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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File Number: 333-11905
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LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
(Exact Name of Registrant as Specified in its Charter)
Delaware 56-1977928
(State of Incorporation) (I.R.S. Employer Identification No.)
1300 National Highway, Thomasville, NC 27360
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (336) 476-4777
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
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 by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The registrant is a privately held corporation. As such, there is no practicable
method to determine the aggregate market value of the voting stock held by
non-affiliates of the registrant.
Number of shares outstanding of the registrant's Common Stock at March 1, 1998:
100 shares of Common Stock, par value $.01 per share
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TABLE OF CONTENTS
Item Page No.
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PART I
1. Business............................................................... 3
2. Properties............................................................. 11
3. Legal Proceedings...................................................... 11
4. Submission of Matters to a Vote of Security Holders.................... 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.. 13
6. Selected Financial Data................................................ 14
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations................................................ 15
8. Financial Statements................................................... 19
Changes in and Disagreements With Accountants on Accounting and
9. Financial Disclosure................................................. 46
PART III
10. Directors and Executive Officers of the Registrant..................... 47
11. Executive Compensation................................................. 47
12. Security Ownership of Certain Beneficial Owners and Management......... 47
13. Certain Relationships and Related Transactions......................... 47
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........ 48
15. Signatures............................................................. 50
FINANCIAL STATEMENT SCHEDULE
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. Financial Statement Schedule....... 51
2
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PART I
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.
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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.
<TABLE>
<CAPTION>
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PRICE CATEGORY PRODUCT CATEGORY
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STATIONARY MOTION/
CASEGOODS UPHOLSTERY RECLINER OCCASIONAL
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<S> <C> <C> <C> <C>
PREMIUM Henredon(R) Beacon Hill(R) Henredon(R)
Maitland-Smith Henredon(R) La Barge(R)
Maitland-Smith
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BEST Drexel Heritage(R) Beacon Hill(R) Drexel Heritage(R) Drexel Heritage(R)
Henredon(R) Drexel Heritage(R) Henredon(R)
Maitland-Smith Henredon(R) La Barge(R)
Maitland-Smith
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BETTER Drexel Heritage(R) BenchCraft(R) BenchCraft(R) Drexel Heritage(R)
Lexington(R) Drexel Heritage(R) Berkline(R) Lexington(R)
Universal(R) Lexington(R) Drexel Heritage(R)
Universal(R)
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GOOD Lexington(R) BenchCraft(R) BenchCraft(R) Universal(R)
Universal(R) Universal(R) Berkline(R)
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PROMOTIONAL Universal(R) BenchCraft(R) BenchCraft(R) Universal(R)
Berkline(R)
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</TABLE>
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.
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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.
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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:
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PRICE CATEGORY BRAND
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Premium Beacon Hill(R)
Ramm, Son & Crocker(TM)
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Best Beacon Hill(R)
Ramm, Son & Crocker(TM)
Sunbury(TM)
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Better Ametex(TM)
Robert Allen(TM)
Sunbury(TM)
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Good Ametex(TM)
Robert Allen(TM)
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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.
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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
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INDEPENDENT DEDICATED DESIGNER
RETAILERS GALLERIES STORES SHOWROOMS
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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).
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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
8
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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.
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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.
10
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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. 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.
11
<PAGE>
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.
-----------
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.
12
<PAGE>
Part II
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.
13
<PAGE>
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(Dollars in millions)
<TABLE>
<CAPTION>
Predecessor(1) Company
----------------------------------------------- ---------------------
1/1/96 8/6/96
to to
1993 1994 1995 8/5/96 12/31/96 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................... $1,763.5 $1,897.5 $1,992.6 $1,147.9 $ 857.5 $1,959.8
Cost of sales ................... 1,326.8 1,434.0 1,501.0 870.7 638.2 1,453.8
Restructuring charge(8) ......... -- -- -- -- -- 14.5
-------- -------- -------- -------- -------- --------
Gross profit .................. 436.7 463.5 491.6 277.2 219.3 491.5
Selling, general, and
administrative(2) ............. 368.5 386.8 397.8 222.2 144.5 347.5
Restructuring charge(8) ......... -- -- -- -- -- 44.0
-------- -------- -------- -------- -------- --------
Operating profit .............. 68.2 76.7 93.8 55.0 74.8 100.0
-------- -------- -------- -------- -------- --------
Interest expense(3) ............. 82.7 87.1 94.8 52.7 20.0 41.9
Other, net(4) ................... 3.2 7.3 8.3 3.5 6.7 15.1
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary item (17.7) (17.7) (9.3) (1.2) 48.1 43.0
Income taxes .................... 8.0 6.1 7.0 6.8 16.8 13.8
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item .......... (25.7) (23.8) (16.3) (8.0) 31.3 29.2
-------- -------- -------- -------- -------- --------
Extraordinary item - loss on
early extinguishment of debt
(net of income taxes of $7.8) . -- -- -- -- -- (11.6)
-------- -------- -------- -------- -------- --------
Net income (loss) ............... $ (25.7) $ (23.8) $ (16.3) $ (8.0) $ 31.3 $ 17.6
======== ======== ======== ======== ======== ========
Other Financial Data:
Gross profit margin ............. 24.8% 24.4% 24.7% 24.2% 25.6% 25.1%
EBITDA(5) ....................... $ 132.6 $ 139.5 $ 160.1 $ 91.8 $ 87.7 $ 178.1
EBITDA margin ................... 7.5% 7.4% 8.0% 8.0% 10.2% 9.1%
Depreciation & amortization ..... $ 66.8 $ 66.4 $ 67.9 $ 39.3 $ 15.4 $ 38.4
Cash provided by (used for)
operating activities .......... (28.7) 13.4 49.3 48.8 109.0 139.8
Cash used for investing
activities .................... (92.1) (67.2) (72.5) (25.6) (708.8) (50.2)
Cash provided by (used for)
financing activities .......... 129.9 53.1 15.8 (21.9) 622.1 (107.8)
Balance Sheet Data:
Working capital(6) .............. $ 724.0 $ 743.3 $ 749.1 $ -- $ 496.1 $ 479.3
Total assets .................... 1,853.5 1,970.5 1,903.9 -- 1,190.7 1,151.2
Total debt ...................... 61.9 45.2 27.2 -- 444.6 354.6
Total liabilities ............... 295.9 274.4 282.9 -- 737.4 713.8
Masco net investment &
advances(7) ................... 1,557.6 1,633.1 1,621.0 -- -- --
Shareholder's equity ............ -- -- -- -- 453.4 437.4
</TABLE>
- --------
(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.
14
<PAGE>
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
========= ========= =========
15
<PAGE>
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.
16
<PAGE>
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
17
<PAGE>
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 of this Report in the Notes to Financial
Statements captioned "Geographic Information."
INFLATION
The Company does not believe that inflation has had a material impact on
its financial position or results of operations during the periods covered by
the Financial Statements and the related notes thereto included herein.
SEASONALITY
The Company does not believe that its results of operations fluctuate
materially due to seasonality.
18
<PAGE>
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
19
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Consolidated Company
--------------------------
December December
31, 31,
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash investments ............................. $ 4,140 $ 22,400
Trade receivables ..................................... 64,480 81,810
Investment in receivables trust ....................... 64,010 51,120
Other receivables ..................................... 40,710 46,280
Inventories ........................................... 510,110 526,300
Prepaid expenses ...................................... 35,440 22,690
Deferred income taxes ................................. 38,530 14,080
----------- -----------
Total current assets .............................. 757,420 764,680
Property and equipment, net ............................. 337,390 349,330
Other assets ............................................ 56,410 76,720
----------- -----------
Total assets ...................................... $ 1,151,220 $ 1,190,730
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Long-term debt, current ............................... $ 2,970 $ 18,970
Accounts payable ...................................... 124,000 93,030
Accrued liabilities ................................... 149,940 153,130
----------- -----------
Total current liabilities ......................... 276,910 265,130
Long-term debt .......................................... 351,600 425,650
Deferred income taxes ................................... 31,250 2,220
Other long-term liabilities ............................. 54,070 44,370
----------- -----------
Total liabilities ................................. 713,830 737,370
----------- -----------
Shareholder's equity:
Common stock, $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding ................... -- --
Additional paid-in capital ............................ 421,050 421,050
Retained earnings ..................................... 25,510 31,270
Foreign currency translation .......................... (9,170) 1,040
----------- -----------
Total shareholder's equity ........................ 437,390 453,360
----------- -----------
Total liabilities and shareholder's equity ........ $ 1,151,220 $ 1,190,730
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Consolidated Company Combined Predecessor
------------------------------ ------------------------------
Period from Period from Period from Period from
Jan. 1, 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 1,959,780 $ 857,490 $ 1,147,890 $ 1,992,610
Cost of sales ...................................... 1,453,770 638,140 870,650 1,500,990
Restructuring charge ............................... 14,480 -- -- --
------------- ------------- ------------- -------------
Gross profit ................................... 491,530 219,350 277,240 491,620
Selling, general and administrative expenses ....... 347,550 144,580 222,230 397,790
Restructuring charge ............................... 44,020 -- -- --
------------- ------------- ------------- -------------
Operating profit ............................... 99,960 74,770 55,010 93,830
------------- ------------- ------------- -------------
Other expense, net:
Interest expense ............................... 41,900 19,930 970 2,360
Interest expense, Masco ........................ -- -- 51,720 92,470
Other, net ..................................... 15,110 6,730 3,480 8,260
------------- ------------- ------------- -------------
57,010 26,660 56,170 103,090
------------- ------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item .......................... 42,950 48,110 (1,160) (9,260)
Income taxes ....................................... 13,750 16,840 6,830 6,980
------------- ------------- ------------- -------------
Income (loss) before extraordinary item ........ 29,200 31,270 (7,990) (16,240)
Extraordinary item - loss on early extinguishment of
debt (net of income taxes of $7,750) ........... (11,620) -- -- --
------------- ------------- ------------- -------------
Net income (loss) .............................. $ 17,580 $ 31,270 $ (7,990) $ (16,240)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Consolidated Company Combined Predecessor
------------------------------ ------------------------------
Period from Period from Period from Period from
Jan. 1, 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................. $ 17,580 $ 31,270 $ (7,990) $ (16,240)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ............ 24,160 9,610 29,790 50,770
Fabric sample book amortization .......... 14,250 5,820 9,470 17,150
Bad debt provision ....................... 6,080 1,580 2,250 6,620
Deferred income taxes .................... (6,680) (5,890) (2,610) 4,560
Extraordinary loss, net of tax ........... 11,620 -- -- --
Restructuring charge ..................... 58,500 -- -- --
Changes in operating assets and liabilities:
Receivables .............................. 16,570 (3,710) 39,550 (19,120)
Inventories .............................. 1,710 34,460 (17,480) 10,390
Prepaid expenses and other assets ........ (5,190) (9,740) 2,470 260
Accounts payable ......................... 30,970 9,420 (1,890) 2,110
Other liabilities ........................ (29,750) 36,220 (4,720) (7,180)
------------- ------------- ------------- -------------
Net cash provided by operating activities ... 139,820 109,040 48,840 49,320
------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures ........................... (32,650) (13,820) (16,520) (61,030)
Fabric sample book expenditures ................ (14,280) (3,260) (9,190) (15,000)
Net investments in receivables trust ........... (12,890) (51,120) -- --
Issuance of notes receivable ................... (3,990) -- -- (10,260)
Collection of notes receivable ................. 16,650 1,670 2,790 5,020
Acquisition of businesses, net of cash
acquired ............................. -- (645,430) -- --
Other, net ..................................... (3,080) 3,200 (2,640) 8,790
------------- ------------- ------------- -------------
Net cash used for investing activities ...... (50,240) (708,760) (25,560) (72,480)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt ................... 234,000 525,000 87,760 16,200
Repayments of long-term debt ................... (325,000) (108,690) (87,090) (3,720)
Net proceeds from short-term debt .............. 950 -- -- --
Net proceeds (repayments) from accounts
receivable transactions ..................... (17,000) 167,000 -- --
Capital contribution ........................... -- 76,400 -- --
Deferred financing costs ....................... (790) (37,590) -- --
Increase (decrease) in Masco Corporation net
investment and advances ..................... -- -- (22,600) 3,280
------------- ------------- ------------- -------------
Net cash provided by (used for) financing
activities ............................... (107,840) 622,120 (21,930) 15,760
------------- ------------- ------------- -------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period ............. (18,260) 22,400 1,350 (7,400)
Balance, beginning of period ................... 22,400 -- 17,310 24,710
------------- ------------- ------------- -------------
Balance, end of period ......................... $ 4,140 $ 22,400 $ 18,660 $ 17,310
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest ....................................... $ 44,450 $ 6,200 $ 52,700 $ 94,700
============= ============= ============= =============
Income taxes ................................... $ 28,300 $ 7,000 $ 10,000 $ 2,000
============= ============= ============= =============
</TABLE>
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.
22
<PAGE>
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.
23
<PAGE>
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
24
<PAGE>
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:
<TABLE>
<CAPTION>
Company Predecessor
------------------------------- ------------------------------
Jan.1, 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec.31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance, beginning of period ..... $ 1,040 $ -- $ 5,200 $ 5,200
Translation adjustment ........... (10,210) 1,040 780 --
Income tax effect ................ -- -- -- --
------------- -------------- ------------- --------------
Balance, end of period ........... $ (9,170) $ 1,040 $ 5,980 $ 5,200
============= ============== ============= ==============
</TABLE>
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
25
<PAGE>
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.
26
<PAGE>
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
========= ========= =========
27
<PAGE>
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.
28
<PAGE>
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
29
<PAGE>
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:
<TABLE>
<CAPTION>
Company Predecessor
------------------------------ ------------------------------
Jan. 1, 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Service cost-benefits earned
during the year ................ $ 7,680 $ 2,630 $ 4,480 $ 6,080
Interest cost on projected benefit
obligation ..................... 13,500 5,430 7,550 12,010
Actual return on assets .......... (9,050) (1,690) (8,410) (16,540)
Net amortization and deferral .... (4,250) (3,750) 970 3,540
------------- ------------- ------------- -------------
Net periodic pension cost ........ $ 7,880 $ 2,620 $ 4,590 $ 5,090
============= ============= ============= =============
</TABLE>
Major assumptions used in accounting for the Company's pension plans are
as follows:
<TABLE>
<CAPTION>
Company Predecessor
-------------------------- -----------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Discount rate for obligations .................... 7.50%-7.75% 7.50%-7.75% 7.25%
Rate of increase in compensation levels .......... 5.0% 5.0% 5.0%
Expected long-term rate of return on plan
assets ......................................... 10.0% 10.0% 11.0%
</TABLE>
30
<PAGE>
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:
<TABLE>
<CAPTION>
Company
----------------------------
1997 1996
------------ ------------
Accumulated Accumulated
Benefits Benefits
Exceed Exceed
Assets Assets
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ......................... $ 157,130 $ 150,770
============ ============
Accumulated benefit obligation ...................... $ 161,880 $ 153,360
============ ============
Projected benefit obligation ........................ $ 191,000 $ 184,940
Assets at fair value ................................ 141,660 134,820
------------ ------------
Projected benefit obligation in excess of plan assets (49,340) (50,120)
Reconciling items:
Unrecognized net loss ............................. 20,410 22,340
Unrecognized prior service cost ................... 330 360
Unrecognized net asset at transition .............. (1,120) (1,310)
Requirement to recognize minimum liability ........ (6,930) (4,720)
Contribution made after measurement date .......... 670 --
------------ ------------
Accrued pension cost ................................ $ (35,980) $ (33,450)
============ ============
</TABLE>
11. SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-in Retained Translation Shareholder's
Stock Capital Earnings Adjustment Equity
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at August 5, 1996 ......... $ -- $ -- $ -- $ -- $ --
Contribution of
businesses from
Holdings ...................... -- 421,050 -- -- 421,050
Net income ...................... -- -- 31,270 -- 31,270
Foreign exchange ................ -- -- -- 1,040 1,040
-------------- -------------- -------------- -------------- --------------
Balance at December 31, 1996 ...... -- 421,050 31,270 1,040 453,360
-------------- -------------- -------------- -------------- --------------
Net income ...................... -- -- 17,580 -- 17,580
Dividend declared ............... -- -- (23,340) -- (23,340)
Foreign exchange ................ -- -- -- (10,210) (10,210)
-------------- -------------- -------------- -------------- --------------
Balance at December 31, 1997 ...... $ -- $ 421,050 $ 25,510 $ (9,170) $ 437,390
============== ============== ============== ============== ==============
</TABLE>
On December 12, 1997, the Company declared a cash dividend, payable
January 1998, of $23.3 million to Holdings.
31
<PAGE>
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
<TABLE>
<CAPTION>
Company Predecessor
------------------------------- ------------------------------
Jan. 1, 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes and
extraordinary item:
Domestic ..................................... $ 76,310 $ 48,640 $ (350) $ (9,410)
Foreign ...................................... (33,360) (530) (810) 150
------------- ------------- ------------- -------------
$ 42,950 $ 48,110 $ (1,160) $ (9,260)
============= ============= ============= =============
Provision (credit) for income taxes:
Currently payable (refundable):
Federal-U.S. income(losses) ................ $ 4,820 $ 16,240 $ 3,680 $ (4,820)
-Certain foreign earnings ........... 3,360 1,640 2,510 3,030
State and local ............................ 3,650 3,840 1,950 3,200
Foreign .................................... 1,110 1,010 1,300 1,010
Deferred:
Domestic ................................... 9,190 (5,890) (2,600) 4,560
Foreign .................................... (8,380) -- (10) --
------------- ------------- ------------- -------------
$ 13,750 $ 16,840 $ 6,830 $ 6,980
============= ============= ============= =============
</TABLE>
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
============== ==============
32
<PAGE>
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:
<TABLE>
<CAPTION>
Company Predecessor
------------------------------- -------------------------------
Jan.1 , 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate ....... 35% 35% 35% 35%
Tax (credit) at U.S. federal
statutory rate .................. $ 15,030 $ 16,840 $ (410) $ (3,240)
Higher taxes on foreign earnings .. 7,560 2,870 4,080 4,050
Amortization in excess of tax ..... -- 140 2,620 4,460
State and local taxes, net of
federal tax benefit ............. 3,470 1,820 1,270 2,080
Reduction from tax sharing
agreement ....................... (12,760) (4,970) -- --
Other ............................. 450 140 (730) (370)
------------- ------------- ------------- -------------
Income taxes .................. $ 13,750 $ 16,840 $ 6,830 $ 6,980
============= ============= ============= =============
</TABLE>
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.
33
<PAGE>
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:
<TABLE>
<CAPTION>
Net Sales (1)
-------------------------------------------------------------
Company Predecessor
----------------------------- -----------------------------
Jan.1 , 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States ................ $ 1,770,000 $ 769,000 $ 1,030,000 $ 1,761,000
Pacific Rim .................. 115,000 58,000 76,000 141,000
European Union and other
foreign countries .......... 75,000 30,000 42,000 91,000
------------- ------------- ------------- -------------
Total ................ $ 1,960,000 $ 857,000 $ 1,148,000 $ 1,993,000
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Operating Profit (Loss)
----------------------------------------------------------------
Company Predecessor
------------------------------ ------------------------------
Jan.1 , 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States ............................ $ 145,000 $ 67,000 $ 55,000 $ 91,000
Pacific Rim .............................. (28,000) 13,000 12,000 22,000
European Union and other foreign countries (1,000) 1,000 (3,000) (3,000)
------------- ------------- ------------- -------------
Total ............................ 116,000 81,000 64,000 110,000
------------- ------------- ------------- -------------
Other expense, net ....................... (57,000) (27,000) (56,000) (103,000)
General corporate expense ................ (16,000) (6,000) (9,000) (16,000)
------------- ------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item ................. $ 43,000 $ 48,000 $ (1,000) $ (9,000)
============= ============= ============= =============
</TABLE>
34
<PAGE>
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:
<TABLE>
<CAPTION>
Company Predecessor
------------------------------ ------------------------------
Jan.1 , 1997 Aug. 6, 1996 Jan. 1, 1996 Jan. 1, 1995
to to to to
Dec. 31, 1997 Dec. 31, 1996 Aug. 5, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States ............................ $ 8,000 $ 6,000 $ 5,000 $ 12,000
Pacific Rim .............................. 249,000 112,000 144,000 289,000
European Union and other
foreign countries ...................... -- -- -- 1,000
</TABLE>
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.
35
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash investments ..................... $ -- $ (7,050) $ 11,190 $ -- $ 4,140
Trade receivables ............................. -- 22,240 42,240 -- 64,480
Investment in receivables trust ............... -- -- 64,010 -- 64,010
Other receivables ............................. -- 24,420 16,290 -- 40,710
Inventories ................................... -- 428,090 82,020 -- 510,110
Prepaid expenses .............................. -- 23,180 12,260 -- 35,440
Deferred income taxes ......................... -- 28,700 9,830 -- 38,530
Intercompany account .......................... -- 248,670 -- (248,670) --
------------ ------------ ------------ ------------ ------------
Total current assets ...................... -- 768,250 237,840 (248,670) 757,420
Property and equipment, net ........................ -- 250,980 86,410 -- 337,390
Other assets ....................................... -- 54,510 1,900 -- 56,410
Investments in affiliates .......................... 437,390 (26,520) -- (410,870) --
------------ ------------ ------------ ------------ ------------
Total assets .............................. $ 437,390 $ 1,047,220 $ 326,150 $ (659,540) $ 1,151,220
============ ============ ============ ============ ============
Liabilities and Shareholder's Equity
Current Liabilities:
Long-term debt, current ....................... $ -- $ 2,200 $ 770 $ -- $ 2,970
Accounts payable .............................. -- 101,350 22,650 -- 124,000
Accrued liabilities ........................... -- 117,610 32,330 -- 149,940
Intercompany account .......................... -- -- 248,670 (248,670) --
------------ ------------ ------------ ------------ ------------
Total current liabilities ................. -- 221,160 304,420 (248,670) 276,910
Long-term debt ..................................... -- 351,600 -- -- 351,600
Deferred income taxes .............................. -- 31,250 -- -- 31,250
Other long-term liabilities ........................ -- 54,060 10 -- 54,070
------------ ------------ ------------ ------------ ------------
Total liabilities ......................... -- 658,070 304,430 (248,670) 713,830
Shareholder's equity ............................... 437,390 389,150 21,720 (410,870) 437,390
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholder's equity .................... $ 437,390 $ 1,047,220 $ 326,150 $ (659,540) $ 1,151,220
============ ============ ============ ============ ============
</TABLE>
36
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
Non-
Guarantor 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
Trade receivables .............................. -- 17,060 64,750 -- 81,810
Investment in receivables trust ............... -- -- 51,120 -- 51,120
Other receivables .............................. -- 24,070 22,210 -- 46,280
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
Other assets ........................................ -- 63,050 13,670 -- 76,720
Investments in affiliates ........................... 453,360 44,790 -- (498,150) --
------------ ------------ ------------ ------------ ------------
Total assets ............................... $ 453,360 $ 1,122,260 $ 370,900 $ (755,790) $ 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
Deferred income taxes ............................... -- 2,220 -- -- 2,220
Other long-term liabilities ......................... -- 33,450 10,920 -- 44,370
------------ ------------ ------------ ------------ ------------
Total liabilities .......................... -- 671,130 323,880 (257,640) 737,370
Shareholder's equity ................................ 453,360 451,130 47,020 (498,150) 453,360
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholder's equity ..................... $ 453,360 $ 1,122,260 $ 370,900 $ (755,790) $ 1,190,730
============ ============ ============ ============ ============
</TABLE>
37
<PAGE>
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
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .......................................... $ -- $ 1,777,970 $ 439,180 $ (257,370) $ 1,959,780
Cost of sales ...................................... -- 1,342,540 368,600 (257,370) 1,453,770
Restructuring charge ............................... -- -- 14,480 -- 14,480
------------ ------------ ------------ ------------ ------------
Gross profit ..................................... -- 435,430 56,100 -- 491,530
Selling, general and administrative
expenses ......................................... -- 297,970 49,580 -- 347,550
Restructuring charge ............................... -- 9,000 35,020 -- 44,020
------------ ------------ ------------ ------------ ------------
Operating profit ................................. -- 128,460 (28,500) -- 99,960
Other, net ......................................... (17,580) 98,980 (4,680) (19,710) 57,010
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes
and extraordinary item ........................... 17,580 29,480 (23,820) 19,710 42,950
Income taxes ....................................... -- 7,910 5,840 -- 13,750
------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary item ............................. 17,580 21,570 (29,660) 19,710 29,200
Extraordinary item-loss on early
extinguishment of debt (net of
income taxes of $7,750) ........................ -- (11,620) -- -- (11,620)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................ $ 17,580 $ 9,950 $ (29,660) $ 19,710 $ 17,580
============ ============ ============ ============ ============
</TABLE>
38
<PAGE>
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
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .......................................... $ -- $ 774,540 $ 200,490 $ (117,540) $ 857,490
Cost of sales ...................................... -- 590,190 165,490 (117,540) 638,140
------------ ------------ ------------ ------------ ------------
Gross profit ..................................... -- 184,350 35,000 -- 219,350
Selling, general and administrative
expenses ......................................... -- 123,850 20,730 -- 144,580
------------ ------------ ------------ ------------ ------------
Operating profit ................................. -- 60,500 14,270 -- 74,770
Other, net ......................................... (31,270) 16,880 8,650 32,400 26,660
------------ ------------ ------------ ------------ ------------
Income before income taxes ....................... 31,270 43,620 5,620 (32,400) 48,110
Income taxes ....................................... -- 14,580 2,260 -- 16,840
------------ ------------ ------------ ------------ ------------
Net income ....................................... $ 31,270 $ 29,040 $ 3,360 $ (32,400) $ 31,270
============ ============ ============ ============ ============
</TABLE>
39
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
17. GUARANTOR FINANCIAL STATEMENTS (Continued)
PREDECESSOR
CONDENSED COMBINING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
for the Period January 1, 1996 to August 5, 1996
------------------------------------------------------------
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 1,014,270 $ 294,360 $ (160,740) $ 1,147,890
Cost of sales .................................... 780,000 251,390 (160,740) 870,650
------------ ------------ ------------ ------------
Gross profit ................................... 234,270 42,970 -- 277,240
Selling, general and administrative expenses ..... 182,510 39,720 -- 222,230
------------ ------------ ------------ ------------
Operating profit ............................... 51,760 3,250 -- 55,010
Other, net ....................................... 44,570 9,280 2,320 56,170
------------ ------------ ------------ ------------
Income (loss) before income taxes .............. 7,190 (6,030) (2,320) (1,160)
Income taxes (credit) ............................ 8,910 (2,080) -- 6,830
------------ ------------ ------------ ------------
Net loss ....................................... $ (1,720) $ (3,950) $ (2,320) $ (7,990)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
for the Period January 1, 1995 to December 31, 1995
------------------------------------------------------------
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 1,728,250 $ 580,000 $ (315,640) $ 1,992,610
Cost of sales .................................... 1,317,550 486,500 (303,060) 1,500,990
------------ ------------ ------------ ------------
Gross profit ................................... 410,700 93,500 (12,580) 491,620
Selling, general and administrative expenses ..... 313,260 97,380 (12,850) 397,790
------------ ------------ ------------ ------------
Operating profit ............................... 97,440 (3,880) 270 93,830
Other, net ....................................... 65,000 23,680 14,410 103,090
------------ ------------ ------------ ------------
Income (loss) before income taxes .............. 32,440 (27,560) (14,140) (9,260)
Income taxes (credit) ............................ 16,170 (9,190) -- 6,980
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 16,270 $ (18,370) $ (14,140) $ (16,240)
============ ============ ============ ============
</TABLE>
40
<PAGE>
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
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES: ............................ $ -- $ 89,700 $ 50,120 $ -- $ 139,820
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ........................... -- (26,970) (5,680) -- (32,650)
Fabric sample book expenditures ................ -- (14,280) -- -- (14,280)
Net investments in receivables trust ........... -- -- (12,890) -- (12,890)
Issuance of notes receivable ................... -- (3,990) -- -- (3,990)
Collection of notes receivable ................. -- 16,650 -- -- 16,650
Other, net ..................................... -- 7,130 (10,210) -- (3,080)
------------ ------------ ------------ ------------ ------------
Net cash used for investing
activities ................................. -- (21,460) (28,780) -- (50,240)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt ................... -- 234,000 -- -- 234,000
Repayments of long-term debt ................... -- (322,930) (2,070) -- (325,000)
Net proceeds from short-term debt .............. -- 950 -- -- 950
Net repayments of accounts
receivable transactions ...................... -- -- (17,000) -- (17,000)
Deferred financing costs ....................... -- (790) -- -- (790)
Intercompany accounts, net ..................... -- 8,970 (8,970) -- --
------------ ------------ ------------ ------------ ------------
Net cash used for financing
activities ................................. -- (79,800) (28,040) -- (107,840)
------------ ------------ ------------ ------------ ------------
CASH AND CASH INVESTMENTS: ......................... --
Decrease for the period ............................ -- (11,560) (6,700) -- (18,260)
Balance, beginning of period ....................... -- 4,510 17,890 -- 22,400
------------ ------------ ------------ ------------ ------------
Balance, end of period ............................. $ -- (7,050) 11,190 $ -- 4,140
============ ============ ============ ============ ============
</TABLE>
41
<PAGE>
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
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES: ........................... $ -- $ 132,200 $ (23,160) $ -- $ 109,040
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ............................ -- (11,250) (2,570) -- (13,820)
Fabric sample book expenditures ................. -- (3,260) -- -- (3,260)
Net investments in receivables trust ............ -- -- (51,120) -- (51,120)
Collection of notes receivable .................. -- 1,670 -- -- 1,670
Acquisition of businesses, net of cash
acquired ...................................... -- (645,430) -- -- (645,430)
Other, net ...................................... -- 3,200 -- -- 3,200
------------ ------------ ------------ ------------ ------------
Net cash used for investing
activities ................................ -- (655,070) (53,690) -- (708,760)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt .................... -- 525,000 -- -- 525,000
Repayments of long-term debt .................... -- (85,350) (23,340) -- (108,690)
Net proceeds from accounts
receivable transactions ....................... -- -- 167,000 -- 167,000
Capital contribution ............................ -- 76,400 -- -- 76,400
Deferred financing costs ........................ -- (37,590) -- -- (37,590)
Intercompany accounts, net ...................... -- 48,920 (48,920) -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities .................... -- 527,380 94,740 -- 622,120
------------ ------------ ------------ ------------ ------------
CASH AND CASH INVESTMENTS:
Increase for the period ............................ -- 4,510 17,890 -- 22,400
Balance, beginning of period ....................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, end of period ............................. $ -- $ 4,510 $ 17,890 $ -- $ 22,400
============ ============ ============ ============ ============
</TABLE>
42
<PAGE>
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
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES: .................................... $ 31,080 $ 20,110 $ (2,350) $ 48,840
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ........................... (14,130) (2,390) -- (16,520)
Fabric sample book expenditures ................ (9,190) -- -- (9,190)
Collection of notes receivable ................. 1,450 1,340 -- 2,790
Other, net ..................................... (4,530) 7,290 (5,400) (2,640)
------------ ------------ ------------ ------------
Net cash provided by (used for) investing
activities ............................... (26,400) 6,240 (5,400) (25,560)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt ................... 800 86,960 -- 87,760
Repayments of short-term debt .................. (800) (86,290) -- (87,090)
Decrease in Masco Corporation net investment and
advances ..................................... (4,900) (25,450) 7,750 (22,600)
------------ ------------ ------------ ------------
Net cash used for financing activities ..... (4,900) (24,780) 7,750 (21,930)
------------ ------------ ------------ ------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period ............... (220) 1,570 -- 1,350
Balance, beginning of period ..................... 4,540 12,770 -- 17,310
------------ ------------ ------------ ------------
Balance, end of period ........................... $ 4,320 $ 14,340 $ -- $ 18,660
============ ============ ============ ============
</TABLE>
43
<PAGE>
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
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES: ........................ $ 102,030 $ (38,600) $ (14,110) $ 49,320
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ......................... (42,550) (18,480) -- (61,030)
Fabric sample book expenditures .............. (15,000) -- -- (15,000)
Issuance of notes receivable ................. (1,480) (8,780) -- (10,260)
Collection of notes receivable ............... 3,000 2,020 -- 5,020
Other, net ................................... (4,600) (1,070) 14,460 8,790
------------ ------------ ------------ ------------
Net cash used for investing
activities ............................. (60,630) (26,310) 14,460 (72,480)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt ................. 120 16,080 -- 16,200
Repayments of long-term debt ................. (2,290) (1,430) -- (3,720)
Increase (decrease) in Masco Corp.
net investment and advances ................ (41,530) 45,160 (350) 3,280
------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities ................... (43,700) 59,810 (350) 15,760
------------ ------------ ------------ ------------
CASH AND CASH INVESTMENTS:
Decrease for the period ........................ (2,300) (5,100) -- (7,400)
Balance, beginning of period ................... 6,840 17,870 -- 24,710
------------ ------------ ------------ ------------
Balance, end of period ......................... $ 4,540 $ 12,770 $ -- $ 17,310
============ ============ ============ ============
</TABLE>
44
<PAGE>
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.
45
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
46
<PAGE>
PART III
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. 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. 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. 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.
47
<PAGE>
PART IV
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 *
48
<PAGE>
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
49
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board, President and Chief Executive Officer March 16, 1998
- -------------------------- (principal executive officer)
Wayne B. Lyon
/s/ RONALD J. HOFFMAN Vice President, Treasurer and Chief Financial Officer March 16, 1998
- -------------------------- (principal financial and accounting officer)
Ronald J. Hoffman
/s/ RICHARD M. CASHIN, JR. Director March 16, 1998
- --------------------------
Richard M. Cashin, Jr.
/s/ DAVID L. JOHNSTON Director March 16, 1998
- --------------------------
David L. Johnston
/s/ ROBERT C. LARSON Director March 16, 1998
- --------------------------
Robert C. Larson
/s/ DAVID F. THOMAS Director March 16, 1998
- --------------------------
David F. Thomas
/s/ MARTIN D. WALKER Director March 16, 1998
- --------------------------
Martin D. Walker
</TABLE>
50
<PAGE>
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
51
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL
Schedule II. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-----------------------------------
Additions
- ---------------------------------- ---------------- ----------------------------------- ---------------- ----------------
Balances at Charged to Charged Balance at
Beginning of Costs and (Credited) to End of
Period Expenses Other Accounts Deductions Period
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts,
deducted from accounts
receivable in the balance sheets
Year ended December 31, 1997 ..... $ 4.8 $ 6.1 $ 0.7 $ 7.7 $ 3.9
================ ================ ================ ================ ================
Aug. 6, 1996 to Dec. 31, 1996 .... $ 9.3 $ 1.6 $ (5.6) $ 0.5 $ 4.8
================ ================ ================ ================ ================
Jan. 1, 1996 to Aug. 5, 1996 ..... $ 9.0 $ 2.3 $ -- $ 2.0 $ 9.3
================ ================ ================ ================ ================
Year ended December 31, 1995 ..... $ 7.7 $ 6.6 $ -- $ 5.3 $ 9.0
================ ================ ================ ================ ================
</TABLE>
52
<PAGE>
Exhibit 10.4
FIRST AMENDMENT dated as of September 15, 1997
(this "Amendment"), to the Restated Credit Agreement
dated as of August 15, 1997, (the "Credit Agreement"),
among LifeStyle Furnishings International Ltd., a
Delaware corporation (the "Parent Borrower"); the
subsidiary borrowers named therein (the "Subsidiary
Borrowers" and, together with the Parent Borrower, the
"Borrowers"); FURNISHINGS INTERNATIONAL INC., a Delaware
corporation ("Holdings"); the Lenders (such term and
each other capitalized term used without definition in
this Amendment having the meaning assigned to such term
in the Credit Agreement); The Chase Manhattan Bank, a
New York banking corporation, as the Swingline Lender,
as Administrative Agent and as Collateral Agent for the
Lenders; The First National Bank of Chicago, as Issuing
Bank and Co-Agent; and CIBC, as Co-Agent.
WHEREAS the Borrowers have requested that the Lenders amend the Credit
Agreement and enter into the agreements as set forth below; and
WHEREAS Lenders constituting the Required Lenders are willing, on the
terms, subject to the conditions and to the extent set forth below, to effect
such amendment and enter into such agreements.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the Borrowers, Holdings, Lenders
constituting the Required Lenders, the Administrative Agent and the Issuing Bank
hereby agree, on the terms and subject to the conditions set forth herein, as
follows:
SECTION 1. Amendment. (a) Section 5.04 of the Credit Agreement is hereby
amended by deleting clause (g) thereof and substituting therefor the following:
(g) Prior to March 31 of each fiscal year, a copy of the budget for
its consolidated balance sheet and related statements of income and cash
flows for each quarter of such fiscal year.
SECTION 2. Representations and Warranties. The Borrowers represent and
warrant to each of the Lenders that:
(a) The execution, delivery and performance by Holdings and the Borrowers
of this Amendment (i) have been duly authorized by all requisite corporate
action and (ii) will not (A) violate (1) any provision of law, statute, rule or
regulation, the certificate of incorporation or other constitutive documents or
by-laws of any Loan Party or (2) any order of any Governmental Authority, (B) be
in conflict with, result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any contractual obligation of any Loan
Party or (C) result in or require the creation or imposition of any Lien (other
than any Lien permitted under Section 6.02(r) of the Credit Agreement after
giving effect to this Amendment, or any Lien created under the Credit Agreement
or
<PAGE>
under the Security Documents) upon or with respect to any property or assets now
owned or hereafter acquired by any Loan Party.
(b) This Amendment has been duly executed and delivered by Holdings and
the Borrowers and constitutes a legal, valid and binding obligation of Holdings
and the Borrowers enforceable against each of them in accordance with its terms
except as enforceability may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally or equitable principles relating to
or limiting creditors, rights generally.
(c)(i) The representations and warranties of the Borrowers set forth in
the Loan Documents are true and correct in all material respects as of the date
this Amendment, except to the extent such representations and warranties
expressly relate to an earlier date (in which case such representations and
warranties shall have been true and correct in all material respects on such
earlier date) and (ii) no Default has occurred and is continuing.
SECTION 3. Loan Documents. This Amendment and each certificate and
instrument delivered by any Loan Party in connection herewith shall be a Loan
Document for all purposes.
SECTION 4. Effectiveness. This Amendment shall become effective as of the
date hereof when the Administrative Agent shall have received copies hereof
that, when taken together, bear the signatures of each of the Borrowers,
Holdings and the Required Lenders.
SECTION 5. Notices. All notices hereunder shall be given in accordance
with the provisions of Section 9.01 of the Credit Agreement.
SECTION 6. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. No Novation. Except as expressly set forth herein, this
Amendment shall not by implication or otherwise limit, impair, constitute a
waiver of or otherwise affect the rights and remedies of any party under the
Credit Agreement, nor alter, modify, amend or in any way affect any of the
terms, conditions, obligations, covenants or agreements contained in the Credit
Agreement, all of which are ratified and affirmed in all respects and shall
continue in full force and effect. This Amendment shall apply and be effective
only with respect to the provision of the Credit Agreement specifically referred
to herein.
SECTION 8. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one agreement. Delivery of an executed
counterpart of a signature page of this Amendment by facsimile transmission
shall be as effective as delivery of a manually executed counterpart of this
Amendment.
2
<PAGE>
SECTION 9. Headings. Section headings used herein are for convenience of
reference only, are not part of this Amendment and are not to affect the
construction of, or to be taken into consideration in interpreting, this
Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD., as the Parent
Borrower,
by
/s/ RONALD J. HOFFMAN
---------------------------------------
Name: Ronald J. Hoffman
Title: Vice President
AMETEX FABRICS, INC.,
THE BERKLINE CORPORATION,
DREXEL HERITAGE FURNISHINGS INC.,
HENREDON FURNITURE INDUSTRIES, INC.,
INTERIOR FABRIC DESIGN, INC.,
INTRO EUROPE, INC.,
LA BARGE, INC.,
LEXINGTON FURNITURE INDUSTRIES, INC.,
MAITLAND-SMITH, INC.,
MARBRO LAMP COMPANY,
RAMM, SON & CROCKER, INC.,
ROBERT ALLEN FABRICS, INC.,
ROBERT ALLEN FABRICS OF N.Y., INC.,
SUNBURY TEXTILE MILLS, INC.,
UNIVERSAL FURNITURE LIMITED,
Each as a Subsidiary Borrower,
by
/s/ RONALD J. HOFFMAN
---------------------------------------
Name: Ronald J. Hoffman
Title: Vice President
LIFESTYLE HOLDINGS, LTD.,
by
/s/ RONALD R. KASS
---------------------------------------
Name: Ronald R. Kass
Title: President
3
<PAGE>
FURNISHINGS INTERNATIONAL, INC.
by
/s/ RONALD J. HOFFMAN
---------------------------------------
Name: Ronald J. Hoffman
Title: Vice President
THE CHASE MANHATTAN BANK
individually and as Administrative Agent,
Collateral Agent and Swingline Lender,
by
/s/ MARIAN N. SCHULMAN
---------------------------------------
Name: Marian N. Schulman
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Issuing Bank,
by
/s/ CHRISTINE DAVIS
---------------------------------------
Name: Christine Davis
Title: Authorized Agent
CIBC INC., individually and as Co-Agent,
by
/s/ WILLIAM C. HUMPHRIES
---------------------------------------
Name: William C. Humphries
Title: Director, CIBC Wood Gundy
Securities Corp. as Agent
WACHOVIA BANK,
by
/s/ HAYWOOD EDMONDSON, V
---------------------------------------
Name: Haywood Edmondson, V
Title: Vice President
COMERCIA BANK,
by
/s/ JAMES R. GROSSETT
---------------------------------------
Name: James R. Grossett
Title: First Vice President
4
<PAGE>
BANK OF TOKYO-MITSUBISHI, TRUST COMPANY,
by
/s/ PAUL P. MALECKI
---------------------------------------
Name: Paul P. Malecki
Title: Vice President
CREDIT LYONNAIS,
by
/s/ ALAIN PANIAESE
---------------------------------------
Name: Alain Paniaese
Title: Executive Vice President
DRESDNER BANK,
by
/s/ B. CRAIG ERICKSON
---------------------------------------
Name: B. Craig Erickson
Title: Vice President
by
/s/ ANTHONY J. BERTI
---------------------------------------
Name: Anthony J. Berti
Title: Assistant Treasurer
FIRST UNION NATIONAL BANK,
by
/s/ RICHARD J. RIZZO, JR.
---------------------------------------
Name: Richard J. Rizzo, Jr.
Title: Vice President
THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, New York
Branch,
by
/s/ SATORU OTSUBO
---------------------------------------
Name: Satoru Otsubo
Title: Joint General Manager
THE MITSUBISHI TRUST & BANKING CORPORATION,
by
/s/ TOSHIHIRO HAYASHI
---------------------------------------
Name: Toshihiro Hayashi
5
<PAGE>
Title: Senior Vice President
SANWA BANK LTD.
by
/s/ RICHARD H. AULT
---------------------------------------
Name: Richard H. Ault
Title: Vice President
THE BANK OF NEW YORK
by
/s/ ANNE MARIE HUGHES
---------------------------------------
Name: Anne Marie Hughes
Title: Assistant Vice President
THE BANK OF SCOTLAND,
by
/s/ ANNIE CHIN TAT
---------------------------------------
Name: Annie Chin Tat
Title: Vice President
BANQUE NATIONALE DE PARIS,
by
/s/ HENRY F. SETINA
---------------------------------------
Name: Henry F. Setina
Title: Vice President
DG BANK,
by
/s/ NORAH MCCANN
---------------------------------------
Name: Norah McCann
Title: Senior Vice President
by
/s/ MARK CONNELLY
---------------------------------------
Name: Mark Connelly
Title: Vice President
DAI ICHI KANGYO BANK LTD.,
by
/s/ SEIICHIRO INO
---------------------------------------
Name: Seiichiro Ino
Title: Vice President
6
<PAGE>
FIRST AMERICAN NATIONAL BANK,
by
/s/ H. HOPE STEWART
---------------------------------------
Name: H. Hope Stewart
Title: Assistant Vice President
SAKURA BANK LTD.,
by
/s/ HIROYASHU IMANISHI
---------------------------------------
Name: Hiroyashu Imanishi
Title: Vice President & Senior Manager
THE SUMITOMO BANK, LTD.,
by
/s/ GARY P. FRANKE
---------------------------------------
Name: Gary P. Franke
Title: Vice President
SUNTRUST BANKS INC.,
by
/s/ JASON P. OWEN
---------------------------------------
Name: Jason P. Owen
Title: Banking Officer
by
/s/ CHRIS H. COTTER
---------------------------------------
Name: Chris H. Cotter
Title: Banking Officer
PNC BANK, National Association,
by
/s/ ROSE H. CRUMP
---------------------------------------
Name: Rose M. Crump
Title: Vice President
7
<PAGE>
Exhibit 10.22
FURNISHINGS INTERNATIONAL INC.
RESTRICTED STOCK PLAN
Section 1. Purpose
The Plan authorizes the Chairman to provide employees, directors and
consultants of the Corporation or its subsidiaries, who are in a position to
contribute materially to the long-term success of the Corporation or its
subsidiaries, with shares of Common Stock of the Corporation, the full enjoyment
of which may be conditioned upon a specified period of future employment. The
Corporation believes that this incentive program will cause those persons to
increase their interest in the welfare of the Corporation and its subsidiaries,
and aid in attracting and retaining employees, directors and consultants of
outstanding ability.
Section 2. Definitions
Unless the context clearly indicates otherwise, the following terms, when
used in the Plan, shall have the meanings set forth in this Section:
(a) "Board" means the Board of Directors of the Corporation.
(b) "Chairman" means initially, the Chairman, President, and Chief
Executive Officer of the Corporation so long as such position shall be held by
Wayne B. Lyon, and thereafter such person or persons as shall be designated by
the Board.
(c) "Common Stock" means shares of Common Stock, par value $.0l per share,
of the Corporation, or any shares of stock of the Corporation into which the
Common Stock is converted, in each case other than the Class D Common Stock.
(d) "Consultant" means any person who is engaged to perform services for
the Corporation or any subsidiary of the Corporation, other than as an Employee
or Director.
(e) "Corporation" means FURNISHINGS INTERNATIONAL INC., a Delaware
corporation.
(f) "Director" means any member of the Board.
<PAGE>
(g) "Employee" means any employee of the Corporation or any subsidiary of
the Corporation, including directors who are otherwise employed thereby.
(h) "Grantee" means a person granted shares of Restricted Stock under the
Plan.
(i) "Plan" means this Restricted Stock Plan as set forth herein and as
amended from time to time.
(j) "Restricted Stock" means a share of Common Stock granted pursuant to
the Plan that is subject to such restrictions as authorized pursuant to Section
5.
Section 3. Shares of Common Stock Subject to the Plan
Subject to adjustment as provided in Section 6, the Common Stock which may
be issued as Restricted Stock pursuant to the Plan shall not exceed (x) 206,608
shares in the aggregate reduced by (y) the aggregate number of outstanding
shares of Common Stock held from time to time by Employees and Consultants of
the Corporation and its subsidiaries that were not issued under the Plan. Common
Stock issuable under the Plan may be authorized but unissued shares or
reacquired shares of Common Stock. Unless otherwise determined by the Board with
the concurrence of the Chairman, shares of Restricted Stock that are forfeited
or are canceled for any reason shall become available for reissuance under the
Plan.
Section 4. Administration of the Plan
The Plan shall be administered by the Chairman. Subject to the express
provisions of the Plan, the Chairman shall have the authority to interpret the
Plan, to prescribe, amend, and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of grant certificates thereunder and
to make all other determinations necessary or advisable for the administration
of the Plan. All interpretations and determinations made by the Chairman in
accordance with the provisions of the Plan shall be final and binding.
Section 5. Grant of Restricted Stock
The Chairman shall determine and designate from time to time in his sole
discretion:
(i) Employees who are to be granted Restricted Stock (except that
grants to the Chairman himself shall require the prior
approval of the Board as set forth below in this Section 5),
and
(ii) the number of shares of Common Stock subject to each such
grant.
-2-
<PAGE>
Restricted Stock shall be granted exclusively in consideration of
services.
Without the prior approval of the Board (acting by Affirmative Board Vote
(as such term is defined in the Stockholders' Agreement, dated as of August
5, 1996, among the Corporation and its stockholders (the "Stockholders'
Agreement")), the type and duration of the restrictions that shall be applicable
to the Restricted Stock, including, but not limited to, conditions relating to
the vesting of the shares and their transferability, shall be identical to those
set forth in the Stockholders' Agreement.
Section 6. Adjustment Upon Changes in Capitalization
In the event of any reclassification, recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or reverse stock
split, or any other similar change in corporate structure which, in the
judgement of the Board affects the value of the shares of Common Stock, the
Board may make proportional adjustments to the number and class of shares
available for issuance hereunder and the number and class of shares of
Restricted Stock theretofore granted.
Section 7. Additional Restrictions on Shares
In addition to the restrictions that may be imposed under Section 5, the
Chairman and/or the Board may require that the Corporation receive from the
Grantee representations, warranties and agreements to the effect, among others,
that the Common Stock to be acquired by the Grantee is being acquired for
investment only and not with a view toward distribution of such Common Stock;
that the Grantee will not dispose of such Common Stock except in transactions
which, in the opinion of counsel to the Corporation, would comply with the
registration provisions of the 1933 Act and all other applicable laws and
regulations; that the Grantee will agree to be bound by the terms and conditions
set forth in any stockholders' agreement or voting trust then in effect and will
become a party thereto; and that the Grantee will be bound with respect to such
Common Stock by the terms and conditions of such restrictions on voting or
transfer as the Corporation may deem necessary or desirable (including, but not
limited to, restrictions that are required or recommended by an underwriter in
connection with a public offering). The Corporation may cause a legend or
legends to be placed on any certificates representing shares issued pursuant to
the Plan.
Section 8. General Provisions
(a) Each Restricted Stock grant shall be evidenced by a written grant
certificate containing such terms and conditions, not inconsistent with the
Plan, as the Chairman shall approve.
-3-
<PAGE>
(b) The grant of Restricted Stock in any year shall not give the Grantee
any right to similar grants in future years or any right to continue such
Grantee's employment relationship with the Corporation or any subsidiary of the
Corporation. All Grantees shall remain subject to discharge to the same extent
as if the Plan were not in effect.
(c) No Grantee, and no beneficiary or other persons claiming under or
through the Grantee, shall have any right, title or interest by reason of any
grant of Restricted Stock to any particular assets of the Corporation or any
subsidiary of the Corporation, or any shares of Common Stock allocated or
reserved for the purposes of the Plan.
(d) The Corporation shall have the right to require that the Grantee make
such provision, or furnish the Corporation such authorization, necessary or
desirable so that the Corporation or any subsidiary of the Corporation may
satisfy its obligation, under applicable laws, to withhold or otherwise pay for
income or other taxes of the Grantee attributable to the grant or vesting of
Restricted Stock.
(e) The validity, construction, and effect of the Plan, any rules and
regulations relating to the Plan, and any grant certificate shall be determined
in accordance with the Delaware General Corporation Law, without giving effect
to principles of conflicts of laws, and applicable federal law.
Section 9. Amendment of Termination
The Board, with the concurrence of the Chairman, may alter, amend,
suspend, discontinue or terminate the Plan at any time; provided, however, that
no such action shall adversely affect the rights of Grantees of Restricted Stock
previously granted hereunder and, provided further, however, that any
stockholder approval necessary in order to comply with applicable law or
regulation shall be obtained in the manner required therein.
Section 10. Effective Date of Plan
The Plan shall be effective as of August 5, 1996.
-4-
<PAGE>
Exhibit 10.23
FURNISHINGS INTERNATIONAL INC.
MANAGEMENT INVESTMENT PLAN
Section 1. Purpose
The Plan authorizes the Board to provide employees, officers and directors
of the Corporation or its subsidiaries, who are in a position to contribute
materially to the long-term success of the Corporation or its subsidiaries, with
the opportunity to purchase Units comprised of shares Class A Common Stock,
Class B Common Stock and Series A-2 Preferred Stock of the Corporation. The
Corporation believes that this incentive program will cause those persons to
increase their interest in the welfare of the Corporation and its subsidiaries,
and aid in attracting and retaining employees, officers and directors of
outstanding ability.
Section 2. Definitions
Unless the context clearly indicates otherwise, the following terms, when
used in the Plan, shall have the meanings set forth in this Section:
(a) "Affirmative Board Vote" shall have the meaning ascribed thereto in
the Stockholders' Agreement.
(b) "Board" means the Board of Directors of the Corporation.
(c) "Class A Common Stock" means shares of any series of the Corporation's
Class A Common Stock, par value $.01 per share, or any securities into which
such Class A Common Stock shall have been changed or any securities resulting
from any reclassification or recapitalization of such Class A Common Stock.
(d) "Class B Common Stock" means shares of any series of the Corporation's
Class B Common Stock, par value $.0l per share, or any securities into which
such Class B Common Stock shall have been changed or any securities resulting
from any reclassification or recapitalization of such Class B Common Stock.
(e) "Corporation" means FURNISHINGS INTERNATIONAL INC., a Delaware
corporation.
(f) "Director" means any member of the Board.
(g) "Employee" means any officer or employee of the Corporation or any
subsidiary of the Corporation, including directors who are otherwise employed
thereby.
<PAGE>
(h) "Fair Market Value" shall have the meaning ascribed thereto in the
Stockholders Agreement.
(i) "Participant" shall mean any Employee or Director who purchased a Unit
(or any fraction thereof) under the Plan.
(j) "Plan" means this Management Investment Plan as set forth herein and
as amended from time to time.
(k) "Series A-2 Preferred Stock" means shares of the Corporation's Series
A-2 Preferred Stock, having a stated value of $100 per share, or any securities
into which such Series A-2 Preferred Stock shall have been changed or any
securities resulting from any reclassification or recapitalization of such
Series A-2 Preferred Stock.
(l) "Stockholders' Agreement" shall mean the Stockholders' Agreement,
dated as of August 5, 1996, among the Corporation and its stockholders.
(m) A single "Unit" shall consist of the following securities: 169.1314
shares of Class A Common Stock (consisting of 56.3771 shares of each of the
three series thereof), 181.6014 shares of Class B Common Stock (consisting of
60.5338 shares of each of the three series thereof), and 480.9201 shares of
Series A-2 Preferred Stock.
Section 3. Units Subject to the Plan
Subject to adjustment as provided in Section 6, the number of Units that
may be issued pursuant to the Plan shall not exceed the number of Units (and
fractions thereof) purchased by the Corporation from 399 Venture Partners, Inc.
pursuant to the Call Agreement, dated August 5,1996 between the Corporation and
399 Venture Partners, Inc. Capital stock which may be issued as Units pursuant
to the Plan may be authorized but unissued shares or reacquired shares of stock.
Unless otherwise determined by the Board, Units (or fractions thereof) purchased
under the Plan that are reacquired by the Corporation shall become available for
reissuance under the Plan.
Section 4. Administration of the Plan
The Plan shall be administered by the Board. Subject to the express
provisions of the Plan, the Board shall have the authority to interpret the
Plan, to prescribe, amend, and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of purchase agreements thereunder
and to make all other determinations necessary or advisable for the
administration of the Plan. All interpretations and determinations made by the
Board in accordance with the provisions of the Plan shall be final and binding.
-2-
<PAGE>
Section 5. Offer of Units
(a) The Board shall determine and designate from time to time in its sole
discretion:
(i) Employees and Directors who are to be offered the opportunity
to purchase Units, and
(ii) the number of Units (or fractions thereof) that shall be
offered to any Employee or Director.
(b) In making the foregoing determinations, the Board shall consider
recommendations made by the Chairman of the Corporation, and such other factors
as it determines are appropriate, including, with respect to awards made in
1997, the performance of the offeree for the year ended December 31, 1996.
(c) Unless otherwise determined by the Board, Units (or fractions thereof)
shall be offered for cash purchase at a price equal to the Fair Market Value
thereof on the date of purchase.
(d) As a condition precedent to the issuance of a Unit (or fraction
thereof) under the Plan, an Employee or a Director shall become party to the
Stockholders' Agreement by executing a Joinder Agreement as an Additional
Stockholder, as such terms are defined therein.
Section 6. Adjustment Upon Changes in Capitalization
In the event of any reclassification, recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or reverse stock
split, or any other similar change in corporate structure which, in the
judgement of the Board affects the value of the shares of stock underlying the
Units, the Board may make proportional adjustments to the number and class of
shares of stock underlying the Units available for issuance hereunder.
Section 7. General Provisions
(a) Each purchase of a Unit (or fraction thereof) under the Plan shall be
evidenced by a written agreement containing such terms and conditions, not
inconsistent with the Plan, as the Board shall approve.
(b) The purchase of a Unit (or fraction thereof) in any year shall not
give the Participant any right to similar purchases in future years or any right
to continue such Participant's employment relationship with the Corporation or
any subsidiary of the Corporation. All Participants shall remain subject to
discharge to the same extent as if the Plan were not in effect.
(c) No Participant, and no beneficiary or other persons claiming under or
through the Participant, shall have any right, title or interest by reason of
any purchase of a Unit (or fraction
-3-
<PAGE>
thereof) to any particular assets of the Corporation or any subsidiary of the
Corporation, or any shares of stock allocated or reserved for the purposes of
the Plan.
(d) The validity, construction, and effect of the Plan, any rules and
regulations relating to the Plan, and any purchase agreement shall be determined
in accordance with the Delaware General Corporation Law, without giving effect
to principles of conflicts of laws, and applicable federal law.
Section 8. Amendment or Termination
The Board may alter, amend, suspend, discontinue or terminate the Plan at
any time; provided, however, that no such action shall adversely affect the
rights of Participants with respect to Units previously purchased hereunder and,
provided further, however, that any stockholder approval necessary in order to
comply with applicable law or regulation shall be obtained in the manner
required therein.
Section 9. Board Action
All Board action to be taken under or in respect of the Plan (including,
but not limited to, actions to be taken pursuant to Sections 4,5,6 and 8) shall
be taken by Affirmative Board Vote.
Section 10. Effective Date of Plan
The Plan shall be effective as of January 1, 1997.
-4-
<PAGE>
Exhibit 10.24
FURNISHINGS INTERNATIONAL INC.
DIRECTOR INVESTMENT PLAN
Section 1. Purpose
The Plan authorizes the Board to provide directors of the Corporation, who
are in a position to contribute materially to the long-term success of the
Corporation, with the opportunity to purchase Units comprised of shares of Class
B Common Stock and Series A-2 Preferred Stock of the Corporation. The
Corporation believes that this incentive program will cause those persons to
increase their interest in the welfare of the Corporation, and aid in attracting
and retaining directors of outstanding ability.
Section 2. Definitions
Unless the context clearly indicates otherwise, the following terms, when
used in the Plan, shall have the meanings set forth in this Section:
(a) "Affirmative Board Vote" shall have the meaning ascribed thereto in
the Stockholders' Agreement.
(b) "Board" means the Board of Directors of the Corporation.
(c) "Class B Common Stock" means shares of any series of the Corporation's
Class B Common Stock, par value $.0l per share, or any securities into which
such Class B Common Stock shall have been changed or any securities resulting
from any reclassification or recapitalization of such Class B Common Stock.
(d) "Corporation" means FURNISHINGS INTERNATIONAL INC., a Delaware
corporation.
(e) "Director" means any member of the Board.
(f) "Fair Market Value" shall have the meaning ascribed thereto in the
Stockholders Agreement.
(g) "Participant" shall mean any Director who purchased a Unit (or any
fraction thereof) under the Plan.
(h) "Plan" means this Director Investment Plan as set forth herein and as
amended from time to time.
(i) "Series A-2 Preferred Stock" means shares of the Corporation's Series
A-2 Preferred Stock, having a stated value of $100 per share, or any securities
into which such Series A-2 Preferred
<PAGE>
Stock shall have been changed or any securities resulting from any
reclassification or recapitalization of such Series A-2 Preferred Stock.
(j) "Stockholders Agreement" shall mean the Stockholders Agreement, dated
as of August 5, 1996 and amended as of December 17, 1996 and again as of March
26, 1997, among the Corporation and its stockholders.
(l) A single "Unit" shall consist of the following securities: 200.0000
shares of Class B Common Stock (consisting of 66.6667 shares of each of the
three series thereof), and 274.2373 shares of Series A-2 Preferred Stock.
Section 3. Units Subject to the Plan
Subject to adjustment as provided in Section 6, the number of Units that
may be issued pursuant to the Plan shall not exceed four. Capital stock which
may be issued as Units pursuant to the Plan may be authorized but unissued
shares or reacquired shares of stock. Unless otherwise determined by the Board,
Units (or fractions thereof) purchased under the Plan that are reacquired by the
Corporation shall become available for reissuance under the Plan.
Section 4. Administration of the Plan
The Plan shall be administered by the Board. Subject to the express
provisions of the Plan, the Board shall have the authority to interpret the
Plan, to prescribe, amend, and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of purchase agreements thereunder
and to make all other determinations necessary or advisable for the
administration of the Plan. All interpretations and determinations made by the
Board in accordance with the provisions of the Plan shall be final and binding.
Section 5. Offer of Units
(a) The Board shall determine and designate from time to time in its sole
discretion:
(i) Directors who are to be offered the opportunity to purchase
Units, and
(ii) the number of Units (or fractions thereof) that shall be
offered to any Director.
(b) In making the foregoing determinations, the Board shall consider
recommendations made by the Chairman of the Corporation, and such other factors
as it determines are appropriate.
(c) Unless otherwise determined by the Board, Units (or fractions thereof)
shall be offered for cash purchase at a price equal to the Fair Market Value
thereof on the date of purchase.
2
<PAGE>
(d) As a condition precedent to the issuance of a Unit (or fraction
thereof) under the Plan, a Director shall become party to the Stockholders
Agreement by executing a Joinder Agreement as an Additional Stockholder, as such
terms are defined therein.
Section 6. Adjustment Upon Changes in Capitalization
In the event of any reclassification, recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or reverse stock
split, or any other similar change in corporate structure which, in the
judgement of the Board affects the value of the shares of stock underlying the
Units, the Board may make proportional adjustments to the number and class of
shares of stock underlying the Units available for issuance hereunder.
Section 7. General Provisions
(a) Each purchase of a Unit (or fraction thereof) under the Plan shall be
evidenced by a written agreement containing such terms and conditions, not
inconsistent with the Plan, as the Board shall approve.
(b) No Participant, and no beneficiary or other persons claiming under or
through the Participant, shall have any right, title or interest by reason of
any purchase of a Unit (or fraction thereof) to any particular assets of the
Corporation or any subsidiary of the Corporation, or any shares of stock
allocated or reserved for the purposes of the Plan.
(c) The validity, construction, and effect of the Plan, any rules and
regulations relating to the Plan, and any purchase agreement shall be determined
in accordance with the Delaware General Corporation Law, without giving effect
to principles of conflicts of laws, and applicable federal law.
Section 8. Amendment or Termination
The Board may alter, amend, suspend, discontinue, or terminate the Plan at
any time; provided, however, that no such action shall adversely affect the
rights of Participants with respect to Units previously purchased hereunder and
provided further that any stockholder approval necessary in order to comply with
applicable law or regulation shall be obtained in the manner required therein.
Section 9. Board Action
All Board action to be taken under or in respect of the Plan (including,
but not limited to, actions to be taken pursuant to Sections 4,5,6 and 8) shall
be taken by Affirmative Board Vote.
Section 10. Effective Date of Plan
The Plan shall be effective as of May 6, 1997.
3
<PAGE>
Exhibit 21
Subsidiaries* Jurisdiction of
Incorporation or
Name Organization
- ----
LifeStyle Holdings Ltd. Delaware
Ametex U.K. Limted United Kingdom
Ametex Sarl France
Green & Kirk Limited United Kingdom
Herbert Green (Silsden) Ltd. United Kingdom
The Berkline Corporation Delaware
Berkline Inc. Quebec
Dixie Furniture Company Incorporated Delaware
Drexel Heritage Furnishings Inc. New York
D-H Retail Space Inc. Delaware
Drexel Heritage Advertising, Inc. Delaware
Drexel Heritage Home Inspirations, Inc. North Carolina
Hanhill (Great Britain) Limited England
Henredon Furniture Industries, Inc. North Carolina
Henredon Transportation Co. North Carolina
Henry Link Corporation Delaware
Maitland-Smith Fine Furnishings Ltd. Hong Kong
P.T. Maitland-Smith Indonesia Indonesia
Intro Europe, Inc. North Carolina
LaBarge, Inc. Michigan
Lexington Furniture Industries, Inc. North Carolina
LifeStyle Outlet Corp. Delaware
Link-Taylor Corporation Delaware
LFI Receivables Corporation Delaware
LFI Servicing Corporation Delaware
Maitland-Smith, Inc. North Carolina
Maitland-Smith Asia Holdings Limited Vanuatu
Cebu Agency Limited Hong Kong
Design Agency Limited Hong Kong
Maitland-Smith Ltd. Hong Kong
Maitland-Smith Cebu Inc. Philippines
Maitland-Smith Pacific Ltd. Vanuatu
Maitland-Smith Philippines, Inc. Philippines
Mandaue Holdings Incorporated Philippines
Perabut Bermutu (L) Bhd. Labuan
Ramm, Son & Crocker Limited England
The Robert Allen Group, Inc. Delaware
Robert Allen Fabrics (Canada) Ltd. Canada
<PAGE>
Subsidiaries* Jurisdiction of
Incorporation or
Name Organization
- ----
Robert Allen Fabrics of N.Y., Inc. Delaware
Sunbury Textile Mills, Inc. Delaware
Universal Furniture Limited Delaware
Blue Mountain Trucking Corporation Mississippi
Custom Truck Tires, Inc. Mississippi
Del Mar Furniture Industries (Singapore) Pte. Ltd. Singapore
H.K.T. (Malaysia) Sdn. Bhd. Malaysia
Hong Kong Teakwood Works Limited Hong Kong
Hong Kong Teakwood Works (Singapore) Pte. Ltd. Singapore
Hong Kong Teakwood Works (Taiwan) Limited Taiwan
Log and Timber Products (Singapore) Pte. Ltd. Singapore
Rigel Enterprises Limited Hong Kong
Shin Shin Wood Products Co. Ltd. -- 51% Taiwan
Sterling Home Furnishings Pte. Ltd. Singapore
Sterling Home Furnishings (Taiwan) Ltd. Taiwan
Sterling Home Furnishings (Hong Kong) Ltd. Hong Kong
Syarikat Malaysia Wood Industries Sdn. Bhd. Malaysia
Teakwood Property Development Ltd. Hong Kong
Teakwood (U.K.) Ltd. United Kingdom
Pilliod (U.K.) Limited United Kingdom
Universal Furniture Industries (U.K.) Ltd. United Kingdom
Universal Furniture Industries (Deutschland) GmbH Germany
Universal Furniture Industries (Scandinavia) AB Sweden
Universal Furniture Industries (Japan) Ltd. Japan
Universal Furniture (Taiwan) Co. Ltd. Taiwan
Universal Furniture (Thailand) Co. Ltd. Thailand
Universal Woodfloor (Europe) AB Sweden
Universal Woodfloor (Europe) AB GmbH Germany
UFL Management Services Pte. Ltd. Singapore
World Wide Furniture Sales, Inc. British Virgin Islands
Xin Jia Po Huan Mei Furniture Ltd. Hong Kong
<PAGE>
Subsidiaries* Jurisdiction of
Incorporation or
Name Organization
- ----
Tianjin Xin Huan International Trading Co. Ltd. China
Universal Furniture (Tianjin) Co. Ltd. China
Universal Furniture (Guangzhou) Co. Ltd. China
Universal Furniture (Xian) Co. Ltd. China
Universal Furniture (Fuzhou) Co. Ltd. China
Universal Trading (Fuzhou) Co. Ltd. China
Universal Trading (Guangzhou) Co. Ltd. China
Young-Hinkle Corporation Delaware
* Directly owned subsidiaries appear at the left hand margin. First tier and
second tier subsidiaries are indicated by single and double indentation,
respectively, and are listed under the names of their respective parent
companies. All subsidiaries are wholly-owned. Certain of these companies may
also use tradenames or other assumed names in the conduct of their businesses.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND SUCH IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,140
<SECURITIES> 64,010
<RECEIVABLES> 105,190<F1>
<ALLOWANCES> 0
<INVENTORY> 510,110
<CURRENT-ASSETS> 757,420
<PP&E> 337,390<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,151,220
<CURRENT-LIABILITIES> 276,910
<BONDS> 200,000
0
0
<COMMON> 0
<OTHER-SE> 437,390
<TOTAL-LIABILITY-AND-EQUITY> 1,151,220
<SALES> 1,959,780
<TOTAL-REVENUES> 1,959,780
<CGS> 1,453,770
<TOTAL-COSTS> 1,468,250
<OTHER-EXPENSES> 15,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,900
<INCOME-PRETAX> 42,950
<INCOME-TAX> 13,750
<INCOME-CONTINUING> 29,200
<DISCONTINUED> 0
<EXTRAORDINARY> (11,620)
<CHANGES> 0
<NET-INCOME> 17,580
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables and property and equipment are presented net of allowances for
doubtful accounts and accumulated depreciation and amortization, respectively.
</FN>
</TABLE>
