<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998 Commission File Number 333-11905
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.)
4000 Lifestyle Court
High Point, North Carolina 27265
(Address of Principal Executive Offices) (Zip Code)
(336) 878-7000
(Telephone Number)
-----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date: 100 shares of Common Stock, par
value $.01 per share, as of June 30, 1998.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997............................ 1
Condensed Consolidated Statements of Operations for the six months and three months ended June 30, 1998
and 1997............................................................................................... 2
Condensed Consolidated Statements of Comprehensive Income for the six months and three months ended
June 30, 1998 and 1997................................................................................. 3
Condensed Consolidated Statements of Cash Flows for the six months and three months ended June 30, 1998
and 1997............................................................................................... 4
Notes to Condensed Consolidated Financial Statements................................................... 5-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11-14
Part II Other Information
Exhibits and Reports on Form 8-K....................................................................... 15
Signature Page......................................................................................... 16
Exhibit Index.......................................................................................... 17
</TABLE>
<PAGE> 3
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
-------------- -----------------
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash investments ...................................... $ 11,640 $ 4,140
Trade receivables .............................................. 58,490 64,480
Investment in receivables trust ................................ 61,590 64,010
Other receivables .............................................. 27,910 40,710
Inventories .................................................... 498,910 510,110
Prepaid expenses ............................................... 33,390 35,440
Deferred income taxes .......................................... 38,530 38,530
----------- -----------
Total current assets ......................................... 730,460 757,420
Property and equipment, net .......................................... 343,300 337,390
Other assets ......................................................... 47,060 56,410
----------- -----------
Total assets ................................................. $ 1,120,820 $ 1,151,220
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Long-term debt, current ........................................ $ 460 $ 2,970
Accounts payable ............................................... 129,080 124,000
Accrued liabilities ............................................ 132,160 149,940
----------- -----------
Total current liabilities .................................... 261,700 276,910
Long-term debt ....................................................... 311,600 351,600
Deferred income taxes ................................................ 31,250 31,250
Other long-term liabilities .......................................... 53,960 54,070
----------- -----------
Total liabilities .......................................... 658,510 713,830
----------- -----------
Stockholder'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 ............................................ 52,310 25,510
Foreign currency translation ................................. (11,050) (9,170)
----------- -----------
Total stockholder's equity ................................... 462,310 437,390
----------- -----------
Total liabilities and stockholder's equity ................... $ 1,120,820 $ 1,151,220
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE> 4
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ................................... $977,460 $969,630 $479,260 $479,400
Cost of sales ............................... 735,480 717,720 358,190 353,220
-------- -------- -------- --------
Gross profit ............................. 241,980 251,910 121,070 126,180
Selling, general and administrative expenses 180,760 172,610 90,880 86,190
-------- -------- -------- --------
Operating profit ......................... 61,220 79,300 30,190 39,990
-------- -------- -------- --------
Other expense, net:
Interest expense ......................... 16,320 22,270 7,850 11,050
Other, net ............................... 6,050 6,230 2,850 3,750
-------- -------- -------- --------
22,370 28,500 10,700 14,800
-------- -------- -------- --------
Income before income taxes ............... 38,850 50,800 19,490 25,190
Income taxes ................................ 12,050 17,780 5,860 8,820
======== ======== ======== ========
Net income ............................... $ 26,800 $ 33,020 $ 13,630 $ 16,370
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 5
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income ............................ $ 26,800 $ 33,020 $ 13,630 $ 16,370
Other comprehensive income, net of tax:
Foreign currency translation ....... (1,880) (2,230) (1,330) 190
-------- -------- -------- --------
Comprehensive income .................. $ 24,920 $ 30,790 $ 12,300 $ 16,560
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 6
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ................................................ $ 26,800 $ 33,020
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................... 12,700 12,770
Fabric sample book amortization ................... 7,180 8,110
Bad debt provision ................................ 1,100 2,320
Changes in operating assets and liabilities:
Receivables ............................................ 17,280 9,350
Inventories ............................................ 11,200 (40,210)
Prepaid expenses and other assets ...................... 5,350 2,130
Accounts payable ....................................... 5,080 29,650
Other liabilities ...................................... 5,450 (12,410)
-------- --------
Net cash provided by operating activities ........ 92,140 44,730
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ...................................... (16,720) (17,170)
Fabric sample book expenditures ........................... (6,060) (6,840)
Net investments in receivables trust ...................... 2,420 (2,870)
Issuance of notes receivable .............................. (580) --
Collection of notes receivable ............................ 4,790 10,530
Other, net ................................................ (2,640) (40)
-------- --------
Net cash used for investing activities .............. (18,790) (16,390)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt .............................. 32,000 --
Repayments of long-term debt .............................. (74,000) (20,040)
Net proceeds (repayments) of other debt ................... (510) 850
Net repayments from accounts receivable transactions ...... -- (7,000)
Dividends paid ............................................ (23,340) --
-------- --------
Net cash used for financing activities .............. (65,850) (26,190)
-------- --------
CASH AND CASH INVESTMENTS:
Increase for the period ................................... 7,500 2,150
Balance, beginning of period .............................. 4,140 22,400
-------- --------
Balance, end of period .................................... $ 11,640 $ 24,550
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 7
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") and its subsidiary
companies as of June 30, 1998 (unaudited) and December 31, 1997, and for the six
and three month periods ended June 30, 1998 and 1997 (unaudited). Intercompany
accounts and transactions are eliminated. These Condensed Consolidated Financial
Statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. The accompanying unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto in the Company's report on
Form 10-K for the fiscal year ended December 31, 1997. In the Notes to Condensed
Consolidated Financial Statements, all dollar amounts are shown in thousands
unless otherwise stated.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," became effective in 1998. This Statement
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. Under the provision of SFAS No. 130, the
Company elected to report comprehensive income in a separate statement of
comprehensive income that begins with net income. Comparative disclosures which
include prior period information have been made to conform with the provisions
of this Statement.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," will become effective for fiscal years beginning after June 15,
1999. This Statement standardizes the disclosure requirements for derivative
instruments and requires that all derivatives be recognized as assets or
liabilities and measured at fair value. The Company does not believe its
adoption will have a material impact on the Company's financial statements.
3. INVENTORY
As of June 30, 1998 and December 31, 1997, inventory balances were as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Finished goods $225,540 $216,360
Raw materials . 200,660 216,010
Work in process 72,710 77,740
-------- --------
$498,910 $510,110
======== ========
</TABLE>
4. LONG-TERM DEBT
As of June 30, 1998 and December 31, 1997, the outstanding balances of
long-term debt were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Revolving credit facility $110,000 $152,000
Senior subordinated notes 200,000 200,000
Other borrowings ......... 2,060 2,570
-------- --------
312,060 354,570
Less current portion ..... 460 2,970
-------- --------
$311,600 $351,600
======== ========
</TABLE>
5
<PAGE> 8
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING INITIATIVES
At the end of 1997, the Company completed an in-depth evaluation of its
global manufacturing and distribution base, and recorded a $58.5 million charge
to rationalize and restructure its worldwide operations, focusing principally on
the Company's Universal Furniture business unit. The majority of Universal
Furniture's restructuring activity is taking place in Asia, where facilities
with 1.4 million square feet of manufacturing and distribution space will be
eliminated by December 31, 1998, as production is consolidated into existing,
lower-cost Asian facilities and as distribution facilities are rationalized.
Implementation of this restructuring effort began in the first quarter of 1998.
At June 30, 1998, facilities with approximately 1.0 million square feet have
been eliminated.
The following represents the Company's restructuring activities for the
period indicated (in millions):
<TABLE>
<CAPTION>
ASSET CONTRACTUAL EMPLOYEE
WRITE-DOWNS OBLIGATIONS SEVERANCE OTHER TOTAL
----------- ----------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 38.1 $ 9.8 $ 8.8 $ 1.8 $ 58.5
Non-cash items .......... (38.1) -- -- -- (38.1)
Cash items .............. -- (3.1) (2.9) (0.5) (6.5)
======== ======== ======== ======== ========
Balance at June 30, 1998 ... $ -- $ 6.7 $ 5.9 $ 1.3 $ 13.9
======== ======== ======== ======== ========
</TABLE>
6. GUARANTOR FINANCIAL STATEMENTS
In connection with the issuance of its 10 7/8% Senior Subordinated
Notes due 2006 (the "Notes"), the Company's domestic operating subsidiaries
("Guarantor Subsidiaries") fully and unconditionally guaranteed the Company's
performance under the Notes on a joint and several basis. The Guarantor
Subsidiaries are direct or indirect wholly owned subsidiaries of the Company.
The remaining subsidiaries are direct or indirect subsidiaries of the Guarantor
Subsidiaries. There are no restrictions under the Company's financing
arrangements on the ability of the Guarantor Subsidiaries to distribute funds to
the Company in the form of cash dividends, loans or advances. The following
financial data provides information regarding the financial position, results of
operations and cash flows of the Guarantor Subsidiaries (condensed consolidating
financial data). Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management has determined
that such information would not be material to the holders of the Notes.
For purposes of the condensed consolidating financial data, the
Guarantor Subsidiaries include substantially all domestic subsidiaries of the
Company (other than special purpose subsidiaries formed in connection with the
Company's receivables financing facility (the "Receivables Subsidiaries") and
certain subsidiaries with substantially no assets or operations). The Guarantor
Subsidiaries account for their investments in the non-guarantor subsidiaries on
the equity method. The Company also accounts for its investments in the
Guarantor Subsidiaries and the Receivables Subsidiaries on the equity method.
The principal elimination entries are to eliminate the investments in
subsidiaries and intercompany balances and transactions.
6
<PAGE> 9
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash investments .............. $ -- $ 2,900 $ 8,740 $ -- $ 11,640
Trade receivables ...................... -- 21,760 36,730 -- 58,490
Investment in receivables trust ........ -- -- 61,590 -- 61,590
Other receivables ...................... -- 11,470 16,440 -- 27,910
Inventories ............................ -- 439,540 59,370 -- 498,910
Prepaid expenses ....................... -- 26,130 7,260 -- 33,390
Deferred income taxes .................. -- 28,700 9,830 -- 38,530
Intercompany account ................... -- 239,180 -- (239,180) --
----------- ----------- ----------- ----------- -----------
Total current assets .............. -- 769,680 199,960 (239,180) 730,460
Property and equipment, net .................. -- 270,460 72,840 -- 343,300
Other assets ................................. -- 45,340 1,720 -- 47,060
Investments in affiliates .................... 462,310 (81,360) -- (380,950) --
----------- ----------- ----------- ----------- -----------
Total assets ...................... $ 462,310 $ 1,004,120 $ 274,520 $ (620,130) $ 1,120,820
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Long-term debt, current ................ $ -- $ 190 $ 270 $ -- $ 460
Accounts payable ....................... -- 105,210 23,870 -- 129,080
Accrued liabilities .................... -- 88,120 44,040 -- 132,160
Intercompany account ................... -- -- 239,180 (239,180) --
----------- ----------- ----------- ----------- -----------
Total current liabilities ......... -- 193,520 307,360 (239,180) 261,700
Long-term debt ............................... -- 311,600 -- -- 311,600
Deferred income taxes ........................ -- 31,250 -- -- 31,250
Other long-term liabilities .................. -- 51,930 2,030 -- 53,960
----------- ----------- ----------- ----------- -----------
Total liabilities ................. -- 588,300 309,390 (239,180) 658,510
Stockholder's equity ......................... 462,310 415,820 (34,870) (380,950) 462,310
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's
equity ......................... $ 462,310 $ 1,004,120 $ 274,520 $ (620,130) $ 1,120,820
=========== =========== =========== =========== ===========
</TABLE>
7
<PAGE> 10
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash investments .............. $ -- $ (7,050) $ 11,190 $ -- $ 4,140
Trade receivables ...................... -- 23,860 40,620 -- 64,480
Investment in receivables trust ........ -- -- 64,010 -- 64,010
Other receivables ...................... -- 30,540 10,170 -- 40,710
Inventories ............................ -- 444,140 65,970 -- 510,110
Prepaid expenses ....................... -- 23,170 12,270 -- 35,440
Deferred income taxes .................. -- 28,700 9,830 -- 38,530
Intercompany account ................... -- 257,070 -- (257,070) --
----------- ----------- ----------- ----------- -----------
Total current assets .............. -- 800,430 214,060 (257,070) 757,420
Property and equipment, net .................. -- 265,440 71,950 -- 337,390
Other assets ................................. -- 54,510 1,900 -- 56,410
Investments in affiliates .................... 437,390 (79,830) -- (357,560) --
----------- ----------- ----------- ----------- -----------
Total assets ...................... $ 437,390 $ 1,040,550 $ 287,910 $ (614,630) $ 1,151,220
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Long-term debt, current ................ $ -- $ 2,200 $ 770 $ -- $ 2,970
Accounts payable ....................... -- 103,180 20,820 -- 124,000
Accrued liabilities .................... -- 102,920 47,020 -- 149,940
Intercompany account ................... -- -- 257,070 (257,070) --
----------- ----------- ----------- ----------- -----------
Total current liabilities ......... -- 208,300 325,680 (257,070) 276,910
Long-term debt ............................... -- 351,600 -- -- 351,600
Deferred income taxes ........................ -- 31,250 -- -- 31,250
Other long-term liabilities .................. -- 51,890 2,180 -- 54,070
----------- ----------- ----------- ----------- -----------
Total liabilities ................. -- 643,040 327,860 (257,070) 713,830
Stockholder's equity ......................... 437,390 397,510 (39,950) (357,560) 437,390
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's
equity ......................... $ 437,390 $ 1,040,550 $ 287,910 $ (614,630) $ 1,151,220
=========== =========== =========== =========== ===========
</TABLE>
8
<PAGE> 11
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales ............................. $ -- $ 912,060 $ 258,580 $(193,180) $ 977,460
Cost of sales ......................... -- 699,450 229,210 (193,180) 735,480
--------- --------- --------- --------- ---------
Gross profit ....................... -- 212,610 29,370 -- 241,980
Selling, general and administrative
expenses ........................... -- 156,570 24,190 -- 180,760
--------- --------- --------- --------- ---------
Operating profit ................... -- 56,040 5,180 -- 61,220
Other (income) expense, net ........... (26,800) 28,680 (8,140) 28,630 22,370
--------- --------- --------- --------- ---------
Income before income taxes ......... 26,800 27,360 13,320 (28,630) 38,850
Income taxes .......................... -- 7,200 4,850 -- 12,050
--------- --------- --------- --------- ---------
Net income ........................ 26,800 20,160 8,470 (28,630) 26,800
--------- --------- --------- --------- ---------
Other comprehensive income, net of tax:
Foreign currency translation ...... -- -- (1,880) -- (1,880)
--------- --------- --------- --------- ---------
Comprehensive income .............. $ 26,800 $ 20,160 $ 6,590 $ (28,630) $ 24,920
========= ========= ========= ========= =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales ............................. $ -- $ 877,240 $ 213,710 $(121,320) $ 969,630
Cost of sales ......................... -- 661,000 178,040 (121,320) 717,720
--------- --------- --------- --------- ---------
Gross profit ....................... -- 216,240 35,670 -- 251,910
Selling, general and
administrative
expenses ........................... -- 148,320 24,290 -- 172,610
--------- --------- --------- --------- ---------
Operating profit ................... -- 67,920 11,380 -- 79,300
Other (income) expense,
net ................................ (33,020) 24,720 (4,810) 41,610 28,500
--------- --------- --------- --------- ---------
Income before income taxes ......... 33,020 43,200 16,190 (41,610) 50,800
Income taxes .......................... -- 14,540 3,240 -- 17,780
--------- --------- --------- --------- ---------
Net income ......................... 33,020 28,660 12,950 (41,610) 33,020
--------- --------- --------- --------- ---------
Other comprehensive income, net of tax:
Foreign currency translation ...... -- -- (2,230) -- (2,230)
--------- --------- --------- --------- ---------
Comprehensive income .............. $ 33,020 $ 28,660 $ 10,720 $ (41,610) $ 30,790
========= ========= ========= ========= =========
</TABLE>
9
<PAGE> 12
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
<S> <C> <C> <C> <C> <C>
ACTIVITIES: .................. $ -- $ 71,960 $ 20,180 $ -- $ 92,140
-------- -------- -------- ------ --------
INVESTING ACTIVITIES:
Capital expenditures ............ -- (11,940) (4,780) -- (16,720)
Fabric sample book expenditures . -- (6,060) -- -- (6,060)
Net investments in receivables
trust ........................ -- -- 2,420 -- 2,420
Issuance of notes receivable .... -- (580) -- -- (580)
Collection of notes receivable .. -- 4,790 -- -- 4,790
Other, net ...................... -- (760) (1,880) -- (2,640)
-------- -------- -------- ------ --------
Net cash used for
investing activities .... -- (14,550) (4,240) -- (18,790)
-------- -------- -------- ------ --------
FINANCING ACTIVITIES:
Proceeds from long-term debt .... -- 32,000 -- -- 32,000
Repayments of long-term debt .... -- (74,000) -- -- (74,000)
Net repayments of other debt .... -- (10) (500) -- (510)
Dividends paid .................. -- (23,340) -- -- (23,340)
Intercompany accounts, net ...... -- 17,890 (17,890) -- --
-------- -------- -------- ------ --------
Net cash used for
financing activities .... -- (47,460) (18,390) -- (65,850)
-------- -------- -------- ------ --------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the
period ....................... -- 9,950 (2,450) -- 7,500
Balance, beginning of period .... -- (7,050) 11,190 -- 4,140
-------- -------- -------- ------ --------
Balance, end of period .......... $ -- $ 2,900 $ 8,740 $ -- $ 11,640
======== ======== ======== ====== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES: .................. $ -- $ 37,310 $ 7,420 $ -- $ 44,730
------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures ......... -- (14,470) (2,700) -- (17,170)
Fabric sample book
expenditures ................. -- (6,840) -- -- (6,840)
Net investments in
receivables trust ............ -- -- (2,870) -- (2,870)
Collection of notes receivable -- 10,530 -- -- 10,530
Other, net ................... -- -- (40) -- (40)
------- -------- -------- -------- --------
Net cash used for investing
activities ................... -- (10,780) (5,610) -- (16,390)
------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Repayments of long-term debt . -- (19,750) (290) -- (20,040)
Net proceeds of other debt ... -- 850 -- -- 850
Net repayments from accounts
receivable transactions ...... -- -- (7,000) -- (7,000)
Intercompany accounts, net ... -- (980) 980 -- --
------- -------- -------- -------- --------
Net cash used for financing
activities ................ -- (19,880) (6,310) -- (26,190)
------- -------- -------- -------- --------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the
period .................... -- 6,650 (4,500) -- 2,150
Balance, beginning of period . -- 4,510 17,890 -- 22,400
------- -------- -------- -------- --------
Balance, end of period ....... $ -- $ 11,160 $ 13,390 $ -- $ 24,550
======= ======== ======== ======== ========
</TABLE>
10
<PAGE> 13
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS
ENDED JUNE 30, 1997
Net sales were $977.5 million for the six months ended June 30, 1998,
an increase of $7.9 million, or 0.8%, from $969.6 million for the comparable
period of 1997. Net sales of fine furniture increased 1.5% to $846.9 million for
the six months ended June 30, 1998 from $834.4 million for the comparable period
of 1997. Fine furniture orders for the six months ended June 30, 1998 increased
8.8% over the comparable period of 1997, reflecting strong industry demand.
However, the Company's net sales of fine furniture were handicapped by a ramp-up
in the implementation of its reengineering efforts. Net sales of decorative home
furnishing fabrics decreased 3.4% to $130.6 million for the six months ended
June 30, 1998 from $135.2 million for the comparable period of 1997. Decorative
home furnishing fabric sales were lost due to shipping delays incurred during
the implementation of a new computer system at The Robert Allen Group. Now that
this computer system has been successfully implemented, 24-hour order-to-ship
schedules are being achieved.
Gross profit was $242.0 million for the six months ended June 30, 1998,
a decrease of $9.9 million, or 3.9%, from $251.9 million for the comparable
period of 1997. Gross profit margins decreased to 24.8% for the six months ended
June 30, 1998 from 26.0% for the comparable period of 1997. This decline in
gross profit margin was primarily attributable to transition costs related to
the Company's restructuring and reengineering initiatives associated with
implementation of "Pull" manufacturing processes. This decline was also due to
temporary production inefficiencies, increased overhead expenses associated with
the successful introduction of an unusually large number of new products,
inventory reduction programs and the costs related to the computer system
implementation at The Robert Allen Group. The Company is reengineering its
manufacturing processes in order to reduce order-to-ship cycles, improve product
quality and value, reduce inventories and broadly improve the Company's
responsiveness to customers and consumers. Gross profit is expected to be
unfavorably impacted, although at a reduced rate, through the next several
quarters as additional costs continue as a result of these restructuring and
reengineering initiatives.
Selling, general and administrative expenses were $180.8 million for
the six months ended June 30, 1998, an increase of $8.2 million, or 4.8%, from
$172.6 million for the comparable period of 1997. As a percentage of net sales,
selling, general and administrative expenses increased to 18.5% for the six
months ended June 30, 1998 from 17.8% for the comparable period of 1997. Selling
expense was 11.3% of net sales as compared to 11.1% for 1997, and general and
administrative expenses were 7.2% of net sales compared to 6.7% in 1997. The
increase in selling expenses reflects increased spending on sales catalogs and
other promotional material. General and administrative expenses increased due to
higher consulting fees and other administrative costs.
Operating profit was $61.2 million for the six months ended June 30,
1998, a decrease of $18.1 million, or 22.8%, from $79.3 million for the
comparable period of 1997. As a percentage of net sales, operating profit
decreased to 6.3% for the six months ended June 30, 1998 from 8.2% for the
comparable period of 1997. The decline in operating profit is directly
attributable to the ramp-up of the restructuring and reengineering initiatives,
which necessarily caused some disruption at certain plants and resulted in
additional costs. In addition, the Company incurred costs related to the
computer system implementation at The Robert Allen Group. Operating profit is
expected to be unfavorably impacted, although at a reduced rate, through the
next several quarters as additional costs continue as a result of these
restructuring and reengineering initiatives.
Exclusive of transition costs related to the Company's restructuring
and reengineering initiatives and costs related to the computer system
implementation at the Robert Allen Group, adjusted or "core" operating profit
was $81.7 million, and increase of $2.4 million, or 3.0%, as compared to the six
months ended June 30, 1997.
11
<PAGE> 14
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest expense was $16.3 million for the six months ended June 30,
1998, a decrease of $6.0 million, or 26.9%, from the comparable period of 1997.
This decrease was a result of lower average debt outstanding during the six
months ended June 30, 1998 and reduced interest rates obtained when the Company
refinanced its credit facility in August 1997.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 TO THE THREE MONTHS
ENDED JUNE 30, 1997
Net sales were $479.3 million for the three months ended June 30, 1998,
essentially flat from $479.4 million for the comparable period of 1997. Net
sales of fine furniture decreased 0.1% to $410.8 million for the three months
ended June 30, 1998 from $411.4 million for the comparable period of 1997. Net
sales of fine furniture were handicapped by the continued implementation of the
Company's reengineering efforts. Net sales of decorative home furnishing fabrics
increased 0.7% to $68.5 million for the three months ended June 30, 1998 from
$68.0 million for the comparable period of 1997. Decorative home furnishing
fabric sales rebounded in the second quarter as The Robert Allen Group's
computer system had been successfully implemented, allowing the resumption of
24-hour order-to-ship schedules.
Gross profit was $121.1 million for the three months ended June 30,
1998, a decrease of $5.1 million, or 4.0%, from $126.2 million for the
comparable period of 1997. Gross profit margins decreased to 25.3% for the three
months ended June 30, 1998 from 26.3% for the comparable period of 1997. This
decline in gross profit margin was primarily attributable to transition costs
related to the Company's restructuring and reengineering initiatives associated
with implementation of "Pull" manufacturing processes. This decline was also due
to temporary production inefficiencies, increased overhead expenses associated
with the successful introduction of an unusually large number of new products
and inventory reduction programs. The Company is reengineering its manufacturing
processes in order to reduce order-to-ship cycles, improve product quality and
value, reduce inventories and broadly improve the Company's responsiveness to
customers and consumers.
Selling, general and administrative expenses were $90.9 million for the
three months ended June 30, 1998, an increase of $4.7 million, or 5.5%, from
$86.2 million for the comparable period of 1997. As a percentage of net sales,
selling, general and administrative expenses increased to 19.0% for the three
months ended June 30, 1998 from 18.0% for the comparable period of 1997. Selling
expense was 11.6% of net sales as compared to 11.4% for 1997, and general and
administrative expenses were 7.4% of net sales compared to 6.6% in 1997. The
increase in selling expenses reflects increased spending on sales catalogs and
other promotional material. General and administrative expenses increased due to
high consulting fees and other administrative costs.
Operating profit was $30.2 million for the three months ended June 30,
1998, a decrease of $9.8 million, or 24.5%, from $40.0 million for the
comparable period of 1997. As a percentage of net sales, operating profit
decreased to 6.3% for the three months ended June 30, 1998 from 8.3% for the
comparable period of 1997.
Exclusive of transition costs related to the Company's restructuring
and reengineering initiatives, adjusted or "core" operating profit was $39.2
million, a decrease of $0.8 million, or 2.0%, as compared to the three months
ended June 30, 1997.
Interest expense was $7.9 million for the three months ended June 30,
1998, a decrease of $3.2 million, or 28.8%, from the comparable period of 1997.
This decrease was a result of lower average debt outstanding during the three
months ended June 30, 1998 and reduced interest rates obtained when the Company
refinanced its credit facility in August 1997.
12
<PAGE> 15
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESTRUCTURING INITIATIVES
At the end of 1997, the Company completed an in-depth evaluation of its
global manufacturing and distribution base, and recorded a $58.5 million charge
to rationalize and restructure its worldwide operations, focusing principally on
the Company's Universal Furniture business unit. The majority of Universal
Furniture's restructuring activity is taking place in Asia, where facilities
with 1.4 million square feet of manufacturing and distribution space will be
eliminated by December 31, 1998, as production is consolidated into existing,
lower-cost Asian facilities and as distribution facilities are rationalized.
Implementation of this restructuring effort began in the first quarter of 1998.
At June 30, 1998, facilities with approximately 1.0 million square feet have
been eliminated.
The following represents the Company's restructuring activities for the
period indicated (in millions):
<TABLE>
<CAPTION>
ASSET CONTRACTUAL EMPLOYEE
WRITE-DOWNS OBLIGATIONS SEVERANCE OTHER TOTAL
----------- ----------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 38.1 $ 9.8 $ 8.8 $ 1.8 $58.5
Non-cash items .......... (38.1) -- -- -- (38.1)
Cash items .............. -- (0.1) (2.0) (0.8) (2.9)
======= ===== ===== ===== =====
Balance at June 30, 1998 ... $-- $ 9.7 $ 6.8 $ 1.0 $17.5
======= ===== ===== ===== =====
</TABLE>
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 current $400.0
million senior secured revolving credit facility.
During the six months ended June 30, 1998, net cash from operating
activities totaled $92.1 million, net cash used for investing activities totaled
$18.8 million, and net cash used for financing activities totaled $65.9 million.
A $23.3 million cash dividend to Furnishings International Inc. ("FII", the
Company's parent) was paid during January 1998.
Capital expenditures totaled $16.7 million for the six months ended
June 30, 1998, a decrease of $0.5 million from the comparable period of 1997.
Fabric sample book expenditures totaled $6.1 million for the six months ended
June 30, 1998, a decrease of $0.7 million over the comparable period of 1997.
LifeStyle made net principal payments on its long-term debt of $42.5
million during the six months ended June 30, 1998. Total long-term debt
decreased to $312.1 million as of June 30, 1998 as compared to $354.6 million at
December 31, 1997. As of August 12, 1998, the Company had borrowed an additional
$26 million under its revolving credit facility.
On July 7, 1998, FII filed a Form S-1 with the Securities and Exchange
Commission related to an initial public offering for up to $460 million in
common stock. Concurrently with the initial public offering, the Company will be
merged with and into FII, which will change its name to LifeStyle Furnishings
International Ltd. In addition, the Company has commenced a cash tender offer
and consent solicitation to acquire all of its outstanding $200 million 10 7/8%
senior subordinated notes (the "Subordinated Notes") due 2006. The cash tender
offer will be paid using borrowings available under the revolving credit
facility. In connection with the tender offer, the Company expects to incur an
extraordinary charge for the early extinguishment of debt in the third quarter
of 1998. In connection with the cash tender offer, the Company is also
soliciting consents to adopt amendments to the indenture under which the
Subordinated Notes were issued to eliminate substantially all of the covenants
and restrictive provisions in the indenture governing the Subordinated Notes.
13
<PAGE> 16
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUES
Year 2000 issues are the result of computer programs that were written
using two digits rather than four to defined the applicable year. For example,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other material adverse
consequences, a temporary inability to process transactions or engage in similar
normal business activities.
Each of the Company's subsidiaries is evaluating its computerized
systems on an internal basis, and is making corrective plans where required.
Such evaluations are designed to cover all financial and operational systems and
the Company has begun to make the necessary changes. The Company has hired a
Year 2000 Project Director who is charged with Year 2000 planning and
remediation and has established a committee comprised of senior managers to
review our Year 2000 implementation strategy and to oversee Year 2000 compliance
measures. The Company has also contracted with a computer systems consulting
firm to conduct a review of all of the Company's computer systems and to issue a
report on the necessary compliance measures. In order to determine the effect on
the Company if a supplier or customer failed to resolve its own Year 2000
issues, the Company is communicating with its suppliers and customers about the
compliance of their own systems. The Company cannot be sure that the failure of
a customer or supplier to be Year 2000 will not have a material adverse effect
on the Company's own business. The Company intends to complete the final
assessment and development of the corrective action plans during 1998 and 1999.
The Company currently anticipates that the development and implementation of
Year 2000 compliance measures will cost approximately $5 million. In addition,
during 1997, the Company began implementing a company-wide, Oracle-based
software platform that is designed to be Year 2000 compliant.
14
<PAGE> 17
PART II. OTHER INFORMATION
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
Items 1, 2, 3, 4, and 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------------------- -------------------------------------
27+ Financial Data Schedule
(b) No reports on Form 8-K were filed by the registrant during the
three months ended June 30, 1998.
- -----------
+ Filed herewith
15
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
Date: August 14, 1998 BY: /s/ RONALD J. HOFFMAN
Ronald J. Hoffman
Vice President, Chief Financial Officer and Treasurer
(Chief Financial Officer and Authorized Signatory)
16
<PAGE> 19
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ --------------------------------------------------
27+ Financial Data Schedule
- -----------
+ Filed herewith
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
SUCH IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11640
<SECURITIES> 61590
<RECEIVABLES> 86400<F1>
<ALLOWANCES> 0
<INVENTORY> 498910
<CURRENT-ASSETS> 730460
<PP&E> 343300<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1120820
<CURRENT-LIABILITIES> 261700
<BONDS> 200000
0
0
<COMMON> 0
<OTHER-SE> 462310
<TOTAL-LIABILITY-AND-EQUITY> 1120820
<SALES> 479260
<TOTAL-REVENUES> 479260
<CGS> 358190
<TOTAL-COSTS> 358190
<OTHER-EXPENSES> 2850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7850
<INCOME-PRETAX> 19490
<INCOME-TAX> 5860
<INCOME-CONTINUING> 13630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13630
<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>
