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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, 1996
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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:
None
(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
--- ---
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, 1997.
On February 28, 1997, 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
Ltd. ("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 and included 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 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, $15
million was received in six months and $.75 million was received one year after
closing. 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 Court Square
Capital Limited ("CSCL"), an affiliate of CVCL, under Consolidated Furniture's
Credit Agreement with CSCL (the "Credit Agreement").
Fairwood is contesting an Internal Revenue Service ("IRS") Agent's
report resulting from an IRS audit examination of the consolidated Federal
income tax returns of Fairwood and its subsidiaries for the years ended July
11, 1988 through December 1991. Fairwood has reached a tentative settlement
subject to approval by IRS and the Joint Committee on Taxation. Furthermore, an
involuntary Chapter 7 petition was filed on January 3, 1996 in the United
States Bankruptcy Court for the Southern District of New York against Fairwood
Corporation by certain bondholders. On November 26, 1996 the motion to dismiss
was denied. On December 26, 1996 Fairwood exercised its right to convert the
pending involuntary bankruptcy case to a voluntary Chapter 11 proceeding as
debtor-in-possession. See Item 3. LEGAL PROCEEDINGS.
Fairwood's subsidiary Consolidated Furniture is the parent of Furniture
Comfort Corporation ("Furniture Comfort" formerly named Mohasco Upholstered
Furniture Corporation) whose two operating divisions, Stratford Company
("Stratford") and Bacalounger Company ("Barcalounger") manufacture upholstered
stationary and motion furniture, such as modular living room groups, recliners,
rockers and glider chairs and upholstered motion furniture, such as, modular
sofas and living room and family room groups.
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Operations
Furniture Comfort, Consolidated Furniture's operating subsidiary through
its Stratford and Barcalounger divisions, 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. Currently a diversified line of upholstered motion furniture is
manufactured and sold under several brand names. While most 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.
Stratford and Barcalounger operate as separate independent entities.
Each division markets and manufactures one or more brands of furniture.
Stratford makes and sells mid-priced upholstered stationary and motion
furniture under the brand names Stratford, Stratolounger and Avon. 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 its 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 and Barcalounger operate 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 at mid price points
have continued to erode 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 and Barcalounger
remain positioned among the largest manufacturers of upholstered stationary and
motion furniture in the United States. However, Stratford sales have shown a
continuous decrease. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL
RESOURCES. For the years ended December 31, 1996, 1995, and 1994, net sales,
including sales to Barcalounger, by Stratford were $114.0 million, $142.6
million and $176.6 million, respectively, and net sales by Barcalounger were
$39.9 million, $36.9 million and $36.5 million, respectively.
The furniture market is highly competitive and includes a large number
of manufacturers, none of which dominates the market. Certain of these
manufacturers produce a broader range of furniture than Stratford and
Barcalounger, and many of them have greater financial and other resources. In
addition, there are relatively few barriers to entry into the industry.
Competition could require Stratford and Barcalounger to reduce prices, offer
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better credit terms, or increase spending on product development, marketing or
sales, any of which could adversely affect the Company.
Stratford targets a broad market for it mid-priced recliner, motion and
stationary upholstered furniture. Stratford sells mainly to large national
retail furniture and department stores and has significant brand recognition.
Barcalounger targets a selected market for its high-end recliner chair
and motion upholstered furniture. Barcalounger sells mainly to furniture stores
and department 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.
In November 1995, Stratford entered into a manufacturing agreement
("Agreement") with Simmons Upholstered Furniture Corporation ("Simmons"), an
affiliate of the Company. Under this Agreement, Stratford manufactures product
for and supplies product on behalf of Simmons, provides sales services and
provides new product development services to Simmons. The products are
manufactured using Stratford's equipment and various plant facilities and the
other services are provided using Stratford's personnel. The term of the
Agreement renews annually, unless terminated by either party. This agreement
resulted in approximately $12.7 and $2.4 million of revenues in 1996 and 1995,
respectively, and the reimbursement of $600,000 and $243,000 for new product
development and $2,257,000 and $100,000 for selling expenses in 1996 and 1995,
respectively.
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: Life Style Furnishings
International, Furniture Brands International, 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.
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, Furniture 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, Furniture
Comfort conducts research and development activities which are decentralized
and directed by its individual operating divisions.
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The Stratford and Barcalounger operating divisions expended a total of
$9,640,000 in the past five years for research and development programs of
which $1,779,000, $2,149,000, and $2,467,000 was expended in 1996, 1995 and
1994, respectively.
Employees
Fairwood has no employees but its subsidiaries and their operating
divisions employed 1,999 persons at December 31, 1996. The Stratford and
Barcalounger divisions have a long record of generally harmonious relations
with employees.
Backlog
The backlog of orders among Furniture Comfort's furniture operations was
approximately $11,270,000 at December 31, 1996 and approximately $13,401,000 at
December 31, 1995. It is expected that the backlog at December 31, 1996 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 fall 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 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.
Sears, Roebuck & Co. accounted for approximately 13 percent, 19 percent
and 20 percent of Furniture Comfort's furniture sales during the years 1996,
1995 and 1994, respectively. Export sales for 1996, 1995 and 1994 were
approximately 2 percent, 2 percent and 1 percent of sales, respectively.
Environmental and Raw Materials
In 1996, there were no significant effects upon the capital
expenditures, earnings and competitive position of Stratford and Barcalounger
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 Stratford and Barcalounger are all procured
in the open market from a number of suppliers. In general, no major
difficulties have been experienced in obtaining raw materials.
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Patents
Patents are not a significant consideration in the manufacture of most
of Stratford and Barcalounger's products. Stratford and Barcalounger do not
believe that their 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 operating divisions 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 Furniture Comfort or its operating divisions.
Stratford and Barcalounger also lease showroom and warehouse space
throughout the United States for display and storage of products. Fairwood and
Consolidated Furniture lease office space in Wilmington, Delaware.
Stratford and Barcalounger believe that their plants and facilities, in
the aggregate, are adequate, suitable and of sufficient capacity for purposes
of conducting its current business.
As of December 31, 1996, Stratford and Barcalounger divisions have
furniture facilities as follows:
Location Use Square Footage
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Stratford
Leased
New Albany, MS Manufacturing plant 1,060,786
Okolona, MS Manufacturing plant 613,233
Eupora, MS Manufacturing plant 314,693
Ontario, CA Manufacturing plant 185,000
Guntown, MS Warehouse 216,000
High Point, NC Showroom 27,386
San Francisco, CA Showroom 10,390
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2,427,488
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Owned
New Albany, MS Manufacturing plant 32,463
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Barcalounger
Leased
Rocky Mount, NC Manufacturing plant 364,000
High Point, NC Showroom 5,725
San Francisco, CA Showroom 2,945
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372,670
2,832,621
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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 5 to the Company's Consolidated Financial
Statements set forth in item 8).
Stratford and Barcalounger believe that its properties are adequate to
serve the current and anticipated needs of Stratford and Barcalounger without
making capital expenditures materially higher than historical levels.
ITEM 3. LEGAL PROCEEDINGS
Fairwood is contesting an Internal Revenue Service ("IRS") Agent's
report resulting from an IRS audit examination of the consolidated Federal
income tax returns of Fairwood and its subsidiaries for the years ended July
11, 1988 through December 1991. The report proposed to adjust Fairwood's
taxable income in the years in issue and in prior years to which net operating
losses of the Consolidated tax group were carried back. Fairwood estimates that
the aggregate proposed liability, if all issues were resolved unfavorably
would, together with statutory interest and state income tax, total
approximately $122 million and eliminate substantially all of the net operating
loss carryforwards. Under available administrative procedures, Fairwood has
protested the proposed adjustments and, through negotiations with the IRS
Appeals Division, has reached an agreement in principle for a potential
settlement of the issues in the case. A final settlement based on the foregoing
is estimated to be approximately $4.4 million and is included in Federal and
State income taxes on the accompanying audited consolidated balance sheets. The
terms of the proposed settlement are subject to final approval by the IRS and
will also require the approval of the Joint Committee on Taxation, and no
assurances can be given that such approvals will be given. However, should the
outcome of the reviews in question be unfavorable to Fairwood on one or more
issues in the case then Fairwood and its Subsidiaries may exercise their rights
to litigate these issues. Fairwood and its subsidiaries cannot predict the
ultimate outcome of these issues, nor the impact on its financial statements.
See note 4 to Fairwood's Consolidated Financial Statements set forth in Item 8.
On October 4, 1994, 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, Consolidated Furniture does not believe its disposals were toxic as
alleged. The damages sought from Sloane Blabon and Consolidated Furniture are
unspecified. On August 28, 1995 Consolidated Furniture joined with five other
Potentially Responsible Parties and made an offer of settlement to the EPA.
Consolidated Furniture's share of the offer is approximately $190,000. The EPA
has not rejected or accepted the offer.
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An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
Fairwood Corporation by certain bondholders. In response to the bankruptcy
filing, on April 22, 1996, Fairwood and certain other entities filed a
cross-motion seeking dismissal of the petition. On November 26, 1996 the motion
to dismiss was denied. On December 26, 1996 Fairwood exercised its right to
convert the pending involuntary bankruptcy case to a voluntary Chapter 11
proceeding as debtor-in-possession. Fairwood has indicated in Court papers that
it intends to propose a plan of reorganization with the bankruptcy Court at
some time in the future. The Chapter 11 case pertains only to Fairwood
Corporation. Its direct and indirect subsidiaries, including Consolidated
Furniture Corporation, Furniture Comfort Corporation, as well as the operating
divisions, Stratford and Barcalounger, are not parties to the bankruptcy, nor
are such operations under the supervision of the bankruptcy Court. These
companies will continue to operate in the normal course of business.
As of the date hereof, there are certain other legal proceedings
pending, which arise out of the normal course of the Companies' 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, 1996 and
1995, there were three shareowners of Fairwood's common stock. No dividends
were declared on Fairwood's common stock in 1996 and 1995. The ability of
Fairwood to pay dividends and make distributions in respect of its common stock
is restricted by instruments relating to 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 5 to Fairwood's
Consolidated Financial Statements set forth in Item 8.
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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,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales $ 151.3 176.8 244.9 261.5 267.0
Operating income (loss) ( 6.4) ( 11.8) ( 8.2) 1.9 (104.4)
Interest expense, net ( 61.2) ( 58.6) ( 53.4) ( 46.6) ( 43.6)
Gain on sale of subsidiary - - 20.8 - -
Loss before extraordinary
items ( 67.4) ( 70.7) ( 39.4) ( 46.9) (159.1)
Extraordinary items - - - - 1.9
Net loss ( 67.4) ( 70.7) ( 39.4) ( 46.9) (157.2)
Total assets 46.6 54.1 95.6 113.6 105.1
Long-term debt, including
current maturities * 453.1 420.7 415.4 386.0 330.8
Redeemable preferred stock .1 .1 .1 .1 .1
* - Does not include accrued interest for 1996 and 1995 of $64.4 million and
$37.3 million, respectively.
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 Corporation
("Chromcraft") and Peters-Revington Corporation ("Peters-Revington") for the
period from January 1 through April 23, 1992, which were sold to Chromcraft
Revington, Inc., an affiliate through mergers that were consummated on 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 1996
and 1995.
For additional information, see the Company's Consolidated Financial
Statements included with this report, including Notes 4 and 13 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
1996 vs 1995 Results of Operations
Consolidated net sales of approximately $151.3 million for 1996
decreased 14.4% from 1995 net sales of approximately $176.8 million, due
primarily to the significant reduction of sales at Stratford.
Net sales (including intercompany sales) for 1996 by Stratford decreased
20% to approximately $114 million as compared to $142.6 million for 1995.
During 1996 and 1995 net sales by Stratford include $12.7 million and $2.4
million, respectively, of sales to Simmons Upholstered Furniture Corporation
("Simmons"), an affiliate of the Company. Excluding these sales, net sales by
Stratford decreased 29.0% in 1996. Total volume in 1996 decreased 25.6%, while
average selling prices decreased by approximately 4.8%. Sales in 1996 to
Stratford's larger, national retail customers decreased 30.3%, while sales to
smaller retail customers decreased 28.8%. The decrease in sales at Stratford
was the result of internal and external factors. In 1995 Stratford altered its
marketing strategy by discontinuing all styles with low profit margins and all
styles with low sales volume. This change was a primary factor in causing
decreased sales to smaller retail customers in 1995 and 1996. Sales to larger
national retail customers decreased mainly due to weak 1996 sales in mid priced
furniture and declining sales among the value merchandisers. In addition these
conditions were adversely affected during 1995 and 1996 by (1) organizational
realignment to lower inventory levels and reordering patterns, (2) the
consolidation and closing of retail chain customers' stores not replaced by new
store openings, (3) discontinuance of furniture departments and sales by
certain large customers, and (4) continuing conflicts between Stratford and
certain customers over price increases and more stringent sales terms.
Net sales for 1996 by Barcalounger increased 8.1% to approximately $39.9
million as compared to $36.9 million for 1995. This increase in sales reflects
an increase of 2.2% in the number of pieces sold in 1996 versus 1995, and a
4.7% increase in average selling prices. Beginning in 1993 and continuing
throughout 1994, 1995 and 1996, Barcalounger added to its product offerings of
higher-priced recliner and motion upholstered furniture through an emphasis on
more expensive leather and fabric coverings. Concurrent with these new
offerings, Barcalounger discontinued certain lower-priced products. By offering
a finer, more exclusive product, Barcalounger was able to increase sales in
1995 and 1996 with those retail furniture store customers who specialize in
higher-priced, better quality furniture. This change led to a sales mix which
resulted in increases in average prices.
Consolidated cost of sales decreased 15.4% in 1996 to approximately
$136.2 million, or 90.0% of net sales as compared to $161.1 million, or 91.1%
of net sales, in 1995. Stratford Company cost of sales decreased to 92.5% of
net sales in 1996, as compared to 94.0% in 1995. Barcalounger cost of sales
decreased to 80.5% of net sales in 1996 from 80.9% of net sales in 1995.
Stratford cost of sales as a percentage of sales decreased in 1996 mainly
because of better absorbing of overhead resulting from the reduction of
overhead costs and a larger LIFO liquidation as a percent of sales in 1996.
Barcalounger cost of sales as a percentage of net sales continued to decrease
in 1996 due to the ongoing impact of the cost reduction and quality improvement
programs initiated in 1994.
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Consolidated selling, administrative and general expenses decreased
21.9% to approximately $21.4 million in 1996 from approximately $27.5 million
in 1995. The decrease was primarily due to the continued organization-wide
downsizing, where appropriate, and continued reduction of general expenses
through increased controls.
Interest expense increased 4.3% to $61.4 million from $58.9 million due
primarily to additional borrowings under the Credit Agreement.
1995 vs 1994 Results of Operations
Consolidated net sales of approximately $176.8 million for 1995
decreased 27.8% from 1994 net sales of approximately $244.9 million, due
primarily to the disposition of Super Sagless in July 1994 and the significant
reduction of sales at Stratford. Excluding Super Sagless, net sales of
approximately $176.8 million for 1995 decreased 17.0% from 1994 net sales of
approximately $213.6 million.
Net sales (including intercompany sales) for 1995 by Stratford decreased
19.2% to approximately $142.6 million as compared to $176.6 million for 1994.
Total volume in 1995 decreased 22.6%, while average selling prices increased by
approximately 3.9%. Sales in 1995 to Stratford's larger, national retail
customers decreased 30.7%, while sales to smaller retail customers decreased
13.3%. The decrease in sales at Stratford was the result of internal and
external factors. In 1995 Stratford changed its market strategy and
discontinued all styles with insufficient profit margins and all styles with
low sales quantities. This change in market strategy was the primary factor
causing the decrease in sales to the smaller retail customers. Sales to the
larger national retail customers decreased primarily because of an overall
industry wide slow-down in sales combined with (1) customers' organizational
realignment lowering customers' overall inventory levels, (2) the consolidating
of customers' stores and the subsequent delayed opening of the new consolidated
stores, (3) discontinuance of furniture sales by certain customers, and (4)
Stratford's price increases conflicted with the retailers' pricing policies.
Net sales for 1995 by Barcalounger increased 1.2% to approximately $36.9
million as compared to $36.5 million for 1994. This increase in sales reflects
an decrease of 0.4% in the number of pieces sold in 1995 versus 1994, and a
2.0% increase in average selling prices. Beginning in 1993 and continuing
throughout 1994 and 1995, Barcalounger added to their product offerings of
higher-priced recliner and motion upholstered furniture through an emphasis on
more expensive leather and fabric coverings. Concurrent with these new
offerings, Barcalounger discontinued certain lower-priced products. By offering
a finer, more exclusive product, Barcalounger was able to increase sales in
1994 and 1995 with those retail furniture store customers who specialize in
higher-priced, better quality furniture. This change led to a sales mix which
resulted in increases in average prices.
Consolidated Cost of sales decreased 25.7% in 1995 to approximately
$161.1 million, or 91.1% of net sales, as compared to $216.8 million, or 88.6%
of net sales, in 1994. Excluding Super Sagless, cost of sales were approximately
$161.1 million and $191.1 million for 1995 and 1994, respectively, or 91.1% and
89.7% of net sales, respectively.
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Stratford Company cost of sales increased to 94.0% of net sales in 1995,
as compared to 91.3% in 1994. Barcalounger cost of sales decreased to 80.9% of
net sales in 1995 from 81.4% of net sales in 1994. Stratford cost of sales as a
percentage of net sales increased in 1995 mainly because of under absorbing
overhead resulting from lower sales volume, increases in prices of certain raw
materials that could not be passed on as price increases, and unfavorable
manufacturing variances caused by the need for smaller quantity and shorter
manufacturing time. Barcalounger cost of sales as a percentage of net sales
continued to decrease in 1995 due to continued impact of the cost reduction and
quality improvement programs implemented during 1994.
Consolidated selling, administrative and general expenses decreased
24.1% to approximately $27.5 million in 1995 from approximately $36.2 million
in 1994. Excluding Super Sagless, selling, administrative and general expenses
were approximately $27.5 million and $30.0 million in 1995 and 1994,
respectively, a decrease of approximately 8.3%, primarily due to the continued
organization-wide downsizing, where appropriate, and continued reduction of
corporate expense through increased controls resulting from the decentralization
and transfers of corporate functions to the operating companies completed during
1993 and 1994.
Other income (expenses), net, decreased approximately $2.2 million, or
79.7% to approximately $(.3) million in 1995 from approximately $1.9 million in
1994. The $1.9 million recorded in 1994 resulted primarily from a gain of
approximately $1.4 million recognized on the sale of Stratford's Clinton, NC
plant. The other expenses, net, in 1994 reflects certain losses on the sales of
property and costs incurred associated with divested operations.
A gain of approximately $20.8 million was recognized in 1994 as a result
of the sale of substantially all of the assets of Super Sagless.
Interest expense increased 9.5% to $58.9 million from $53.8 million due
primarily to additional borrowings under the Revolving Credit Agreement.
Liquidity and Capital Resources
Capital requirements for operations during 1996 and 1995 were provided
primarily by financing channels and operating cash flows at certain operating
divisions.
Fairwood had a working capital deficit of approximately $(224.3) million
and $(190.8) million at December 31, 1996 and 1995, respectively. At December
31, 1996, Fairwood had long-term debt of approximately $453.1 million of which
$169.0 million was current. Long-term debt at December 31, 1995 was
approximately $420.7 million of which $169.0 million was current. Accrued
interest on long-term debt was $64.4 million at December 31, 1996 and $37.4
million at December 31, 1995. Accrued interest is classified as a current
liability.
In conjunction with Fairwood'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,
- 12 -
13
Fairwood issued $33.5 million of subordinated pay-in-kind merger debentures and
918,170 warrants to purchase, in the aggregate, 142,900 shares of Fairwood's
Class A common stock. The exercise period for the warrants issued with the
merger debentures expired on September 22, 1995. 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 January 1997.
Throughout 1996, 1995 and 1994, Consolidated Furniture funded interest
obligations related to long-term indebtedness through increased borrowings from
CSCL. Borrowings from CSCL during the years ended December 31, 1996, 1995 and
1994 were approximately $32.6 million, $32.5 million and $31.2 million,
respectively. However, during 1995 and 1994 a portion of the proceeds to
Consolidated Furniture from the factoring of Stratford's trade accounts
receivable and the sale of substantially all of the assets of Super Sagless of
approximately $15 million and $40 million, respectively, were used to repay debt
of Consolidated Furniture and its subsidiaries. All outstanding debt and
accrued interest at December 31, 1996, excluding the $62.9 million of
outstanding merger debentures plus $23.9 million accrued interest thereon and
$0.4 million of 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 has obtained an extension of the debt payable to
CSCL to January 1998. 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 8.25% at December 31, 1996.
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.
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 $15 and $.75 million,
which was primarily used to repay $13 million of secured, senior debt of
Consolidated Furniture were received in January and July of 1995.
In July 1995, a portion of the proceeds to Consolidated Furniture from
the sale of trade receivables of Stratford to a factor were used to repay
secured, senior debt of Consolidated Furniture. At December 31, 1996, $9.7
million was the amount of the advance due to the Factor.
Interest payments during the years ended December 31, 1996, 1995 and
1994 of approximately $34.4 million, $31.9 million and $52.9 million,
respectively were primarily made through increased borrowings and the issue of
additional pay-in-kind debentures. Principal payments of approximately $.2
million, $27.2 million and $25.9 million were made during the years ended
December 31, 1996, 1995 and 1994, respectively.
Annual maturities on debt for the years ended December 31, 1997 and
1998, are approximately $169.0 million and $284.2 million, respectively.
Interest payments expected to be made for the years ended December 31, 1997,
1998 and 1999 are estimated to be approximately $38.3 million, $42.2 million
and $46.4 million.
- 13 -
14
On each of April 1, 1995, October 1, 1995, April 1, 1996 and October 1,
1996, Fairwood failed to make the required interest payments due on the senior
subordinated pay-in-kind debentures and merger debentures (collectively, the
"Fairwood Debentures") and Fairwood does not expect to make the cash interest
payments required under the Fairwood Debentures on any future semi-annual
interest payment dates. Accrued interest of $60.8 million on the Fairwood
Debentures, which includes $36.9 million due to CSCL, is included in accrued
expenses on the accompanying consolidated balance sheet as of December 31,
1996. See Note 5 to the accompanying Consolidated Financial Statements.
Based on the terms of the Fairwood Debentures, the failure to make the
April 1, 1995 interest payment constitutes an event of default which permits
the acceleration of the Fairwood Debentures by the demand of the holders of the
requisite aggregate principal amount of the debentures. Upon acceleration, the
Fairwood debentures and all accrued interest would be due and payable.
Accordingly, the Fairwood Debentures totaling $168.8 million have been
classified as current liabilities in the accompanying Consolidated Financial
Statements as of December 31, 1996.
Capital additions were approximately $.7 million, $2.4 million and $3.4
million for the years 1996, 1995 and 1994, respectively. The operating units,
Stratford and Barcalounger anticipate making capital expenditures of
approximately $.6 million during 1997, primarily for the purpose of maintaining
and upgrading their manufacturing equipment, machinery and facilities. Stratford
and Barcalounger have no firm commitments for the purchase of capital equipment
or facilities. It is anticipated that necessary capital expenditures will be
funded through cash flow generated from operations of one of its subsidiaries,
available credit facilities under the Company's revolving credit agreement with
CSCL, and other financing arrangements. Consolidated Furniture and Furniture
Comfort intend to pursue other sources of financing to the extent available and
cost effective.
Consolidated Furniture and the operating companies are dependent upon
CSCL for funding of their 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 January 1997 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 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 indenture 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.
- 14 -
15
Consolidated Furniture anticipates that funds provided by operations and
available credit facilities under the Credit Agreement will be available in
1997 to support the operations of Stratford and Barcalounger. However, as
discussed above, funds provided by available credit facilities cannot be
expected to be adequate to make transfers to Fairwood for cash interest
payments due in 1997 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.
An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
Fairwood Corporation by certain bondholders. In response to the bankruptcy
filing, on April 22, 1996, Fairwood and certain other entities filed a
cross-motion seeking dismissal of the petition. On November 26, 1996 the motion
to dismiss was denied. On December 26, 1996 Fairwood exercised its right to
convert the pending involuntary bankruptcy case to a voluntary Chapter 11
proceeding as debtor-in-possession. Fairwood has indicated in Court papers that
it intends to propose a plan of reorganization with the bankruptcy Court at some
time in the future. The Chapter 11 case pertains only to Fairwood Corporation.
Its direct and indirect subsidiaries, including Consolidated Furniture
Corporation, Furniture Comfort Corporation, as well as their operating
divisions, Stratford and Barcalounger, are not parties to the bankruptcy, nor
are such operations under the supervision of the bankruptcy Court. These
companies will continue to operate in the normal course of business.
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, 1996 and 1995
Consolidated Statements of Operations for the Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareowners' Equity (Deficit) for the Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
- 15 -
16
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, 1996 and 1995, 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, 1996. We also have audited the related financial statement
schedule as listed in the accompanying index for Item 14(a)2 on page 44. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, 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.
- 16 -
17
The accompanying consolidated financial statements and financial
statement schedule have been prepared assuming that Fairwood will continue as a
going concern. As discussed in Note 4 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 $122 million,
including interest, through the year ended December 31, 1996. Fairwood believes
that the proposed adjustments are in error and is vigorously contesting this
matter. Under available administrative procedures, Fairwood had protested the
proposed adjustments and, through negotiations with the IRS Appeals Division,
has reached an agreement in principle for a potential settlement of the issues
in the case. A final settlement based on the foregoing is estimated to be
approximately $4.4 million and is included in Federal and state income taxes on
the accompanying audited consolidated balance sheets. The terms of the proposed
settlement are subject to final approval by the IRS and will also require the
approval of the Joint Committee on Taxation, and no assurance can be given that
such approvals will be given. As discussed in Notes 5 and 13 to the
consolidated financial statements, Fairwood has failed to make the required
interest payments on its senior subordinated pay-in-kind and merger debentures
when due in 1995 and 1996 and does not expect to be able to make such payments
in the future. Further, an involuntary Chapter 7 petition was filed on January
3, 1996 in the United States Bankruptcy Court for the Southern District of New
York against Fairwood by certain bondholders. In response to the bankruptcy
filing, on April 22, 1996, Fairwood and certain other entities filed a
cross-motion seeking dismissal of the petition. On November 26, 1996, a motion
to dismiss was denied. On December 26, 1996 Fairwood exercised its right to
convert the pending involuntary bankruptcy case to a voluntary Chapter 11
proceeding as debtor-in-possession. Fairwood has indicated in Court papers that
it intends to propose a plan of reorganization with the bankuptcy Court at some
time in the future. These matters raise substantial doubt about the ability of
Fairwood to continue as a going concern. Management's plans in regard to these
matters are described in Notes 4, 5 and 13. The consolidated financial
statements and the financial statement schedule do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Washington, D.C.
February 21, 1997
- 17 -
18
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands except share data)
Assets (note 5) 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 429 4,985
------- -------
Accounts and notes receivable:
Trade (note 3) 23,673 29,545
Due from affiliate (note 9) 2,418 1,293
Other 648 1,542
------- -------
26,739 32,380
Less allowance for discounts and doubtful accounts 1,566 1,857
Less advances from Factor (note 3) 9,703 14,443
------- -------
15,470 16,080
------- -------
Inventories (note 1) 13,625 14,394
------- -------
Prepaid expenses and other current assets (note 4) 2,468 2,524
------- -------
Total current assets 31,992 37,983
------- -------
Property, plant and equipment, at cost:
Land 84 84
Buildings and improvements 12,591 12,591
Machinery and equipment 15,949 15,717
Leasehold improvements 2,359 2,334
Construction in progress 51 149
------- -------
31,034 30,875
Less accumulated depreciation and amortization 18,709 16,841
------- -------
12,325 14,034
------- -------
Other assets 2,260 2,125
------- -------
$ 46,577 54,142
====== ======
Liabilities and Shareowners' equity (deficit) 1996 1995
- --------------------------------------------- ---- ----
Current liabilities:
Overdraft $ 715 721
Current maturities of long-term debt (notes 5 and 10):
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 180 170
Accounts payable:
Trade 6,940 3,659
Other (includes claims payable of $1,860 in
1996 and $1,750 in 1995) 2,896 2,928
Accrued expenses (includes interest of $64,413 in
1996 and $37,388 in 1995) 71,095 46,820
Federal and state income taxes 5,699 5,719
------- -------
Total current liabilities 256,306 228,798
------- -------
Long-term debt, less current maturities (notes 5 and 10):
Revolving credit 203,992 171,369
Senior subordinated debentures 80,000 80,000
Capitalized lease obligations 190 370
------- -------
284,182 251,739
------- -------
Deferred Federal income taxes (note 4) 1,524 1,318
Other liabilities (note 8) 2,513 3,222
------- -------
4,037 4,540
------- -------
Redeemable preferred stock (note 6):
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 5 and 7):
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 (Note 8) ( 539) ( 956)
Accumulated deficit (553,457) (486,027)
------- -------
(498,048) (431,035)
------- -------
Commitments and contingencies (notes 4, 5, 8, 9, 10,
12 and 13)
$ 46,577 54,142
====== ======
See accompanying notes to consolidated financial statements.
-18-
19
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Net sales (notes 9 and 11) $ 151,316 176,834 244,869
------- ------- -------
Cost of sales (note 9) 136,242 161,091 216,834
Selling, administrative
and general expenses (note 9) 21,461 27,508 36,247
------- ------- -------
157,703 188,599 253,081
------- ------- -------
Operating loss ( 6,387) ( 11,765) ( 8,212)
Interest income 198 316 498
Interest on indebtedness (notes 3 and 5) ( 61,433) ( 58,893) ( 53,852)
Gain on sale of subsidiary (note 2) - - 20,847
Other income (expenses), net 249 ( 378) 1,859
-------- -------- -------
Loss before income taxes ( 67,373) ( 70,720) ( 38,860)
Provision for income
taxes (note 4) - - 532
------- ------- -------
Net loss $ ( 67,373) ( 70,720) ( 39,392)
======= ======= =======
See accompanying notes to consolidated financial statements.
- 19 -
20
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareowners' Equity (Deficit)
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
Common Stock Additional Minimum Shareowners'
---------------- Paid-in Pension Accumulated Equity
Class A Class B Capital Liability deficit (Deficit)
------- ------- ------- --------- ----------- ------------
Balance, January 1, 1994 $ - 10 55,938 - (375,827) (319,879)
Net loss ( 39,392) ( 39,392)
Adjustment to minimum
pension liability (note 8) ( 1,367) ( 1,367)
Preferred stock dividends ( 40) ( 40)
----- ----- ------ ------ ------- -------
Balance, December 31, 1994 - 10 55,938 ( 1,367) (415,259) (360,678)
Net loss ( 70,720) ( 70,720)
Adjustment to minimum
pension liability (note 8) 411 411
Preferred stock dividends ( 48) ( 48)
----- ----- ------ ------ ------- -------
Balance, December 31, 1995 - 10 55,938 ( 956) (486,027) (431,035)
Net loss ( 67,373) ( 67,373)
Adjustment to minimum
pension liability (note 8) 417 417
Preferred stock dividends ( 57) ( 57)
----- ----- ------ ------ ------- -------
Balance, December 31, 1996 - 10 55,938 ( 539) (553,457) (498,048)
===== ===== ====== ====== ======= =======
See accompanying notes to consolidated financial statements.
-20-
21
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
-------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Cash flows from operating activities:
Net loss ( 67,373) ( 70,720) ( 39,392)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,170 2,075 2,974
Gain on sale of Super Sagless assets - - ( 20,847)
Loss (gain) on sale of property, plant and equipment 59 ( 58) ( 1,636)
Current period conversions of PIK debentures - - 18,300
Changes in assets and liabilities:
Accounts receivable 5,350 6,567 3,079
Inventories 769 4,419 5,700
Prepaid expenses and other current assets 262 ( 66) 849
Accounts payable 2,098 ( 2,082) ( 1,646)
Accrued expenses 25,369 26,080 5,119
Federal and state income taxes ( 20) ( 6) 16
Other, net ( 427) ( 106) ( 69)
------- ------- -------
Cash used - operating activities ( 31,743) ( 33,897) ( 27,553)
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment ( 679) ( 2,413) ( 3,401)
Proceeds from disposition of property,
plant and equipment 159 427 3,929
Proceeds from sale of Super Sagless assets - 15,750 22,379
------- ------- --------
Cash provided (used) - investing activities ( 520) 13,764 22,907
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 32,623 32,499 31,193
Overdraft ( 6) 721 -
Proceeds from sale of receivables to Factor, net ( 4,740) 14,443 -
Repayment of long-term debt ( 170) ( 27,160) ( 25,900)
------- ------- -------
Cash provided - financing activities 27,707 20,503 5,293
------- ------- -------
Increase (decrease) in cash and cash equivalents ( 4,556) 370 647
Cash and cash equivalents:
Beginning of period 4,985 4,615 3,968
------- ------- -------
End of period $ 429 4,985 4,615
======= ======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $ 34,406 31,866 28,835
Income taxes 20 6 506
Conversion of accrued interest to PIK debentures - - 24,091
Adjustment to minimum pension liability ( 417) ( 411) 1,367
See accompanying notes to consolidated financial statements.
- 21 -
22
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Description of Business
Principles of Consolidation and Description of Business
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.
Through its wholly-owned subsidiary, Consolidated Furniture, the Company
manufactures and sells mid- and high-priced upholstered and motion furniture
under the brand names Stratford, Stratolounger, Stratopedic, Avon and
Barcalounger. The products are sold nationally to furniture retailers and
department stores mainly through a commissioned sales force.
Inventories
All inventories (materials, labor and overhead) are valued at the lower
of cost or market using the last-in, first-out (LIFO) method. LIFO liquidations
occurred during 1996 and 1995 which resulted in a reductions of cost of sales
of approximately $2.3 million for each year.
The components of inventory at December 31, are as follows (in
thousands):
1996 1995
---- ----
Raw materials $ 13,047 12,857
In process 3,028 3,532
Finished goods 5,163 8,063
------ ------
Inventories at first-in, first-out 21,238 24,452
LIFO reserve 7,613 10,058
------ ------
Inventories at LIFO $ 13,625 14,394
====== ======
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.
Revenue Recognition
Revenue is recognized when title to furniture passes to the customer.
The Company provides a reserve against estimated future customer returns under
the warranty terms of sale.
- 22 -
23
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
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting
amounts of existing assets and liabilities and their respective tax bases at
each year-end. Deferred tax assets and liabilities are measured using enacted
tax rates and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce the deferred tax asset to the amount
expected to be realized. Income tax expense is the amount payable for the year
and the change during the period in deferred tax assets and liabilities.
Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Live Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121) in 1996 for purposes of determining and measuring
impairment of certain long-lived assets to be held and used in the business.
The Company reviews all long-lived assets to be held and used in the
business for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset or a group of assets may not be
recoverable. The Company considers a history of operating losses to be its
primary indicator of potential impairment. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows that
are largely independent of the cash flows of other groups of assets.
- 23 -
24
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company deems an asset to be impaired if a forecast of undiscounted
future operating cash flows directly related to the assets, including disposal
value, if any, is less than its carrying amount. If an assets is determined to
be impaired, the loss is measured as the amount by which the carrying amount of
the asset exceeds its fair value. Fair value is based on quoted market prices
in active markets, if available. If quoted market prices are not available, an
estimate of fair value is based on the best information available, including
prices for similar assets or the results of valuation techniques such as
discounting estimated future cash flows as if the decision to continue to use
the impaired asset was a new investment decision. The Company generally
measures fair value using industry knowledge, price quotes, when attainable, and
other factors relevant to determine recoverability. Considerable management
judgment is necessary to estimate the fair value. Accordingly, actual results
could vary significantly from such estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform with the 1996 financial statement presentation.
(2) Divestiture
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, $15 million was
received six months after closing and the remaining $0.75 million was received
one year after closing. After considering the estimated costs of disposition,
the Company recognized a gain before income taxes of approximately $21 million
in 1994. The net proceeds from the sale were used to pay existing debt owed
Court Square Capital Limited ("CSCL"), an affiliate of the Company's principal
shareowner.
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.
(3) Trade accounts receivable
On July 25 1995, Stratford Company, an operating division of
Consolidated Furniture, entered into a factoring agreement to sell certain
trade receivables on a recourse and nonrecourse basis. Receivables sold for
which Stratford has not received written approval from the factor are with
recourse. Only those receivables sold for which Stratford has received written
credit approval from the factor are nonrecourse. Stratford retains credit risk
for all recourse receivables and transfers the credit risk to the factor for
all nonrecourse receivables.
- 24 -
25
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Trade accounts receivable
Under the factoring agreement, advances may be made to Stratford for up
to 75 percent of the aggregate purchase price of outstanding non-recourse
receivables less the factoring commission and other fees. All advances are
repayable upon demand and are settled with the factor's collection of the
purchased receivables or the passing of 120 days after the due date of
nonrecourse receivables. Stratford pays interest on the balance of the
outstanding advances. The interest rate is the greater of 9 percent or Capital
Bank's prime rate plus 1 percent. As of December 31, 1996, receivables sold
which remain to be collected approximated $14,472,000 of which approximately
$873,000 were sold with recourse. As of December 31, 1995, receivables sold
which remain to be collected approximated $20,190,000 of which approximately
$3,899,000 were sold with recourse.
On December 10, 1996, Barcalounger Company, an operating division of
Consolidated Furniture, entered into a factoring agreement with Capital
Factors, Inc. to sell certain trade receivables on a recourse basis.
Barcalounger retains credit risk for all receivables sold under the factoring
agreement. Under the factoring agreement, advances may be made to Barcalounger
for up to 80 percent of the aggregate purchase price of "eligible receivables"
less factoring commissions and other fees and reserves. All advances are
repayable upon demand and are generally settled with the factor's collection of
the purchased receivables. Under the factoring agreement, Barcalounger pays
interest on the balance of the outstanding advances at an interest rate equal
to the greater of eight percent or one percent above the prime rate designated
by Citibank, New York. As of December 31, 1996, no advances were outstanding
under the Barcalounger factoring agreement.
(4) Income Taxes
Components of the provision for income taxes are summarized, in
thousands, as follows:
Years ended December 31,
-------------------------------
1996 1995 1994
-------- -------- ------
Current:
Federal $ - - -
State and local - - 532
------ ------ ------
- - -
Deferred - - -
------ ------ ------
Total provision for income
taxes $ - - 532
====== ====== ======
- 25 -
26
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) 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,
------------------------------
1996 1995 1994
-------- -------- ------
Expected tax benefit computed
at U.S. rate $ (22,906) (24,045) (13,393)
Increase in valuation
allowance 24,802 26,865 15,467
State taxes, net of
Federal benefit ( 2,658) ( 2,820) ( 1,542)
Other 762 - -
------ ------ ------
Total provision for income taxes $ - - 532
====== ====== ======
The tax effects of temporary differences as of December 31, 1996 and
1995, in thousands, are as follows:
1996 1995
------- -------
Deferred tax assets:
Net operating loss carryforwards $ 86,284 59,713
Accounts receivable 606 813
Vacation and holiday pay 315 421
Accrued expenses 3,500 4,166
Interest on merger debentures 4,320 4,904
Valuation allowance (93,501) (68,699)
------ ------
$ 1,524 1,318
====== ======
Deferred tax liabilities:
Property, plant and equipment $ 1,524 1,318
====== ======
The valuation allowance for deferred tax assets as of January 1, 1994
was $41,834,000. The net changes in the total valuation allowance for the years
ended December 31, 1996 and 1995 were increases of $24,802,000 and $26,865,000,
respectively.
At December 31, 1996, the Company's net operating loss carryforwards of
approximately $225,603,000 expire in various years through 2011. However, the
agreement in principle with the IRS (as described below) would result in a
reduction of approximately $82,500,000 of the available net operating loss
carryforwards and may also result in the reduction of net operating loss
carryforwards generated in future years, if any.
- 26 -
27
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Income Taxes (continued)
Net current deferred income tax benefits of $1,524,000 and $1,318,000 at
December 31, 1996 and 1995, respectively, are included in other current assets
in the accompanying consolidated balance sheets.
Fairwood is contesting an Internal Revenue Service ("IRS") Agent's
report resulting from an IRS audit examination of the consolidated Federal
income tax returns of Fairwood and its subsidiaries for the years ended July
11, 1988 through December 1991. The report proposed to adjust Fairwood's
taxable income in the years in issue and in prior years to which net operating
losses of the Consolidated tax group were carried back. Fairwood estimates that
the aggregate proposed liability, if all issues were resolved unfavorably
would, together with statutory interest and state income tax, total
approximately $122 million and eliminate substantially all of the net operating
loss carryforwards. Fairwood believes that the proposed adjustments are in
error and is vigorously contesting this matter. Under available administrative
procedures, Fairwood had protested the proposed adjustments and, through
negotiations with the IRS Appeals Division, has reached an agreement in
principle for a potential settlement of the issues in the case. A final
settlement based on the foregoing is estimated to be approximately $4.4 million
and is included in Federal and state income taxes on the accompanying audited
consolidated balance sheets. The terms of the proposed settlement are subject
to final approval by the IRS and will also require the approval of the Joint
Committee on Taxation, and no assurance can be given that such approvals will
be given. However, should the outcome of the reviews in question be unfavorable
to Fairwood on one or more issues in the case then Fairwood and its
Subsidiaries may exercise their rights to litigate these issues. Fairwood and
its Subsidiaries cannot predict the ultimate outcome of these issues, nor the
impact on its financial statements.
(5) 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 to purchase, in the aggregate, 142,900 shares of
Fairwood's Class A common stock. The exercise period for the warrants issued
with the merger debentures expired on September 22, 1995. 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 and certain covenants therein have been
waived at various times through January 1997. In September 1996, Consolidated
Furniture entered into the Fifteenth Amendment to the Credit Agreement which
changed the covenant for liens on collateral granted pursuant to that certain
- 27 -
28
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Long-term Debt (continued)
Factoring Agreement dated September 1996 by and between Barcalounger and
Capital Factors, Inc. In December 1996, Consolidated Furniture entered into the
Sixteenth Amendment to the Credit Agreement which extended the maturity date to
January 2, 1998. In January 1997, Consolidated Furniture entered into the Sixth
Amendment to the Increasing Rate Senior Subordinated Debentures due January 2,
1997, which extended the due date to January 2, 1998. Proceeds from the
disposition of certain operating companies, including the sale of substantially
all the assets and liabilities of Super Sagless and proceeds from the factoring
of Stratford's trade accounts receivable were used to repay a portion of the
debts due under the Credit Agreement with CSCL.
The outstanding debt at December 31, 1996 and 1995 was as follows (in
thousands):
December 31,
1996
Interest
Debt 1996 1995 Rates
- ---- -------- -------- -------
Revolving credit, due 1998 $ 203,992 171,369 9-3/4%
Senior subordinated debentures, due 1998 80,000 80,000 18%
Senior subordinated pay-
in-kind debentures, due 2001 105,853 105,853 15-1/2%
Merger debentures, due 2004 62,928 62,928 16-7/8%
Other, due 1998 370 540 6%
------- -------
453,143 420,690
Less current maturities 168,961 168,951
------- -------
$ 284,182 251,739
======= =======
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.
All outstanding debt and accrued interest at December 31, 1996,
excluding the $62.9 million of outstanding merger debentures plus $23.9
million accrued interest thereon and $0.4 million of capitalized lease
obligations, is payable to CSCL.
On each of April 1, 1995, October 1, 1995, April 1, 1996 and October 1,
1996, Fairwood failed to make the required interest payments due on the senior
subordinated pay-in-kind debentures and merger debentures (collectively, the
"Fairwood Debentures") and Fairwood does not expect to make the cash interest
payments required under the Fairwood Debentures on any future semi-annual
interest payment dates. Accrued interest of $60.8 million on the Fairwood
Debentures, which includes $36.9 million due to CSCL, is included in accrued
expenses in the accompanying consolidated balance sheet as of December 31,
1996. An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
- 28 -
29
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Long-term Debt (continued)
Fairwood Corporation by certain merger debenture holders. In response to the
bankruptcy filing, on April 22, 1996, Fairwood and certain other entities filed
a cross-motion seeking dismissal of the petition. On November 26, 1996, the
motion to dismiss was denied. On December 26, 1996, Fairwood exercised its
right to convert the pending involuntary bankruptcy case to a voluntary Chapter
11 proceeding as debtor-in-possession. Fairwood has indicated in Court papers
that it intends to propose a plan of reorganization with the bankruptcy Court
at some time in the future. The Chapter 11 case pertains only to Fairwood
Corporation. Its direct and indirect subsidiaries, including Consolidated
Furniture Corporation, Furniture Comfort Corporation, as well as their
operating divisions, Stratford and Barcalounger, are not parties to the
bankruptcy, nor are such operations under the supervision of the bankruptcy
Court. It is currently expected that these companies will continue to operate
in the normal course of business.
Based on the terms of the Fairwood Debentures, the failure to make the
April 1, 1995 and subsequent period interest payments constitutes an event of
default which permits the acceleration of the Fairwood Debentures by the demand
of the holders of the requisite aggregate principal amount of the debentures.
Upon acceleration, the Fairwood Debentures and all accrued interest would be
due and payable. Accordingly, the Fairwood Debentures have been classified as
current liabilities in the accompanying consolidated balance sheets as of
December 31, 1996 and 1995.
The fair market value of the debentures and revolving credit debt cannot
be reasonably estimated considering Fairwood's ongoing financial difficulties
(Note 13).
The aggregate maturities of long-term debt (including capitalized lease
obligations) during the next five years and thereafter are as follows:
$168,961,000 in 1997; and $284,182,000 in 1998.
(6) 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, 1996 and 1995, dividends payable
were approximately $260,000 and $200,000, respectively.
(7) 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.
- 29 -
30
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) 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,
-------------------------------
1996 1995 1994
-------- -------- -------
Current service cost $ - - -
Interest cost 1,062 954 892
Return on assets (1,018) ( 808) ( 829)
----- ----- -----
$ 44 146 63
===== ===== =====
Information with respect to the retirement plans for 1996 and 1995 has
been determined by consulting actuaries. The following table sets forth the
plans' funded status at December 31, 1996 and 1995, respectively, and
reconciles amounts recognized in the consolidated balance sheets at December
31, 1996 and 1995, respectively (in thousands):
1996 1995
------ ------
Actuarial present value of obligations:
Vested $ 14,349 14,251
Nonvested 75 253
------ ------
Accumulated and projected benefit obligation 14,424 14,504
Assets at fair value at December 31 12,331 11,629
------ ------
Accumulated and projected benefit obligation
in excess of assets 2,093 2,875
Unrecognized net gain (loss) ( 140) ( 631)
------ ------
Accrued pension cost at December 31 1,953 2,244
Adjustment for minimum liability 539 956
------ ------
Pension liability at December 31 $ 2,492 3,200
====== ======
Assumptions:
Interest rates for obligations 7.75% 7.00%
Long-term rate of return 9.00% 9.00%
Salary increase rate N/A N/A
- 30 -
31
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
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 years ended December 31, 1996, 1995 and 1994, company
contributions were $140,000, $133,000 and $120,000, 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 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 years ended December 31, 1996, 1995 and
1994, company matching contributions were $42,000, $38,000 and $36,000,
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 years ended December 31, 1996, 1995 and 1994, company
contributions were $802,000, $648,000 and $1,039,000, respectively.
Prior to the sale of Super Sagless, $252,500 was incurred for the year
ended December 31, 1994 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 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 $2,000 in 1996, $2,000 in 1995 and
$39,000 in 1994.
- 31 -
32
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Related party transactions
In November 1995, Stratford entered into a manufacturing agreement
("Agreement") with Simmons Upholstered Furniture Corporation ("Simmons"), an
affiliate of the Company. Under this Agreement, Stratford manufactures product
for and supplies product on behalf of Simmons and provides sales services and
provides new product development services to Simmons. The products are
manufactured utilizing Stratford's equipment and various plant facilities and
the other services are provided using Stratford's personnel. The term of the
Agreement renews annually, unless terminated by either party.
Under the terms of the Agreement, in 1995, Stratford was paid by Simmons
a standard predetermined labor and overhead rate for time and materials
utilized for the benefit of Simmons. In 1996, Stratford earned a percentage of
the Simmons gross margin on products manufactured, in addition to monthly
services charges for new product development and selling activities performed
by Stratford
As a result of this Agreement, Stratford recognized approximately
$12,722,000 and $2,400,000 of revenue in 1996 and 1995, respectively, from the
manufacture and supply of product and was reimbursed by Simmons $600,000 and
$243,000, respectively, for new product development and $2,257,000 and
$100,000, respectively, for selling expenses. The new product development and
selling expense reimbursements are recognized as a reduction to selling,
administrative and general expenses in the accompanying 1996 and 1995
consolidated statements of operations. The revenues and related cost for the
manufacture and supply of product are included in net sales and cost of sales,
respectively, in the accompanying 1996 and 1995 consolidated statements of
operations. At December 31, 1996 and 1995, approximately $2,418,000 and
$1,293,000, respectively, was due from Simmons under this Agreement.
(10) 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).
- 32 -
33
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Rental Commitments (continued)
Future minimum lease payments at December 31, 1996, under all
non-cancelable leases are as follows (in thousands):
Period Capital Operating
------ ------- ---------
1997 197 1,381
1998 196 1,109
1999 - 947
2000 - 471
2001 - 26
----- ------
Total minimum lease payments 393 3,934
======
Less amounts representing interest 23
-----
Total capitalized lease
obligations 370
Less current maturities of
capitalized lease obligations 180
Capitalized lease obligations
net of current maturities $ 190
=====
It is expected that, in the normal course of business, non-cancelable
leases that expire will be renewed or replaced.
Rental expense is summarized, in thousands, as follows:
Years ended December 31,
--------------------------------
1996 1995 1994
-------- -------- ---------
Minimum Rentals
(including cancel-
able leases) $ 2,115 1,946 4,314
Sublease rentals ( 291) ( 203) ( 285)
------ ------ ------
$ 1,824 1,743 4,029
====== ====== ======
(11) Significant Customer
The Company is engaged in only one segment of business, the manufacture
of furniture. Sears Roebuck and Co. accounted for approximately 13 percent, 19
percent, and 20 percent of the Company's sales in each of the years 1996, 1995
and 1994, respectively.
- 33 -
34
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Contingencies
Consolidated Furniture was served a complaint by third party plaintiffs
against Consolidated Furniture and a former subsidiary. The original complaint
in the case was filed by the Environmental Protection Agency to recover over
$200 million from 12 defendants (not including Consolidated Furniture), for
costs incurred in connection with the investigation and remediation of a Super
Fund site. On August 28, 1995, Consolidated Furniture joined with 5 other
Potentially Responsible Parties and made an offer of settlement to the EPA.
Consolidated Furniture's share of the offer is approximately $190,000. The EPA
has not rejected or accepted the offer.
There were other contingent liabilities at December 31, 1996 consisting
of purchase commitments and legal proceedings arising in the ordinary course of
business including environmental litigation. Fairwood believes that the
financial risk involved in connection with all other contingent liabilities,
except the proposed adjustments delivered by the IRS, see note 4, is not
material in relation to the consolidated financial position of the Company.
(13) 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 5, interest on Fairwood's senior subordinated
pay-in-kind debentures and merger debentures was not paid on April 1, 1995,
October 1, 1995, April 1, 1996 and October 1, 1996 and Fairwood does not expect
to make the cash interest payments required under the Fairwood Debentures on
any future semi-annual interest payment date. 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.
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. Certain instruments
related to the Credit Agreement have been amended at various times through
January 1997.
- 34 -
35
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Liquidity (continued)
Throughout portions of 1996, 1995, and 1994, 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 1994 and 1995 the proceeds from the
disposition of certain operating companies, including the sale of substantially
all of the assets and liabilities of Super Sagless were used to repay a portion
of the debt due under the Credit Agreement with CSCL. Additionally, during 1995
a substantial portion of the $15 million in proceeds from the factoring of
Stratford's trade account receivables was used to repay debt of Consolidated
Furniture due under the Credit Agreement with CSCL.
Consolidated Furniture 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 Fairwood and (b) payment of income taxes.
Management believes funding from CSCL will be adequate for Consolidated
Furniture's working capital requirements and any cash payments due on the debt
of Consolidated Furniture through December 31, 1997.
However, cash flow from Stratford, Barcalounger and their parent
Companies Furniture Comfort and Consolidated Furniture will not be sufficient
to permit the Company to make cash interest payments on Fairwood's senior
subordinated pay-in-kind debentures and merger debentures. 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, since Fairwood has failed to
make the interest payments required during 1995 and 1996, see note 5, and will
probably fail to make any future cash interest payments, the Fairwood
Debentures have been classified as current. Based on the terms of the Fairwood
Debentures, the failure to make the April 1, 1995 and subsequent period
interest payment constitutes an event of default which permits the acceleration
of the Fairwood Debentures by the demand of the holders of the requisite
aggregate principal amount of the debentures. Upon acceleration, the Fairwood
Debentures and all accrued interest would be due and payable.
- 35 -
36
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Liquidity (continued)
An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
Fairwood Corporation by certain bondholders. In response to the bankruptcy
filing, on April 22, 1996, Fairwood and certain other entities filed a
cross-motion seeking dismissal of the petition. On November 26, 1996 the motion
to dismiss was denied. On December 26, 1996 Fairwood exercised its right to
convert the pending involuntary bankruptcy case to a voluntary Chapter 11
proceeding as debtor-in-possession. Fairwood has indicated in Court papers that
it intends to propose a plan of reorganization with the bankruptcy Court at
some time in the future. The Chapter 11 case pertains only to Fairwood
Corporation. Its direct and indirect subsidiaries, including Consolidated
Furniture Corporation, Furniture Comfort Corporation, as well as their
operating divisions, Stratford and Barcalounger, are not parties to the
bankruptcy, nor are such operations under the supervision of the bankruptcy
Court. It is expected that currently these companies will continue to operate
in the normal course of business.
- 36 -
37
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 65 1990 Chief Financial Officer, Executive
Vice President, Secretary and
Treasurer since September 1989. Mr.
Sganga has also been, 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 since September 1989.
Mr. Sganga has been a director of
Consolidated Furniture and Furniture
Comfort Corporation since February
1990.
M. Saleem Muqaddam 49 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, Furniture Comfort,
Chromcraft Revington, Inc.,
Pamida Holdings, Inc.,
Plantronics, Inc., Furnishings
International Inc. and Simmons
Upholstered Furniture Corporation.
- 37 -
38
Fairwood's senior executive officer holds the title of Chief
Financial Officer, Executive Vice President, Secretary and Treasurer. No
executive officer holds the title of President or Chief Executive Officer, but
the functions customarily performed by the person holding such titles are
performed by Fairwood's Chief Financial Officer, Executive Vice President,
Secretary and Treasurer. There are no arrangements or understandings between
any director and any other person naming such person pursuant to which such
director was selected as a director.
The following were subsidiary presidents and may be deemed to be
executive officers of the Company as of December 31, 1996:
Date Assumed
Name Age Position Position
----- --- -------- ------------
Gary L. Parks 41 Chief Operating Officer June 1996
Stratford Division of
Furniture Comfort
Corporation.
Stephen R. Lake 50 President February 1995
Stratford Division of
Furniture Comfort
Corporation.
Wayne T. Stephens 46 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 June 24, 1996 Mr. Parks was hired to the position of Chief
Operating Officer of Stratford, a Division of Furniture Comfort Corporation.
From 1986 to January 1995 he served in various positions with Simmons
Upholstered Furniture Inc. including plant manager, division manager and
finally as Vice President of manufacturing. From January 1995 to May 1996 he
was President of Rosalco.
Effective May 31, 1996 Mr. Lake 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 February
1995 in his present position. 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 Chier Executive Officer of Super Sagless Corporation.
- 38 -
39
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 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
Barcalounger.
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
Name and Annual Compensation
Principal ------------------- All Other
Position Year Salary Bonus Compensation
- --------- ---- ------ ----- ------------
John B. Sganga 1996 $150,000 $ 25,000 $ 9,113 (1)
Executive VP 1995 150,000 25,000 9,803 (1)
and CFO 1994 150,000 - 7,766 (1)
Gary L. Parks 1996 96,058 9,250 2,290 (2)
Stephen R. Lake 1996 135,000 - -
President 1995 250,000 100,000 552 (5)
Stratford 1994 213,686 (3) 1,147,721 (4) 51,849 (5)
Wayne T. Stephens 1996 185,000 96,885 3,661 (6)
President & CEO 1995 160,000 108,800 2,788 (6)
Barcalounger 1994 160,000 76,800 2,150 (6)
(1) 1996 amount represents company contributions to the investment plan of
$1,750 and $7,363 for automobile allowance. 1995 amount represents company
contributions to the investment plan of $1,500 and $8,303 for the value of
the use of a company vehicle. 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.
(2) 1996 amount represents $2,290 for the value of the use of a company
vehicle.
(3) 1994 includes Super Sagless base salary of $107,917.
(4) 1994 amount includes Super Sagless special bonus of $1,047,721.
- 39 -
40
(5) 1995 amount represents the value for the use of a company car. 1994 amount
represents distribution from Super Sagless Retirement Plan of $51,849.
(6) 1996 amount represents company contributions to the investment plan of
$2,203 and $1,458 for the value of the use of a company vehicle. 1995
amount represents company contributions to the investment plan of $1,776
and $1,012 for the value of the use of a company vehicle. 1994 amount
represents company contributions to the investment plan of $800 and $1,350
for the value of the use of a company vehicle.
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 provided for an annual salary, plus such bonuses as may be awarded
in the discretion of the Board of Directors. This agreement ended on December
31, 1995, and Mr. Sganga continues to be employed under similar terms.
Retirement Plan
Messrs. Sganga, Lake 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.
Salaried Investment Plan
Officers of Consolidated Furniture are eligible to participate in its
Tax-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 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 1996, 1995 and 1994, such contributions for Mr. Sganga were
$1,750, $1,500 and $1,500, respectively. 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 8, 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. The Company contribution for
Mr. Stephens was $2,203 and $1,776 in 1996 and 1995, respectively.
- 40 -
41
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
are 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 1996 Plan Year were $216,119,
including awards of $96,885 for Mr. Stephens and $9,250 for Mr. Parks. Total
awards made for the 1995 Plan Year were $399,372, including awards of $108,800
for Mr. Stephens and $100,000 for Mr. Lake. Total awards made for the 1994 Plan
Year were $519,000, including awards of $76,800 for Mr. Stephens and $267,721
for Mr. Lake.
During 1994, Mr. Lake also received a $780,000 bonus associated with the
sale of substantially all of the assets and liabilities of Super Sagless and a
guaranteed bonus of $100,000 from Stratford.
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 1996.
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.
- 41 -
42
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, 1997, certain information
regarding the directors and executive officers and 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.
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%
John B. Sganga - 0.00% 0%
M. Saleem Muqaddam** 1,000,100 99.98% 60%
- --------------------
* 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.
** Mr. Muqaddam disclaims beneficial ownership of these shares owned of
record by CVCL which are attributed to him by reason of his status as an
officer of CVCL.
- 42 -
43
Ownership by Directors and Officers
As of February 28, 1997, 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, 1996 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 1996 and at December 31, 1996, the largest aggregate amount of
indebtedness outstanding that was payable to CSCL was approximately $389.8
million. See Note 5, Long-term Debt, in the Notes to Consolidated Financial
Statements set forth in Item 8. During 1996 the Company borrowed approximately
$32.6 million from CSCL and made no payments to CSCL. During 1997 it is
anticipated that approximately $36.5 million will be borrowed from CSCL and
that no repayments to CSCL will be made. It is also anticipated that interest
due to CSCL on the senior subordinated pay-in-kind debentures, which interest
approximates $16.4 million, will not be paid.
399 Venture Partners, Inc. ("VPI"), an affiliate of CVCL owns a majority
of Furnishings International Inc. (formerly known as Simmons Holding
Corporation)("Furnishings"), the parent of Simmons Upholstered Furniture
Corporation ("Simmons"). M. Saleem Muqaddam is a vice president of CVCL and a
director of Furnishings, Simmons and the Company. Stratford and Simmons are
parties to a Manufacturing Agreement dated as of November 29, 1995 (the
"Agreement"). Under this Agreement, Stratford has agreed to manufacture product
for and supply product on behalf of Simmons for a term of one year, subject to
automatic annual renewals, unless terminated by either party. (See Note 9 to
the Company's Consolidated Financial Statements set forth in Item 10).
- 43 -
44
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................................... 16-17
Consolidated Balance Sheets at December 31, 1996 and 1995...... 18
Consolidated Statements of Operations for the Years ended
December 31, 1996, 1995 and 1994 ............................ 19
Consolidated Statements of Shareowners' Equity (Deficit)
for the Years ended December 31, 1996, 1995 and 1994 ........ 20
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994 ............................. 21
Notes to Consolidated Financial Statements .................... 22-36
2. Financial Statement Schedule
For the three years ended December 31, 1996:
Schedule II--Valuation and Qualifying Accounts
and Reserves................................... 49
Other schedules are omitted because of the absence of conditions
under which they are required.
- 44 -
45
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 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) 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).
(4.5) 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).
(4.6) 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
RevingtonCorporation 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")).
(4.7) Amendment, dated December 15, 1989, to the Credit Agreement,
(incorporated by reference to Exhibit 4.9 of the 1989 Form
10-K).
(4.8) Amendment, dated March 13, 1990, to the Credit Agreement,
(incorporated by reference to Exhibit 4.10 of the 1989 Form
10-K).
- 45 -
46
(4.9) 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")).
(4.10) 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).
(4.11) Agreement and Waiver, dated August 15, 1990, to the Credit
Agreement, (incorporated by reference to Exhibit 4.13 of the
1990 Form 10-K).
(4.12) Agreement and Waiver, dated September 5, 1990, to the Credit
Agreement, (incorporated by reference to Exhibit 4.14 of the
1990 Form 10-K).
(4.13) Agreement and Waiver, dated September 15, 1990, to the Credit
Agreement, (incorporated by reference to Exhibit 4.16 of the
1990 Form 10-K).
(4.14) 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).
(4.15) 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).
(4.16) 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).
(4.17) 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).
(4.18) Amendment, dated March 30, 1990, to the Senior Subordinated
Debentures, (incorporated by reference to Exhibit 4.14 of the
1989 Form 10-K).
(4.19) 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).
(4.20) 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).
(4.21) 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")).
(4.22) Waiver, dated as of October 31, 1991, to the Credit
Agreement, (incorporated by reference to Exhibit 4.24 of the
1991 Form 10-K).
(4.23) 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).
- 46 -
47
(4.24) 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).
(4.25) 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).
(4.26) 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")).
(4.27) 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).
(4.28) 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")).
(4.29) 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).
(4.30) Tenth Amendment, dated as of March 22, 1993, to Credit
Agreement, (incorporated by reference to Exhibit 4.33 of the
1992 Form 10-K).
(4.31) 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")).
(4.32) Eleventh Amendment, dated as of March 25, 1994, to Credit
Agreement, (incorporated by reference to Exhibit 4.35 of the
1993 Form 10-K).
(4.33) Fourth Amendment, dated as of January 3, 1994, to the Senior
Subordinated Debentures, (incorporated by reference to
Exhibit 4.36 of the 1993 Form 10-K).
(4.34) Factoring Agreement, dated as of July 25, 1995, between
Capital Factors, Inc. and Stratford Company, a division of
Furniture Comfort Corporation, (incorporated by reference to
Exhibit 4.37 of the 1995 Form 10-K).
(4.35) Debt Subordination Agreement, dated as of July, 1995, between
Capital Factors, Inc. and Consolidated Furniture Corporation,
formerly Mohasco Corporation, (incorporated by reference to
Exhibit 4.38 of the 1995 Form 10-K).
(4.36) Lien Subordination Agreement, dated as of July 25, 1995,
between Capital Factors, Inc. and Court Square Capital
Limited, (incorporated by reference to Exhibit 4.39 of the
1995 Form 10-K).
(4.37) Twelfth Amendment, dated as of November 30, 1995, to Credit
Agreement, (incorporated by reference to Exhibit 4.40 of the
1995 Form 10-K).
- 47 -
48
(4.38) Fifth Amendment, dated as of January 2, 1996, to the Senior
Subordinated Debentures, (incorporated by reference to
Exhibit 4.41 of the Registrant's first quarter report on Form
10-Q for the quarter ended March 30, 1996 (the "1996 First
Quarter 10- Q")).
(4.39) Thirteenth Amendment, dated as of January 13, 1996, to Credit
Agreement, (incorporated by reference to Exhibit 4.42 of the
Registrant's first quarter report on Form 10-Q for the
quarter ended March 30, 1996 (the "1996 First Quarter 10-
Q")).
(4.40) Fourteenth Amendment, dated as of March 25, 1996, to Credit
Agreement, (incorporated by reference to Exhibit 4.43 of the
Registrant's first quarter report on Form 10-Q for the
quarter ended March 30, 1996 (the "1996 First Quarter 10-
Q")).
(4.41) Fifteenth Amendment, dated as of September 30, 1996, to
Credit Agreement.
(4.42) Sixteenth Amendment, dated as of December 31, 1996, to Credit
Agreement.
(4.43) Sixth Amendment, dated as of January 2, 1997, to the Senior
Subordinated Debentures.
(4.44) Factoring Agreement, dated as of December 10, 1996, between
Capital Factors, Inc. and Barcalounger Company, a division of
Furniture Comfort Corporation.
(4.45) Debt Subordination Agreement, dated as of December 10, 1996,
between Capital Factors, Inc. and Consolidated Furniture
Corporation, formerly Mohasco Corporation.
(4.46) Lien Subordination Agreement, dated as of December 10, 1996,
between Capital Factors, Inc. and Court Square Capital
Limited.
(10.1) Mohasco Executive Retirement Plan, (incorporated by reference
to Exhibit 10.5 of the 1990 Form 10-K).
(10.2) Mohasco Corporation Executive Incentive Plan, (incorporated
by reference to Exhibit 10.6 of the 1990 Form 10-K).
(10.3) Amendment, dated December 31, 1991, to the Mohasco Executive
Retirement Plan, (incorporated by reference to Exhibit 10.6
of the 1991 Form 10-K).
(10.4) 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, (incorporated by reference to Exhibit 2.1 of
the 1994 Second Quarter 10-Q).
(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 three months ended December
31, 1996.
- 48 -
49
Schedule II
FAIRWOOD CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1996, 1995 and 1994
(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:
1996
----
Allowance for discounts $ 246 603 770 79
Allowance for doubtful
accounts 1,611 533 657 1,487
Allowance for estimated
loss on claims - - - -
------ ------ ------ -----
$ 1,857 1,136 1,427 1,566
====== ====== ====== ======
1995
----
Allowance for discounts $ 324 1,251 1,329 246
Allowance for doubtful
accounts 2,432 781 1,602 1,611
Allowance for estimated
loss on claims - - - -
------ ------ ------ -----
$ 2,756 2,032 2,931 1,857
====== ====== ====== ======
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
====== ====== ====== ======
- 49 -
50
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 26, 1997
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1997 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)
- 50 -
51
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1997 by the following person on
behalf of the Registrant and in the capacity indicated.
Title
-----
/s/ M. Saleem Muqaddam Director
- -----------------------------
M. Saleem Muqaddam
- 51 -