SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): January 11, 2002
(December 28, 2001)
Furniture Brands International, Inc.
(Exact name of Registrant as specified in charter)
Delaware I-91 43-0337683
- ------------------------- ------------------- ---------------------
(State of Incorporation) (Commission (IRS Employer
File Number) Identification Number)
101 South Hanley Road, St. Louis, Missouri 63105
------------------------------------------------
(Address of principal executive offices)
(314) 863-1100
--------------
(Registrant's telephone number)
Item 7. Financial Statements and Exhibits.
On January 11, 2002 the Company filed a Form 8-K Current Report announcing
the acquisition of substantially all the assets of Henredon Furniture
Industries, Inc., Drexel Heritage Furnishings, Inc., Maitland-Smith Inc. and
Maitland-Smith Pacific, LTD by HDM Furniture Industries, Inc., a wholly-owned
subsidiary of the Company. Pursuant to this amendment the following financial
statements and pro forma information are now being filed as parts of this Form
8-K Current Report.
(a) Financial statements of business acquired.
Combined Financial Statements of Henredon Furniture Industries, Inc., Drexel
Heritage Furnishings, Inc., Maitland-Smith Pacific Ltd. and Maitland-Smith, Inc.
and Subsidiaries:
Report of Independent Accountants............................................. 6
Combined Balance Sheet as of December 31, 2000................................ 7
Combined Statement of Operations for the year ended December 31,
2000.......................................................................... 8
Combined Statement of Equity and Comprehensive Loss for the year ended December
31, 2000...................................................................... 9
Combined Statement of Cash Flows for the year ended December 31,
2000......................................................................... 10
Notes to Combined Financial Statements........................................11
Unaudited Combined Financial Statements of Henredon Furniture Industries, Inc.,
Drexel Heritage Furnishings, Inc., Maitland-Smith Pacific Ltd. and
Maitland-Smith, Inc. and Subsidiaries:
Combined Balance Sheet as of September 30, 2001 (Unaudited).................. 25
Combined Statements of Operations for the nine months ended September 30, 2001
and 2000(Unaudited)...........................................................26
Combined Statement of Equity and Comprehensive Loss for the nine months ended
September 30, 2001 (Unaudited)................................................27
Combined Statements of Cash Flows for the nine months ended September 30, 2001
and 2000 (Unaudited)..........................................................28
Notes to Combined Financial Statements(Unaudited)............................ 29
(b) Pro forma financial information.
Unaudited Pro Forma Condensed Combined Balance sheet as of September 30,
2001......................................................................... 36
Unaudited Pro Forma Condensed Combined Statement of Operations for the nine
months ended September 30, 2001...............................................37
Unaudited pro Forma Condensed Combined Statement of Operations for the twelve
months ended December 31, 2000................................................38
(c) Exhibits
2. Asset Purchase Agreement, made as of December 4, 2001, by and among
Henredon Furniture Industries, Inc., Drexel Heritage Furnishings,
Inc., Maitland-Smith, Inc., Maitland-Smith Pacific, LTD, LifeStyle
Furnishings International, Ltd., HDM Furniture Industries, Inc. and
the Company.*
4. Registration Rights Agreement, made and entered into as of December
28, 2001, by and among the Company, Henredon Furniture Industries,
Inc., Drexel Heritage Furnishings, Inc., Maitland-Smith, Inc.,
Maitland-Smith Pacific, LTD and LifeStyle Furnishings International,
Ltd.*
- -------------------
*Previously filed
REPORT ON AUDITS OF COMBINED FINANCIAL STATEMENTS OF
Henredon Furniture Industries, Inc.,
Drexel-Heritage Furnishings, Inc.,
Maitland-Smith Pacific Ltd. and Maitland-Smith, Inc.
(Wholly Owned Subsidiaries of LifeStyle Furnishings International Ltd.)
and their subsidiaries as of and for the year ended December 31, 2000
CONTENTS
Page (s)
--------
Report of Independent Accountants.................................................................. 6
Combined Financial Statements:
Balance Sheet at December 31, 2000..................................................................7
Statement of Operations for the year ended December 31, 2000........................................8
Statement of Equity and Comprehensive Loss for the year ended December 31, 2000.....................9
Statement of Cash Flows for the year ended December 31, 2000...................................... 10
Notes to Combined Financial Statements............................................................ 11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and the Board of Directors of LifeStyle Furnishings
International Ltd.:
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of equity and comprehensive loss and of cash flows
present fairly, in all material respects, the combined financial position of
Henredon Furniture Industries, Inc., Drexel-Heritage Furnishings, Inc.,
Maitland-Smith Pacific Ltd. and Maitland-Smith, Inc. and their subsidiaries (the
"Companies"), wholly-owned subsidiaries of LifeStyle Furnishings International,
Ltd. ("LifeStyle"), at December 31, 2000 and the results of their combined
operations and their combined cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of LifeStyle's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As explained in Note 1, Basis of Presentation and Accounting Policies -
Acquisition, on December 28, 2001, LifeStyle sold certain assets and liabilities
of the Companies. The accompanying combined financial statements do not reflect
the results of this transaction.
As explained in Note 1, Basis of Presentation and Accounting Policies - Basis of
Presentation, the combined financial statements include significant costs
allocated by LifeStyle for services provided and financing costs. In addition,
the Companies participated in LifeStyle's cash management and benefit programs
and generated significant revenue from sales to other LifeStyle companies.
/s/ PriceWaterhouse Coopers LLP
February 8, 2002
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED BALANCE SHEET
(Dollars in thousands)
As of
December 31,
2000
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 819
Accounts receivables, net 2,056
Receivable from LifeStyle Furnishings International, Ltd. subsidiaries, net 20,853
Notes receivable 616
Inventories 137,904
Prepaid expenses 2,073
Deferred income taxes 15,282
------------------
Total current assets 179,603
Property and equipment, net 76,748
Notes receivable 1,368
Other assets 3,329
------------------
Total assets $ 261,048
==================
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 32,487
Accrued liabilities 30,402
Income taxes payable 10,891
------------------
Total current liabilities
73,780
Long-term debt, LifeStyle Furnishings International, Ltd. 65,015
Deferred income taxes 10,893
------------------
Total liabilities 149,688
------------------
Commitments and contingencies (Notes 3 and 13)
Equity:
LifeStyle Furnishings International Ltd.
Net investment and advances 126,488
Accumulated other comprehensive loss (15,128)
------------------
Total equity 111,360
------------------
Total liabilities and equity $ 261,048
==================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED STATEMENT OF OPERATIONS
(Dollars in thousands)
December 31,
2000
------------------
Net sales, third parties $ 438,703
Net sales, LifeStyle Furnishings International Ltd. subsidiaries 65,209
------------------
Total net sales 503,912
Cost of sales 385,485
Restructuring and asset impairment charge 2,784
------------------
Gross profit 115,643
Selling, general and administrative expenses 63,404
Allocated costs, LifeStyle Furnishings International Ltd. 7,900
Restructuring and asset impairment charge 10,961
------------------
Operating profit 33,378
Interest expense, LifeStyle Furnishings International Ltd. 27,826
Other income, net 1,621
------------------
Income before income taxes 7,173
Income taxes 2,549
------------------
Net income 4,624
==================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC. DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED STATEMENT OF EQUITY AND COMPREHENSIVE LOSS
(Dollars in thousands)
LifeStyle
Furnishings Accumulated
International Ltd. Other
Net investment Comprehensive Total
and advances Loss Equity
---------------------- -------------------- ----------------------------
Balance at December 31, 1999 $ 170,970 $ (11,462) $ 159,508
Net income 4,624 - 4,624
Foreign currency translation - (3,666) (3,666)
---------------------- -------------------- ---------------------------
Total comprehensive income 4,624 (3,666) 958
Changes in LifeStyle net
investment and advances (49,106) - (49,106)
---------------------- -------------------- ---------------------------
Balance at December 31, 2000 $ 126,488 $ (15,128) $ 111,360
====================== ==================== ===========================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED STATEMENT OF CASH FLOWS
(Dollars in thousands)
December 31,
2000
------------------
Operating Activities:
Net income $ 4,624
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,301
Bad debt provision 1,644
Forgiveness of note receivable 264
Gain on sale of property and equipment (1,100)
Deferred income taxes (8,340)
Noncash interest expense 7,188
Noncash restructuring and asset impairment charge 12,354
Changes in operating assets and liabilities:
Receivables (21,629)
Inventories 7,922
Prepaid expenses and other assets 429
Accounts payable 4,140
Other liabilities 21,807
------------------
Net cash provided by operating activities 37,604
------------------
Investing Activities:
Capital expenditures (8,263)
Proceeds from sale of property and equipment 1,400
Issuance of notes receivable (880)
Collection of notes receivable 2,130
Other, net (2,550)
------------------
Net cash used for investing activities (8,163)
------------------
Financing Activities:
Net proceeds from accounts receivable securitization 19,993
Net change in LifeStyle net investment and advances (49,106)
------------------
Net cash used for financing activities (29,113)
------------------
Cash and Cash Equivalents:
Increase for the period 328
Balance, beginning of period 491
------------------
Balance, end of period $ 819
==================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation and Accounting Policies
Basis of Presentation. The combined financial statements reflect the financial
position, results of operations and cash flows of Henredon Furniture Industries,
Inc., Drexel-Heritage Furnishings, Inc., Maitland-Smith Pacific Ltd. and
Maitland-Smith, Inc. and their subsidiaries (all of which are wholly owned
subsidiaries of LifeStyle Furnishings International, Ltd.) ("LifeStyle"),
hereinafter referred to as the Companies, for the year ended December 31, 2000.
All intercompany accounts and transactions have been eliminated. The combined
Companies are not a legal entity and since no direct ownership in the Companies
as a combined group exists, LifeStyle's net investment and advances in the
Companies is shown in lieu of stockholder's equity in the combined financial
statements and includes the accumulation of transactions between the Companies
and LifeStyle as described below.
The Companies' operations consist of the manufacturing and sale of home
furnishings products. Management believes the assumptions underlying the
combined financial statements are reasonable. However, the combined financial
position, results of operations, and cash flows as presented herein, may not be
the same as would have occurred had the Companies operated as a stand-alone
entity during the period presented and may not be indicative of future financial
results.
The combined financial statements include allocations of LifeStyle's corporate
overhead, executive management and administrative expenses amounting to $7.9
million in 2000. The allocations include the general administrative expenses of
LifeStyle's corporate office, such as accounting, information technology, human
resources, legal, environmental, treasury, tax and real estate administration.
The costs also include specific LifeStyle corporate initiatives including the
development of an enterprise-wide computer system, development of a Far East
outsourcing infrastructure, administration of the corporate cash management,
banking and accounts receivable securitization programs and other corporate
initiatives that the Companies would not necessarily have incurred on a
stand-alone basis.
As specific identification of these expenses was not practical, allocations were
primarily charged based on the ratio of the Companies' revenues to LifeStyle's
consolidated revenues. LifeStyle's management believes that the allocation
method is reasonable, however, the allocation does not necessarily represent
what the Companies would have incurred on a stand-alone basis. As the Companies
were operated in a decentralized manner with their own administrative
infrastructure, and the Companies would likely make different decisions
regarding administrative initiatives, their overhead as a separate company would
be different than that reflected in the combined financial statements.
LifeStyle uses a centralized approach to cash management and the financing of
its operations. The Companies' cash accounts are swept on a daily basis and are
netted against the net investment and advances account. As a result, none of
LifeStyle's cash, cash equivalents or debt at the corporate level has been
allocated to the Companies in the combined financial statements. Cash in the
combined financial statements primarily represents amounts held locally by the
Companies' operations in its remote geographic areas.
The Companies' combined financial statements include interest expense totaling
$27.8 million in 2000. Interest expense has been allocated based on cash used by
the Companies, which is included in net investment and advances, and the
outstanding balances of payment in kind notes (see Note 8) and costs related to
the Receivables Facility (see Note 7). The average interest rate was 10.5% in
2000. The amounts used to calculate interest expense do not necessarily reflect
the level of indebtedness the Companies would incur as a separate entity. The
Companies believe these are reasonable estimates of the cost of financing the
Companies' assets and operations in the past. However, the Companies may not be
able to obtain financing at interest rates similar to those used for the
interest expense calculation. Accordingly, the Companies' interest expense and
financing costs as a separate entity may be different than that reflected in the
combined financial statements.
1. Basis of Presentation and Accounting Policies, (continued)
Acquisition. On December 28, 2001, certain assets and liabilities of the
Companies were acquired by HDM Furniture Industries, Inc. and Furniture Brands
International Inc. ("FBI") for $175 million in cash and 4 million shares of FBI
common stock valued at $32 per share at December 28, 2001 (the "Acquisition").
In connection with the Acquisition, certain assets and liabilities included in
the accompanying financial statements were retained by LifeStyle. In addition,
intercompany balances with LifeStyle and long-term debt balances due LifeStyle
were liquidated and the Companies ceased to be parties to the agreement which
establish the Receivables facility. The combined financial statements do not
reflect the results of the Acquisition, and would not necessarily be comparable
to the financial position, results of operations or cash flows of the Companies
following the Acquisition.
Revenue Recognition. Revenue on sales to third parties and other LifeStyle
companies is recognized upon shipment when products are shipped by common
carrier or customer vehicle as the Companies do not assume the risk of loss
while the goods are in transit. Sales to LifeStyle companies are at prices
consistent with sales to third parties. Revenue is recognized when products are
delivered to customers when shipped on company vehicles. An estimate of returns
and allowances is recorded when revenue is recognized. The Companies charge
certain of its customers for delivery. Revenue associated with such delivery was
$6.2 million for the year ended December 31, 2000. Delivery revenue is included
in net sales in the accompanying combined statement of operations. Costs
associated with the delivery of the Companies' products to its customers
totalled $5.3 million for the year ended December 31, 2000 and is included in
cost of sales.
Concentration of Credit Risk. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers, relatively
small account balances and dispersion throughout the United States. The
Companies periodically evaluate the financial strength of their customers and
believe their credit risk exposure is limited. The Companies do not require
collateral.
Use of Estimates in the Preparation of Financial Statements. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires the Companies 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 Equivalents. The Companies consider all highly liquid investments with
an original maturity of three months or less to be cash and cash equivalents.
The impact of exchange rate changes on cash flow items is immaterial. Interest
and taxes were paid by LifeStyle on behalf of the Companies.
Receivables. Accounts receivable are presented net of aggregate allowances for
doubtful accounts of $2.7 million at December 31, 2000.
1. Basis of Presentation and Accounting Policies, (continued)
Property and Equipment. Property and equipment, 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 Companies review property and
equipment for impairment whenever events or circumstances indicate that the
carrying value may not be recoverable through undiscounted cash flows. If such
review indicates an impairment has occurred, the Companies write down the
carrying value of the assets to their fair value. 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
Companies generally use estimated useful lives ranging from 15 to 40 years for
buildings and land improvements and 3 to 8 years for machinery and equipment.
Depreciation expense was $8.3 million during 2000.
Advertising Expenses. The Companies expense advertising costs as incurred.
Advertising expenses were approximately $7.2 million for the year ended December
31, 2000.
Self Insurance. Certain of the Companies are self-insured for medical claims.
The self-insurance liability is determined actuarially, based on claims filed
and an estimate of claims incurred but not yet reported. Maximum self-insured
retention, including defense costs per occurrence, is $100,000 per individual
claim. The Companies are insured for covered costs, including defense costs, in
excess of these limits.
Self insurance expense related to the above totalled $11.0 million and total
claim payments were $17.8 million for the year ended December 31, 2000.
Foreign Currency Translation. Assets and liabilities of Maitland-Smith's foreign
subsidiaries in Indonesia and the Philippines, 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 equity. Gains on foreign currency transactions were $0.3
million for the year ended December 31, 2000 and are included in other expense,
net in the accompanying combined statement of operations.
New Accounting Standards. In August 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". This Statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This Statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a segment of a business. The Statement is effective for fiscal years beginning
after December 15, 2001. The Companies do not expect the adoption to have a
material impact on the results of operations, financial position or cash flows.
1. Basis of Presentation and Accounting Policies, (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and in June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which delayed the effective date
the Companies are required to adopt SFAS No. 133 until fiscal year 2001. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment to SFAS No. 133." SFAS
No. 133 as amended requires the Companies to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Companies do not enter into derivative financial instruments for trading
purposes. The Companies entered into forward contracts to hedge certain
anticipated foreign currency transactions. Upon adoption of SFAS No. 133 in the
first fiscal quarter of 2001, these activities will be recognized on the
combined balance sheet. If the provisions of SFAS No. 133 were adopted at
December 31, 2000, the Companies would have reflected a net liability of
approximately $0.5 million on the balance sheet representing the estimated net
fair value of foreign currency derivative instruments designated as hedges. A
corresponding unrealized loss would be recognized in accumulated comprehensive
loss in the combined statement of equity and comprehensive loss.
2. Inventories
December 31,
2000
--------------
(in thousands)
Finished goods $ 87,813
Raw material 23,974
Work in process 26,117
-------------
$ 137,904
=============
Inventories are stated at the lower of cost or net realizable value, with
cost determined by use of the first-in, first-out method.
3. Property and Equipment
December 31,
2000
--------------
(in thousands)
Land and improvements $ 5,923
Buildings 53,275
Machinery and equipment 47,871
-------------
107,069
Less accumulated depreciations 30,321
-------------
$ 76,748
=============
3. Property and Equipment, (continued)
The Companies lease various facilities and equipment under non-cancelable
operating lease arrangements. Rent expense was $2.4 million during 2000.
At December 31, 2000, future minimum rental commitments for operating leases
with non-cancelable terms in excess of one year are as follows: 2001 - $3.3
million; 2002 - $2.5 million; 2003 - $1.8 million; 2004 - $1.4 million; 2005 -
$1.0 million and thereafter - $2.0 million.
4. Notes Receivable
Drexel-Heritage has notes receivable from certain of its customers for the
customer's initial purchase or significant expansion of their showroom display
inventory. These notes require periodic payments of principal and interest which
may be forgiven if certain levels of purchases are made by the customers from
any of the LifeStyle companies. During 2000, approximately $0.3 million of notes
were forgiven and expensed as purchase levels were attained. The notes are
collateralized by the inventory and personal guarantees of the customers and
have terms of repayment over eight to ten years. These notes bear interest based
predominantly on the prevailing prime rate, which was 9.5% at December 31, 2000.
5. Accrued Liabilities (in thousands)
December 31,
2000
-------------
Salaries, wages and commissions $ 5,715
Employee retirmenet plans 1,003
Interest, LifeStyle Furnishings International, Ltd. 2,144
Rayalties 2,235
Advertising 1,283
Insurance 3,407
Property, payroll and other taxes 851
Restructuring 898
Returns and allowances 4,120
Cash overdrafts 5,284
Other 3,462
-------------
$ 30,402
=============
6. Restructuring Initiatives and Asset Impairment
During 2000, Drexel-Heritage recognized a charge totaling $13.7 million to
restructure its manufacturing and distribution operations. As a result of the
restructuring, significant costs have been incurred to provide for employee
severance, the impairment of inventory and property and equipment, and other
related costs, which include building maintenance and security until the
property is sold and costs associated with the disposal of equipment. The
restructuring initiatives included a reduction in workforce, eliminating
approximately 300 positions, and the sale of five facilities by the end of 2001.
The positions eliminated consist primarily of production and supervisory
personnel. In addition, approximately 800,000 square feet of manufacturing and
distribution space has been removed from operations. At December 31, 2000, the
Companies had property, with a net book value of approximately $1.9 million,
held for sale included in property and equipment, net on the combined balance
sheet. As of the Acquisition date, two facilities remained as held for sale with
a net book value of approximately $0.9 million.
The activities discontinued consist of furniture and components parts and
manufacturing plants that supply other manufacturing operations. The activities
previously performed at these facilities were shifted to other facilities where
existing production capacity can be more efficiently utilized. As such, the
operations discontinued do not have separately identifiable revenues or
operating income.
As a result of the restructuring, inventory with a carrying value of $2.8
million has been written-off. Property and equipment, consisting primarily of
real property, machinery and equipment at closed facilities, have been written
down by approximately $8.8 million in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The fair value of these assets was determined based on analysis of
comparable sales in the affected regions.
Operating profit for 2000 included total restructuring and asset impairment
charges of $13.7 million, including the $2.8 million of inventory write-offs
referred to above which are included in gross profit. The following represents
Drexel-Heritage's restructuring activities for the period indicated (in
thousands):
Asset Write-downs
---------------------------------
Property and Employee
Inventory Equipment Severance Other Total
----------- ------------ ---------- ---------- ---------
Restructuring and
impairment charge $ 2,784 $ 8,814 $ 207 $ 1,940 $ 13,745
Activity/payments (2,784) (8,814) (207) (1,042) (12,847)
---------- ----------- --------- -------- ---------
Balance at
December 31, 2000 $ - $ - $ - $ 898 $ 898
=========== ============ ========== ========= ==========
7. Receivables Facility
The Companies participate in LifeStyle's $190.0 million Receivables Facility
under which LFI Receivables Corporation, a special-purpose, bankruptcy remote
subsidiary of LifeStyle (the "Receivables Subsidiary") purchases, on a revolving
basis, substantially all domestic trade receivables generated by LifeStyle,
including the Companies. The Receivables Subsidiary then sells a fractional
undivided interest in the pool of purchased receivables to an unrelated third
party conduit, which funds its purchases of receivables through the issuance of
commercial paper securitized by its fractional undivided ownership interest in
the receivables pool. In the event the purchaser is unable to fund any purchase
(or portion thereof) through the issuance of commercial paper, a backup
liquidity facility is available to fund the purchase. The Receivables Subsidiary
retains a fractional undivided interest in the receivables pool equal to the
percentage not sold to the third party conduit. Third party investors have no
recourse to LifeStyle's, including the Companies', other assets for failure of
debtors to pay when due. LifeStyle, including the Companies, continue to service
the receivables.
As of December 31, 2000 the outstanding balance of the Companies' accounts
receivable sold to the Receivable Subsidiary were $64.7 million.
Purchases of interests in receivables that are funded through the issuance of
commercial paper bear interest at a rate equal to the applicable commercial
paper rate plus 0.22% per annum. Purchases funded through the alternate
liquidity facility are funded at a rate equal to LIBOR plus 0.50% per annum. The
conduit purchaser also receives a facility fee equal to 0.15% per annum on the
average daily excess, if any, of the available facility purchase limit over the
actual amount of purchased receivables interests. The cost of the facility
amounted to $9.0 million during 2000. Gross proceeds from sales to the facility
and collections reinvested in the facility approximated $433 million and $413
million, respectively for the year ended December 31, 2000.
This arrangement places certain restrictions on LifeStyle, including the
Companies, and the Receivables Subsidiary, including restrictions on placing
liens on trade receivables. At December 31, 2000, LifeStyle, including the
Companies, was in compliance with these covenants.
In connection with the Acquisition, the Companies ceased to be parties to the
agreement which established the Receivables facility.
8. Long-Term Debt
As of December 31, 2000 the outstanding balance of the Payment-in-Kind notes
(PIK), including cumulative accrued interest, was approximately $65 million,
with no current portion.
Payment-In-Kind Notes. In August 1996, the Companies issued $39.1 million
payment-in-kind notes ("PIK Notes") to LifeStyle. The PIK Notes bear interest at
12% per annum which is payable semi-annually, and may be paid in kind by the
issuance of additional notes. The unpaid principal and PIK interest were due in
2008. In connection with the Acquisition, the PIK Notes and accrued interest
were liquidated.
9. Employee Retirement Plans
Pension plan
Prior to the sale of the Companies, the Companies' employees participated in
LifeStyle's defined benefit pension plan which covers substantially all
LifeStyle employees. In general, employees of the Companies terminated
employment with LifeStyle at the Acquisition date but will maintain their vested
rights in the LifeStyle pension plan. The Companies have no further obligations
under this plan after the Acquisition. LifeStyle's funding policy is to
contribute annual amounts as needed based on actuarial and economic assumptions
designed to achieve adequate funding of projected benefit obligations. The net
periodic pension cost allocated to the Companies associated with the LifeStyle
defined benefit pension plan was $2.4 million during the year ended December 31,
2000. Benefits provided under LifeStyle's defined benefit pension plan are
primarily based on the employee's age, years of service and compensation.
Savings plan
Prior to the sale of the Companies, the Companies' employees participated in
LifeStyle's savings plan. Substantially all of LifeStyle's domestic employees
were eligible to participate in the plan under which LifeStyle made matching
contributions of 50% of a participant's contribution of up to 6% of the
participant's eligible compensation, subject to limitations required by
government laws or regulations. Contributions to the plan on behalf of employees
of the Companies were $1.9 million during the year ended December 31, 2000.
Foreign benefit plans
Cebu, Philippines. Employees of Maitland-Smith in Cebu, Philippines are covered
by the Maitland-Smith staff retirement plan which provides a lump sum payment
upon retirement at age 60 or a reduced benefit at early retirement between age
50 and 60. The plan is unfunded. Maitland-Smith has recorded a liability of $1.0
million in accrued liabilities for the actuarially determined liability
outstanding at December 31, 2000 and expense of $0.3 million for the year ended
December 31, 2000.
Semarang, Indonesia. Employees of Maitland-Smith in Semarang, Indonesia are
covered by the Indonesian Government pension arrangements. Maitland-Smith pays
monthly contributions to the government based on current hours worked. In 2000,
the expense related to this plan was insignificant.
Hong Kong. Employees of Maitland-Smith in Hong Kong are covered by the Mandatory
Provident Fund Schemes Ordinance which required that Maitland-Smith set up a
Mandated Provident Fund to which both employers and employees contribute.
Employer contributions are made monthly based on a percentage of the employees'
salaries. Maitland-Smith's liability is limited to its monthly contribution. In
2000, the expense related to this plan was insignificant.
Expatriate plan. Maitland-Smith contributes 3.5% of expatriates' salaries to a
defined contribution plan. Employees also contribute 3.5%. Expatriates are fully
vested after three years of service. Maitland-Smith's liability is limited to
its monthly contribution. In 2000, Maitland-Smith recorded $20,000 in expense
related to this plan.
10. Derivative Financial Instruments and Fair Value of Financial Instruments
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 approximates fair value as the floating rates
inherent in the related financial instruments reflect changes in overall market
interest rates. The fair value of the PIK notes approximates $56 million at
December 31, 2000 based on prevailing interest rates at that time.
Maitland-Smith conducts its business in several foreign currencies. As a result,
it is subject to the transaction exposure that arises from foreign exchange rate
movements. During 2000, the Companies entered into foreign currency forward
contracts for the purchase and sale of Asian currencies to hedge income
statement currency exposures. These contracts are principally entered into for
up to 60% of the net anticipated foreign currency receipts and disbursements.
Counter-parties for these instruments are major financial institutions but do
subject the Companies to a certain amount of credit risk. Maturity dates of the
contracts attempt to match the anticipated receipts and disbursements. The
outstanding hedge agreements as of December 31, 2000 mature through March 2002.
The net dollar equivalent of these currency contracts and related fair values
are detailed below:
December 31,
2000
--------------
(in thousands)
National amount $ 14,413
Fair value, based on current quoted prices 13,874
-------------
Net unrecognized loss $ (539)
=============
11. Income Taxes
December 31,
2000
--------------
(in thousands)
Income (loss) before income taxes:
Domestic $ (10,160)
Foreign 17,333
-------------
$ 7,173
=============
Provisions (benefit) for income taxes:
Currently payable:
Federal $ 9,381
State and local 575
Foreign 933
Deferred:
Domestic (8,340)
Foreign -
-------------
$ 2,549
=============
11. Income Taxes (continued)
Following is a reconciliation of tax computed at the U.S. federal statutory rate
to the provision for income taxes attributed to income (loss) before income
taxes:
December 31,
2000
--------------
(in thousands)
U.S. federal statutory rate 35%
Tax at U.S. federal statutory rate $ 2,511
Foreign earnings taxed at (less)
than U.S. rate (388)
State and local taxes, net of federal tax
benefit (342)
Other 768
-------------
Income taxes $ 2,549
=============
Provision for U.S. income taxes on undistributed earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered
permanently invested.
December 31,
2000
--------------
(in thousands)
Deferred tax assets:
Inventoriesstatutory rate $ 3,301
Accrued liabilities 11,981
Loss carryforwards 3,923
------------
Gross deferred tax assets 19,205
Valuation allowance (3,858)
-------------
Deferred tax assets, net of valuation allowances 15,347
-------------
Deferred tax liabilities:
Property and equipment 10,958
-------------
Gross deferred tax liabilities 10,958
-------------
Net deferred tax asset $ 4,389
=============
Under SFAS No. 109, a liability or asset is recognized for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. Deferred tax assets are reviewed periodically for recoverability and
valuation allowances are provided as necessary.
11. Income Taxes (continued)
As of December 31, 2000, the Companies had state net operating loss
carryforwards, the tax effect of which was $3.9 million. A valuation allowance
was established for substantially all of this deferred tax asset. The state loss
carryforwards expire, if unused, on or before 2020 and may be used only to
offset taxable income computed on a separate Company basis.
The Companies and their subsidiaries are included in the consolidated federal
tax return of LifeStyle's parent company and participate in a tax sharing
agreement. The Companies' provision for income taxes has been computed on a
separate return basis and does not reflect the impact of the tax sharing
agreement. Substantially all income tax related assets and liabilities are due
from or to LifeStyle.
12. Operating Segments
The Companies generate revenue from one operating segment, fine furniture, and
are principally involved in the manufacture, sale and distribution of home
furnishing products to independent and franchised retailers. These products
consist of case goods, upholstered products, accessories, casual furniture and
indoor/outdoor furniture.
The following geographic information represents the Companies' revenues after
elimination of sales between the Companies based on product shipment location
and total assets based on physical location for the regions indicated (in
thousands):
Net Sales:
United States:
Third parties $ 425,503
LifeStyle Furnishings INternational Ltd. 65,209
-------------
Total United States 490,712
Pacific Rim:
Third parties 13,200
-------------
Total net sales $ 503,912
=============
Total Assets:
United States $ 244,578
Pacific Rim 16,470
-------------
$ 261,048
=============
13. Commitments and Contingencies
LifeStyle has a $400 million senior secured revolving credit facility due 2003.
The revolving credit facility bears interest at a floating rate equal to LIBOR
plus an applicable percentage based upon LifeStyle's debt coverage ratio at the
end of each quarter. The effective interest rate as of December 31, 2000 was
8.1%. Interest expense allocated to the Companies related to the facility was
$11.6 million for the year ended December 31, 2000 and is included in Interest
Expense, LifeStyle Furnishings International Ltd. in the accompanying combined
statement of operations.
13. Commitments and Contingencies (continued)
The obligation under the revolving credit facility is unconditionally
guaranteed, jointly and severally, by LifeStyle's parent and substantially all
domestic subsidiaries of LifeStyle, including the Companies, and is
collateralized by substantially all the fixed assets of LifeStyle 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, 2000, LifeStyle was in
compliance with these covenants. However, LifeStyle violated the interest
coverage and debt service coverage ratios at June 30, 2001. LifeStyle obtained a
permanent waiver of these violations and subsequent modifications of the
covenants. LifeStyle has been in compliance with the modified covenants since
June 2001. In connection with the Acquisition, the Companies have been released
from their obligations under the Revolving Credit Facility.
In the ordinary course of business, the Companies may become exposed to
potential liabilities resulting from spills and releases of hazardous substances
at its sites and facilities. The Companies also have been named as potentially
responsible parties at a number of non-owned contaminated sites, including
Superfund sites. The Companies do not believe that costs associated with
investigating or remediating these releases or costs related to these sites will
have a material adverse effect on the Companies' financial condition, cash
flows, operating expenses or earnings. However, there can be no assurance that
material costs relating to these matters will not be incurred in the future.
From time to time, the Companies are a party to various legal actions in the
normal course of its business. Although the outcome of these actions cannot be
predicted, it is management's opinion that these matters will not have a
material adverse effect on the liquidity or results of operations of the
Companies.
The Companies have entered into various royalty agreements with third parties
which permit the Companies to manufacture and market products under the third
party's name. The Companies pay royalties based on a percentage of sales of the
products. The initial terms of these agreements run through December 2003 and
may be renewed. The agreements may be terminated by the third party or the
Companies for uncured breaches of the agreement. Royalty expense paid to third
parties was approximately $9.4 million for the year ended December 31, 2000.
UNAUDITED COMBINED FINANCIAL STATEMENTS OF
Henredon Furniture Industries, Inc.,
Drexel-Heritage Furnishings, Inc.,
Maitland-Smith Pacific Ltd. and Maitland-Smith, Inc.
(Wholly Owned Subsidiaries of LifeStyle Furnishings International Ltd.)
and their subsidiaries as of September 30, 2001
and for the nine months ended September 30, 2001 and 2000
CONTENTS
Page (s)
--------
Combined Financial Statements:
Balance Sheet at September 30, 2001..................................................................... 25
Statement of Operations for the nine months ended September 30, 2001 and 2000........................... 26
Statement of Equity and Comprehensive Loss for the nine months ended September 30, 2001................. 27
Statement of Cash Flows for the nine months ended September 31, 2001 and 2000........................... 28
Notes to Combined Financial Statements.................................................................. 29
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED BALANCE SHEET
(Dollars in thousands)
As of
September 30,
2001
ASSETS (unaudited)
-------------------
Current assets:
Cash and cash equivalents $ 610
Accounts receivable, net 1,652
Receivable from LifeStyle Furnishings International, Ltd. subsidiaries, net 12,801
Notes receivable 1,388
Inventories 128,896
Prepaid expenses 1,468
Deferred income taxes 13,516
-------------------
Total current assets 160,331
Property and equipment, net 77,244
Notes receivable 282
Other assets 3,646
-------------------
Total assets $ 241,503
===================
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 24,606
Accrued liabilities 24,940
Income taxes payable 368
-------------------
Total current liabilities 49,914
Long-term debt, LifeStyle Furnishings International, Ltd. 68,916
Deferred income taxes 7,703
-------------------
Total liabilities 126,533
-------------------
Commitments and contingencies
Equity:
LifeStyle Furnishings International Ltd.
Net investment and advances 131,043
Accumulated other comprehensive loss (16,073)
-------------------
Total equity 114,970
-------------------
Total liabilities and equity $ 241,503
===================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands)
For the nine months ended
September 30,
2001 2000
------------------- ------------------
(unaudited)
Net sales, third parties $ 283,374 $ 329,921
Net sales, LifeStyle Furnishings International Ltd. subsidiaries 40,529 48,012
------------------- ------------------
Total net sales 323,903 377,933
Cost of sales 253,994 290,782
Restructuring and asset impairment charge - 2,784
------------------- ------------------
Gross profit 69,909 84,367
Selling, general and administrative expenses 49,036 46,881
Allocated costs, LifeStyle Furnishings International Ltd. 5,739 5,919
Restructuring and asset impairment charge - 10,961
------------------- ------------------
Operating profit 15,134 20,606
Interest expense, LifeStyle Furnishings International Ltd. 18,081 20,428
Other income (expense), net (73) 1,182
------------------- ------------------
Income (loss) before income taxes (3,020) 1,360
Income tax provision (benefit) (1,056) 483
------------------ -------------------
Net income (loss) $ (1,964) $ 877
=================== ====================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC. DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED STATEMENT OF EQUITY AND COMPREHENSIVE LOSS (unaudited)
(Dollars in thousands)
LifeStyle
Furnishings Accumulated
International Ltd Other
Net investment Comprehensive Total
and advances Loss Equity
------------------------------------------------ ---------------------
Balance at December 31, 2000 $ 126,488 $ (15,128) $ 111,360
Net loss (1,964) (1,964)
Other comprehensive loss:
Foreign currency translation (545) (545)
Cumulative effect adjustment
of SFAS No. 133 adoption,
net of tax of approximately $14 (500) (500)
Net derivative gain reclassified
as earnings 100 100
----------------------- -------------------- ---------------------
Total comprehensive loss
(1,964) (945) (2,909)
Changes in net investment
and advances 6,519 6,519
----------------------- --------------------- --------------------
Balance at September 30, 2001 $ 131,043 $ (16,073) $ 114,970
======================= ==================== ====================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
COMBINED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the nine months ended
September 30,
2001 2000
----------------- ------------------
(unaudited)
Operating Activities:
Net income (loss) $ (1,964) $ 877
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,077 6,010
Bad debt provision 1,302 1,455
Deferred income taxes (1,425) (7,718)
Noncash interest expense 5,299 5,329
Noncash restructuring and asset impairment charge - 12,354
Changes in operating assets and liabilities:
Receivables 453 (18,169)
Inventories 9,008 4,229
Prepaid expenses and other assets 288 700
Accounts payable (7,881) 982
Other liabilities (17,383) 19,566
----------------- ------------------
Net cash provided by (used for) operating activities (6,226) 25,615
----------------- ------------------
Investing Activities:
Capital expenditures (6,956) (5,283)
Proceeds from sale of property held for sale 300 -
Issuance of notes receivable (778) (620)
Collection of notes receivable 188 1,888
Other, net (860) (84)
----------------- ------------------
Net cash used for investing activities (8,106) (4,099)
----------------- ------------------
Financing Activities:
Net proceeds from accounts receivable securitization 7,604 15,277
Change in LifeStyle net investment and advances 6,519 (36,260)
----------------- ------------------
Net cash provided by (used for) financing activities 14,123 (20,983)
----------------- ------------------
Cash and Cash Investments:
Increase (decrease) for the period (209) 533
Balance, beginning of period 819 491
----------------- ------------------
Balance, end of period $ 610 $ 1,024
================= ==================
The accompanying notes are an integral part of the combined financial
statements.
HENREDON FURNITURE INDUSTRIES, INC., DREXEL-HERITAGE FURNISHINGS, INC.,
MAITLAND-SMITH PACIFIC LTD. AND MAITLAND-SMITH, INC. AND THEIR SUBSIDIARIES
(Wholly Owned Subsidiaries of LifeStyle Furnishings International, Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Accounting Policies
Basis of Presentation. The combined financial statements reflect the financial
position, results of operations and cash flows of Henredon Furniture Industries,
Inc., Drexel-Heritage Furnishings, Inc., Maitland-Smith Pacific Ltd. and
Maitland-Smith, Inc. and their subsidiaries (all of which are wholly owned
subsidiaries of LifeStyle Furnishings International, Ltd.) ("LifeStyle"),
hereinafter referred to as the Companies, as of September 30, 2001 and for the
nine months periods ended September 30, 2001 and 2000. All intercompany accounts
and transactions have been eliminated. The accompanying unaudited interim
combined financial statements have been prepared in accordance with Regulation
S-X and accordingly, certain financial information has been condensed and
certain footnote disclosures have been omitted. Such information and disclosures
are normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America. These
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. Financial results for interim
periods are not necessarily indicative of those for the full year.
The combined Companies are not a legal entity and since no direct ownership in
the Companies as a combined group exists, LifeStyle's net investment and
advances in the Companies is shown in lieu of stockholder's equity in the
combined financial statements and includes the accumulation of transactions
between the Companies and LifeStyle as described below.
The Companies' operations consist of the manufacturing and sale of home
furnishings products. Management believes the assumptions underlying the
combined financial statements are reasonable. However, the combined financial
position, results of operations, and cash flows as presented herein, may not be
the same as would have occurred had the Companies operated as a stand-alone
entity during the period presented and may not be indicative of future financial
results.
The combined financial statements include allocations of LifeStyle's corporate
overhead, executive management and administrative expenses amounting to $5.7
million and $5.9 million for the nine months ended September 31, 2001 and 2000
respectively. The allocations include the general administrative expenses of
LifeStyle's corporate office, such as accounting, information technology, human
resources, legal, environmental, treasury, tax and real estate administration.
The costs also include specific LifeStyle corporate initiatives including the
development of an enterprise-wide computer system, development of a Far East
outsourcing infrastructure, administration of the corporate cash management,
banking and accounts receivable securitization programs and other corporate
initiatives that the Companies would not necessarily have incurred on a
stand-alone basis.
As specific identification of these expenses was not practical, allocations were
primarily charged based on the ratio of the Companies' revenues to LifeStyle's
consolidated revenues. LifeStyle's management believes that the allocation
method is reasonable, however, the allocation does not necessarily represent
what the Companies would have incurred on a stand-alone basis. As the Companies
were operated in a decentralized manner with their own administrative
infrastructure, and the Companies would likely make different decisions
regarding administrative initiatives, their overhead as a separate company would
be different than that reflected in the combined financial statements.
LifeStyle uses a centralized approach to cash management and the financing of
its operations. The Companies' cash accounts are swept on a daily basis and are
netted against the net investment and advances account. As a result, none of
LifeStyle's cash, cash equivalents or debt at the corporate level has been
allocated to the Companies in the combined financial statements. Cash in the
combined financial statements primarily represents amounts held locally by the
Companies' operations in its remote geographic areas.
1. Basis of Presentation and Accounting Policies, (continued)
The Companies' combined financial statements include interest expense totaling
$18.1 million and $20.4 million for the nine months ended September 30, 2001 and
2000, respectively. Interest expense has been allocated based on cash used by
the Companies, which is included in net investment and advances, and the
outstanding balances of payment in kind notes and costs related to the
Receivables Facility. The average interest rate was 6.7% and 7.9% in 2001 and
2000, respectively. The amounts used to calculate interest expense do not
necessarily reflect the level of indebtedness the Companies would incur as a
separate entity. The Companies believe these are reasonable estimates of the
cost of financing the Companies' assets and operations in the past. However, the
Companies may not be able to obtain financing at interest rates similar to those
used for the interest expense calculation. Accordingly, the Companies' interest
expense and financing costs as a separate entity may be different than that
reflected in the combined financial statements.
Acquisition. On December 28, 2001, certain assets and liabilities of the
Companies were acquired by HDM Furniture Industries, Inc. and Furniture Brands
International Inc. ("FBI") for $175 million in cash and 4 million shares of FBI
common stock valued at $32 per share at December 28, 2001 (the "Acquisition").
In connection with the Acquisition, certain assets and liabilities included in
the accompanying financial statements were retained by LifeStyle. In addition,
all intercompany balances with LifeStyle and long-term debt balances due
LifeStyle were liquidated and the Companies ceased to be parties to the
agreement which established the Receivables facility. The combined financial
statements do not reflect the results of the Acquisition, and would not
necessarily be comparable to the financial position, results of operations or
cash flows of the Companies following the Acquisition.
Revenue Recognition. Revenue on sales to third parties and other LifeStyle
companies is recognized upon shipment when products are shipped by common
carrier or customer vehicle as the Companies do not assume the risk of loss
while the goods are in transit. Sales to LifeStyle companies are at prices
consistent with sales to third parties. Revenue is recognized when products are
delivered to customers when shipped on company vehicles. An estimate of returns
and allowances is recorded when revenue is recognized. The Companies charge
certain of its customers for delivery. Revenue associated with such delivery was
$4.9 million and $4.6 million during the nine months ended September 30, 2001
and 2000, respectively. Delivery revenue is included in net sales in the
accompanying combined statement of operations. Costs associated with the
delivery of the Companies' products to its customers totalled $4.4 million and
$4.0 million during the nine months ended September 30, 2001 and 2000,
respectively and are included in cost of sales.
New Accounting Standard. In August 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". This Statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This Statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a segment of a business. The Statement is effective for fiscal years beginning
after December 15, 2001. The Companies do not expect the adoption to have a
material impact on the results of operations, financial position or cash flows.
2. Inventories (in thousands)
December 31,
2001
--------------
(in thousands)
Finished goods $ 89,502
Raw material 16,920
Work in process 22,474
-------------
$ 128,896
=============
Inventories are stated at the lower of cost or net realizable value, with cost
determined by use of the first-in, first-out method.
3. Property and Equipment
December 31,
2001
--------------
(in thousands)
Land and improvements $ 5,393
Buildings 54,486
Machinery and equipment 51,835
-------------
111,714
Less accumulated depreciations 34,470
-------------
$ 77,244
=============
4. Accrued Liabilities (in thousands)
December 31,
2001
-------------
Salaries, wages and commissions $ 7,891
Employee retirmenet plans 1,282
Interest, LifeStyle Furnishings International, Ltd. 1,739
Rayalties 1,825
Advertising 1,849
Insurance 2,406
Property, payroll and other taxes 1,437
Restructuring 180
Returns and allowances 3,659
Cash overdrafts 1,077
Other 1,595
-------------
$ 24,940
=============
5. Restructuring Initiatives and Asset Impairment
During the nine months ended September 2000, Drexel-Heritage recognized a charge
totaling $13.7 million to restructure its manufacturing and distribution
operations. As a result of the restructuring, significant costs have been
incurred to provide for employee severance, the impairment of inventory and
property and equipment, and other related costs which include building
maintenance and security until the property is sold and costs associated with
the disposal of equipment. The restructuring initiatives included a reduction in
workforce, eliminating approximately 300 positions, and the sale of five
facilities by the end of 2001. The positions eliminated consist primarily of
production and supervisory personnel. In addition, approximately 800,000 square
feet of manufacturing and distribution space has been removed from operations.
At September 30, 2001, the Companies had property and equipment with a net book
value of $1.6 million held for sale.
The activities discontinued consist of furniture and components parts and
manufacturing plants that supply other manufacturing operations. The activities
previously performed at these facilities were shifted to other facilities where
existing production capacity can be more efficiently utilized. As such, the
operations discontinued do not have separately identifiable revenues or
operating income.
As a result of the restructuring, inventory with a carrying value of $2.8
million has been written-off. Property and equipment, consisting primarily of
real property, machinery and equipment at closed facilities, have been written
down by approximately $8.8 million in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The fair value of these assets was determined based on analysis of
comparable sales in the affected regions.
Operating profit for 2000 included total restructuring and asset impairment
charges of $13.7 million, including the $2.8 million of inventory write-offs
referred to above which are included in gross profit. The following represents
Drexel-Heritage's restructuring activities for the nine month period ended
September 30, 2001 (in thousands):
Other
Costs Total
----------- -----------
Balance at
December 31, 2000 $ 898 $ 898
Activity/payments 718 718
------------ -----------
Balance at
December 30, 2001 $ 180 $ 180
============ ============
6. Long-Term Debt
As of September 30, 2001 the outstanding balance of the Payment-in-Kind notes
(PIK), including cumulative accrued interest, was approximately $68.9 million,
with no current portion. In connection with the Acquisition, the PIK notes and
accrued interest were liquidated.
7. Accounting for Derivatives and Hedging Activities
The Companies adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", on January 1, 2001. On January 1, 2001, the Companies held
forward contracts to hedge certain anticipated foreign currency transactions,
which are designated as cash flow hedging instruments. In accordance with the
transition provisions of SFAS No. 133, the Companies recorded a net-of-tax
cumulative-effect-type adjustment of $0.5 million in accumulated comprehensive
loss to recognize the fair value of all derivatives that are designated as
cash-flow hedging instruments. Net gains of $0.1 million on derivative
instruments were reclassified to earnings and recorded in accumulated
comprehensive loss during the nine months ended September 30, 2001.
Effective with the adoption of SFAS No. 133, all derivatives were recognized on
the balance sheet at their fair value. On the date the derivative contract is
entered into, the Companies designate the derivative as (1) a hedge of the fair
value of a recognized asset or liability or of an unrecognized firm commitment
("fair value" hedge) or (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow" hedge). Changes in the fair value of a derivative that
is highly effective and that is designated and qualifies as a fair-value hedge,
along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk, including losses or gains on firm commitments,
are recorded in current-period earnings. Changes in fair value of a derivative
that is highly effective and that is designated and qualifies as a cash-flow
hedge are recorded in other comprehensive loss, until earnings are affected by
the variability of cash flows. Earnings are affected by the variability of cash
flows when periodic settlements on a variable-rate assets or liabilities are
recorded in earnings.
8. Operating Segments (in thousands)
The Companies generate revenue from one operating segment, fine furniture and
are principally involved in the manufacture, sale and distribution of home
furnishing products to independent and franchised retailers. These products
consist of case goods, upholstered products, accessories, casual furniture and
indoor/outdoor furniture.
The following geographic information represents the Companies' revenues after
elimination of sales between the Companies based on product shipment location
and total assets based on physical location for the regions indicated (in
thousands):
September 30,
2001 2000
-------------- --------------
Net Sales:
United States:
Third parties $ 274,357 $ 319,686
LifeStyle Furnishings INternational Ltd. 40,529 48,012
------------- --------------
Total United 314,886 367,698
Pacific Rim:
Third parties 9,017 10,235
------------- --------------
Total net sales $ 323,903 $ 377,933
============= ==============
September 30,
2001
--------------
Total Assets:
United States $ 225,380
Pacific Rim 16,123
--------------
$ 241,503
==============
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
reflects the acquisition of Henredon Furniture Industries, Drexel Heritage
Furnishings and Maitland-Smith (collectively "HDM") which was consummated on
December 28, 2001, the incurrence of indebtedness by Furniture Brands
International, Inc. (the "Company") and the issuance of four million shares of
the Company's common stock in connection therewith, as of the beginning of each
period presented for pro forma statements of operations purposes and on
September 30, 2001 for pro forma balance sheet purposes. This information is
presented for comparative purposes only and is not necessarily indicative of the
combined results of operations in the future or of what the combined results of
operations would have been if the foregoing transactions had actually been
consummated as of such dates. The unaudited pro forma condensed combined
financial information should be read in connection with the historical financial
statements of the Company.
The pro forma financial information has been prepared on the basis of
assumptions described in the notes thereto and includes assumptions relating to
the allocation of the consideration paid for the HDM acquisition to its
respective assets and liabilities based on preliminary estimates of their
respective fair values. The actual allocation of such consideration may differ
from that reflected in the pro forma consolidated financial statements after
valuations and other studies to be performed pursuant to post-closing
adjustments related to the acquisition have been completed. Actual amounts
allocated will be based upon the estimated fair values at the time of the
acquisition.
Furniture Brands International, Inc.
Pro Forma Condensed Combined Balance Sheet
(Unaudited)
September 30, 2001
------------------------------------------------------------------------------------------
Historical Acquisition
------------------------------------ ----------------------------------------------------
(Dollars in Thousands) Furniture Brands HDM Pro Forma Pro Forma
International Adjustments
----------------- ----------------- ---------------------- ----------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 19,399 $ 610 $ (610) (a) $ 19,399
Receivables 313,906 15,841 53,484 (b)
(12,801) (a) 370,430
Inventories 278,766 128,896 -- 407,662
Prepaid expenses and other
current assets 28,752 14,984 (13,516) (a) 30,220
----------------- ----------------- ---------------------- ----------------------
Total current assets 640,823 160,331 26,557 827,711
Net property, plant and 261,234 77,244 -- 338,478
equipment
Intangible assets 279,731 -- 72,982 (c) 352,713
Other assets 24,611 3,928 (3,095) (a) 25,444
----------------- ----------------- ---------------------- ----------------------
$1,206,399 $241,503 $96,444 $1,544,346
================= ================= ====================== ======================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accrued interest expense $ 4,265 $ 1,739 $(1,739) (a) $ 4,265
Accounts payable and other
accrued expenses 153,008 48,175 (368) (a)
3,000 (d) 203,815
----------------- ----------------- ---------------------- ----------------------
Total current liabilities 157,273 49,914 893 208,080
Long-term debt 314,400 68,916 (68,916) (a)
176,500 (e) 490,900
Other long-term liabilities 109,870 7,703 (7,703) (a) 109,870
Shareholders' equity:
Common stock 52,277 -- 4,000 (f) 56,277
Paid-in capital 112,660 -- 106,640 (f) 219,300
Retained earnings 497,672 -- -- 497,672
Accumulated other
comprehensive income (5,895) -- -- (5,895)
Treasury stock (31,858) -- -- (31,858)
Net investment in -- 114,970 (114,970) (g) --
Subsidiaries
----------------- ----------------- ---------------------- ----------------------
Total Shareholders' equity 624,856 114,970 (4,330) 735,496
----------------- ----------------- ---------------------- ----------------------
$1,206,399 $241,503 $96,444 $1,544,346
================= ================= ====================== ======================
(a) Adjusted to reflect the elimination of assets not acquired and liabilities
not assumed in the Acquisition of HDM.
(b) Adjusted to reflect the termination of HDM as a participant in the
Lifestyle Receivables Facility.
(c) Adjusted to reflect intangible assets pursuant to the acquisition of HDM.
Based upon third-party valuation, $51,100 of the intangible assets were
allocated to trademarks and trade names with the balance allocated to
goodwill. All the intangible assets acquired were determined to have
indefinite lives and will not be amortized; however, will be tested
annually for impairment.
(d) Adjusted to reflect accrual for charges associated with the closing of
certain Drexel Heritage manufacturing facilities.
(e) Adjusted to reflect additional borrowings from the Company's existing
credit facility in connection with the acquisition.
(f) Adjusted to reflect the issuance of four million shares of the Company's
common stock in connection with the acquisition.
(g) Adjusted to reflect the elimination of the equity of HDM that existed prior
to the acquisition of HDM by the Company.
Furniture Brands International, Inc.
Pro Forma Condensed Combined Statement of Operations
(Unaudited)
(Dollars in thousands, Nine Months ended September 30, 2001
except per share data) ------------------------------------------------------------------------------------------
Historical Acquisition
------------------------------------ ----------------------------------------------------
Furniture Brands HDM Pro Forma Pro Forma
International Adjustments
------------------ ----------------- ---------------------- ----------------------
Net sales $1,414,512 $323,903 -- $1,738,415
Cost of sales 1,062,135 253,994 -- 1,316,129
------------------ ----------------- ---------------------- ----------------------
Gross profit 352,377 69,909 -- 422,286
Selling, general and
administrative expenses 266,024 49,036 -- 315,060
Asset impairment charges 18,000 -- -- 18,000
Allocated costs, Lifestyle
Furnishings International Ltd. -- 5,739 (5,739) (a) --
------------------ ----------------- ---------------------- ----------------------
Earnings from operations 68,353 15,134 5,739 89,226
Interest expense 17,505 18,081 (18,081) (b)
7,360 (c) 24,865
Other income (expense), net 2,209 (73) -- 2,136
------------------ ----------------- ---------------------- ----------------------
Earnings before income tax expense 53,057 (3,020) 16,460 66,497
Income tax expense 17,858 (1,056) 6,008 (d) 22,810
------------------ ----------------- ---------------------- ----------------------
Net earnings $35,199 $ (1,964) $10,452 $43,687
================== ================= ====================== ======================
Weighted average common and common equivalent shares outstanding (in thousands):
Basic 50,275 -- 4,000 (e) 54,275
Diluted 51,255 -- 4,000 (e) 55,255
Net earnings per common share:
Basic $0.70 -- -- $0.80
Diluted $0.69 -- -- $0.79
Furniture Brands International, Inc.
Pro Forma Condensed Combined Statement of Operations
(Unaudited)
(Dollars in thousands, Twelve Months ended December 31, 2000
except per share data)
-----------------------------------------------------------------------------------------
Historical Acquisition
------------------------------------- --------------------------------------------------
Furniture Brands HDM Pro Forma Pro Forma
International Adjustments
------------------ ----------------- ---------------------- -----------------------
Net sales $2,116,239 $503,912 -- $2,620,151
Cost of sales 1,569,380 385,485 -- 1,954,865
Restructuring and asset
impairment charge -- 2,784 -- 2,784
------------------ ----------------- ---------------------- -----------------------
Gross profit 546,859 115,643 -- 662,502
Selling, general and
administrative expenses 354,245 63,404 -- 417,649
Restructuring and asset
impairment charge -- 10,961 -- 10,961
Allocated costs, Lifestyle
Furnishings International Ltd. -- 7,900 (7,900) (a) --
------------------ ----------------- ---------------------- -----------------------
Earnings from operations 192,614 33,378 7,900 233,892
Interest expense 36,389 27,826 (27,826) (b)
12,955 (c) 49,344
Other income (expense), net 9,772 1,621 -- 11,393
------------------ ----------------- ---------------------- -----------------------
Earnings before income tax expense 165,997 7,173 22,771 195,941
Income tax expense 57,574 2,549 8,311 (d) 68,434
------------------ ----------------- ---------------------- -----------------------
Net earnings $108,423 $4,624 $14,460 $127,507
================== ================= ====================== =======================
Weighted average common and common equivalent shares outstanding (in thousands):
Basic 49,532 -- 4,000 (e) 53,532
Diluted 50,443 -- 4,000 (e) 54,443
Net earnings per common share:
Basic $2.19 -- -- $2.38
Diluted $2.15 -- -- $2.34
(a) Adjusted to reflect the reversal of allocated charges (allocation of
Lifestyle corporate headquarter expenses) included in HDM's combined
statement of operations. The financial statements of the acquired companies
included all expenses of a stand-alone corporation before the allocation of
the management fee. The only incremental expenses to be incurred by the
Company as a result of the acquisition relates to additional interest
expense resulting from an increase in long-term debt.
(b) Adjusted to reflect the reversal of interest expense included in HDM's
combined statement of operations.
(c) Adjusted to reflect increased interest expense to the Company related to
borrowings under the Company's existing credit facility in connection with
the acquisition of HDM.
(d) Adjusted to record the income tax effect of all adjustments at a rate of
36.5%.
(e) Adjusted to reflect additional shares of the Company's common stock issued
in connection with the acquisition of HDM.
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.
Furniture Brands International, Inc.
By: /s/ Steven W. Alstadt
---------------------------------
Steven W. Alstadt
Controller and Chief Accounting Officer
Dated: June 25, 2002