of accounts receivable ($155.0 million). Prior to the closing of such transactions on August 5, 1996, the Company conducted no business. References to the Company for periods prior to August 5, 1996 refer, unless the context otherwise requires, to the Predecessor.
The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the acquired assets and assumed liabilities based upon estimated fair values as of the closing date of the acquisition. This allocation resulted in a reduction of non-current assets, principally property and equipment.
As a result of the acquisition and new basis of accounting, the Company's financial statements for the periods subsequent to the acquisition are not comparable to the Predecessor's financial statements for the periods prior to the acquisition.
The unusual tax rate for periods prior to August 6, 1996 is primarily the result of state and local taxes and taxes on foreign earnings calculated at rates in excess of U.S. federal statutory rates.
RESTRUCTURING INITIATIVES
As a result of the Company's evaluation of its global manufacturing and distribution base, the Company has taken a $58.5 million charge in 1997 to rationalize and restructure its worldwide operations principally focusing on its Universal Furniture business unit. The majority of Universal's restructuring activity will take place in the Far East where approximately 4,000,000 square feet will be rationalized to improve quality, reduce order-to-ship times and enhance product values. The plan was finalized and approved in December 1997. The restructuring initiatives include a reduction in workforce, eliminating approximately 5,000 positions by the end of 1998. As a result of the restructuring, significant non-recurring costs will be incurred to sever lease obligations, provide for employee severance, and to provide for the impairment of inventory and fixed assets. Implementation of this plan began in the first quarter of 1998.
Gross profit and operating profit for 1997 include total non-recurring charges of $14.5 million and $44.0 million, respectively, comprised of the following components:
(Millions) Cash Non-Cash Total --------------------- --------- --------- --------- Asset write-downs... $ - $ 38.1 $ 38.1 Contractual obligations....... 9.8 - 9.8 Employee severance.. 8.8 - 8.8 Other............... 1.8 - 1.8 --------- --------- --------- $ 20.4 $ 38.1 $ 58.5 ========= ========= =========
In connection with the August 5, 1996 acquisition of the Predecessor, management developed a restructuring plan, which was finalized in December 1996. As permitted by Emerging Issues Task Force ("EITF") Issue 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination," the total cost of the plan of approximately $28.3 million was included as part of the purchase price allocation. The restructuring plan provided for severance costs associated with the closure of various facilities, costs associated with the relocation of equipment and office facilities and other closure related expenses.
RESULTS OF OPERATIONS
For the purposes of the discussions that follow, the results of operations for the period August 6, 1996 through December 31, 1996 have been combined with the results of the Predecessor.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Net sales were $1,959.8 million for the year ended December 31, 1997, a decrease of $45.6 million, or 2.3%, from $2,005.4 million for the year ended December 31, 1996. Net sales of fine furniture decreased 2.3% to $1,693.6 million for the year ended December 31, 1997 from $1,733.3 million for the year ended December 31, 1996. Fine furniture sales were negatively impacted by the Company's strategy of exiting less profitable products and relatively soft major retailer sales including reduced shipments to two large customers who filed for protection under Chapter 11 of the United States Bankruptcy Code. Net sales of decorative home furnishing fabrics decreased 2.2% to $266.2 million for the year ended December 31, 1997 from $272.1 million for the year ended December 31, 1996, as the continuing growth of leather as a replacement for fabric in upholstered furniture negatively impacted fabric sales.
Gross profit was $491.5 million for the year ended December 31, 1997, a decrease of $5.0 million, or 1.0%, from $496.5 million for the year ended December 31, 1996. Excluding the non-recurring restructuring charge of $14.5 million, gross profit increased by $9.5 million or 1.9% to $506.0 million. Improvement in gross profit margins were primarily attributable to the Company's continuous improvement initiatives and the benefit of lower depreciation expense, partially offset by the impact of lower sales volume.
Selling, general and administrative expenses were $347.5 million for the year ended December 31, 1997, a decrease of $19.2 million, or 5.2%, from $366.7 million for the year ended December 31, 1996. The decrease in general and administrative expenses reflects the benefits of the Company's cost reduction initiatives, elimination of goodwill amortization, and the net decrease in general and administrative expenses which the Company has incurred on a stand-alone basis compared to the management fees previously charged by Masco. These reductions were partially offset by higher bad debt expenses resulting from the bankruptcy filings previously mentioned. As a percentage of net sales, selling, general and administrative expenses improved to 17.7% for the year ended December 31, 1997 from 18.3% for the year ended December 31, 1996. Selling expense was 10.9% of net sales as compared to 11.0% for 1996, and general and administrative expenses decreased to 6.8% of net sales from 7.3% in 1996.
Operating profit was $100.0 million for the year ended December 31, 1997, a decrease of $29.8 million, or 23.0%, from $129.8 million for the year ended December 31, 1996. Excluding the non-recurring restructuring charges, operating profit increased by $28.7 million or 22.1% to $158.5 million. As a percentage of net sales, operating profit, before restructuring charges, increased to 8.1% for the year ended December 31, 1997 from 6.5% for the comparable period of 1996.
Interest expense was $41.9 million for the year ended December 31, 1997, a decrease of $30.8 million, or 42.4%, from the year ended December 31, 1996. This decrease was a result of lower average debt outstanding during the year and reduced interest rates obtained when the Company refinanced its revolving credit facility in August 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Net sales were $2,005.4 million for the year ended December 31, 1996, an increase of $12.8 million, or 0.6%, from $1,992.6 million for the year ended December 31, 1995. Net sales of fine furniture increased 0.7% to $1,733.3 million for the year ended December 31, 1996 from $1,721.2 million for the year ended December 31, 1995. Net sales of fine furniture grew primarily due to recent product introductions and modest increased industry demand. Net sales of decorative home furnishings fabrics increased 0.3% to $272.1 million for the year ended December 31, 1996 from $271.4 million for the year ended December 31, 1995, primarily due to strength in the woven segment of the market and improved business conditions.
Gross profit was $496.5 million for the year ended December 31, 1996, an increase of $4.9 million, or 1.0%, from $491.6 million for the comparable period of 1995. This increase was primarily attributable to the impact of a modest increase in sales and improved gross profit margins. Gross profit margins improved from August 6, 1996 to December 31, 1996 primarily due to reduced depreciation expense. This improvement was offset by decreases in the gross profit margin earlier in 1996, which were primarily the result of temporary plant closings due to bad weather and start-up costs related to substantial new product introductions.
Selling, general and administrative expenses were $366.7 million for the year ended December 31, 1996, a decrease of $31.1 million, or 7.8%, from $397.8 million for the comparable period of 1995. As a percentage of net sales, selling, general and administrative expenses improved to 18.3% for the year ended December 31, 1996 from 20.0% for the year ended December 31, 1995. Selling expense was 11.0% of net sales as compared to 11.8% for 1995, and general and administrative expenses decreased to 7.3% of net sales from 8.2% in 1995. The decrease in general and administrative expenses reflects the benefits of the Company's cost reduction initiatives implemented in late 1995, combined with the net decrease in general and administrative expenses incurred since August 6, 1996 as a stand alone company when compared to the management fees previously charged to the Predecessor by Masco.
Operating profit increased to $129.8 million for the year ended December 31, 1996, an increase of $36.0 million, or 38.4%, from $93.8 million for the comparable period of 1995. As a percentage of net sales, operating profit increased to 6.5% for the year ended December 31, 1996 from 4.7% for the comparable period of 1995. This improvement was achieved primarily for the reasons discussed above.
Interest expense was $72.6 million for the year ended December 31, 1996, a decrease of $22.2 million, or 23.4%, from the year ended December 31, 1995. This decrease was a result of lower average debt outstanding during the period from August 6, 1996 to December 31, 1996. Proceeds from debt issued in connection with the acquisition were used to repay, in part, the funds previously advanced by Masco. The decrease in interest expense as a result of the lower average debt outstanding was partially offset by higher average borrowing rates from August 6, 1996 to December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service, working capital needs and the funding of capital expenditures. The Company's principal source of cash to fund its liquidity needs is its net cash from operating activities and availability of borrowings under its revolving credit facility. Net cash from operating activities for the year ended December 31, 1997 was $139.8 million, a decrease of $18.0 million from $157.8 million in the comparable period of 1996.
The Company made net principal payments on its long-term debt of $90.1 million and net repayments of $17.0 million under its accounts receivable securitization facility for the year ended December 31, 1997. Since August 5, 1996, the Company has reduced its debt levels by $198.8 million and its accounts receivable securitization balance by $5.0 million.
On August 15, 1997, the Company replaced the existing revolving credit facility, Tranche A term loan and Tranche B term loan with a six year $400 million senior secured revolving credit facility. The revolving credit facility provides the Company with increased financial flexibility by eliminating quarterly principal payment requirements, reducing financing costs and reducing the number of restrictive covenants. In connection with the repayment of the existing revolving credit and term loan facilities, the Company recorded an extraordinary non-cash charge of $19.4 million ($11.6 million net of tax), consisting of the write-off of unamortized deferred financing costs, related to the early extinguishment of debt.
The Company made capital expenditures of $32.7 million for the year ended December 31, 1997. The Company believes that as a result of the availability of excess capacity in its manufacturing facilities, no significant additional capital expenditures will be required to expand capacity. The Company's ability to make capital expenditures is subject to certain restrictions under the Company's long-term debt arrangements.
As of December 31, 1997, the amount available under the Company's revolving credit facility was $248.0 million (less the face amount of existing letters of credit of $12.8 million). The Company believes that cash generated from operations, together with the amounts available under the revolving credit facility, will be adequate to meet its
debt service requirements, capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard.
On December 12, 1997, the Company declared a cash dividend, payable in January 1998, of $23.3 million to Holdings. As a result of this dividend payment and routine working capital requirements, the Company's borrowings under the revolving credit facility increased to $184 million, as of January 31, 1998.
In connection with the issuance of the senior subordinated notes, the Company's domestic operating subsidiaries fully and unconditionally guarantee the Company's performance under the Notes on a joint and several basis. There are no restrictions under the Company's financing arrangements on the ability of the Company's domestic operating subsidiaries to distribute funds to the Company in the form of cash dividends, loans or advances.
During 1997, the Company initiated the implementation of an enterprise-wide Year 2000 compliant Oracle software system. Prior to completion of the Oracle implementation, the Company recognizes the need to identify, evaluate and implement changes to its existing computer systems and applications to achieve Year 2000 compliance and mitigate effects on customers and business operations. The Company's subsidiaries are in various stages of assessing and correcting Year 2000 issues. These range from finalizing assessments to formulating corrective action plans where required, to commencing conversion efforts. The assessment of issues covers all financial and operational systems and includes communication with suppliers and customers to determine the extent to which the Company may be impacted by the failure of third parties to remediate their own Year 2000 issues. The final assessment and development of corrective action plans will be completed in mid 1998. The conversion efforts, which were begun in 1997, will continue during 1998 and 1999. The cost associated with ensuring Year 2000 compliance is being developed as part of the detailed conversion planning.
INTERNATIONAL OPERATIONS
As of December 31, 1997, the Company conducted operations in several foreign countries including Canada, China, Indonesia, Malaysia, Singapore, Taiwan, the Philippines and several European countries.
The Company's international operations may be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. The financial position and results of operations of the Company's foreign subsidiaries are remeasured using the U.S. dollar or translated using the local currency as the functional currency depending on the nature of the operations. During 1997, the Company recorded a $7.0 million loss on remeasurement and a $10.2 million translation adjustment to shareholder's equity because of the devaluation of Asian currencies against the U.S. dollar.
Financial information concerning the Company's export sales and foreign operations, including the net sales, operating profit and assets which are attributable to the Company's operations in the United States and in foreign countries, are set forth in Item 8
Item 8. Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of LIFESTYLE FURNISHINGS INTERNATIONAL LTD.:
We have audited the accompanying consolidated balance sheets of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. and subsidiaries (the "Company") as of December 31, 1997 and 1996 and the related consolidated statements of operations and cash flows for the year ended December 31, 1997 and for the period from August 6, 1996 to December 31, 1996. We have also audited the combined statements of operations and cash flows of the Masco Home Furnishings Group (certain subsidiaries of Masco Corporation, as described in Note 2, and the Company's predecessor) for the period from January 1, 1996 to August 5, 1996 and the year ended December 31, 1995. These financial statements are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements for the periods ended prior to August 6, 1996 do not reflect the new basis of accounting established by the acquisition of the Masco Home Furnishings Group as described in Note 1, and are presented on the historical cost basis existing prior to the acquisition period.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the year ended December 31, 1997 and for the period from August 6, 1996 to December 31, 1996, and the combined results of operations and cash flows of the Masco Home Furnishings Group for the period from January 1, 1996 to August 5, 1996 and the year ended December 31, 1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
February 25, 1998
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
BALANCE SHEETS (In Thousands)
The accompanying notes are an integral part of the financial statements.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
STATEMENTS OF OPERATIONS (In Thousands)
The accompanying notes are an integral part of the financial statements.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
STATEMENTS OF CASH FLOWS (In Thousands)
Non-cash transactions:
On December 12, 1997, the Company declared a cash dividend, payable January 1998, of $23.3 million to Holdings.
In addition to the acquisition consideration reflected above, Holdings issued $285 million in notes and $60 million in equity securities to the seller during 1996.
The accompanying notes are an integral part of the financial statements.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
1. THE ACQUISITION
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") was formed in May 1996 for the purpose of acquiring (the "acquisition") the Masco Home Furnishings Group (the "Group" or "Predecessor"). In the formation of the Company, 100 shares of common stock were issued to FURNISHINGS INTERNATIONAL INC. ("Holdings"), the Company's sole stockholder. On August 5, 1996, Holdings acquired the Predecessor from Masco Corporation ("Masco") for approximately $1.1 billion and contributed substantially all of the businesses acquired to the Company. The purchase price of $1.1 billion was financed by: (i) senior bank facilities ($325.0 million); (ii) senior subordinated notes ($200.0 million); (iii) equity contribution ($421.0 million); and (iv) proceeds from sale of accounts receivable ($155.0 million). (See Note 8 Receivables Facility and Note 9 Long-Term Debt).
The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the acquired assets and assumed liabilities based upon estimated fair values as of the closing of the acquisition. This allocation resulted in a reduction of non-current assets, principally property and equipment.
As a result of the acquisition and new basis of accounting, the Company's financial statements for the periods subsequent to the acquisition are not comparable to the Predecessor's financial statements for the periods prior to the acquisition.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Basis of Presentation. The Consolidated Financial Statements as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the period from August 6, 1996 to December 31, 1996 include the accounts of the Company and its subsidiary companies. Intercompany accounts and transactions are eliminated. In the Notes to the Financial Statements, all dollar amounts are shown in thousands unless otherwise stated.
The financial information for the periods ended on or prior to August 5, 1996 refers to the Predecessor as it existed prior to the acquisition. The Group was not a legal entity and included certain Masco subsidiaries whose operations consisted of the manufacture and sale of home furnishings products including quality furniture, fabrics and other home furnishings principally in the United States. The financial position and results of operations of the Predecessor, as presented herein, may not be the same as would have occurred had the Group been an entity independent of Masco.
Included in selling, general and administrative expenses of the Predecessor are general corporate expenses which represent certain corporate staff support and administrative services previously provided by Masco. These expenses were charged to the Group by Masco based upon approximately 1 percent of sales of most domestic Group operations. Masco's management believes this method of allocation was reasonable. Because these services were never contracted with outsiders nor bids obtained, it is not practical to disclose estimates of what the cost would have been on a stand alone basis. In addition, the Group participated in certain programs provided by Masco including various insurance programs and incentive compensation plans; related costs of these programs that exceed amounts included in general corporate expenses were separately charged to the Group by Masco. Outstanding liabilities related to the above services and programs were included in Masco Net Investment and Advances in the balance sheet of the Predecessor.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates and assumptions.
Cash and Cash Investments. The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash investments.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
Receivables. Trade and other receivables are presented net of aggregate allowances for doubtful accounts of $3.9 million at December 31, 1997 and $4.8 million at December 31, 1996.
Deferred Charges. Deferred charges, which consist primarily of debt issuance costs associated with the acquisition, are amortized over the terms of the related debt using the effective interest method. Deferred charges totaling $16.0 million, net of accumulated amortization of $3.0 million, and $38.3 million, net of accumulated amortization of $1.7 million, were included in Other Assets in the accompanying balance sheet as of December 31, 1997 and 1996, respectively. In August 1997, the Company wrote off $19.4 million of unamortized deferred financing costs related to the early extinguishment of debt.
Property and Equipment. Property and equipment are stated at acquisition cost as determined under APB Opinion No. 16 "Business Combinations." Assets acquired subsequent to the acquisition, including significant betterments to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. The Company reviews property and equipment for impairment and write down to fair value whenever events or circumstances indicate that the carrying value may not be recoverable through undiscounted cash flows. Fair value is determined based on comparable market values, when available, or discounted cash flows.
Depreciation and Amortization. Depreciation is computed principally using the straight line method over the estimated useful lives of the assets. The Company generally uses estimated useful lives ranging from 15 to 40 years for buildings and land improvements, and 3 to 8 years for machinery and equipment. Purchased software and direct external costs related to the implementation of the software are capitalized and amortized over a range of three to six years. Depreciation expense was $20.2 million during 1997, $7.6 million for the period August 6, 1996 to December 31, 1996, $21.5 million for the period January 1, 1996 to August 5, 1996, and $36.0 million during 1995.
The Company produces fabric sample books which are used to market some of its products. The Company capitalizes the cost of these sample books and amortizes their cost over three years as a selling expense. The unamortized net cost of the sample books is included in other assets and prepaid expenses and at December 31, 1997 and 1996 aggregated $18.8 million and $20.8 million, respectively, and the related amounts charged to selling expense were $14.3 million during 1997, $5.8 million for the period August 6, 1996 to December 31, 1996, $9.5 million for the period January 1, 1996 to August 5, 1996 and $17.2 million during 1995.
Joint Ventures. The Company has investments in several fifty-fifty joint ventures in Asia which are accounted for on the equity method. At December 31, 1997 and 1996, the Company's investment in these joint ventures totaled $7.3 million and $9.4 million, respectively, and is included in other assets. In connection with certain of these investments, the Company has guaranteed a minimum return on investment to its joint venture partners if certain annual financial targets are not achieved. The Company records a liability for these guarantees when payment is both probable and estimable.
Receivables Facility. Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," to account for its receivables facility. SFAS No. 125 allows the Company to derecognize the trade receivables transferred to LFI Receivables Corporation (Note 8). Its adoption did not have a material effect on the results of operations or financial position of the Company.
Fair Value of Financial Instruments and Concentrations of Credit Risk. The carrying value of financial instruments reported in the balance sheet for current assets and current liabilities approximates fair value. The carrying values of notes receivable, revolving credit facility, investment in receivables trust and the forward contract to sell accounts receivable approximate fair value as the floating rates inherent in the related financial instruments reflect changes in overall market interest rates. The fair value of the senior subordinated notes was approximately $222
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
million and $215 million as of December 31, 1997 and 1996, respectively, based on quoted market values, compared to a carrying value of $200 million.
The Company's interest rate collar, which results in $250 million of the Company's long-term debt being subject to a LIBOR ceiling of 8.0% and a LIBOR floor of 5.45%, had a fair value of approximately $(0.4) and $(0.8) million at December 31, 1997 and 1996, respectively, with a carrying value of zero. Subsequent to December 31, 1997, the Company renegotiated the interest rate collar, lowering the LIBOR ceiling to 6.75% and the LIBOR floor to 5.35%.
Foreign Currency Translation. Assets and liabilities of the Company's foreign subsidiaries, where the local currency is the functional currency, are translated at the balance sheet date exchange rates and statement of operations accounts are translated at the average rates prevailing during the year. Adjustments resulting from the translation are recorded as a separate component of shareholder's equity.
The following table reconciles the changes from period to period:
Assets and liabilities of the Company's foreign subsidiaries, where the U.S. dollar is the functional currency, are remeasured at balance sheet date exchange rates, except for nonmonetary assets and liabilities, which are remeasured using historical exchange rates. The resulting gains and losses are included in the statement of operations. Due to the significant devaluation of Asian currencies during 1997, the Company recognized a $7.0 million loss on remeasurement for the year ended December 31, 1997. During the period August 6, 1996 to December 31, 1996, January 1, 1996 to August 5, 1996 and the year ended December 31, 1995, the Company recognized $0.2 million, $(0.5) million, and $(0.6) million, respectively, in remeasurement gains (losses).
Reclassifications. Certain prior period amounts have been reclassified to conform with current period presentation.
Recently Issued Accounting Standards. SFAS No. 129, "Disclosure of Information about Capital Structure," will become effective in 1998 and will not have a material effect on the information currently reported by the Company.
SFAS No. 130, "Reporting Comprehensive Income," will become effective in 1998. This Statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. Its adoption will require the Company to report comprehensive income below the total for net income in the statement of operations, in a separate statement of comprehensive income that begins with net income, or in a statement of changes in equity. Comparative disclosures which include prior period information will be restated to conform with the provisions of this Statement.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," will become effective in 1998. This Statement establishes standards for reporting information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement requires that the Company report financial and descriptive information about its reportable
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Comparative disclosures which include prior period information will be restated to conform with the provisions of this Statement.
SFAS No. 132 "Employers' Disclosure about Pensions and Other Postretirement Benefits," will become effective in 1998. This Statement standardizes the disclosure requirements for pensions and postretirement benefits and will require changes in disclosures of benefit obligations and fair values of plan assets. Comparative disclosures which include prior period information will be restated to conform with the provisions of this Statement.
3. INVENTORIES
Company Company -------------- -------------- 1997 1996 -------------- -------------- Finished goods ......................... $ 216,360 $ 223,610 Raw material ........................... 216,010 216,250 Work in process ........................ 77,740 86,440 -------------- -------------- $ 510,110 $ 526,300 ============== ==============
Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method.
4. PROPERTY AND EQUIPMENT
Company Company -------------- -------------- 1997 1996 -------------- --------------
Land and improvements .................. $ 32,600 $ 37,330 Buildings .............................. 204,920 206,380 Machinery and equipment ................ 121,550 113,250 -------------- -------------- 359,070 356,960 Less accumulated depreciation .......... 21,680 7,630 -------------- -------------- $ 337,390 $ 349,330 ============== ==============
The Company leases various facilities and equipment under non-cancelable lease arrangements. Rent expense was $19.4 million during 1997, $8.4 million for the period August 6, 1996 to December 31, 1996, $12.3 million for the period January 1, 1996 to August 5, 1996, and $21.5 million during 1995.
At December 31, 1997, future minimum rental commitments for operating leases with non-cancelable terms in excess of one year are as follows: 1998-$15.3 million; 1999-$13.2 million; 2000-$11.4 million; 2001-$6.8 million; 2002-$4.2 million; and thereafter-$5.2 million.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. NOTES RECEIVABLE
The Company has notes receivable from certain of its customers which are included in Other Receivables and Other Assets in the accompanying balance sheets. Generally, these notes require periodic payments of principal and interest and are collateralized by inventory and personal guarantees of the customers. These notes bear interest based predominately on the prevailing prime rate. Approximately $7.6 million of these notes are due from one customer at December 31, 1997. Although the Company does not currently foresee a material credit risk associated with this receivable, repayment is dependent upon the financial stability of this customer.
6. ACCRUED LIABILITIES
Company Company -------------- -------------- 1997 1996 -------------- --------------
Salaries, wages and commissions ........ $ 26,780 $ 31,810 Employee retirement plans .............. 8,390 7,700 Interest ............................... 11,170 13,720 Advertising and sales promotion ........ 9,550 10,380 Insurance .............................. 7,120 7,710 Warranty reserve ....................... 2,500 2,500 Income taxes ........................... -- 15,760 Property, payroll and other taxes ...... 2,900 4,010 Restructuring .......................... 28,510 27,950 Dividend ............................... 23,340 -- Other .................................. 29,680 31,590 -------------- -------------- 149,940 $ 153,130 ============== ==============
7. RESTRUCTURING INITIATIVES
As a result of the Company's evaluation of its global manufacturing and distribution base, the Company has taken a $58.5 million charge in 1997 to rationalize and restructure its worldwide operations principally focusing on its Universal Furniture business unit. The majority of Universal's restructuring activity will take place in the Far East where approximately 4,000,000 square feet will be rationalized to improve quality, reduce order-to-ship times and enhance product values. The plan was finalized and approved in December 1997. The restructuring initiatives include a reduction in workforce, eliminating approximately 5,000 positions by the end of 1998. As a result of the restructuring, significant non-recurring costs will be incurred to sever lease obligations, provide for employee severance, and to provide for the impairment of inventory and fixed assets. Implementation of this plan began in the first quarter of 1998.
Gross profit and operating profit for 1997 include total non-recurring charges of $14.5 million and $44.0 million, respectively, comprised of the following components:
(Millions) Cash Non-Cash Total - ------------------------------ --------- --------- --------- Asset write-downs ............ $ -- $ 38.1 $ 38.1 Contractual obligations ...... 9.8 -- 9.8 Employee severance ........... 8.8 -- 8.8 Other ........................ 1.8 -- 1.8 --------- --------- --------- $ 20.4 $ 38.1 $ 58.5 ========= ========= =========
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. RESTRUCTURING INITIATIVES (Continued)
In connection with the August 5, 1996 acquisition of the Predecessor, management developed a restructuring plan, which was finalized in December 1996. As permitted by Emerging Issues Task Force ("EITF") Issue 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination," the total cost of the plan of approximately $28.3 million was included as part of the purchase price allocation. The restructuring plan provided for severance costs associated with the closure of various facilities, costs associated with the relocation of equipment and office facilities and other closure related expenses.
8. RECEIVABLES FACILITY
In connection with the Company's $200 million Receivables Facility, LFI Receivables Corporation (the "Receivables Subsidiary"), a special-purpose, bankruptcy remote subsidiary of the Company purchases, on a revolving basis, substantially all domestic trade receivables generated by the Company and Holdings at a 2.04% discount from face. The Receivables Subsidiary transfers and assigns all its rights in substantially all those receivables to the LFI Receivables Master Trust (the "Master Trust"). The Company continues to service the receivables. The servicing assets and liabilities related to this arrangement are not significant.
A syndicate of banks and other financial institutions (the "Participants") may purchase investor certificates representing fractional undivided senior interests in the assets of the Master Trust ("Senior Investor Certificates"). The Receivables Subsidiary also retains an investment in the Master Trust equal to the face value of receivables transferred to the Master Trust, but not sold to the Participants, comprised of: i) a fractional, undivided senior interest in trade receivables; and ii) a fractional, undivided subordinated interest in trade receivables.
As of December 31, the balance of trade receivables and cash held by the Master Trust, as well as the fractional, undivided senior and subordinated interests in the assets of the Master Trust, were as follows:
Company Company 1997 1996 -------------- --------------
Senior interests sold to Participants .... $ 150,000 $ 167,000 Senior interests retained by the Receivables Subsidiary ................. -- 4,950 Subordinated interests retained by the Receivables Subsidiary ................. 64,010 46,170 -------------- --------------
Balance of trade receivables and cash held by the Master Trust .................... $ 214,010 $ 218,120 ============== ==============
The Senior Investor Certificates bear interest at LIBOR plus .125% to .625% and there is a commitment fee of .175% per annum on the unused commitment under the facility. The cost of this facility amounted to $9.8 million during 1997 and $4.4 million for the period August 6, 1996 to December 31, 1996, and is included in "Other, net" in the accompanying Statement of Operations.
This arrangement places certain restrictions on the Company and the Receivables Subsidiary, including placing liens on the Company's trade receivables. At December 31, 1997, the Company was in compliance with these covenants.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. LONG-TERM DEBT
As of December 31, the outstanding balances of long-term debt were as follows: Company Company 1997 1996 -------------- -------------- Revolving credit facility .............. $ 152,000 $ -- Tranche A term loan .................... -- 100,420 Tranche B term loan .................... -- 140,580 Senior subordinated notes .............. 200,000 200,000 Other borrowings ....................... 2,570 3,620 -------------- -------------- 354,570 444,620 Less current portion ................... 2,970 18,970 -------------- -------------- $ 351,600 $ 425,650 ============== ==============
The Company may periodically guarantee loans, leases or other credit facilities for its customers and joint venture partners. At December 31, 1997, the outstanding balance of these guarantees approximated $5.2 million. In addition, the Company has guaranteed to certain joint venture partners a minimum return on investment. Future guarantees under these arrangements aggregated approximately $4.3 million at December 31, 1997.
At December 31, 1997, the maturities of long-term debt during each of the next five years were approximately as follows: 1998-$3.0 million; 1999-$1.6 million; and $350 million subsequent to 2002.
Revolving Credit Facility. On August 15, 1997, the Company replaced the existing Revolving credit facility, Tranche A term loan and Tranche B term loan with a six year $400 million senior secured revolving credit facility. The revolving credit facility provides the Company with increased financial flexibility by eliminating quarterly principal payment requirements, reducing financing costs and reducing a number of restrictive covenants. The revolving credit facility bears interest at a floating rate equal to LIBOR plus an applicable percentage based upon the Company's debt coverage ratio at the end of each quarter. In connection with the repayment of the existing revolving credit and term loan facilities, the Company recorded an extraordinary loss of $19,370 ($11,620 net of tax), consisting of the write-off of unamortized deferred financing costs, related to the early extinguishment of debt.
The obligation under the revolving credit facility is unconditionally guaranteed, jointly and severally, by Holdings and substantially all domestic subsidiaries of the Company, and is collateralized by substantially all the fixed assets of the Company and the guarantors. The revolving credit facility contains restrictive covenants including minimum interest coverage ratios, maximum leverage ratios, and annual capital expenditures limitations. At December 31, 1997, the Company was in compliance with these covenants.
Senior Subordinated Notes. In connection with the acquisition, the Company issued, in a private placement, $200 million unsecured senior subordinated notes maturing August 1, 2006 ("Notes"). Interest on the Notes is payable semiannually at 10.875% per annum commencing on February 1, 1997. On November 8, 1996, the Company's registration statement on Form S-4 (No. 333-11905) became effective under the Securities Act of 1933, providing for the exchange of the Notes for new Notes. All old Notes were exchanged for new Notes on December 13, 1996. The new Notes are identical in all material respects to the Notes issued through the private placement except that they are registered under the Securities Act, thus allowing, subject to certain limitations, transfer pursuant to the Securities Act.
The Notes may be redeemed by the Company subsequent to August 1, 2001 at premiums which begin at 5.438% and decline each year to 0% for redemptions taking place after August 1, 2004. In addition, at any time prior to August 1, 1999, the Company may redeem up to 33.33% of the original aggregate principal amount of the Notes with the proceeds of one or more public equity offerings at a redemption price of 110.875%. Also, upon a qualifying change of control, the Notes may be redeemed at the option of the Company at the Applicable Premium (as defined), or in certain instances at the option of the Note holders at a premium of 1%. The Notes contain certain restrictive
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. LONG-TERM DEBT (Continued)
covenants which, among others, limit the incurrence of additional indebtedness and restrict capital transactions, distributions, and asset dispositions of certain subsidiaries. At December 31, 1997, the Company was in compliance with these covenants.
In connection with the Note offering, the Company's domestic operating subsidiaries (the "Guarantor Subsidiaries") fully and unconditionally guarantee the Company's performance under the Notes on a joint and several basis (see Note 17 Guarantor Financial Statements).
10. EMPLOYEE RETIREMENT PLANS
The Company sponsors qualified defined benefit and defined contribution retirement plans for most of its employees. The Company also maintains a non-qualified, defined benefit retirement plan for certain key executives. The Company's funding policy with respect to the qualified defined benefit plans is to contribute amounts to the plan sufficient to meet minimum funding requirements as set by law. The non-qualified plan is unfunded. The Company's defined contribution plans, available to most domestic employees, contain a savings provision that permits pre-tax employee contributions and, at certain locations, a limited employer match. Aggregate charges to income under these plans were $11.1 million during 1997, $4.4 million for the period August 6, 1996 to December 31, 1996, $4.0 million for the period January 1, 1996 to August 5, 1996, and $7.1 million during 1995.
Net periodic pension cost for the Company's pension plans includes the following components:
Major assumptions used in accounting for the Company's pension plans are as follows:
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. EMPLOYEE RETIREMENT PLANS (Continued)
During 1997, the Company changed the measurement date of its defined benefit plans from December 31 to September 30 as permitted by SFAS No. 87. The funded status of the Company's pension plans at December 31 is summarized as follows:
11. SHAREHOLDER'S EQUITY
On December 12, 1997, the Company declared a cash dividend, payable January 1998, of $23.3 million to Holdings.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
12. INTEREST EXPENSE, MASCO
Prior to the acquisition, the accumulation of transactions between the Predecessor and Masco, including operating results, management fees, advances and other intercompany transactions were shown as Masco Net Investments and Advances in the balance sheet. Interest on funds advanced by Masco was charged to the Predecessor based on interest rates which approximated the bank prime rate, adjusted monthly.
13. INCOME TAXES
Company Company -------------- -------------- 1997 1996 -------------- --------------
Deferred tax assets: Inventories ........................ $ 8,850 $ 7,830 Accrued liabilities ................ 40,930 37,260 -------------- -------------- Gross deferred tax assets ......... 49,780 45,090 -------------- -------------- Deferred tax liabilities: Property and equipment ............. 29,960 23,560 Other .............................. 1,290 1,280 -------------- -------------- Gross deferred tax liabilities ... 31,250 24,840 -------------- -------------- Net deferred tax asset before valuation allowance: ........................... 18,530 20,250 -------------- -------------- Valuation allowance .................... -- (8,390) -------------- -------------- Net deferred tax asset ................. $ 18,530 $ 11,860 ============== ==============
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. INCOME TAXES (Continued)
The following is a reconciliation of tax computed at the U.S. federal statutory rate to the provision for income taxes allocated to income (loss) before income taxes:
The Company is included in the consolidated federal tax return of Holdings. Pursuant to the Company's tax sharing agreement with Holdings, the Company will be required to make tax sharing payments to Holdings with respect to the Company's pro rata share of consolidated federal and combined state and local income tax liabilities.
Under SFAS No. 109, deferred income taxes are provided to recognize the effect of temporary differences between financial reporting and income tax reporting. Realization of deferred tax assets is dependent upon the ability to carryback reversing deductible temporary differences to offset actual taxable income in the carryback period or to offset taxable temporary differences as scheduled reversals are projected to occur. Management established a partial valuation allowance relating to deferred tax assets existing at December 31, 1996. No valuation allowance was required at December 31, 1997.
The Predecessor was included in the consolidated federal and state tax returns of Masco. Accordingly, substantially all income tax-related assets and liabilities were due to or from Masco. Income taxes and credits were computed on a separate return basis.
14. RELATED PARTY TRANSACTIONS
As part of the Acquisition, Holdings and the Company entered into a Management Agreement pursuant to which Holdings provides to the Company executive management, corporate support, administrative, data processing, human resources, legal, environmental, audit, treasury, tax and other management-related services. The Company compensates Holdings in an amount equal to Holdings' actual cost of providing such services. Those costs approximated $15.9 million during 1997 and $6.6 million for the period August 6, 1996 to December 31, 1996, of which approximately $1.5 million was included in accrued liabilities at December 31, 1997 and 1996.
The Company sells furniture and accessories to certain distribution businesses owned by Holdings. The Company's sales to Holdings were $38.6 million during 1997 and $21.2 million for the period August 6, 1996 to December 31, 1996. As a result of these sales transactions, the Company had accounts receivable totaling $15.0 million and $13.6 million at December 31, 1997 and 1996, respectively.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
15. ENVIRONMENTAL REGULATIONS
In the ordinary course of business, the Company may become exposed to potential liabilities resulting from spills and releases of hazardous materials at its manufacturing facilities. The Company also has been named as a potentially responsible party at a total of seven non-owned contaminated sites, including Superfund sites. The Company does not believe that the costs related to these sites or those costs associated with investigating or remediating these releases will have a material adverse effect on the Company's financial condition, cash flows, operating expenses or earnings. Furthermore, Masco has agreed to indemnify the Company for certain liabilities in excess of specified amounts relating to the existence of hazardous substances at certain of the Company's manufacturing facilities. Actual resolution of these matters, however, could differ from management's estimates and assumptions.
16. GEOGRAPHIC INFORMATION
The Company is engaged principally in one line of business: the manufacture and sale of home furnishings products including quality furniture, fabrics and other home furnishings.
The following tables present information about the Company by geographic area:
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
16. GEOGRAPHIC INFORMATION (Continued)
Assets at December 31 ------------------------------- Company Company -------------- -------------- 1997 1996 -------------- -------------- United States ............................ $ 906,000 $ 921,000 Pacific Rim .............................. 193,000 212,000 European Union and other foreign countries 52,000 58,000 -------------- -------------- Total ............................ $ 1,151,000 $ 1,191,000 ============== ==============
(1) After elimination of intracompany sales between geographic areas of:
17. GUARANTOR FINANCIAL STATEMENTS
In connection with the issuance of the Senior Subordinated Notes, the Guarantor Subsidiaries fully and unconditionally guaranteed the Company's performance under the Notes on a joint and several basis. The Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company. The remaining subsidiaries are direct or indirect subsidiaries of the Guarantor Subsidiaries. There are no restrictions under the Company's financing arrangements on the ability of the Guarantor Subsidiaries to distribute funds to the Company in the form of cash dividends, loans or advances. The following combined financial data provides information regarding the financial position, results of operations and cash flows of the Guarantor Subsidiaries (condensed consolidated/combined financial data). Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that such information would not be material to the holders of the Notes.
For purposes of the consolidated financial data, the Guarantor Subsidiaries include substantially all domestic subsidiaries of the Company (other than the Receivables Subsidiary and certain subsidiaries with substantially no assets or operations). The Guarantor Subsidiaries account for their investments in the non-guarantor subsidiaries on the equity method. The Company also accounts for its investments in the Guarantor Subsidiaries and the Receivables Subsidiary on the equity method. The principal elimination entries are to eliminate the investments in subsidiaries and intercompany balances and transactions.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY CONDENSED CONSOLIDATING BALANCE SHEET December 31, 1997
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY CONDENSED CONSOLIDATING BALANCE SHEET December 31, 1996
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS for the Period January 1, 1997 to December 31, 1997
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS for the Period August 6, 1996 to December 31, 1996
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
PREDECESSOR CONDENSED COMBINING STATEMENTS OF OPERATIONS
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS for the Period January 1, 1997 to December 31, 1997
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS for the Period August 6, 1996 to December 31, 1996
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
PREDECESSOR CONDENSED COMBINING STATEMENT OF CASH FLOWS for the Period January 1, 1996 to August 5, 1996
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
PREDECESSOR CONDENSED COMBINING STATEMENT OF CASH FLOWS for the Period January 1, 1995 to December 31, 1995
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
18. PRO FORMA SUPPLEMENTARY DATA (Unaudited)
The following pro forma supplementary data for the years ended December 31, 1996 and 1995 give effect to the acquisition transactions as if they had occurred on January 1, 1995. The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company's results of operations had the transactions been consummated on the dates assumed and do not project the Company's results of operations for any future date. (See Notes 1 The Acquisition and 2 Basis of Presentation and Accounting Policies)
Year Ended ----------------------------- Dec. 31, 1996 Dec. 31, 1995 ------------- -------------
Net sales................. $ 2,005.4 $ 1,975.1 Gross profit.............. 502.0 496.5 Operating profit.......... 147.9 125.2 Net income................ 48.4 28.3
The primary adjustments applied to the historical predecessor financial statements to arrive at the pro forma presentation include the following:
a) Adjustment to reflect elimination of goodwill amortization of approximately $14.2 million on an annualized basis.
b) Adjustment of approximately $15.9 million on an annual basis to reflect decreased depreciation for writedown of property and equipment from the allocation of the estimated fair value of the net assets.
c) Adjustment to reflect the reduction of interest expense due to the elimination of interest expense on Masco net advances offset by the impact of interest expense on the financing arrangements incurred at the acquisition.
d) Adjustment to eliminate the operating results of businesses acquired by Holdings from Masco but not contributed to the Company.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required to be presented in this Item 10 will be contained in an amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 11.
Item 11. Executive Compensation
The information required to be presented in this Item 11 will be contained in an amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be presented in this Item 12 will be contained in an amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required to be presented in this Item 13 will be contained in an amendment to this Form 10-K to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibits ------ -----------------------
3.1 Certificate of Incorporation of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") (1)
3.2 By-Laws of the Company (1)
4.1 Indenture between the Company and IBJ Schroder Bank & Trust Company, as Trustee,dated August 5, 1996 (1)
4.2 Supplemental Indenture dated December 20, 1996 (2)
10.1 Acquisition Agreement between FURNISHINGS INTERNATIONAL INC. and Masco Corporation dated as of March 29, 1996 (1)
10.2 Amendment No. 1 to Acquisition Agreement dated as of June 21, 1996 (1)
10.3 Amendment No. 2 to Acquisition Agreement dated as of August 5, 1996 (1)
10.4 Restated Credit Agreement dated as of August 15, 1997 among FURNISHINGS INTERNATIONAL INC., the Company, the subsidiary borrowers named therein, the lenders named therein and The Chase Manhattan Bank, as Swingline Lender, Administrative Agent and Collateral Agent, The First National Bank of Chicago as Issuing Bank (the "Credit Agreement") (4) and First Amendment to Restated Credit Agreement dated as of September 15, 1997*
10.5 Purchase Agreement, dated as of January 29, 1997, with respect to Series 1997-1 Term Certificates(2)
10.6 Amended and Restated Pooling Agreement, dated as of February 4, 1997, among LFI Receivables Corporation, LFI Servicing Corporation and The Chase Manhattan Bank, as Trustee (2)
10.7 Series 1997-1 Supplement to the Amended and Restated Pooling Agreement, dated as of February 4, 1997, among LFI Receivables Corporation, LFI Servicing Corporation and The Chase Manhattan Bank, as Trustee (2)
10.8 Series 1997-2 Supplement to the Amended and Restated Pooling Agreement, dated as of February 4, 1997, among LFI Receivables Corporation, LFI Servicing Corporation, The Chase Manhattan Bank as Agent and as Initial Purchaser and The Chase Manhattan Bank as Trustee (2)
10.9 Amended and Restated Servicing Agreement, dated as of February 4, 1997, among LFI Receivables Corporation, LFI Servicing Corporation, as Master Servicer, each of the Servicers party thereto and The Chase Manhattan Bank, as Trustee (2)
10.10 Amended and Restated Receivables Sale Agreement, dated as of February 4, 1997, among LFI Receivables Corporation, the Sellers named therein and the Servicers named therein (2)
10.11 Stockholders' Agreement, dated as of August 5, 1996, among Masco Corporation, FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison Companies, Inc., and the other stockholders named therein (the "Stockholders Agreement") (1)
10.12 Amendment No. 1 to the Stockholder's Agreement dated as of December 17, 1996 (2)
10.13 Amendment No. 2 to the Stockholder's Agreement dated as of March 26, 1997 (2)
10.14 Registration Rights Agreement, dated as of August 5, 1996, among Masco Corporation, FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison Companies, Inc., and the other stockholders named therein (1)
10.15 Management Agreement, dated as of August 5, 1996, by and between FURNISHINGS INTERNATIONAL INC. and the Company (1)
10.16 Amendment No. 3 to the Stockholder's Agreement dates as of July 15, 1997 (3)
10.17 Tax Sharing Agreement, dated as of the 5th day of August 1996, by and between FURNISHINGS INTERNATIONAL INC., Simmons Upholstered Furniture Corporation, the Company and LFI Receivables Corporation (1)
10.18 Letter Agreement, dated as of April 28, 1997, by and between FURNISHINGS INTERNATIONAL INC. and Masco Corporation (1)
10.18 12.0% Senior Pay-in-Kind Note of FURNISHINGS INTERNATIONAL INC. dated August 5, 1996 (1)
10.20 Purchase Agreement dated July 31, 1996 between the Company, Chase Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the Guarantors named therein (1)
10.21 Company's Retirement Benefit Restoration Plan (2)
10.22 Restricted Stock Plan *
Exhibit Number Description of Exhibits ------ -----------------------
10.23 Management Investment Plan*
10.24 Director Investment Plan*
21 Subsidiaries of the Company*
27 Financial Data Schedule*
(b) Financial Statement Schedule 1. Financial Statement Schedule filed herewith: Schedule II Valuation and Qualifying Accounts
(c) Reports on Form 8-K No reports on Form 8-K were filed by the registrant during the three months ended December 31, 1997
- -----------
* Filed herewith
(1) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-11905)
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(3) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1997
(4) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1997
Item 15.
Item 15. Signatures.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. BY:
/s/ WAYNE B. LYON --------------------------- Wayne B. Lyon Chairman of the Board, President and Chief Executive Officer
March 16, 1998
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons in the capacities and on the date indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of LIFESTYLE FURNISHINGS INTERNATIONAL LTD.:
Our report on the consolidated financial statements of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. and subsidiaries and the combined financial statements of the Masco Home Furnishings Group is included on page 19 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 49 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand, L.L.P. Greensboro, North Carolina February 25, 1998
LIFESTYLE FURNISHINGS INTERNATIONAL Schedule II. Valuation and Qualifying Accounts