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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1994
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-18446
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Fairwood Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3472113
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Center
1201 N. Orange Street, Suite 790
Wilmington, DE 19801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-884-6749
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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None Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
Warrants to Purchase Common Stock
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(Title of Class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant was zero as of February 28, 1995.
On February 28, 1995, the registrant had outstanding 500 shares of Class A
Voting common stock, $.01 par value and 999,800 shares of Class B Non-Voting
common stock, $.01 par value.
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PART I
ITEM 1. BUSINESS
Fairwood Corporation ("Fairwood"), is a privately-held Delaware corporation
organized in 1988 by investors including Citicorp Venture Capital Limited
("CVCL") for the purpose of acquiring all of the common stock of Consolidated
Furniture Corporation, formerly named Mohasco Corporation ("Consolidated
Furniture"). At the date of acquisition, Consolidated Furniture s operations
were diversified to include the manufacture of residential furniture and
carpet, and the rental of residential and office furniture. Consolidated
Furniture sold its carpet and rental operations in 1988.
The principal executive offices of Fairwood are located at One Commerce
Center, 1201 Orange St., Suite 790, Wilmington, Delaware 19801. Fairwood is a
holding company with no independent operations: its primary asset is all of
the common stock of Consolidated Furniture.
On March 10, 1992, Consolidated Furniture entered into two Agreements and
Plans of Merger, which provided for the disposition of two wholly-owned
subsidiaries, Chromcraft Corporation ("Chromcraft") and Peters-Revington
Corporation ("Peters-Revington") to Chromcraft Revington, Inc., an affiliate.
The mergers were consummated on April 23, 1992 and the proceeds of the
disposition were used by Consolidated Furniture to repay long-term debt owed
to Court Square Capital Limited ("CSCL"), an affiliate of CVCL, under
Consolidated Furniture's Credit Agreement with CSCL (the "Credit Agreement").
On July 29, 1994, substantially all of the assets and liabilities of Super
Sagless Corporation ("Super Sagless"), a wholly-owned subsidiary of
Consolidated Furniture, were sold to a third party for $40 million cash. Of
the total sales price, $24.25 million was received in cash upon closing and
$15 million was received six months after closing. The remaining $.75 million
was placed in escrow for a period of one year to secure certain of Super
Sagless s post-closing obligations and representations. After considering the
estimated costs of disposition, Super Sagless has recognized a gain before
income taxes of approximately $21 million. The net proceeds from the sale
were used to repay long-term debt owed to CSCL under the Credit Agreement.
Through its subsidiaries, Fairwood manufactures upholstered stationary and
motion furniture, such as modular living room groups, recliners, rockers and
sleepers.
Operations
Fairwood, through its subsidiary, Consolidated Furniture, and Furniture
Comfort Corporation ("Furniture Comfort"), formerly named Mohasco Upholstered
Furniture Corporation, Consolidated Furniture's primary operating subsidiary,
serves selected segments of the highly diversified $19+ billion residential
furniture market. Consolidated Furniture entered the furniture industry
through a series of acquisitions commencing in 1964. Furniture Comfort's
current operations engage in the manufacture and sales of a diversified line
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of upholstered furniture under several brand names. While most of its
products are moderately priced and designed to appeal to a wide range of
furniture buyers, certain products have been successfully targeted to a more
selective, higher priced market. The products are sold nationally to
furniture retailers and department stores mainly through commissioned sales
forces.
Furniture Comfort has two divisions operating as separate independent
companies. Each company markets and manufactures one or more specific brands
of furniture. The Stratford Company ("Stratford") makes and sells mid-priced
upholstered stationary and motion furniture under the brand names of
Stratford, Stratolounger, Stratopedic and Avon. The Barcalounger Company
("Barcalounger") manufactures and sells higher-priced motion furniture and is
well known for its high-quality recliners.
The furniture industry is affected to a substantial degree by style, value
and fashion. Stratford and Barcalounger participate in important furnishings
market showings held during the year in a number of larger cities to acquaint
retailers with the significant number of new products introduced each year.
Each Division frequently reviews their product lines to evaluate whether minor
or major restyling of such lines is warranted. To generate new product and
style ideas based upon consumer and retailer response, the divisions maintain
in-house design staffs and contract with outside designers. The designers
consult with manufacturing management to analyze the economic feasibility of
producing new products based on their designs.
Stratford operates in a highly competitive segment of the motion furniture
business. Many new competitors and existing stationary manufacturers have
entered this particular market, as well as existing competitors which have
expanded their lines. New entrants have eroded Stratford s market share. In
many cases this increased competitive activity has led to a lowering of
selling prices and the extension of liberal credit terms in order to maintain
market share. Despite the inroads of these competitors over the past five
years, Stratford remains positioned as one of the largest manufacturers of
upholstered stationary and motion furniture in the United States. During this
same five-year period, the impact of the economic recession on the industry
also resulted in decreasing profit margins.
Barcalounger targets a selected market for its high-end recliner chair and
living room motion furniture. Barcalounger sells mainly to furniture stores
that carry more expensive products and provide interior design services
directly or indirectly. Barcalounger gives extensive warranties for its
products. The value and fine quality of its furniture is apparent as hardwood
frames are emphasized and only the finest leather and fabric coverings are
offered. Barcalounger has significant brand recognition and has a reputation
of having one of the best product lines in terms of value, quality, design and
service in the higher priced segment of the motion furniture industry.
Stratford and Barcalounger are well known in the furniture industry which
is characterized by a large number of relatively small manufacturers. The
following are among the Company's larger competitors: Masco Corporation,
Interco Industries, La-Z-Boy, Klausner, Natuzzi, and Bassett, many of which
have greater financial resources than the Company. Competition is intense at
all levels, stressing price, style, fabric and product finish.
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Factors Affecting the Home Furnishings Industry
The furniture industry as a whole is affected by demographics, household
formations, the level of personal discretionary income, household mobility and
the rate of new home construction. There exists a substantial replacement
market that is relatively less affected by these factors.
Research and Development
Since the furniture industry is characterized by active competition among
a large number of companies, many of which also have substantial facilities
and resources, Comfort believes that the maintenance of high product quality
and the development of new products are essential to maintaining its
competitive position. In support of these goals, Comfort conducts research
and development activities which are decentralized and directed by its
individual operating divisions.
The Stratford and Barcalounger operating divisions expended a total of
$13,600,000 in the past five years for research and development programs of
which $2,467,000, $2,623,000, and $2,403,000 was expended in 1994, 1993 and
1992, respectively.
Employees
Consolidated Furniture and its subsidiaries employed 2,388 persons at
December 31, 1994. Consolidated Furniture has a long record of generally
harmonious relations with employees.
Backlog
The backlog of orders among Furniture Comfort's furniture operations was
approximately $ 21,306,000 at December 31, 1994 and approximately $22,643,000
at December 31, 1993. It is expected that the backlog at December 31, 1994
will be filled in the current year. Furniture Comfort does not consider
backlog to be a significant indicator of the sales outlook for its products
beyond the period of a few months.
Seasonality, Major Customers and Export Sales
There are seasonal factors which affect Furniture Comfort's business.
Spring and all are generally considered periods of increased interest by
consumers in interior furnishings since these are periods of increased real
estate activity involving relocation of families. The Christmas holiday
season and other special occasions usually generate increased sales of some of
Furniture Comfort's furniture lines. On the other hand, inclement weather in
mid-winter generally discourages the purchase of interior furnishings.
Similarly, the closedown of a portion of the Furniture Comfort's activities
for vacation periods of one or two weeks in July has a limiting effect on
production as well as sales. Furniture Comfort maintains adequate levels of
inventory to meet seasonal demands.
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Sears, Roebuck & Co. accounted for approximately twenty, sixteen and
thirteen percent of Furniture Comfort's furniture sales during the years 1994,
1993 and 1992, respectively. Export sales for 1994 were approximately one
percent of sales and were not significant in prior years.
Environmental and Raw Materials
In 1994, there were no significant effects upon the capital expenditures,
earnings and competitive position of Furniture Comfort and its divisions
occasioned by compliance with provisions of federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.
Raw materials purchased by the Furniture Comfort are all procured in the
open market from a number of suppliers. In general, no major difficulties
have been experienced in obtaining raw materials.
Patents
Patents are not a significant consideration in the manufacture of most of
Furniture Comfort's products. Furniture Comfort does not believe that its
operating income is materially dependent on any one patent or license or group
of related patents or licenses.
ITEM 2. PROPERTIES
The furniture manufacturing activities of the Company are conducted in
modern facilities of suitable construction. These facilities are in good
operating condition, reasonably maintained and contain reasonably modern
equipment. All of the principal items of machinery and equipment located in
these facilities are owned by the primary operating subsidiary of Consolidated
Furniture.
Furniture Comfort's divisions also lease showroom and warehouse space
throughout the United States for display and storage of products. Until March,
1993 Consolidated Furniture owned an office building located in Fairfax,
Virginia. Office space is now leased.
Furniture Comfort believes that its plants and facilities, in the
aggregate, are adequate, suitable and of sufficient capacity for purposes of
conducting its current business.
As of December 31, 1994, Furniture Comfort's divisions have eight plants
and furniture facilities located in three states, California, North Carolina
and Mississippi, occupying a total of approximately 2.8 million square feet.
Of these plants and facilities, a total of approximately .04 million square
feet of floor space is owned by the subsidiaries of Consolidated Furniture. A
total of 2.8 million square feet is leased under long-term leases with various
municipalities and counties with various expiration dates extending to 1999.
Substantially all of the assets of Consolidated Furniture and its
subsidiaries are subject to a lien in favor of CSCL granted in connection with
the Credit Agreement (See Note 4 to the Company s Consolidated Financial
Statements set forth in item 8).
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ITEM 3. LEGAL PROCEEDINGS
The Internal Revenue Service ("IRS") has completed the audit examination
of the consolidated Federal income tax returns of Fairwood and its
subsidiaries, including Consolidated Furniture (the "Consolidated Group"), for
the years ended July 11, 1988 through December 31, 1991, and has delivered to
the Company a "30-day letter" and Revenue Agent's Report ("RAR") proposing to
adjust Fairwood's taxable income in the years in issue and in prior years to
which net operating losses of the Consolidated Group were carried back. The
cumulative proposed deficiency in Federal income tax arising from the proposed
adjustments is approximately $66 million, before applicable statutory
interest. Fairwood estimates that the aggregate proposed liability would,
together with statutory interest through the year ended December 31, 1994, and
net of any applicable deduction for such interest, total approximately $100
million. The principal issues addressed in the RAR are (i) the proposed
disallowance of approximately $164 million of interest expense claimed by the
Consolidated Group with respect to debt incurred in connection with the 1988
acquisition of Consolidated Furniture by Fairwood under the theory that such
debt should be recharacterized as equity for tax purposes, (ii) the proposed
disallowance of approximately $19 million of investment banking, legal and
other fees incurred by the Consolidated Group and deducted in the years in
issue under the theory that such expenses are capital in nature and related
theories, and (iii) the proposed disallowance of approximately $5 million of
compensation expense deducted by the Consolidated Group under the theory that
such expense constitutes non-deductible "golden parachute" payments. Fairwood
believes that the proposed adjustments are in error and intends to contest
vigorously this matter. Under available administrative procedures, Fairwood
has protested the proposed adjustments and has had an initial conference with
IRS Appeals division and expects to have additional conferences with the IRS
Appeals division. Depending upon the outcome of discussions of the issues
with the IRS Appeals division, Fairwood may litigate one or more of the
issues.
On October 14, 1993, Consolidated Furniture was served with a complaint
filed in U.S. District Court in Philadelphia by third party plaintiffs against
Consolidated Furniture and its former subsidiary, Sloane Blabon Corporation,
which engaged in the linoleum business, U.S. vs. Berks Associates, et al.,
Civ. No. 91-4868, E.D. PA. The original complaint in the case was filed by
the Environmental Protection Agency against Berks Associates and others to
recover over $200 million from twelve defendants (not including Consolidated
Furniture) for costs incurred or to be incurred in connection with the
investigation and remediation of a Super Fund site in Douglasville,
Pennsylvania. The original defendants then sued over 600 third party
defendants to share in the liability, if any. Sloane Blabon is alleged to
have disposed of benzine at the site from 1949 through May, 1953, when Sloane
Blabon sold its relevant assets to Congoleum Corporation. During the period
in question, Sloane Blabon disposed of substantial quantities of benzine to
Berks Associates at the Douglasville site. However, Fairwood does not believe
its disposals were toxic as alleged. The damages sought from Sloane Blabon
and Consolidated Furniture are unspecified. On November 1, 1993, Fairwood
filed a Notice and Certification denying the charges. Fairwood believes the
charges are without merit and that it has valid defenses to the claims. At
present, no trial date has been set.
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As of the date hereof, there are certain other legal proceedings pending,
which arise out of the normal course of the Fairwood's business, the financial
risk of which is not considered material in relation to the consolidated
financial position of Fairwood.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER
MATTERS
Fairwood's common stock is privately held. At December 31, 1994 and 1993,
there were three shareowners of Fairwood's common stock. No dividends were
declared on Fairwood's common stock in 1994 and 1993. The ability of Fairwood
to pay dividends and make distributions in respect of its common stock is
restricted by instruments relating to the Fairwood's debt. Furthermore, the
ability of Consolidated Furniture and its subsidiaries to transfer monies to
Fairwood (including without limitation by dividend or distribution) is
restricted by instruments relating to Consolidated Furniture's and its
subsidiaries' debt, including the Credit Agreement. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources" and Note 4 to Fairwood s Consolidated
Financial Statements set forth in Item 8.
Common stock purchase warrants issued by Fairwood in connection with the
1989 Fairwood merger are held by the public. The common stock purchase
warrants became exercisable in September 1994. See Note 4 to Fairwood's
Consolidated Financial Statements set forth in Item 8. The warrant exercise
price is $1 per share (subject to adjustment). In October 1994, Fairwood
notified the holders of the warrants that the warrants may be exercised at any
time before the close of business on September 21, 1995. Fairwood s notice
also stated that the fair value of the shares appeared to be significantly
less than the exercise price of the warrants and that therefore a registration
statement had not been filed with the Securities and Exchange Commission
covering the issuance of the shares upon exercise of the warrants. Fairwood
noted that in the event that holders of the warrants do exercise them,
issuance of the shares may be delayed pending the filing of a registration
statement covering the issuance and its effectiveness under the Securities Act
of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
FAIRWOOD CORPORATION AND SUBSIDIARIES
Five Year Summary of Consolidated Financial Data
(Dollar Amounts in Millions)
Years ended December 31,
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1994 1993 1992 1991 1990
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Net sales $ 244.9 261.4 267.0 341.4 335.2
Loss from continuing
operations ( 39.4) ( 46.9) (159.1) ( 49.9) ( 37.5)
Loss from discontinued
operations - - - - ( 28.5)
Loss before extraordinary
items ( 39.4) ( 46.9) (159.1) ( 49.9) ( 66.0)
Extraordinary items - - 1.9 - -
Net loss ( 39.4) ( 46.9) (157.2) ( 49.9) ( 66.0)
Total assets 95.5 113.6 105.1 277.8 291.4
Long-term debt, including
current maturities 415.4 386.0 330.8 370.8 330.4
Redeemable preferred stock .1 .1 .1 .1 .1
Fairwood acquired Consolidated Furniture in a purchase transaction deemed
to be effective as of July 3, 1988. In 1992, the excess of purchase cost over
fair value of assets acquired in the purchase of Consolidated Furniture was
written off due to the determined unrecoverability of these costs. Also in
1992, operations data includes the activities of Chromcraft and Peters-
Revington for the period from January 1 through April 23, 1992. In 1994,
operations data includes the activities of Super Sagless for the period from
January 1 through July 29, 1994. Accordingly, the data presented for 1994,
1993 and 1992 is not comparable with one another or prior periods.
The provision for income taxes associated with the 1990 prepayment of
promissory notes by the acquirer of Consolidated Furniture s former rental
operations are reflected as discontinued operations.
For additional information, see the Company's Consolidated Financial
Statements included with this report, including Notes 3 and 11 thereto
regarding certain tax and liquidity matters.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES
1994 vs 1993 Results of Operations
Net sales of approximately $244.9 million for 1994 decreased from 1993
net sales of approximately $261.4 million, due to the disposition of Super
Sagless in July 1994. Excluding Super Sagless, net sales for 1994 were
approximately $213.1 million as compared to approximately $213.6 million
for 1993.
Cost of sales decreased in 1994 to approximately $216.8 million from
approximately $221.5 million in 1993, primarily due to the disposition of
Super Sagless in July 1994. Excluding Super Sagless, cost of sales were
approximately $191.1 million and $182.7 million for 1994 and 1993,
respectively, or 89.7% and 85.6% of sales for 1994 and 1993, respectively.
The 4.1% increase in cost of sales as a percentage of sales from 1993 to
1994, while sales decreased approximately 0.2%, was primarily due to
increased material costs of upgraded product content, unfavorable
manufacturing variances and delays in implementing certain price increases.
Selling, administrative and general expenses decreased to approximately
$36.2 million in 1994 from approximately $38.0 million in 1993, in part due
to decreased variable selling costs. Excluding Super Sagless, selling,
administrative and general expenses were approximately $31.8 million and
$31.4 million for 1994 and 1993, respectively.
Other income (expenses), net, increased approximately $6.2 million to
approximately $1.9 million in 1994 from approximately $(4.3) million in
1993, primarily due to the gain on sale of the Clinton plant of
approximately $1.4 million in 1994 and various expenses incurred in 1993
considered to be of a non-operating nature. As a result of the sale in
July 1994 of substantially all of the assets and liabilities of Super
Sagless, a gain of approximately $20.8 million was recognized.
1993 vs 1992 Results of Operations
Net sales of approximately $261.4 million for 1993 decreased slightly
from 1992 net sales of approximately $267.0 million, due to the disposition
of Chromcraft and Peters-Revington in April 1992. Excluding Chromcraft and
Peters-Revington in the 1992 results, net sales for 1993 were approximately
$261.4 million compared to approximately $231.5 million for 1992, an
increase of approximately 13%, primarily due to the number of units sold of
upholstered furniture in 1993.
Cost of sales decreased in 1993 to approximately $221.5 million from
approximately $233.8 million in 1992, primarily due to the disposition of
Chromcraft and Peters-Revington. Excluding Chromcraft and Peters-Revington
in the 1992 results, cost of sales were approximately $221.5 million and
$206.9 million for 1993 and 1992, respectively, or 84.7% and 89.4% of sales
for 1993 and 1992, respectively. The 4.7% reduction in cost of sales as a
percentage of sales from 1992 to 1993, while sales increased approximately
13%, was primarily due to favorable manufacturing variances associated with
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higher volume of production and cost reduction and quality improvement
programs at all subsidiary company manufacturing facilities. These
programs include the streamlining of work flows, utilization of cellular
production techniques, establishment of focused factory systems and
implementation of benchmarking methods to lower and control both unit and
factory overhead costs.
Selling, administrative and general expenses decreased to approximately
$38.0 million in 1993 from approximately $51.7 million in 1992, in part due
to the disposition of Chromcraft and Peters-Revington. Excluding Chromcraft
and Peters-Revington, selling, administrative and general expenses were
approximately $38.0 million and $46.5 million for 1993 and 1992,
respectively. This decrease in selling, administrative and general
expenses from 1992 to 1993 is primarily due to more effective utilization
of resources and reduction of personnel due to the consolidation of
administrative functions.
Other expenses, net, decreased approximately $2.4 million to
approximately $4.3 million in 1993 from approximately $6.7 million in 1992,
primarily due to recording in 1992 anticipated losses in connection with
the sale, completed in March 1993, of the Company's Fairfax, Virginia
office building, and the transfer of many corporate functions to the
operating companies, which were partially offset by 1993 losses on sales of
property and costs associated with divested operations.
A restructuring charge of approximately $85.9 million in 1992 was due
to the write-off of the excess of purchase cost over fair value of assets
acquired in the 1988 purchase of Consolidated Furniture due to the
unrecoverability of these costs. Fairwood determined that the write up in
assets resulting from the 1988 purchase was unrecoverable due to the
continuing significant losses of the operating companies, and a lower of
cost or market analysis of Fairwood s assets.
Provision for Income Taxes
A cumulative effect of change in accounting principle of $2.1 million
was recorded in 1993, which is described in Note 1, Summary of Significant
Accounting Policies, in the Notes to Consolidated Financial Statements.
Due to the taxable income generated as a result of the disposition of
Chromcraft and Peters-Revington, Fairwood provided for taxes of
approximately $4.5 million in 1992, which were partially offset by the
utilization of a net operating loss carry-forward of approximately $1.9
million, shown as an extraordinary item on the Consolidated Statements of
Operations, yielding a net provision of approximately $2.6 million. Please
refer to Note 3, Income Taxes, in the Notes to Company s Consolidated
Financial Statements.
Liquidity and Capital Resources
Capital requirements for operations during 1994 and 1993 were provided
by financing channels and operating cash flow.
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Fairwood had working capital of approximately $43.5 million and $43.3
million at December 31, 1994 and 1993, respectively. At December 31, 1994,
Fairwood had long-term debt of approximately $415.4 million of which $.2
million was current. Long-term debt at December 31, 1993 was approximately
$386.0 million of which $.2 million was current. In July 1994, a portion
of the proceeds to Consolidated Furniture from the disposition of Super
Sagless were used to repay secured, senior debt of Consolidated Furniture
and its subsidiaries in the approximate amount of $24.25 million. The
remainder of the total sales consideration of $40 million for the assets of
Super Sagless was placed in escrow to secure certain of the Company s post-
closing obligations and representations. In January 1995, $15 million was
received which was primarily used to repay additional amounts of secured,
senior debt of Consolidated Furniture. The remaining $0.75 million of
proceeds are expected to be received in mid-1995.
Throughout 1994, 1993 and 1992, Consolidated Furniture funded interest
obligations related to long-term indebtedness through increased borrowings
from CSCL. However, during 1992 and 1994 the proceeds to Consolidated
Furniture from the disposition of Chromcraft and Peters-Revington and the
sale of substantially all of the assets of Super Sagless of approximately
$83 million and $24.25 million were used to repay debt of Consolidated
Furniture and its subsidiaries. All outstanding debt at December 31, 1994
and 1993, excluding the merger debentures and capitalized lease
obligations, is payable to CSCL, which is an indirect subsidiary of
Citicorp, a bank holding company, and an affiliate of CVCL. Consolidated
Furniture will attempt either to refinance, or negotiate an extension of,
the debt payable to CSCL when due in January 1996, although there can be no
assurance that such attempts will be successful. Interest on the revolving
credit loan of Consolidated Furniture and its subsidiaries is payable
quarterly at 1-1/2% above the applicable prime rate, which prime rate was
8.5% at December 31, 1994. Interest on the senior subordinated debentures
of Consolidated Furniture is payable semi-annually at 18%. Interest on the
senior subordinated pay-in-kind debentures and merger debentures of
Fairwood is payable semi-annually at 15-1/2% and 16-7/8%, respectively.
Fairwood has the option until April 1, 1995 to pay interest on its
senior subordinated pay-in-kind debentures and merger debentures either by
cash or by the distribution of additional securities. Additional securities
were issued in lieu of the cash payments of interest due April 1, 1994 and
October 1, 1994 on both the senior subordinated pay-in-kind debentures and
merger debentures. Accordingly, the principal amount of Fairwood s senior
subordinated pay-in-kind debentures and merger debentures increased by
$14.7 million and $9.4 million, respectively, since December 31, 1993. For
further details on financing and debt see Note 4 to Consolidated Financial
Statements.
As described above, on October 1, 1994, Fairwood tendered additional
debentures in payment of interest on its senior subordinated pay-in-kind
debentures and merger debentures. On October 3, 1994, the trustee for the
merger debentures informed Fairwood that it would notify holders of the
merger debentures of its decision to decline to accept the additional
merger debentures in satisfaction of the October 1, 1994 installment of
interest and that Fairwood failed to make payment of interest in cash.
Fairwood informed the trustee that they disputes the trustee s view that
the October 1, 1994 interest payment was required by the indenture
governing the merger debentures to be made entirely in cash.
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Capital additions were approximately $3.4 million, $4.2 million and
$3.2 million for the years 1994, 1993 and 1992, respectively. Additions
for 1995 are budgeted at approximately $3.1 million, primarily for the
purchase of new manufacturing equipment.
Fairwood s cash flow from operations will not be sufficient to permit
Fairwood to make cash interest payments on the senior debt obligations of
Consolidated Furniture and Fairwood s senior subordinated pay-in-kind
debentures and merger debentures. In addition, Consolidated Furniture s
credit facilities do not permit it to borrow funds to enable Fairwood to
make cash interest payments on the senior subordinated pay-in-kind
debentures and merger debentures. Accordingly, depending on the
interpretation of the indentures governing the senior subordinated pay-in-
kind debentures and merger debentures, Fairwood may have failed to make the
interest payments required on October 1, 1994 and will probably fail to
make the cash interest payments on April 1, 1995.
Fairwood s operating companies are dependent upon CSCL for funding of
its debt service costs. Instruments relating to the revolving credit
facility and senior subordinated debentures have been amended and certain
provisions thereof waived at various times through April 1994 to provide
more favorable terms to Consolidated Furniture and, in certain instances,
to avoid defaults thereunder. Under the Credit Agreement, Consolidated
Furniture and its subsidiaries are generally restricted from transferring
moneys to Fairwood (including without limitation by dividend or
distribution) with the exception of amounts for (a) specified
administrative expenses of the Company not exceeding $275,000 per year and
(b) payment of income taxes. Furthermore, Consolidated Furniture is
subject to additional restrictions on transferring moneys to Fairwood
(including without limitation by dividend or distribution) under the
inddenture for its senior subordinated debentures, which generally requires
the satisfaction of certain financial conditions for such transfers.
Fairwood is subject to additional restrictions on payment or transfer of
moneys (including without limitation by dividend or distribution) under the
indentures for its senior subordinated pay-in-kind debentures and merger
debentures, which generally require the satisfaction of certain financial
conditions for such transfers.
Consolidated Furniture anticipates that funds provided by operations
and available credit facilities under the Credit Agreement will be adequate
in 1995 to support the operations of Stratford and Barcalounger. However,
as discussed above, funds provided by operations and available credit
facilities cannot be expected to be adequate to make cash interest payments
due in 1995 on the Fairwood senior subordinated pay-in-kind debentures and
merger debentures. Consolidated Furniture s obligations under the Credit
Agreement are secured by substantially all of the assets of Consolidated
Furniture and its subsidiaries.
- 12 -
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are filed as
a part of this report:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Operations for the Years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Shareowners' Equity (Deficit) for the Years
ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the Years ended December 31,
1994, 1993 and 1992
Notes to Consolidated Financial Statements
- 13 -
14
Independent Auditors' Report
The Shareowners and Board of Directors
Fairwood Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Fairwood
Corporation and subsidiaries ("Fairwood") as of December 31, 1994 and 1993, and
the related consolidated statements of operations, shareowners' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1994. We also have audited the financial statement schedule as
listed in the index for Item 14(a)2 on page 46. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fairwood
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the Company
has been notified by the Internal Revenue Service of proposed adjustments to
its Federal income tax returns for the years 1988 through 1991. Such
adjustments would result in a net tax cost of approximately $100 million,
including interest through the year ended December 31, 1994. The Company has
indicated that it disagrees with the proposed adjustments and intends is
vigorously contesting the positions taken by the Internal Revenue Service. The
ultimate outcome of these proposed adjustments cannot presently be determined.
Accordingly, no provision for any liability that may result upon ultimate
resolution of these proposed adjustments has been recognized in the
accompanying consolidated financial statements.
- 14 -
15
The accompanying consolidated financial statements have been prepared assuming
that Fairwood will continue as a going concern. As discussed in Note 11 to the
consolidated financial statements, Fairwood expects that it will be unable to
meet certain required interest payments on its senior subordinated pay-in-kind
and merger debentures when due in 1995 and beyond. Further, as discussed in
Note 4 to the consolidated financial statements, Fairwood has been notified by
the trustee for the merger debentures that it would decline to accept the
additional merger debentures in satisfaction of the October 1, 1994 installment
of interest and that Fairwood failed to make the required payment of interest
in cash at that date. These matters, along with the tax matter discussed in
the previous paragraph, raise substantial doubt about the ability of Fairwood
to continue as a going concern. Management's plans in regard to these matters
are discussed in Notes 3 and 11. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Notes 1 and 3 to the consolidated financial statements,
Fairwood adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, as of January 1, 1993.
/s/ KPMG PEAT MARWICK LLP
February 10, 1995
Washington, DC
- 15 -
16
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
(In thousands except share data)
Assets (note 4) 1994 1993
------ ---- ----
Current assets:
Cash and cash equivalents $ 4,615 3,968
------ ------
Accounts and notes receivable:
Trade 38,034 47,734
Escrows receivable from sale of subsidiary (note 2) 15,750 -
Other 1,812 1,718
------ -------
55,596 49,452
Less allowance for discounts and doubtful accounts 2,756 4,062
------ ------
52,840 45,390
------- -------
Inventories (note 1) 18,813 31,175
Prepaid expenses and other current assets (note 3) 2,499 3,678
------ -------
Total current assets 78,767 84,211
------- -------
Property, plant and equipment, at cost:
Land 137 233
Buildings and improvements 12,799 20,685
Machinery and equipment 4,418 28,916
Leasehold improvements 2,120 2,633
Construction in progress 539 1,961
------- -------
20,013 54,428
Less accumulated depreciation and amortization 5,948 28,685
------- -------
14,065 25,743
------- -------
Other assets 2,732 3,601
------- -------
$ 95,564 113,555
======= =======
Liabilities and Shareowners' equity (deficit) 1994 1993
-------------------------------------------- ---- ----
Current liabilities:
Current maturities of long-term debt (notes 4 and 8) $ 160 150
Accounts payable:
Trade 6,084 9,135
Other (includes claims payable of $1,991 in
1994 and $2,263 in 1993) 2,537 4,810
Accrued expenses (includes interest of $10,357 in
1994 and $9,431 in 1993) 20,740 21,070
Federal and state income taxes 5,725 5,709
------ -------
Total current liabilities 35,246 40,874
------ -------
Long-term debt, less current maturities (notes 4 and 8):
Revolving credit 165,870 160,427
Senior subordinated debentures 80,000 80,000
Senior subordinated pay-in-kind debentures 105,853 91,173
Merger debentures 62,928 53,517
Capitalized lease obligations 540 700
----- -----
415,191 385,817
------- -------
Deferred Federal income taxes (note 3) 1,359 2,827
Other liabilities (note 7) 4,346 3,816
------ ------
5,705 6,643
------ ------
Redeemable preferred stock (note 5):
Par value $.01 per share, authorized 100,000 shares:
Junior preferred, cumulative, issued and outstanding
1,000 shares. Liquidation value $100 per share. 100 100
----- -----
Shareowners' equity (deficit):
Common stock, par value $.01 per share (notes 4 and 6):
Class A voting, authorized 3,000,000 shares; issued
and outstanding 500 shares. - -
Class B non-voting, authorized 3,000,000 shares;
issued and outstanding 999,800 shares. 10 10
Additional paid-in capital 55,938 55,938
Minimum pension liability ( 1,367) -
Retained deficit (415,259) (375,827)
------- -------
(360,678) (319,879)
------- -------
Commitments and contingencies (notes 3, 4, 8, 10
and 11)
$ 95,564 113,555
====== =======
See accompanying notes to consolidated financial statements.
- 16 -
17
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
(In thousands)
Net sales $ 244,869 261,451 267,043
------- ------- -------
Cost of sales 216,834 221,519 233,824
Selling, administrative
and general expenses 36,247 37,985 51,652
------- ------- -------
253,081 259,504 285,476
------- ------- -------
Operating income (loss) ( 8,212) 1,947 ( 18,433)
Interest income 498 205 225
Interest on indebtedness (note 4) ( 53,852) ( 46,846) ( 43,781)
Gain on sale of subsidiary (note 2) 20,847 - -
Restructuring charge (note 1) - - 85,945
Other income (expenses), net 1,859 ( 4,296) ( 6,711)
------- ------- -------
Loss before income taxes,
cumulative effect of change
in accounting principle and
extraordinary item ( 38,860) ( 48,990) (154,645)
Provision for income
taxes (note 3) 532 - 4,512
------- ------- -------
Loss before cumulative
effect of change in accounting
principle and extraordinary item ( 39,392) ( 48,990) (159,157)
Cumulative effect of change in
accounting principle (note 3) - 2,100 -
Extraordinary item (note 3):
Reduction of income taxes
arising from carryforward of
prior year operating losses - - 1,925
------- ------- -------
Net loss $ ( 39,392) ( 46,890) (157,232)
======= ======= =======
See accompanying notes to consolidated financial statements.
- 17 -
18
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareowners' Equity (Deficit)
Years Ended December 31, 1994, 1993 and 1992
(In thousands)
Common Stock Additional Minimum Shareowners'
---------------- Paid-in Pension Retained Equity
Class A Class B Capital Liability deficit (Deficit)
------- ------- ------- --------- --------- ---------
Balance, January 1, 1992 $ - 10 24,990 - (171,644) (146,644)
Capital contribution (note 2) 30,948 30,948
Net loss (157,232) (157,232)
Preferred stock dividends ( 28) ( 28)
----- ----- ------ ------ ------- -------
Balance, December 31, 1992 - 10 55,938 - (328,904) (272,956)
Net loss ( 46,890) ( 46,890)
Preferred stock dividends ( 33) ( 33)
----- ----- ------ ------ ------- -------
Balance, December 31, 1993 - 10 55,938 - (375,827) (319,879)
Net loss ( 39,392) ( 39,392)
Adjustment to minimum
pension liability (note 7) ( 1,367) ( 1,367)
Preferred stock dividends ( 40) ( 40)
----- ----- ------ ------ ------- -------
Balance, December 31, 1994 - 10 55,938 ( 1,367) (415,259) (360,678)
===== ===== ====== ====== ======= =======
See accompanying notes to consolidated financial statements.
- 18 -
19
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
(In thousands)
Cash flows from operating activities:
Loss before extraordinary item and cumulative effect of
accounting change ( 39,392) ( 48,990) (159,157)
Gain from extraordinary item - - 1,925
Cumulative effect of change in accounting principle - 2,100 -
Net loss ( 39,392) ( 46,890) (157,232)
--------- --------- ---------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,974 3,905 8,417
Amortization of goodwill - - 1,956
Restructuring charge - - 85,945
Gain on sale of Super Sagless assets ( 20,847) - -
Loss (gain) on sale of property, plant and equipment ( 1,636) 431 87
Loss, recognized in 1992, on sale of property - 4,562 -
Deferred income taxes ( 1,468) 2,827 -
Proceeds from pension plan reversion - - 69
Current period conversions of PIK debentures 18,300 15,686 13,433
Changes in assets and liabilities:
Accounts receivable 3,079 ( 9,490) 10,884
Inventories 5,700 ( 7,217) ( 636)
Prepaid expenses and other current assets 849 ( 3,280) ( 12)
Accounts payable ( 1,646) ( 323) 1,958
Accrued expenses 5,119 ( 847) 4,560
Federal and state income taxes 16 3,789 1,920
Other, net 1,399 496 ( 229)
--------- --------- ---------
Cash used - operating activities ( 27,553) ( 36,351) ( 28,824)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ( 3,401) ( 4,206) ( 3,223)
Proceeds from disposition of property,
plant and equipment 3,929 3,980 398
Proceeds from sale of Super Sagless assets 22,379 - -
Proceeds from disposition of Chromcraft and
Peters-Revington - - 50,525
--------- --------- ---------
Cash provided (used) - investing activities 22,907 ( 226) 47,700
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 31,193 48,202 36,022
Repayment of long-term debt ( 25,900) ( 13,650) ( 61,039)
--------- --------- ---------
Cash provided (used) - financing activities 5,293 34,552 ( 25,017)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 647 ( 2,025) ( 6,197)
Cash and cash equivalents:
Beginning of period 3,968 5,993 12,190
--------- --------- ---------
End of period $ 4,615 3,968 5,993
========= ========= =========
Supplemental schedule of cash flow information
----------------------------------------------
Cash paid during year for:
Interest $ 28,835 25,372 25,273
Income taxes 506 978 2,185
Non-cash portion of proceeds from sale of Super Sagless assets 15,750 - -
Conversion of accrued interest to PIK debentures 24,091 20,649 17,697
Adjustment to minimum pension liability 1,367 - -
Non-cash portion of proceeds from disposition of
Chromcraft and Peters-Revington and debt repayment - - 32,579
See accompanying notes to consolidated financial statements.
- 19 -
20
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements represent a consolidation of the
financial statements of Fairwood Corporation ("Fairwood" or the "Company"), and
Consolidated Furniture Corporation ("Consolidated Furniture", formerly named
Mohasco Corporation) and all of its subsidiaries. All significant intercompany
balances, transactions and profits have been eliminated in consolidation.
Inventories
All inventories (materials, labor and overhead) are valued at the lower of
cost or market using the last-in, first-out (LIFO) method.
A LIFO liquidation occurred during 1992 but did not result in any
significant reduction of cost of sales.
The components of inventory at December 31 are as follows (in thousands):
1994 1993
---- ----
Raw materials $ 14,696 20,371
In process 4,193 9,487
Finished goods 11,914 14,346
------- -------
Inventories at first-in, first-out 30,803 44,204
LIFO reserve 11,990 13,029
------- -------
Inventories at LIFO $ 18,813 31,175
======= =======
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment is provided
principally on a straight-line basis over the estimated useful lives as
follows: buildings and buildings capitalized under long-term leases from 30 to
45 years; machinery and equipment from 3 to 14 years; and leasehold
improvements over the term of the related leases.
Manufacturing and warehousing facilities under long-term leases which were
constructed by various local governmental bodies have been capitalized.
- 20 -
21
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Statements of Cash Flows
Cash and cash equivalents include cash in banks and highly liquid
short-term investments having a maturity of three months or less on the date of
purchase.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, ("Statement 109"). Statement 109 requires a change from the deferred
method of accounting for income taxes to the asset and liability method. Under
the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date of the change in tax rates.
Effective January 1, 1993, the Company adopted Statement 109. The
adoption of Statement 109 resulted in a cumulative effect adjustment of
$2,100,000 which reduced the net loss for 1993, and which is reflected in the
1993 statement of operations. Financial statements for 1992 and prior years
have not been restated.
Under the deferred method, which was applied in 1992 and prior years,
deferred income taxes are recognized for income and expense items that are
reported in different years for financial reporting and tax purposes using the
tax rate applicable for the year of the calculation. Under the deferred
method, deferred taxes are not adjusted for subsequent changes in tax rates.
Restructuring Charge
In December 1992, the excess of purchase cost over the fair value of
assets acquired in the 1988 and 1989 purchase of Consolidated Furniture was
written off due to the unrecoverability of these costs.
- 21 -
22
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Restructuring Charge (continued)
The charge includes the following costs:
(In thousands)
Inventories $ 13,633
Property, plant and equipment 9,618
Tradenames and goodwill 62,694
------
$ 85,945
======
The Company determined that the write up in assets resulting from the
purchase was unrecoverable due to the continuing significant losses of the
operating companies, and a lower of cost or market analysis of the Company's
assets.
(2) Divestitures
Super Sagless Corporation
On July 29, 1994, substantially all of the assets and liabilities of Super
Sagless Corporation ("Super Sagless"), a wholly-owned subsidiary of
Consolidated Furniture, were sold to a third party for $40 million cash. Of
the total sales price, $24.25 million was received upon closing and $15 million
was received six months after closing. The remaining $0.75 million was placed
in escrow for a period of one year to secure certain of the Company's
post-closing obligations and representations. After considering the estimated
costs of disposition, the Company has recognized a gain before income taxes of
approximately $21 million. The net proceeds from the sale were used to pay
existing debt owed CSCL.
During the period January 1 through July 29, 1994, Super Sagless generated
operating earnings before income taxes, exclusive of the gain on sale, of
approximately $2,300,000. During 1993 and 1992, Super Sagless generated
operating earnings (loss) before income taxes of approximately $2,400,000 and
($883,000), respectively.
Chromcraft and Peters-Revington Corporations
The Company disposed of Chromcraft Corporation ("Chromcraft") and
Peters-Revington Corporation ("Peters-Revington") to Chromcraft Revington,
Inc., an affiliate, in April 1992. The proceeds from the disposition amounted
to approximately $83.1 million, approximately $30.9 million greater than the
book value of the net assets of Chromcraft and Peters-Revington. Due to the
affiliated nature of the
- 22 -
23
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Divestitures (continued)
transaction, the $30.9 million was accounted for as contributed capital. The
proceeds were used to repay long-term debt owed to Court Square Capital Limited
("CSCL"), an affiliate of the Company. The disposition generated taxable
income which resulted in a tax provision for the year 1992.
During the period January 1 through April 23, 1992, Chromcraft and
Peters-Revington generated operating earnings before income taxes of
approximately $700,000.
(3) Income Taxes
As discussed in note 1, the Company adopted Statement 109 as of January 1,
1993, which resulted in a cumulative effect adjustment of $2,100,000 which
decreased the net loss for the year 1993. The effect of Statement 109 on the
provision for income taxes for the years ended December 31, 1994 and 1993 was
not material.
Components of the provision for income taxes are summarized, in thousands,
as follows:
Years ended December 31,
------------------------------
1994 1993 1992
-------- -------- --------
Current:
Federal $ - - 3,225
State and local 532 - 1,287
------ ------ ------
532 - 4,512
Deferred - - -
------ ------ ------
Total provision for income
taxes before utilization
of net operating
loss carryforward 532 - 4,512
Net operating loss
carryforward - - ( 1,925)
------ ------ ------
Total provision for income
taxes $ 532 - 2,587
====== ====== ======
- 23 -
24
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Income Taxes (continued)
The differences between the actual taxes and taxes computed at the U.S.
Federal Income tax rate of 34% are summarized, in thousands, as follows:
Years ended December 31,
------------------------------
1994 1993 1992
-------- -------- --------
Expected tax benefit computed
at U.S. rate $ (13,393) (16,657) (52,579)
Increase in valuation
allowance 13,574 16,821 -
Taxable gain on
disposition (note 2) - - 21,675
State taxes, net
of Federal benefit 351 - 850
Non-deductible depreciation
from purchase accounting
adjustments - - 1,448
Goodwill amortization and
restructuring charge - - 29,886
Other - ( 164) 3,232
------ ------ ------
532 - 4,512
Utilization of net operating
loss carryforward - - ( 1,925)
------ ------ ------
Total provision for income taxes $ 532 - 2,587
====== ====== ======
- 24 -
25
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Income Taxes (continued)
The tax effects of temporary differences as of December 31, 1994 and 1993,
in thousands, are as follows:
1994 1993
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 31,978 $ 18,356
Accounts receivable 1,077 1,138
Vacation and holiday pay 420 655
Accrued expenses 4,983 4,551
Interest on merger debentures 4,735 4,494
Valuation allowance (41,834) (26,367)
------ ------
$ 1,359 $ 2,827
====== ======
Deferred tax liabilities:
Property, plant and equipment $ 1,359 $ 2,827
====== ======
The valuation allowance for deferred tax assets as of January 1, 1993 was
$7,047,000. The net changes in the total valuation allowance for the years
ended December 31, 1994 and 1993 were increases of $15,467,000 and $19,320,000,
respectively.
At December 31, 1994, the Company's net operating loss carryforwards of
approximately $84,240,000 expire in 2008 and 2009.
Net current deferred income tax benefits of $1,359,000 and $2,827,000 at
December 31, 1994 and 1993, respectively, are included in other current assets
in the accompanying consolidated balance sheets.
The Internal Revenue Service ("IRS") has examined the Company's Federal
income tax returns for the years 1988 through 1991 and is challenging certain
deductions, of which the most significant involves an effort to recharacterize
interest deductions as dividend distributions. The IRS has proposed
adjustments that approximate a net tax cost of $100 million, including interest
through the year ended December 31, 1994. The Company believes the IRS's
position with respect to these issues is incorrect and is vigorously contesting
these proposed adjustments. The Company cannot predict the ultimate outcome
nor the impact on its financial statements, if any.
- 25 -
26
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Long-term Debt
In conjunction with the Company's acquisition by merger of Consolidated
Furniture on September 22, 1989, certain bridge loans were refinanced with
loans under a credit agreement with CSCL (the "Credit Agreement") and senior
subordinated pay-in-kind debentures due to CSCL. In exchange for the
approximately 6.85% of Consolidated Furniture common stock then outstanding,
the Company issued $33.5 million of subordinated pay-in-kind merger debentures
and 918,170 warrants (as discussed below) to purchase, in the aggregate,
142,900 shares of the Company's Class A common stock. The assets of
Consolidated Furniture and its subsidiaries are pledged as security for the
amounts due under the Credit Agreement. Certain instruments related to the
Credit Agreement have been amended at various times through March 1994. Among
other things, these amendments extended certain debt due dates, increased
certain debt limits and credit lines and modified selected financial covenant
tests. Certain provisions of these instruments have been waived at various
times through April 1994. Proceeds from the disposition of Chromcraft and
Peters-Revington and the sale of substantially all the assets and liabilities
of Super Sagless were used to repay a portion of the debts due under the Credit
Agreement with CSCL.
The outstanding debt at December 31, 1994 and 1993 was as follows (in
thousands):
December 31,
1994
Interest
Debt 1994 1993 Rates
---- ---- ---- ------------
Revolving credit, due 1996 $ 165,870 160,427 10%
Senior subordinated
debentures, due 1996 80,000 80,000 18%
Senior subordinated pay-
in-kind debentures, due 2001 105,853 91,173 15 1/2%
Merger debentures, due 2004 62,928 53,517 16 7/8%
Other, due 1998 700 850 6%
------- -------
415,351 385,967
Less current maturities 160 150
------- -------
$ 415,191 385,817
======= =======
- 26 -
27
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Long-term Debt (continued)
Substantially all of the Company's debt instruments restrict the payment
of dividends and the Credit Agreement with CSCL, relating to Consolidated
Furniture's revolving credit facility, contains certain financial covenant
tests. The Company plans to attempt to refinance, or negotiate an extension
of, the debt payable to CSCL when due.
In the opinion of management, the Company has the option until April 1,
1995 to pay interest on the senior subordinated pay-in-kind debentures and
merger debentures either by cash or by the distribution of additional
securities. On October 1, 1994, the Company tendered additional debentures in
payment of interest on its senior subordinated pay-in-kind debentures and
merger debentures. On October 3, 1994, the trustee for the merger debentures
informed the Company that it would notify holders of the merger debentures of
its decision to decline to accept the additional merger debentures in
satisfaction of the October 1, 1994 installment of interest and that the
Company failed to make payment of interest in cash. The Company informed the
trustee that the Company disputes the trustee's view that the October 1, 1994
interest payment was required by the indenture governing the merger debentures
to be made entirely in cash. See Note 11.
The aggregate maturities of long-term debt (including capitalized lease
obligations) during the next five years and thereafter are as follows:
$160,000 in 1995; $246,040,000 in 1996; $180,000 in 1997; $190,000 in 1998; and
$168,781,000 subsequent to 1999.
The warrants issued with the merger debentures, discussed above, became
exercisable as of September 22, 1994 for a one-year period. The warrant
exercise price is $1 per share (subject to adjustment).
(5) Redeemable Preferred Stock
The Company issued 1,000 shares of junior preferred stock, par value $.01
per share, for $100,000, which shares are held by CSCL. Dividends accrue at
$18 per share annually. As of December 31, 1994 and 1993, dividends payable
were approximately $150,000 and $110,000, respectively.
- 27 -
28
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Common Stock
Holders of Class A common stock are entitled to convert their shares to an
equal number of Class B common stock and holders of Class B common stock are
entitled to convert their shares to an equal number of Class A common stock.
(7) Employee Benefit Plans
All salaried employees, excluding certain key executives, and hourly paid
employees of the Company with one year of service were covered by
non-contributory defined benefit retirement plans through May 31, 1993, at
which time further benefit accruals ceased and the plans were "frozen."
Benefits for the plans are determined based on length of service and certain
average annual employee earnings. The cost of the retirement plans is accrued
annually; funding is in accordance with actuarial requirements of the plans,
subject to the Employee Retirement Income Security Act of 1974, as amended.
Pension expense is summarized, in thousands, as follows:
Years ended December 31,
-------------------------
1994 1993 1992
------ ------ -------
Current service cost $ - 1,506 1,992
Interest cost 892 956 856
Return on assets ( 829) ( 630) ( 407)
Amortization of prior service cost - 99 212
Special curtailment charge due to
cessation of benefit accruals as of
May 31, 1993 and disposition of
Chromcraft and Peters-Revington in
April 1992 - 927 914
----- ----- -----
$ 63 2,858 3,567
===== ===== =====
- 28 -
29
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Employee Benefit Plans (continued)
Information with respect to the retirement plans for 1994 and 1993 has
been determined by consulting actuaries. The following table sets forth the
plans' funded status at December 31, 1994 and 1993, respectively, and
reconciles amounts recognized in the consolidated balance sheets at December
31, 1994 and 1993, respectively (in thousands):
1994 1993
---- ----
Actuarial present value of obligations:
Vested $12,326 11,787
Nonvested 689 642
------ ------
Accumulated and projected benefit obligation 13,015 12,429
Assets at fair value at December 31 9,079 9,033
------ ------
Projected benefit obligation in excess of assets 3,936 3,396
Unrecognized net gain (loss) ( 1,367) ( 3)
------ ------
Accrued pension cost at December 31 2,569 3,393
Adjustment for minimum liability 1,367 -
------ ------
Pension liability at December 31 $ 3,936 3,393
====== ======
Assumptions:
Interest rates for obligations 7.25% 7.25%
Long-term rate of return 9.00% 9.00%
Salary increase rate N/A N/A
As a result of the disposition of Chromcraft and Peters-Revington in April
1992, all employees of Chromcraft and Peters-Revington were vested in their
retirement benefits under the plans.
Effective June 1, 1993, the following defined contribution plans were
adopted by the Company's operating companies:
Barcalounger Retirement Plan
This non-contributory plan is designed to provide income at retirement and
covers all Barcalounger employees with at least one year of service. Annual
company contributions are based on individual participant's earnings and length
of service. For the year ended December 31, 1994 and the period June 1, 1993
to December 31, 1993, company contributions were $120,000 and $115,000,
respectively.
Barcalounger Savings Plan
This plan is designed to provide a savings vehicle for Barcalounger
employees with at least one year of service who may elect
- 29 -
30
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Employee Benefit Plans (continued)
to participate by saving on a before-tax and/or after-tax basis in one or more
of four investment funds. Annual company contributions match 25% of
participants' contributions of up to four percent of earnings. For the year
ended December 31, 1994 and the period June 1, 1993 to December 31, 1993,
company matching contributions were $36,000 and $21,000, respectively.
Stratford Retirement Plan
This non-contributory plan is designed to provide income at retirement and
covers all Stratford employees with at least one year of service. Annual
company contributions are based on individual participant's earnings and length
of service. For the year ended December 31, 1994 and the period June 1, 1993
to December 31, 1993, company contributions were $1,039,000 and $630,000,
respectively.
Prior to the sale of Super Sagless, $252,500 and $492,000 was incurred for
the year ended December 31, 1994 and the period June 1, 1993 to December 31,
1993, respectively, under the Super Sagless Retirement-Savings Plan, which
covered Super Sagless employees with at least one year of service. No future
contributions to the Super Sagless Plan by the Company are required.
The Company also maintained a non-qualified retirement plan for certain key
executives, who were excluded from participation in Consolidated Furniture's
Salaried Retirement Plan. Benefits of the executive retirement plan were
substantially the same as the Salaried Retirement Plan. The executive
retirement plan ceased benefit accruals in December 1992. The cost of this
plan was approximately $751,000 in 1992. As of December 31, 1994, the
remaining obligations under this executive plan are approximately $546,000, and
are included in other long-term liabilities.
The Company also sponsors an investment plan. The plan previously covered
all employees but, subsequent to the adoption of the Barcalounger and Super
Sagless plans, noted above, this plan covers all employees not covered by such
plans. At the date of adoption of the Barcalounger and Super Sagless plans,
Barcalounger and Super Sagless participants' account balances were transferred
to the Barcalounger and Super Sagless plans. Company contributions to the
Company's investment plan were $39,000 in 1994, $50,000 in 1993 and $177,000 in
1992.
- 30 -
31
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Employee Benefit Plans (continued)
Under various incentive compensation plans, certain employees of the
Company and its subsidiaries earned bonuses for reaching specific performance
criteria amounting to $519,000 in 1994, $964,000 in 1993 and $346,000 in 1992.
(8) Rental Commitments
The Company and its subsidiaries lease certain manufacturing and
warehousing facilities (capitalized leases), equipment (primarily
transportation equipment), and warehouse and showroom facilities (operating
leases).
Future minimum lease payments at December 31, 1994, under all
non-cancelable leases are as follows:
Period Capital Operating
------ ------- ---------
(In thousands)
1995 $ 197 1,114
1996 197 929
1997 197 910
1998 196 928
1999 - 724
After 1999 - 426
----- -------
Total minimum lease payments 787 5,031
=======
Less amounts representing interest 87
-----
Total capitalized lease
obligations 700
Less current maturities of
capitalized lease obligations 160
-----
Capitalized lease obligations
net of current maturities $ 540
=====
It is expected that, in the normal course of business, non-cancelable
leases that expire will be renewed or replaced.
- 31 -
32
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Rental Commitments (continued)
Rental expense is summarized, in thousands, as follows:
Years ended December 31,
------------------------------
1994 1993 1992
-------- -------- --------
Minimum Rentals
(including cancel-
able leases) $ 4,314 4,276 5,502
Contingent rentals
(principally mileage
charges) - 362 452
Sublease rentals ( 285) ( 425) ( 674)
------ ------ ------
$ 4,029 4,213 5,280
====== ====== ======
(9) Financial Information by Industry Segments
The Company is engaged in only one segment of business, the manufacture of
furniture. Sears Roebuck and Co. accounted for approximately twenty percent,
sixteen percent and thirteen percent of the Company's sales in each of the
years 1994, 1993 and 1992, respectively.
(10) Contingencies
There were contingent liabilities at December 31, 1994 consisting of
purchase commitments and legal proceedings arising in the ordinary course of
business. The financial risk involved in connection with all contingent
liabilities, except the proposed adjustments delivered by the IRS, see note 3,
and the potential default condition on the merger debentures, see note 4, is
not considered material in relation to the consolidated financial position of
the Company.
- 32 -
33
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Liquidity
Consolidated Furniture is expected to service its long-term debt under the
Credit Agreement, relating to the revolving credit facility, and senior
subordinated debentures from its cash flow from operations and available credit
facilities. As discussed in Note 4, subject to the interpretation of the
trustee for the merger debentures, interest on Fairwood's senior subordinated
pay-in-kind debentures and merger debentures was settled by distribution of
additional securities through September 1994. Fairwood has substantially no
assets other than the common stock of Consolidated Furniture, and Consolidated
Furniture and its primary operating subsidiary have pledged substantially all
of their assets to secure their obligations under the Credit Agreement.
Throughout portions of 1994, 1993 and 1992, Consolidated Furniture did not
generate sufficient funds from operations to fully meet its interest
obligations related to its long-term indebtedness. Consolidated Furniture
funded these interest obligations through increased borrowings from CSCL under
the Credit Agreement. However, during 1992 and 1994 the proceeds to
Consolidated Furniture from the disposition of Chromcraft and Peters-Revington
and substantially all of the assets of Super Sagless of approximately $83
million and $24 million, respectively, were used to repay debt of Consolidated
Furniture and its subsidiaries under the Credit Agreement.
The Company is dependent upon CSCL for funding of its debt service costs.
CSCL has in the past increased its revolving line of credit line to
Consolidated Furniture under the Credit Agreement which has enabled
Consolidated Furniture to meet its debt service obligations. Under the Credit
Agreement, Consolidated Furniture and its subsidiaries are generally restricted
from transferring monies to the Company with the exception of amounts for (a)
specified administrative expenses of the Company not exceeding $275,000 per
year and (b) payment of income taxes. Management believes that cash flow from
operations and funding from CSCL will be adequate for its working capital
requirements and any cash payments due on the debt of Consolidated Furniture
through December 31, 1995.
However, the Company's cash flow from operations will not be sufficient to
permit the Company to make cash interest payments on the Company's senior
subordinated pay-in-kind debentures and merger debentures. Consolidated
Furniture's credit facilities do not permit it to borrow funds to enable the
Company to make cash interest payments on the senior subordinated pay-in-kind
debentures
- 33 -
34
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Liquidity (continued)
and merger debentures. Accordingly, depending on the interpretation of the
indentures governing the senior subordinated pay-in-kind debentures and merger
debentures, the Company may have failed to make the interest payments required
on October 1, 1994, see note 4, and will probably fail to make the cash
interest payments required on April 1, 1995. Management is assessing its
alternatives and plans with respect to this matter based on possible actions,
if any, which are taken by the holders of the senior subordinated pay-in-kind
debentures and merger debentures.
- 34 -
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and position or principal occupation during the past five
years of each member of the Board of Directors and executive officer of the
Company are set forth below. Directors serve for a term of one year and
until their successors are elected and qualified. Officers are elected
annually by the Board of Directors to serve for the ensuing year and until
their respective successors are elected.
Director Position and Principal Occupation or
Name Age Since Employment Held During Last 5 Years
---- --- -------- ------------------------------------
John B. Sganga 63 1992 Chief Financial Officer, Executive
Vice President, Secretary and
Treasurer since February 1993.
Mr. Sganga is also, inter alia,
Chief Financial Officer, Executive
Vice President, Secretary and
Treasurer of Consolidated Furniture
and Vice President, Treasurer and
Secretary of each of Consolidated
Furniture's subsidiaries. From
December 1988 to February 1993,
Mr. Sganga served the Company and
its subsidiaries in various officer
positions. Mr. Sganga is also a
director of Consolidated Furniture.
M. Saleem Muqaddam 47 1992 Vice President, CVCL, an affiliate
of the Company, since 1989. Mr.
Mugaddam is also vice president of
CSCL, an affiliate of CVCL.
Previously, Mr. Muqaddam spent 15
years with Citibank, N.A., an
affiliate of the Company, in senior
managerial positions. Mr. Muqaddam
is also a director of Consolidated
Furniture, Chromcraft Revington,
Inc., Pamida Holdings, Inc. and
Plantronics, Inc.
- 35 -
36
The following were subsidiary presidents and may be deemed to be executive
officers of the Company as of December 31, 1994:
Date Assumed
Name Age Position Position
---- --- -------- --------
Stephen R. Lake 48 Chief Operating Officer August 1994
Stratford Division of
Furniture Comfort
Corporation.
Robert M. Shaughnessy 54 President of Furniture July 1992
Comfort Corporation and
President and Chief
Executive Officer
Stratford Division of
Furniture Comfort
Corporation
Wayne T. Stephens 44 President and Chief October 1992
Executive Officer
Barcalounger Division of
Furniture Comfort
Corporation
There are no family relationships among any of the Company's directors or
officers.
The following is a brief account of the business experience during the
past five years of each of the subsidiary presidents:
Effective February 1, 1995 Mr. Lake was appointed to the position of
President of the Stratford Company ( Stratford ), a Division of Furniture
Comfort Corporation. From August 1994 to February 1995 he was the Chief
Operating Officer of Stratford. From September 1991 to July 1994 he was the
President and Chief Executive Officer of Super Sagless Corporation. From
prior to 1989 to February 1991 he was Vice President and General Manager of
Clark Components N.A.
Effective February 1, 1995 Mr. Shaughnessy resigned as President of
Furniture Comfort Corporation and President and Chief Executive Officer of
Stratford. Prior to his resignation he had been employed by the Company since
July 1992 in his present position. From February 1991 to July 1992 he was
Vice President, Marketing, Outboard Marine Corporation, from June 1990 to
February 1991 he worked as a consultant and from prior to 1989 to June 1990 he
was Senior Vice President, Navistar.
In connection with services provided by The Finley Group, a management
consulting firm, Mr. Stephens, a principal of that firm, has acted as
president of a number of companies; he was president from September 1989 to
January 1990 of Southwest Elevator Corporation, from January 1990 to January
1991 of Munford, Inc., from January 1991 to October 1991 of Specialty
Paperboard, Inc., from January 1992 to October 1992 of Docktor Pet, Inc. and
from October 1992 to April 1993 as President and Chief Executive Officer of
the Barcalounger Division of Furniture Comfort Corporation. While continuing
in his role as President and Chief Executive Officer of the Barcalounger
division, in April 1993, Mr. Stephens became a direct consultant to the
Company and in January 1994 an employee of Furniture Comfort Corporation.
Prior to joining The Finley Group in September 1989, Mr. Stephens was a
partner with Deloitte & Touche, a public accounting firm.
- 36 -
37
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS' COMPENSATION
Information concerning the compensation earned by the above named
executive officers is set forth in the Summary Compensation Table.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
Name and Annual Compensation ------------
Principal ------------------- LTIP All Other
Position Year Salary Bonus Payouts Compensation
--------- ---- ----- ------- ------------
John B. Sganga 1994 $150,000 $ $ - $ 7,766 (1)
Executive VP 1993 190,729 - - 1,907 (1)
and CFO 1992 192,500 34,235 1,392 (2) 157,835 (1)
Stephen R. Lake
Chief Operating 1994 213,686 1,147,721 - 51,849 (3)
Officer 1993 170,000 172,975 - 15,809 (3)
Stratford 1992 153,750 112,468 - 413
Robert M. Shaughnessy
President of 1994 250,000 141,934 - 4,524 (4)
Furniture Comfort 1993 235,231 - - 39,903 (4)
& CEO Stratford 1992 101,667 110,000 - 28,935 (4)
Wayne T. Stephens 1994 160,000 - - 2,150 (5)
President & CEO 1993 (5) - - -
Barcalounger 1992 (5) - - -
(1) 1994 amount represents company contributions to the investment plan of
$1,500 and $6,266 for the value of the use of a company vehicle. 1993
amount represents company contributions to the Investment Plan. 1992
amount includes $150,510 distribution under the Executive Retirement
Plan, $5,400 excess of book value over purchase price of company car, and
$1,925 company contribution to Salaried Investment Plan.
(2) Deferred executive incentive award given in 1989 and payable in 1992. No
deferred awards have been given since 1989.
(3) 1994 includes Super Sagless distribution from Super Sagless Retirement
Plan of $51,849, Super Sagless base salary of $107,917 and bonus of
$947,721 and Stratford base salary of $107,917 and bonus of $100,000.
1993 includes $12,916 distribution under the Executive Retirement Plan,
$1,518 company contribution to the Super Sagless Retirement-Savings Plan,
and $1,375 company contribution to Investment Plan. 1992 amount
represents the company contribution to Investment Plan.
(4) 1994 amount represents $4,524 for the value of the use of a company
vehicle. 1993 and 1992 amounts represent relocation allowances.
(5) 1994 amounts represent company contributions to the investment plan of
$800 and $1,350 for the value of the use of a company vehicle. For the
period October 1992 to April 1993, $155,682 was paid to The Finley Group
for services it rendered through Mr. Stephens. For the period May 1993
to December 1993, $200,000 was paid to Mr. Stephens as a consultant.
- 37 -
38
EMPLOYMENT AGREEMENTS
Consolidated Furniture entered into an employment agreement with Mr.
Sganga, who is named in the summary compensation table, effective December 15,
1993, which provides for an annual salary, plus such bonuses as may be awarded
in the discretion of the Board of Directors. This agreement will remain in
effect through December 31, 1995 unless terminated sooner with or without
cause by the Board of Directors. If employment is terminated without cause,
other than due to death or disability or other incapacity, Mr. Sganga will be
entitled to receive a severance payment in an amount equal to the lesser of
(i) $150,000 and (ii) an amount equal to sum of the base salary payments that
he would have received had he remained in the employ of the Company until
December 31, 1995. No severance will be paid if termination is for cause, or
due to death, disability or other incapacity.
Consolidated Furniture entered into an employment agreement with Mr.
Stephen R. Lake, who is named in the summary compensation table, effective
June 16, 1994, which provides for an annual salary beginning at $250,000, plus
bonuses based on preestablished goals for each year. Mr. Lake was guaranteed
a $100,000 bonus for 1994. If employment is terminated without cause before
the third anniversary date of the agreement, Mr. Lake will be entitled to
receive a severance payment equal to his annual base salary then in effect.
RETIREMENT PLAN
Messrs. Sganga, Lake, Shaughnessy and Stephens, who are named in the
summary Compensation Table, are not participants in the Salaried and Sales
employees Retirement Plan of Consolidated Furniture, which ceased further
benefit accruals as of May 31, 1993.
Consolidated Furniture adopted in 1990 a non-qualified non-contributory
Executive Retirement Plan for certain of its executives in the operating
companies and corporate office, including Messrs. Sganga, Shaughnessy and
Lake. Participants in this plan are not eligible to participate in the
Consolidated Furniture Salaried and Sales Employees Retirement Plan.
Executives designated as participants begin to accrue retirement benefits
following completion of one year of employment. Benefits accrued under the
plan are reduced by any benefits to which the individual may be entitled under
a prior or current defined benefit pension or supplemental retirement plan of
Consolidated Furniture.
In December 1992, benefit accruals were ceased to the Executive Retirement
Plan and Messrs. Sganga and Lake received payment in full settlement of the
accrued benefit obligation under the plan. Mr. Sganga received $150,510 in
1992 and Mr. Lake received $12,916 in 1993. Mr Stephens is not eligible to
participate in the Executive Retirement Plan.
SALARIED INVESTMENT PLAN
Officers of Consolidated Furniture are eligible to participate in its
ax-qualified Investment Plan for Salaried and Sales Employees. Directors who
are not officers are not eligible. Consolidated Furniture may, but is not
obligated to, contribute up to 100% of any savings of a participant not
exceeding 4% of salary.
The full value of a participant's investment in the plan becomes payable
upon retirement, disability or death. Upon termination of employment for
- 38 -
39
other reasons, a participant is entitled to the accumulated value of his or
her savings, and to varying amounts of Consolidated Furniture's contributions
depending on years of membership in the plan, with 100% thereof payable if
years of membership are 5 or more.
During 1994, such contributions for Mr. Sganga were $1,500. In June 1993,
the following defined contribution plans were adopted: Barcalounger Retirement
Plan, Barcalounger Savings Plan, Stratford Retirement Plan, and Super Sagless
Retirement-Savings Plan. Please refer to note 7, Employee Benefit Plans, in
the Notes to Consolidated Financial Statements. The company contribution for
Mr. Lake in the Super Sagless Retirement-Savings Plan was $1,518. Mr.
Shaughnessy is not a member of the Stratford Retirement Plan and Mr. Stephens
was not eligible for membership in the Barcalounger Retirement Plan nor the
Barcalounger Savings Plan.
INCENTIVE PLAN
Consolidated Furniture maintains an executive incentive (bonus) plan
implemented to provide individual awards for attainment of specified business
objectives. Under the executive incentive plan, each of Consolidated
Furniture's profit centers is assigned certain business goals annually, which
for 1994 were based on earnings and cash flow. Awards are made to profit
center participants based upon the extent to which their respective profit
centers attain their goals. Total awards made for the 1994 Plan Year were
$519,000, including awards of $267,721 for Mr. Lake and $141,934 for Mr.
Shaughnessy.
DIRECTORS' COMPENSATION
As of the date of this Annual Report on Form 10-K, the Company has not
determined what compensation directors who are not officers of the Company
will receive for their service as director. No compensation was paid to
directors for their services as directors in 1994.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's board of directors does not have a separate compensation
committee. Accordingly, the entire board of directors considers executive
compensation matters, except that any executive officer who is a director does
not take part in executive compensation matters regarding that executive
officer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The Company's common stock consists of both voting stock and non-voting
stock. The table below sets forth, as of February 28, 1995, certain
information regarding each person who owns of record or beneficially 5% or
more of the outstanding shares of common stock. Such beneficial owners own
their shares directly and have sole voting and investment power with respect
to their shares.
- 39 -
40
Percentage of
Number of Outstanding Shares Percentage
Name and Address Shares of Company's of Company's of
of Beneficial Owner Common Stock Common Stock Voting Power
------------------- ------------------- ------------------ ------------
Citicorp Venture Capital 1,000,100 99.98% 60%
Ltd. *
399 Park Avenue
New York, NY 10043
Thomas F. Creamer 100 0.01% 20%
Anthony C. Howkins 100 0.01% 20%
---------------------------
* Owns 999,800 shares of the Company's Class B Non-Voting Common Stock and
300 shares of the Company's Class A Voting Common Stock. Under the
Company's Certificate of Incorporation, the Class B Non-Voting Common
Stock is convertible into Class A Voting Common Stock, so long as the
holder of the Class B Stock would be permitted to hold the resulting Class
A Stock under applicable law. On December 31, 1990, CVCL and Fairwood
entered into an Agreement and Plan to Relinquish Control pursuant to
which CVCL converted 200 shares of Class B Stock into 200 shares of Class
A Stock and increased its ownership of the outstanding Class A Stock from
33-1/3% to 60%. Under this Agreement, CVCL is required to convert a
sufficient number of shares of Class A Stock into Class B Stock to reduce
CVCL's ownership of Class A Stock such that CVCL will no longer be
presumed to have control of Fairwood under the regulations of the Small
Business Administration upon the earlier of (i) the date on which the
Company's ratio of earnings before interest, taxes and
depreciation to interest expense on a consolidated basis has been 1.5 to 1
for three consecutive fiscal quarters or (ii) December 31, 1997 (or such
later date as may be consented to by the Small Business Administration).
The Agreement has been accepted by the Small Business Administration.
CVCL is a subsidiary of Citibank, N.A., a national bank which is owned by
Citicorp a publicly owned bank holding company, and is an affiliate of
CSCL.
OWNERSHIP BY DIRECTORS AND OFFICERS
As of February 28, 1995, no shares of the Company's common stock were
beneficially held by any director or officer.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As further described in the Company's financial statements in Item 8, a
large majority of the Company's long-term debt at December 31, 1994 is payable
to CSCL, an affiliate of CVCL, the Company's majority shareowner. M. Saleem
Muqaddam, a director of the Company, is a vice president of CVCL and CSCL.
During 1994, the largest aggregate amount of indebtedness outstanding that was
payable to CSCL was approximately $353.4 million; as of February 28, 1995, the
aggregate amount of such indebtedness was approximately $337.8 million. See
Note 4, Long-term Debt, in the Notes to Consolidated Financial Statements set
forth in Item 8.
399 Venture Partners, Inc., an affiliate of CVCL, owns approximately 49%
of Chromcraft Revington, Inc. M. Saleem Muqaddam, vice president of CVCL and
director of the Company, is a director of Chromcraft Revington, Inc.
- 40 -
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Page
The following financial statements and supplementary data are
included in Part II, Item 8:
Independent Auditors' Report................................... 14-15
Consolidated Balance Sheets at December 31, 1994 and 1993...... 16
Consolidated Statements of Operations for the Years ended
December 31, 1994, 1993 and 1992 ............................ 17
Consolidated Statements of Shareowners' Equity (Deficit)
for the Years ended December 31, 1994, 1993 and 1992 ........ 18
Consolidated Statements of Cash Flows for the Years ended
December 31, 1994, 1993 and 1992 ............................. 19
Notes to Consolidated Financial Statements .................... 20-34
2. FINANCIAL STATEMENT SCHEDULE
For the three years ended December 31, 1994:
Schedule VIII--Valuation and Qualifying Accounts
and Reserves................................... 46
Other schedules are omitted because of the absence of conditions
under which they are required.
- 41 -
42
3. Exhibits
Exhibits are listed by numbers corresponding to the Exhibit Table of
Item 601 in Regulation S-K
(3.1) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.3 of the
` Registrant's Registration Statement on Form S-4 (the "Form
S-4")).
(3.2) By-Laws of the Registrant (incorporated by reference to
Exhibit 3.4 of the Form S-4).
(3.3) Certificate of Amendment of Certificate of Incorporation,
dated March 22, 1993 (incorporated by reference to Exhibit
3.3 of the Registrant's annual report on Form 10-K for the
year ended December 31, 1992 (the "1992 Form 10-K"))
(4.1) Indenture, dated as of August 15, 1989, between Fairwood
Corporation, formerly MHS Holdings Corporation
(the "Company") and Bankers Trust Company, as Trustee,
relating to the 16-7/8% Subordinated Pay-In-Kind Debentures
due 2004 (the "Merger Debentures"), (incorporated by
reference to Exhibit 4.1 of the Registrant's third quarter
report on Form 10-Q for the quarter ended September 30, 1989
(the "1989 Third Quarter 10-Q")).
(4.2) Form of Merger Debentures, included as Exhibit A to Exhibit
4.1, (incorporated by reference to Exhibit 4.2 of the 1989
Third Quarter 10-Q).
(4.3) Pledge and Security Agreement, dated as of August 15, 1989,
made by the Company to Bankers Trust Company, as Trustee,
(incorporated by reference to Exhibit 4.3 of the 1989 Third
Quarter 10-Q).
(4.4) Warrant Agreement, dated as of August 15, 1989, between the
Company and Pittsburgh National Bank, as Warrant Agent,
(incorporated by reference to Exhibit 4.4 of the 1989 Third
Quarter 10-Q).
(4.5) Form of Warrants, included as Exhibit A to Exhibit 4.4,
(incorporated by reference to Exhibit 4.5 of the 1989 Third
Quarter 10-Q).
(4.6) 15-1/2% Senior Subordinated Pay-In-Kind Debentures of the
Company, dated as of September 22, 1989, issued to Citicorp
Capital Investors Ltd. (incorporated by reference to Exhibit
4.6 of the 1989 Third Quarter 10-Q).
(4.7) Pledge and Security Agreement, dated September 22, 1989,
made by the Company to Citicorp Capital Investors Ltd., as
Agent, (incorporated by reference to Exhibit 4.7 of the 1989
Third Quarter 10-Q).
(4.8) Credit Agreement dated as of September 22, 1989 among
Mohasco Corporation ("Mohasco"), Mohasco Upholstered
Furniture Corporation, Chromcraft Corporation, Super Sagless
Corporation, Choice Seats Corporation and Peters Revington
Corporation and Citicorp Capital Investors Ltd. (the "Credit
Agreement"), (incorporated by reference to Exhibit 4.8 of
the Registrant's annual report on Form 10-K for the year
ended December 31, 1989 (the "1989 Form 10-K")).
(4.9) Amendment, dated December 15, 1989, to the Credit Agreement,
(incorporated by reference to Exhibit 4.9 of the 1989 Form
10-K).
(4.10) Amendment, dated March 13, 1990, to the Credit Agreement,
(incorporated by reference to Exhibit 4.10 of the 1989 Form
10-K).
- 42 -
43
(4.11) Notice of Election and Waiver, dated March 13, 1990, to the
Credit Agreement, (incorporated by reference to Exhibit 4.11
of the Registrant's annual report on Form 10-K for the year
ended December 31, 1990 (the "1990 Form 10-K")).
(4.12) Term Note B, dated March 13, 1990, issued to Court Square
Capital Limited, (incorporated by reference to Exhibit 4.12
of the 1989 Form 10-K).
(4.13) Agreement and Waiver, dated August 15, 1990, to the Credit
Agreement, (incorporated by reference to Exhibit 4.13 of the
1990 Form 10-K).
(4.14) Agreement and Waiver, dated September 5, 1990, to the Credit
Agreement, (incorporated by reference to Exhibit 4.14 of the
1990 Form 10-K).
(4.15) Agreement and Waiver, dated September 15, 1990, to the
Credit Agreement, (incorporated by reference to Exhibit 4.16
of the 1990 Form 10-K).
(4.16) Waiver and Amendment, dated September 15, 1990, to the
Credit Agreement and letter, dated September 15, 1990,
related thereto, (incorporated by reference to Exhibit 4.16
of the 1990 Form 10-K).
(4.17) Waiver and Fourth Amendment, dated as of December 31, 1990,
to the Credit Agreement, (incorporated by reference to
Exhibit 4.17 of the 1990 Form 10-K).
(4.18) Revolving Credit Note, dated September 22, 1989, amended and
restated as of September 15, 1990, issued to Court Square
Capital Limited, and Endorsement No. 1 thereto, dated as of
December 31, 1990, (incorporated by reference to Exhibit
4.18 of the 1990 Form 10-K).
(4.19) Increasing Rate Senior Subordinated Debentures of Mohasco
Corporation dated as of September 22, 1989 issued to
Citicorp Capital Investors Ltd. (the "Senior Subordinated
Debentures"), (incorporated by reference to Exhibit 4.13 of
the 1989 Form 10-K).
(4.20) Amendment, dated March 30, 1990, to the Senior Subordinated
Debentures, (incorporated by reference to Exhibit 4.14 of
the 1989 Form 10-K).
(4.21) Second Amendment, dated as of December 31, 1990, to the
Senior Subordinated Debentures, (incorporated by reference
to Exhibit 4.21 of the 1990 Form 10-K).
(4.22) Endorsement No. 1, dated as of December 31, 1990, to the
Senior Subordinated Debentures, (incorporated by reference
to Exhibit 4.22 of the 1990 Form 10-K).
(4.23) Waiver, dated as of June 29, 1991, to the Credit Agreement,
(incorporated by reference to Exhibit 4.23 of the
Registrant's annual report on Form 10-K for the year ended
December 31,1991 the "1991 Form 10-K")).
(4.24) Waiver, dated as of October 31, 1991, to the Credit
Agreement, (incorporated by reference to Exhibit 4.24 of the
1991 Form 10-K).
(4.25) Letter Agreement, dated as of October 31, 1991, between the
Company and Manufacturers Hanover, as Warrant Agent and
letter from Pittsburgh National Bank, dated October 28,
1991, related thereto, (incorporated by reference to Exhibit
4.25 of the 1991 Form 10-K).
(4.26) Waiver and Fifth Amendment, dated as of March 27, 1992, to
Credit Agreement, (incorporated by reference to Exhibit 4.26
of the 1991 Form 10-K).
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44
(4.27) Third Amendment, dated as of March 27, 1992, to the Senior
Subordinated Debentures, (incorporated by reference to
Exhibit 4.27 of the 1991 Form 10-K).
(4.28) Endorsement No. 2, dated as of March 27, 1992, to the Senior
Subordinated Debentures, (incorporated by reference to
Exhibit 4.28 of the 1991 Form 10-K).
(4.29) Sixth Amendment, dated as of April 23, 1992, to Credit
Agreement, (incorporated by reference to Exhibit 4.1 of the
Registrant's second quarter report on Form 10-Q for the
quarter ended June 27, 1992 (the "1992 Second Quarter
10-Q")).
(4.30) Seventh Amendment, dated as of April 23, 1992, to Credit
Agreement, (incorporated by reference to Exhibit 4.2 of the
1992 Second Quarter 10-Q).
(4.31) Eighth Amendment, dated as of September 26, 1992, to Credit
Agreement, (incorporated by reference to Exhibit 4.1 of the
Registrant's third quarter report on Form 10-Q for the
quarter ended September 26,1992 (the "1992 Third Quarter
10-Q")).
(4.32) Waiver and Ninth Amendment, dated as of February 4, 1993, to
Credit Agreement, (incorporated by reference to Exhibit 4.32
of the 1992 Form 10-K.
(4.33) Tenth Amendment, dated as of March 22, 1993, to Credit
Agreement, (incorporated by reference to Exhibit 4.33 of the
1992 Form 10-K.
(4.34) Recision of Waiver, dated as of April 30, 1993, to Credit
Agreement, (incorporated by reference to Exhibit 4.1 of the
Registrant's first quarter report on Form 10-Q for the
quarter ended April 3, 1993 (the "1993 First Quarter 10-
Q")).
(4.35) Eleventh Amendment, dated as of March 25, 1994, to Credit
Agreement.
(4.36) Fourth Amendment, dated as of January 3, 1994, to the Senior
Subordinated Debentures.
(10.1) Employment Agreement, between Mohasco and Robert W. Hatch,
dated September 21, 1989, (incorporated by reference to
Exhibit 10.1 of the 1989 Form 10-K).
(10.2) Supplemental Executive Retirement Agreement, between Mohasco
and Robert W. Hatch, dated September 27, 1990, (incorporated
by reference to Exhibit 10.2 of the 1990 Form 10-K).
(10.3) Mohasco Executive Retirement Plan, (incorporated by
reference to Exhibit 10.5 of the 1990 Form 10-K).
(10.4) Mohasco Corporation Executive Incentive Plan, (incorporated
by reference to Exhibit 10.6 of the 1990 Form 10-K).
(10.5) Amendment, dated December 31, 1991, to the Mohasco Executive
Retirement Plan, (incorporated by reference to Exhibit 10.6
of the 1991 Form 10-K).
(10.6) Merger Agreement dated March 10, 1992 among Chromcraft
Revington, Inc., Chromcraft Merger Subsidiary, Inc., Mohasco
Corporation, Chromcraft Corporation and the Company,
(incorporated by reference to Exhibit 10.1 of the March 17,
1992 Form 8-K).
(10.7) Merger Agreement dated March 10, 1992 among Chromcraft
Revington, Inc., PR Merger Subsidiary, Inc., Mohasco
Corporation, Peters-Revington Corporation and the Company,
(incorporated by reference to Exhibit 10.2 of the March 17,
1992 Form 8-K).
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45
(10.8) Employment Agreement, between Mohasco and John B. Sganga,
dated December 15, 1993.
(10.9) Agreement for Purchase and Sale of Assets among Super
Sagless Corporation, Mohasco Corporation, Leggett & Platt
Furniture Hardware Company and Leggett & Platt,
Incorporated, dated July 14, 1994.
(10.10)Employment Agreement, between Furniture Comfort Corporation
and Stephen R. Lake, dated June 16, 1994.
(22.1) List of Subsidiaries of the Registrant.
The Company agrees to furnish the Securities and Exchange Commission, upon
request, a copy of any instrument defining the rights of holders of long term
debt of the Company and its consolidated subsidiaries.
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K for the twelve months ended
December 31, 1994.
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46
Schedule VIII
FAIRWOOD CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1994, 1993 and 1992
(In Thousands)
Balance at Additions Deductions Balance
beginning charged to from at close
Description of period earnings reserves of period
----------- --------- ---------- ---------- ---------
Valuation and qualifying
accounts and reserves
deducted from accounts
and notes receivable:
1994
----
Allowance for discounts $ 259 1,420 1,355 324
Allowance for doubtful
accounts 2,753 934 1,255 2,432
Allowance for estimated
loss on claims 1,050 - 1,050 -
------ ------ ------ ------
$ 4,062 2,354 3,660 2,756
====== ====== ====== ======
1993
----
Allowance for discounts $ 185 1,705 1,631 259
Allowance for doubtful
accounts 2,454 1,433 1,134 2,753
Allowance for estimated
loss on claims 518 1,192 660 1,050
------ ------ ------ ------
$ 3,157 4,330 3,425 4,062
====== ====== ====== ======
1992
----
Allowance for discounts $ 161 1,570 1,546 185
Allowance for doubtful
accounts 3,150 1,367 2,063 2,454
Allowance for estimated
loss on claims 276 525 283 518
------ ------ ------ ------
$ 3,587 3,462 3,892 3,157
====== ====== ====== ======
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47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FAIRWOOD CORPORATION
By: /s/ John B. Sganga
------------------------
John B. Sganga
Chief Financial Officer,
Executive Vice President,
Secretary and Treasurer
Date: March 29, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 31, 1995 by the following persons on
behalf of the Registrant and in the capacities indicated.
Title
/s/ John B. Sganga Director and Chief
--------------------------- Financial Officer,
John B. Sganga Executive Vice President,
Secretary and Treasurer
(principal executive,
financial and accounting
officer)
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48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 31, 1995 by the following person on
behalf of the Registrant and in the capacity indicated.
Title
/s/ M. Saleem Muqaddam Director
-------------------------------
M. Saleem Muqaddam
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