<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997.
COMMISSION FILE NUMBER 333-11905
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 56-1977928
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1300 NATIONAL HIGHWAY
THOMASVILLE, NORTH CAROLINA 27360
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
(910) 476-4777
(TELEPHONE NUMBER)
------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES /X/ NO / /
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE:
100 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE AS OF AUGUST 14,
1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--June 30, 1997 and December 31, 1996............................... 1
Condensed Statements of Operations for the six months and the three months ended June 30,
1997 and 1996............................................................................ 2
Condensed Statements of Cash Flows for the six months ended June 30, 1997 and 1996.......... 3
Notes to Condensed Financial Statements..................................................... 4-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 12-14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
Signature Page...................................................................................... 16
Exhibit Index....................................................................................... 17
</TABLE>
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
COMPANY COMPANY
------------ ------------
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash investments.......................................................... $ 24,550 $ 22,400
Trade receivables.................................................................. 65,270 81,810
Investment in receivables trust.................................................... 53,990 51,120
Other receivables.................................................................. 46,330 46,280
Inventories........................................................................ 566,510 526,300
Prepaid expenses................................................................... 26,250 22,690
Deferred income taxes.............................................................. 14,080 14,080
------------ ------------
Total current assets............................................................. 796,980 764,680
Property and equipment, net.......................................................... 354,230 349,330
Notes receivable..................................................................... 8,910 7,620
Other assets......................................................................... 59,750 69,100
------------ ------------
Total assets..................................................................... $1,219,870 $1,190,730
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Long-term debt, current............................................................ $ 18,840 $ 18,970
Accounts payable................................................................... 122,680 93,030
Accrued liabilities................................................................ 141,890 153,130
------------ ------------
Total current liabilities........................................................ 283,410 265,130
Long-term debt....................................................................... 406,590 425,650
Other long-term liabilities.......................................................... 45,720 46,590
------------ ------------
Total liabilities................................................................ 735,720 737,370
------------ ------------
Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and
outstanding........................................................................ -- --
Additional paid-in capital........................................................... 421,050 421,050
Retained earnings.................................................................... 64,290 31,270
Foreign currency translation......................................................... (1,190) 1,040
------------ ------------
Total shareholder's equity....................................................... 484,150 453,360
------------ ------------
Total liabilities and shareholder's equity....................................... $1,219,870 $1,190,730
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
---------------------------- ----------------------------
CONSOLIDATED COMBINED CONSOLIDATED COMBINED
COMPANY PREDECESSOR COMPANY PREDECESSOR
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................. $ 969,630 $ 981,120 $ 479,400 $ 490,110
Cost of sales......................................... 717,720 741,960 353,220 372,790
------------- ------------- ------------- -------------
Gross profit........................................ 251,910 239,160 126,180 117,320
Selling, general and administrative expenses.......... 172,610 189,130 86,190 93,800
------------- ------------- ------------- -------------
Operating profit.................................... 79,300 50,030 39,990 23,520
------------- ------------- ------------- -------------
Other expense, net:
Interest expense.................................... 22,270 780 11,050 780
Interest expense, Masco Corporation................. -- 43,730 -- 21,490
Other, net.......................................... 6,230 2,930 3,750 1,870
------------- ------------- ------------- -------------
28,500 47,440 14,800 24,140
------------- ------------- ------------- -------------
Income before income taxes.......................... 50,800 2,590 25,190 (620)
Income taxes.......................................... 17,780 5,020 8,820 2,080
------------- ------------- ------------- -------------
Net income.......................................... $ 33,020 $ (2,430) $ 16,370 $ (2,700)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
CONSOLIDATED COMBINED
COMPANY PREDECESSOR
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................................................... $ 33,020 $ (2,430)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 12,770 25,500
Fabric sample book amortization................................................... 8,110 8,330
Bad debt provision, net........................................................... 2,320 1,590
Changes in operating assets and liabilities:
Receivables....................................................................... 9,350 7,990
Inventories....................................................................... (40,210) (8,220)
Prepaid expenses and other assets................................................. 2,130 (880)
Accounts payable.................................................................. 29,650 3,820
Other liabilities................................................................. (12,410) 9,740
------------- -------------
Net cash provided by operating activities....................................... 44,730 45,440
------------- -------------
INVESTING ACTIVITIES:
Net investments in receivables trust................................................ (2,870) --
Capital expenditures................................................................ (17,170) (13,870)
Fabric sample book expenditures..................................................... (6,840) (7,220)
Issuance of notes receivable........................................................ -- (3,280)
Collection of notes receivable...................................................... 10,530 5,490
Other, net.......................................................................... (40) (3,350)
------------- -------------
Net cash used for investing activities.......................................... (16,390) (22,230)
------------- -------------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings............................................. 850 --
Net repayments from accounts receivable transactions................................ (7,000) --
Proceeds from long-term debt........................................................ -- 65,460
Repayments of long-term debt........................................................ (20,040) (66,530)
Net decrease in Masco Corporation net investment and advances....................... -- (27,400)
------------- -------------
Net cash used for financing activities.......................................... (26,190) (28,470)
------------- -------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period.................................................. 2,150 (5,260)
Balance, beginning of period........................................................ 22,400 17,310
------------- -------------
Balance, end of period.............................................................. $ 24,550 $ 12,050
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited Condensed Financial Statements include the accounts of
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") and its subsidiary
companies as of June 30, 1997 and December 31, 1996 and for the three and six
month periods ended June 30, 1997. Intercompany accounts and transactions are
eliminated. These Condensed Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
The accompanying unaudited Condensed Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto in the
Company's report on Form 10-K for the fiscal year ended December 31, 1996. In
the Notes to Condensed Financial Statements, all dollar amounts are shown in
thousands unless otherwise stated.
The financial information for the three and six month periods ended June 30,
1996 refers to Masco Home Furnishings Group (the "Predecessor") as it existed
prior to its acquisition by the Company on August 5, 1996 (the "Acquisition").
The Predecessor was not a legal entity and included certain subsidiaries of
Masco Corporation ("Masco") whose operations consisted of the manufacture and
sale of home furnishings products including fine furniture and decorative home
furnishing fabrics. With respect to the unaudited financial information for the
interim periods of the Predecessor, it is the opinion of management that all
adjustments, which consist of normal and recurring adjustments necessary for a
fair presentation of interim combined financial statements, have been included.
As a result of the Acquisition and new basis of accounting resulting from
the application of the purchase method 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.
Operating results of the interim period are not necessarily indicative of
results that may be expected for the fiscal year ended December 31, 1997.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." The adoption
of SFAS 125 did not have a material impact on the Company's financial
statements.
3. INVENTORY
As of June 30, 1997 and December 31, 1996, inventory balances were as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Finished goods......................................................................... $ 249,830 $ 223,610
Raw materials.......................................................................... 230,815 216,250
Work in process........................................................................ 85,865 86,440
---------- ------------
$ 566,510 $ 526,300
---------- ------------
---------- ------------
</TABLE>
4
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
As of June 30, 1997 and December 31, 1996, the outstanding balances of
long-term debt were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Revolving credit facility.............................................................. $ -- $ --
Tranche A term loan.................................................................... 87,820 100,420
Tranche B term loan.................................................................... 133,140 140,580
Senior subordinated notes.............................................................. 200,000 200,000
Other borrowings....................................................................... 4,470 3,620
---------- ------------
425,430 444,620
Less current portion................................................................... 18,840 18,970
---------- ------------
$ 406,590 $ 425,650
---------- ------------
---------- ------------
</TABLE>
The Company has negotiated with its lenders a six year $400 million senior
secured revolving credit facility to replace the existing Revolving credit
facility, Tranche A term loan and Tranche B term loan. The new facility will
provide the Company with increased financial flexibility by eliminating
quarterly principal payments, reducing financing costs on the facility and
eliminating certain restrictive covenants.
The Company expects to complete the refinancing on August 15, 1997, at which
time deferred financing costs related to the existing facility of approximately
$20 million will be written off as a non-cash extraordinary item.
5. GUARANTOR FINANCIAL STATEMENTS
In connection with the issuance of its 10 7/8% Senior Subordinated Notes due
2006 (the "Notes"), the Company's domestic operating subsidiaries ("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 financial data provides
information regarding the financial position, results of operations and cash
flows of the Guarantor Subsidiaries (condensed consolidating/combining 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 condensed consolidating/combining financial data, the
Guarantor Subsidiaries include substantially all domestic subsidiaries of the
Company (other than special purpose subsidiaries formed in connection with the
Company's receivables financing facility (the "Receivables Subsidiaries") 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 Subsidiaries on the equity method.
The principal elimination entries are to eliminate the investments in
subsidiaries and intercompany balances and transactions.
5
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash investments...................... $ -- $ 11,160 $ 13,390 $ -- $ 24,550
Receivables.................................... -- 17,180 94,420 -- 111,600
Investment in receivables trust................ -- -- 53,990 -- 53,990
Inventories.................................... -- 470,200 96,310 -- 566,510
Prepaid expenses............................... -- 17,220 9,030 -- 26,250
Deferred income taxes.......................... -- 12,640 1,440 -- 14,080
Intercompany account........................... -- 248,830 7,830 (256,660) --
---------- ------------ -------------- ------------ ------------
Total current assets....................... -- 777,230 276,410 (256,660) 796,980
Property and equipment, net...................... -- 269,490 84,740 -- 354,230
Notes receivable................................. -- 8,910 -- -- 8,910
Other assets..................................... -- 58,330 1,420 -- 59,750
Investments in affiliates........................ 484,150 4,000 -- (488,150) --
---------- ------------ -------------- ------------ ------------
Total assets............................... $ 484,150 $ 1,117,960 $ 362,570 $ (744,810) $1,219,870
---------- ------------ -------------- ------------ ------------
---------- ------------ -------------- ------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Long-term debt, current........................ $ -- $ 16,290 $ 2,550 $ -- $ 18,840
Accounts payable............................... -- 97,740 24,940 -- 122,680
Accrued liabilities............................ -- 97,530 44,360 -- 141,890
Intercompany account........................... -- 7,830 248,830 (256,660) --
---------- ------------ -------------- ------------ ------------
Total current liabilities.................. -- 219,390 320,680 (256,660) 283,410
Long-term debt................................... -- 406,590 -- -- 406,590
Other long-term liabilities...................... -- 44,380 1,340 -- 45,720
---------- ------------ -------------- ------------ ------------
Total liabilities.......................... -- 670,360 322,020 (256,660) 735,720
---------- ------------ -------------- ------------ ------------
Shareholder's equity............................. 484,150 447,600 40,550 (488,150) 484,150
---------- ------------ -------------- ------------ ------------
Total liabilities and shareholder's
equity................................... $ 484,150 $ 1,117,960 $ 362,570 $ (744,810) $1,219,870
---------- ------------ -------------- ------------ ------------
---------- ------------ -------------- ------------ ------------
</TABLE>
6
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash investments....................... $ -- $ 4,510 $ 17,890 $ -- $ 22,400
Receivables..................................... -- 41,130 86,960 -- 128,090
Investment in receivables trust................. -- -- 51,120 -- 51,120
Inventories..................................... -- 431,910 94,390 -- 526,300
Prepaid expenses................................ -- 15,100 7,590 -- 22,690
Deferred income taxes........................... -- 11,440 2,640 -- 14,080
Intercompany account............................ -- 245,140 12,500 (257,640) --
---------- ------------ -------------- ------------ ------------
Total current assets........................ -- 749,230 273,090 (257,640) 764,680
Property and equipment,net........................ -- 265,190 84,140 -- 349,330
Notes receivable.................................. -- 7,620 -- -- 7,620
Other assets...................................... -- 55,430 13,670 -- 69,100
Investments in affiliates......................... 453,360 14,790 -- (468,150) --
---------- ------------ -------------- ------------ ------------
Total assets................................ $ 453,360 $ 1,092,260 $ 370,900 $ (725,790) $1,190,730
---------- ------------ -------------- ------------ ------------
---------- ------------ -------------- ------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Long-term debt, current......................... $ -- $ 17,350 $ 1,620 $ -- $ 18,970
Accounts payable................................ -- 71,230 21,800 -- 93,030
Accrued liabilities............................. -- 109,950 43,180 -- 153,130
Intercompany account............................ -- 12,500 245,140 (257,640) --
---------- ------------ -------------- ------------ ------------
Total current liabilities................... -- 211,030 311,740 (257,640) 265,130
Long-term debt.................................... -- 424,430 1,220 -- 425,650
Other long-term liabilities....................... -- 35,670 10,920 -- 46,590
---------- ------------ -------------- ------------ ------------
Total liabilities........................... -- 671,130 323,880 (257,640) 737,370
---------- ------------ -------------- ------------ ------------
Shareholder's equity.............................. 453,360 421,130 47,020 (468,150) 453,360
---------- ------------ -------------- ------------ ------------
Total liabilities and shareholder's
equity.................................... $ 453,360 $ 1,092,260 $ 370,900 $ (725,790) $1,190,730
---------- ------------ -------------- ------------ ------------
---------- ------------ -------------- ------------ ------------
</TABLE>
7
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ -- $ 877,240 $ 213,710 $ (121,320) $ 969,630
Cost of sales...................................... -- 661,000 178,040 (121,320) 717,720
---------- ----------- -------------- ------------ ------------
Gross profit..................................... -- 216,240 35,670 -- 251,910
Selling, general and administrative expenses....... -- 148,320 24,290 -- 172,610
---------- ----------- -------------- ------------ ------------
Operating profit................................. -- 67,920 11,380 -- 79,300
Other expense, net................................. (33,020) 24,720 (4,810) 41,610 28,500
---------- ----------- -------------- ------------ ------------
Income before income taxes....................... 33,020 43,200 16,190 (41,610) 50,800
Income taxes....................................... -- 14,540 3,240 -- 17,780
---------- ----------- -------------- ------------ ------------
Net income....................................... $ 33,020 $ 28,660 $ 12,950 $ (41,610) $ 33,020
---------- ----------- -------------- ------------ ------------
---------- ----------- -------------- ------------ ------------
</TABLE>
PREDECESSOR
CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
----------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales................................................. $ 864,990 $ 252,150 $ (136,020) $ 981,120
Cost of sales............................................. 666,180 211,800 (136,020) 741,960
----------- -------------- ------------ ----------
Gross profit............................................ 198,810 40,350 -- 239,160
Selling, general and administrative expenses.............. 154,370 34,760 -- 189,130
----------- -------------- ------------ ----------
Operating profit........................................ 44,440 5,590 -- 50,030
Other expense, net........................................ 39,240 5,980 2,220 47,440
----------- -------------- ------------ ----------
Income (loss) before income taxes....................... 5,200 (390) (2,220) 2,590
Income taxes.............................................. 5,290 (270) -- 5,020
----------- -------------- ------------ ----------
Net loss................................................ $ (90) $ (120) $ (2,220) $ (2,430)
----------- -------------- ------------ ----------
----------- -------------- ------------ ----------
</TABLE>
8
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
COMPANY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:......... $ -- $ 37,310 $ 7,420 $ -- $ 44,730
-------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Net investments in receivables trust............... -- -- (2,870) -- (2,870)
Capital expenditures............................... -- (14,470) (2,700) -- (17,170)
Fabric sample book expenditures.................... -- (6,840) -- -- (6,840)
Collection of notes receivable..................... -- 10,530 -- -- 10,530
Other, net......................................... -- -- (40) -- (40)
-------- --------- --------- --------- ---------
Net cash used for investing activities......... -- (10,780) (5,610) -- (16,390)
-------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term debt.................. -- 850 -- -- 850
Net repayments from accounts receivable
transactions..................................... -- -- (7,000) -- (7,000)
Repayments of long-term debt....................... -- (19,750) (290) -- (20,040)
Intercompany accounts, net......................... -- (980) 980 -- --
-------- --------- --------- --------- ---------
Net cash used for financing activities......... -- (19,880) (6,310) -- (26,190)
-------- --------- --------- --------- ---------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period................. -- 6,650 (4,500) -- 2,150
Balance, beginning of period....................... -- 4,510 17,890 -- 22,400
-------- --------- --------- --------- ---------
Balance, end of period............................. $ -- $ 11,160 $ 13,390 $ -- $ 24,550
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
</TABLE>
9
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
PREDECESSOR
CONDENSED COMBINING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
----------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:................ $ 17,990 $ 29,710 $ (2,260) $ 45,440
----------- -------------- ------------ ----------
INVESTING ACTIVITIES:
Capital expenditures...................................... (11,630) (2,240) -- (13,870)
Fabric sample book expenditures........................... (7,220) -- -- (7,220)
Issuance of notes receivable.............................. (3,280) -- -- (3,280)
Collection of notes receivable............................ 3,180 2,310 -- 5,490
Other, net................................................ (4,100) 3,930 (3,180) (3,350)
----------- -------------- ------------ ----------
Net cash provided by (used for) investing
activities.......................................... (23,050) 4,000 (3,180) (22,230)
----------- -------------- ------------ ----------
FINANCING ACTIVITIES:
Increase (decrease) in Masco Corporation net investment
and advances............................................ 3,140 (35,980) 5,440 (27,400)
Increase in other debt.................................... 800 64,660 -- 65,460
Payment of other debt..................................... (830) (65,700) -- (66,530)
----------- -------------- ------------ ----------
Net cash provided by (used for) financing
activities.......................................... 3,110 (37,020) 5,440 (28,470)
----------- -------------- ------------ ----------
CASH AND CASH INVESTMENTS:
Decrease for the period................................... (1,950) (3,310) -- (5,260)
Balance, beginning of period.............................. 4,540 12,770 -- 17,310
----------- -------------- ------------ ----------
Balance, end of period.................................... $ 2,590 $ 9,460 $ -- $ 12,050
----------- -------------- ------------ ----------
----------- -------------- ------------ ----------
</TABLE>
10
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
6. PRO FORMA SUPPLEMENTARY DATA
The following pro forma supplementary data for the six months ended June 30,
1996 gives effect to the Acquisition transactions as if they had occurred on
January 1, 1996. 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 Acquisition transactions been consummated on the
dates assumed and does not project the Company's results of operations for any
future date.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
(DOLLARS IN
MILLIONS)
-------------------
<S> <C>
Net sales.................................................................................... $ 981.1
Gross profit................................................................................. 243.8
Operating profit............................................................................. 65.5
Net income................................................................................... 18.7
</TABLE>
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 write-down 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
FURNISHINGS INTERNATIONAL INC. from Masco but not contributed to the
Company.
11
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For purposes of the discussions that follow, the results of operations for
the six months and three months ended June 30, 1996 represent the results of the
Predecessor.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 TO THE THREE MONTHS
ENDED JUNE 30, 1996
Net sales were $479.4 million for the three months ended June 30, 1997, a
decrease of $10.7 million, or 2.2%, from $490.1 million for the comparable
period of 1996. Net sales of fine furniture decreased 3.5% to $411.4 million for
the three months ended June 30, 1997 from $426.5 million for the comparable
period of 1996. Fine furniture sales were negatively impacted by the Company's
strategy of exiting less profitable product lines and relatively soft major
retailer sales. Net sales of decorative home furnishing fabrics increased 6.9%
to $68.0 million for the three months ended June 30, 1997 from $63.6 million for
the comparable period of 1996.
Gross profit was $126.2 million for the three months ended June 30, 1997, an
increase of $8.9 million, or 7.6%, from $117.3 million for the Predecessor's
comparable period of 1996. Gross profit margins increased to 26.3% for the three
months ended June 30, 1997 from 23.9% for the comparable period of 1996. This
increase was primarily attributable to the Company's continuous improvement
initiatives and the benefit of reduced depreciation expense which resulted from
the allocation of the purchase price of the Acquisition.
Selling, general and administrative expenses were reduced to $86.2 million
for the three months ended June 30, 1997, a decrease of $7.6 million, or 8.1%,
from $93.8 million for the comparable period of 1996. As a percentage of net
sales, selling, general and administrative expenses improved to 18.0% for the
three months ended June 30, 1997 from 19.1% for the comparable period of 1996.
Selling expense was 11.4% of net sales as compared to 11.3% for 1996, and
general and administrative expenses decreased to 6.6% of net sales from 7.8% in
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.
Operating profit increased to $40.0 million for the three months ended June
30, 1997, an increase of $16.5 million, or 70.2%, from $23.5 million for the
comparable period of 1996. As a percentage of net sales, operating profit
increased to 8.3% for the three months ended June 30, 1997 from 4.8% for the
comparable period of 1996. This improvement was achieved primarily for the
reasons discussed above.
Interest expense was $11.1 million for the three months ended June 30, 1997,
a decrease of $11.2 million, or 50.2%, from the comparable period of 1996. This
decrease was a result of lower average debt outstanding during the three months
ended June 30, 1997 when compared to the Predecessor's advances from Masco
outstanding during the comparable period of 1996. The reduced interest expense
from the lower level of debt after the Acquisition combined with approximately
$128 million of principal repayments made since August 5, 1996 were partially
offset by higher average borrowing rates.
12
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS
ENDED JUNE 30, 1996
Net sales were $969.6 million for the six months ended June 30, 1997, a
decrease of $11.5 million, or 1.2%, from $981.1 million for the comparable
period of 1996. Net sales of fine furniture decreased 1.6% to $834.4 million for
the six months ended June 30, 1997 from $848.0 million for the comparable period
of 1996. Fine furniture sales were negatively impacted by the Company's strategy
of exiting less profitable product lines and relatively soft major retailer
sales. Net sales of decorative home furnishing fabrics increased 1.6% to $135.2
million for the six months ended June 30, 1997 from $133.1 million for the
comparable period of 1996.
Gross profit was $251.9 million for the six months ended June 30, 1997, an
increase of $12.7 million, or 5.3%, from $239.2 million for the Predecessor's
comparable period of 1996. Gross profit margins increased to 26.0% for the six
months ended June 30, 1997 from 24.4% for the comparable period of 1996. This
increase was primarily attributable to the Company's continuous improvement
initiatives and the benefit of reduced depreciation expense which resulted from
the allocation of the purchase price of the Acquisition.
Selling, general and administrative expenses were reduced to $172.6 million
for the six months ended June 30, 1997, a decrease of $16.5 million, or 8.7%,
from $189.1 million for the comparable period of 1996. As a percentage of net
sales, selling, general and administrative expenses improved to 17.8% for the
six months ended June 30, 1997 from 19.3% for the comparable period of 1996.
Selling expense was 11.1% of net sales as compared to 11.3% for 1996, and
general and administrative expenses decreased to 6.7% of net sales from 8.0% in
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.
Operating profit increased to $79.3 million for the six months ended June
30, 1997, an increase of $29.3 million, or 58.6%, from $50.0 million for the
comparable period of 1996. As a percentage of net sales, operating profit
increased to 8.2% for the six months ended June 30, 1997 from 5.1% for the
comparable period of 1996. This improvement was achieved primarily for the
reasons discussed above.
Interest expense was $22.3 million for the six months ended June 30, 1997, a
decrease of $22.2 million, or 50.0%, from the comparable period of 1996. This
decrease was a result of lower average debt outstanding during the six months
ended June 30, 1997 when compared to the Predecessor's advances from Masco
outstanding during the comparable period of 1996. The reduced interest expense
from the lower level of debt after the Acquisition combined with approximately
$128 million of principal repayments made since August 5, 1996 were partially
offset by higher average borrowing rates.
13
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
(DOLLARS IN
MILLIONS)
-------------------
<S> <C>
Net sales................................................................ $ 981.1
Gross profit............................................................. 243.8
Operating profit......................................................... 65.5
Net income............................................................... 18.7
</TABLE>
(a) The Note to Financial Statements captioned "Pro Forma Supplementary
Data" as set forth in Note 6 of the accompanying financial statements of this
report should be read in conjunction with this information.
For purposes of the discussion that follows, the results of the six months
ended June 30, 1997 are compared with the pro forma results of the six months
ended June 30, 1996 (giving effect to the Acquisition transactions as if they
had occurred on January 1, 1996). On a pro forma basis, the Company's operating
income increased from $65.5 million to $79.3 million, an increase of 21.1%, and
net income increased from $18.7 million to $33.0 million, an increase of 76.5%.
Results benefited from initiatives to trim less profitable product lines and
reduce manufacturing expense, as well as lowering selling, general and
administrative costs, combined with lower interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on the
indebtedness incurred in connection with the Acquisition, 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 six months ended June 30, 1997 was $44.7 million, a
decrease of $0.7 million from $45.4 million in the comparable period of 1996.
The Company made principal payments on its long-term debt of $20.0 million
for the six months ended June 30, 1997. Transactions under the Receivables
Facility resulted in net repayments of $7.0 million and an increased investment
in the receivables trust of $2.9 million. Capital expenditures totaled $17.2
million for the six months ended June 30, 1997.
The Company has negotiated with its lenders a six year $400 million senior
secured revolving credit facility to replace the existing Revolving credit
facility, Tranche A term loan and Tranche B term loan. The new facility will
provide the Company with increased financial flexibility by eliminating
quarterly principal payments, reducing financing costs on the facility, and
eliminating certain restrictive covenants.
The Company expects to complete the refinancing on August 15, 1997, at which
time deferred financing costs related to the existing facility of approximately
$20 million will be written off as a non-cash extraordinary item.
14
<PAGE>
PART II. OTHER INFORMATION
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
Items 1, 2, 3, 4, and 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------
<C> <S>
10.1+ Third Amendment, dated as of July 15, 1997, to Stockholders'
Agreement
27+ Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed by the registrant during the three
months ended June 30, 1997.
- ------------------------
+ Filed herewith
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFESTYLE FURNISHINGS INTERNATIONAL
LTD.
Date: August 14, 1997 BY: /s/ RONALD J. HOFFMAN
---------------------------------------------------------------------------
Ronald J. Hoffman
Vice President, Chief Financial
Officer and Treasurer
(Chief Financial Officer and
Authorized Signatory)
16
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.1 Third Amendment, dated as of July 15, 1997, to Stockholders' Agreement
27 Financial Data Schedule
</TABLE>
17
<PAGE>
Exhibit 10.1
THIRD AMENDMENT TO
STOCKHOLDERS' AGREEMENT
THIRD AMENDMENT TO STOCKHOLDERS' AGREEMENT (this "Amendment") dated as
-----------
of July 15, 1997 by and among FURNISHINGS INTERNATIONAL INC., a Delaware
corporation (the "Company"), Masco Corporation, a Delaware corporation
-------
("Masco"), 399 Venture Partners, Inc., a Delaware corporation ("399") and
----- ---
Douglas C. Barnard, as Voting Trustee under the Voting Trust Agreement (the
"Trustee").
-------
RECITALS
WHEREAS, the Company, Masco, 399 and the Management Stockholders are
parties to the Stockholders' Agreement dated as of August 5, 1996 by and among
the Company and its stockholders (as previously amended, the "Agreement");
---------
(capitalized terms not otherwise defined herein are used as defined in the
Agreement);
WHEREAS, 399 has the right, as the holder of HFG Common Stock
representing more than fifty percent (50%) of the HFG Common Stock on a
Fully-Diluted Basis then held by the Institutional Stockholders as a group,
pursuant to Section 7.4(a)(i) of the Agreement to take action on behalf of the
Institutional Stockholders;
WHEREAS, the Trustee has the right pursuant to Section 7.4(a)(iii) of
the Agreement to take action on behalf of the Management Stockholders; and
WHEREAS, the parties hereto desire to amend the Agreement in order to
effect certain changes in the definition of "Permitted Transferee" and in the
weighted voting of the directors of the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. AMENDMENTS
1.1 DEFINITION OF PERMITTED TRANSFEREE. Clause (i) of the definition
of "Permitted Transferee" is hereby amended and restated in its entirety so that
it reads as follows (with retroactive effect as necessary in order to
accommodate any previous transfers):
"(i) with respect to any Stockholder who is a natural
person, (A) the spouse or any lineal descendant (including
by adoption and stepchildren) of such Stockholder, (B) any
trust of which such Stockholder is the trustee (or any trust
of which such Stockholder is not the trustee, or is not the
only trustee, provided that each trustee other than the
Stockholder has executed a Joinder Agreement, and provided,
in the case of a Management Stockholder
<PAGE>
THIRD AMENDMENT
or an Additional Management Stockholder, that the Stockholder does
not transfer more than his or her beneficial interest in the
Voting Trust with respect to any HFG Common Stock or Equity
Equivalents that he or she wishes to transfer), so long as
such trust is established solely for the benefit of one or
more of the Stockholder and the other individuals specified
in clause (A) above and has terms which are not inconsistent
with the terms of this Agreement, (C) any partnership, all
of the general partner(s) and limited partner(s) (if any) of
which are one or more of the Stockholder and the other
individuals specified in clause (A) above, or (D) any other
trust or partnership established by any such Stockholder to
the extent approved in writing by the Company (acting with
an Affirmative Board Vote, including the consent of the
Masco Director); provided, however, that the Chairman of the
Company may permit any manager to give a specified number of
shares of HFG Common Stock to his or her parents, to his or
her spouse's parents, or to any thereof, so long as the
total number of shares of HFG Common Stock transferred by
all such managers pursuant to this proviso does not exceed
1,000 shares in the aggregate (with appropriate adjustments
for stock splits, stock dividends, and stock combinations)."
1.2 WEIGHTED BOARD VOTING. Section 5.4(a)(iii) of the Agreement is
hereby amended and restated in its entirety so that it reads as follows:
"(iii) each of the Institutional Directors will have
a weighted vote of 12.25%, except that if and so long as
both Richard M. Cashin, Jr. and David F. Thomas are
Institutional Directors, their weighted votes will be
increased to 22.25% each, with a corresponding reduction in
the weighted votes of the other Institutional Directors to
2.25% each; provided, however, that, in the event there are
-------- -------
more than 50 stockholders of the Company, such weighting
shall, upon notice to the Company from the Institutional
Stockholders, be shifted to 4.75% for each of the
Institutional Directors, with a corresponding shift in the
weighting of each of the Disinterested Director's weighted
vote from 3.75% to 11.25% (and thereafter the Institutional
Stockholders shall have the right upon notice to the Company
to increase the weighting back to its original position)."
SECTION 2. MISCELLANEOUS
2.1 FURTHER ACTIONS. Each of the parties hereto shall cooperate and
shall take further action and shall execute and deliver such further documents
as may be reasonably requested by any other party in order to carry out the
amendments set forth herein.
2
<PAGE>
THIRD AMENDMENT
2.2 GOVERNING LAW. This Amendment shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule that would cause the
application of the laws of any jurisdiction other than the State of New York,
except to the extent that the General Corporation Law of the State of Delaware
applies as a result of the Company being incorporated in the State of Delaware,
in which case such General Corporation Law shall apply.
2.3 HEADINGS. The headings used in this Amendment have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
2.4 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
2.5 CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY
TRIAL. The provisions of Sections 7.18 and 7.19 of the Agreement shall apply to
this Amendment as if repeated herein.
[Remainder of Page Intentionally Left Blank]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
FURNISHINGS INTERNATIONAL INC.
By: /s/ Wayne B. Lyon
----------------------------------------
Wayne B. Lyon
President and Chief Executive Officer
MASCO CORPORATION
By: /s/ John R. Leekley
----------------------------------------
John R. Leekley
Senior Vice President
399 VENTURE PARTNERS, INC.
By: /s/ David F. Thomas
----------------------------------------
David F. Thomas
President
/s/ Douglas C. Barnard
----------------------------------------
Douglas C. Barnard, as Voting Trustee
[Signature Page to Third Amendment]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 24550 22400
<SECURITIES> 53990 51120
<RECEIVABLES> 111600<F1> 128090<F1>
<ALLOWANCES> 0 0
<INVENTORY> 566510 526300
<CURRENT-ASSETS> 796980 764680
<PP&E> 354230<F1> 349330<F1>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1219870 1190730
<CURRENT-LIABILITIES> 283410 265130
<BONDS> 200000 200000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 484150 453360
<TOTAL-LIABILITY-AND-EQUITY> 1219870 1190730
<SALES> 969630 981120
<TOTAL-REVENUES> 969630 981120
<CGS> 717720 741960
<TOTAL-COSTS> 717720 741960
<OTHER-EXPENSES> 6230 2930
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 22270 44510
<INCOME-PRETAX> 50800 2590
<INCOME-TAX> 17780 5020
<INCOME-CONTINUING> 33020 (2430)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 33020 (2430)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1>Receivables and property and equipment are presented net of allowances for
doubtful accounts and accumulated depreciation and amortization, respectively.
</FN>
</TABLE>
