1
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, 1997
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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 _____________________
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
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, 1998.
On February 28, 1998, 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.
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. On May 2, 1997, certain holders of the Fairwood
Debentures filed a Motion seeking to convert Fairwood's Chapter 11 case to a
Chapter 7 liquidation or, alternatively, to appoint a Chapter 11 trustee. On
July 21, 1997, the Bankruptcy Court denied the request to convert the case and
held in abeyance, pending further proceedings, the request to appoint a Chapter
11 trustee. Fairwood cannot predict how the Court may rule on the request to
appoint a Chapter 11 trustee or when such ruling may occur. Fairwood has
indicated in Bankruptcy Court papers that if the Motion for the appointment of
a Chapter 11 trustee is denied, 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. See Item 3. LEGAL PROCEEDINGS.
Fairwood's subsidiary Consolidated Furniture is the parent of Futorian
Furnishings, Inc. ("Futorian" formerly Furniture Comfort Corporation) whose two
operating divisions, Stratford Division ("Stratford") and Bacalounger Division
("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.
Operations
Futorian, 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
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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. Barcalounger has been able
to maintain its market share by focusing on its core high-end high-quality
product lines. In many cases this increased competitive activity has led to a
lowering of selling prices and the extension of liberal credit terms in an
attempt to maintain market share. 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, 1997, 1996 and 1995, net sales,
including sales to Barcalounger, by Stratford were $100.6 million, $114.0
million and $142.6 million, respectively, and net sales by Barcalounger were
$49.7 million, $39.9 million and $36.9 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
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 strong brand recognition.
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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 $11.2, $12.7 and $2.4 million of revenues in 1997,
1996 and 1995, respectively, and the reimbursement of $600,000, $600,000 and
$243,000 for new product development and $2,029,000, $2,257,000 and $100,000
for selling expenses in 1997, 1996 and 1995, respectively.
In response to Stratford's eroding market share Stratford continues to
make changes to its operations primarily to improve the efficiency of its
production process and to reduce overhead and administration costs. The
agreement with Simmons allows Stratford to utilize certain excess capacity. In
December 1997, Stratford, in response to the continued erosion of sales,
significantly reduced its production activity in Okolona, Mississippi. As a
result of the significantly reduced activity, Stratford recognized a loss of
$1.4 million primarily for certain severance costs. Stratford believes that by
reducing the activity at this facility and centralizing the majority of
production in its New Albany, Mississippi facility, Stratford will be better
able to react to continually changing market conditions.
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, Futorian believes that the maintenance of high product
quality
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and the development of new products are essential to maintaining its
competitive position. In support of these goals, Futorian conducts research
and development activities which are decentralized and directed by its
individual operating divisions.
The Stratford and Barcalounger operating divisions expended a total of
$10,960,000 in the past five years for research and development programs of
which $1,945,000, $1,779,000, and $2,149,000 was expended in 1997, 1996 and
1995, respectively.
Employees
Fairwood has no employees but its subsidiaries and their operating
divisions employed 2,074 persons at December 31, 1997. The Stratford and
Barcalounger divisions have a long record of generally harmonious relations
with employees.
Backlog
The backlog of orders among Futorian's furniture operations was
approximately $17,830,000 at December 31, 1997 and approximately $11,270,000 at
December 31, 1996. It is expected that the backlog at December 31, 1997 will
be filled in the current year. Futorian 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 Futorian'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 Futorian'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 Futorian's activities for vacation periods of one or two weeks in
July has a limiting effect on production as well as sales. Futorian maintains
adequate levels of inventory to meet seasonal demands.
Sears, Roebuck & Co. accounted for approximately 9 percent, 13 percent
and 19 percent of Futorian's furniture sales during the years 1997, 1996 and
1995, respectively. Export sales for 1997, 1996 and 1995 were approximately 2
percent of sales for each of the three years.
Environmental and Raw Materials
In 1997, 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 Futorian 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, 1997, 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
Guntown, MS Warehouse 216,000
Ontario, CA Manufacturing plant 228,000
High Point, NC Showroom 27,386
San Francisco, CA Showroom 10,390
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2,470,488
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Owned
Chicago, IL Office and showroom 35,000
New Albany, MS Manufacturing plant 32,463
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67,463
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Barcalounger
Leased
Rocky Mount, NC Manufacturing plant 364,000
High Point, NC Showroom 9,808
San Francisco, CA Showroom 2,945
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376,753
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2,914,704
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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 period 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 $132.3 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 set forth in item 8. 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 consolidated 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. On May 2, 1997, certain holders of the
Fairwood Debentures filed a Motion seeking to convert Fairwood's Chapter 11 case
to a Chapter 7 liquidation or, alternatively, to appoint a Chapter 11 trustee.
On July 21, 1997, the Bankruptcy Court denied the request to convert the case
and held in abeyance, pending further proceedings, the request to appoint a
Chapter 11 trustee. Fairwood cannot predict how the Court may rule on the
request to appoint a Chapter 11 trustee or when such ruling may occur. Fairwood
has indicated in Bankruptcy Court papers that if the Motion for the appointment
of a Chapter 11 trustee is denied, 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. Fairwood Corporation's
direct and indirect subsidiaries, including Consolidated Furniture Corporation,
Futorian Furnishings, Inc., 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, 1997 and
1996, there were three shareowners of Fairwood's common stock. No dividends
were declared on Fairwood's common stock in 1997 and 1996. 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 moneys 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,
--------------------------------------------
1997 1996 1995 1994 1993
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Net sales $ 148.1 151.3 176.8 244.9 261.5
Operating income (loss) ( 20.6) ( 6.4) ( 11.8) ( 8.2) 1.9
Interest expense, net ( 65.5) ( 61.2) ( 58.6) ( 53.4) ( 46.6)
Gain on sale of subsidiary - - - 20.8 -
Net loss ( 86.1) ( 67.4) ( 70.7) ( 39.4) ( 46.9)
Total assets 57.4 46.6 54.1 95.6 113.6
Long-term debt, including
current maturities * 505.8 453.1 420.7 415.4 386.0
Redeemable preferred stock .1 .1 .1 .1 .1
* - Does not include accrued interest for 1997, 1996 and 1995 of $91.4 million,
$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 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 and 1993 is not comparable with
one another or 1997, 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES
Certain statements in this Management's Discussion and Analysis ("MD&A") and
elsewhere in this Form 10-K for 1997 into which this MD&A is incorporated are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those projected in such forward-looking statements.
1997 vs 1996 Results of Operations
Consolidated net sales of approximately $148.1 million for 1997 decreased
2.1% from 1996 net sales of approximately $151.3 million, due to the
significant reduction of sales at Stratford.
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Net sales (including intercompany sales) for 1997 by Stratford
decreased 11.8% to approximately $100.6 million as compared to $114.0 million
for 1996. During 1997 and 1996 net sales by Stratford include $11.2 million and
$12.7 million, respectively, of sales to Simmons Upholstered Furniture
Corporation ("Simmons"), an affiliate of the Company. Excluding these sales,
net sales by Stratford decreased 8.4% in 1997. Total volume, excluding frame
and coil sales which accounted for 10.6% of sales in 1997 and 6.4% in 1996, in
1997 decreased 16.0%, while average selling prices decreased by approximately
.5%. Sales in 1997 to Stratford's larger, national retail customers decreased
13.0%, while sales to smaller retail customers decreased 18.9%. These
decreases in sales volume were due to a continuance of adverse factors that
includes a weakness in sales in mid-priced furniture that Stratford targets,
intense competition due to the overall softness in industry sales and the
recent bankruptcy of Stratford's second and third largest customers. Moreover,
Stratford's largest customer had reduced its number of selling units and
inventory levels and consequently its purchases. These events are the main
causes for the decrease in sales to the value merchants and the larger chain
store customers who now make up the bulk of Stratford's customer base.
Stratford's previous strategies to improve margins and lower selling costs were
in conflict with certain customer's marketing strategies and slowed and blocked
Stratford's attempts to recapture smaller stores' sales.
Net sales for 1997 by Barcalounger increased 24.6% to approximately $49.7
million as compared to $39.9 million for 1996. This increase in sales reflects
an increase of 17.0% in the number of pieces sold in 1997 versus 1996, and a
6.8% increase in average selling prices. Beginning in 1993 and continuing
throughout 1994, 1995, 1996 and 1997, 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 1997 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 increased 4.2% in 1997 to approximately $142.0
million, or 95.9% of net sales as compared to $136.2 million, or 90.0% of net
sales, in 1996. Stratford Company cost of sales, including intercompany
sales, increased to 103.5% of net sales in 1997, as compared to 93.4% in 1996.
Barcalounger cost of sales was 80.6% of net sales in 1997 and 1996. Stratford
cost of sales as a percentage of sales increased in 1997 mainly because of
inefficiencies and costs incurred when Stratford moved product lines from the
Okolona facility to the New Albany facility and intense price competition.
Consolidated selling, administrative and general expenses increased 24.8%
to approximately $26.7 million in 1997 from approximately $21.4 million in
1996. The increase was due primarily to costs related to two of Stratford's
major customers declaring bankruptcy in 1997.
Interest expense increased 6.7% to $65.5 million from $61.4 million due
primarily to additional borrowings under the Credit Agreement, as discussed in
Liquidity and Capital Resources.
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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 1997 and 1996 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.
Liquidity and Capital Resources
Capital requirements for operations during 1997 and 1996 were provided
primarily by financing channels and operating cash flows at certain operating
divisions.
Fairwood had a working capital deficit of approximately $(258.6) million
and $(224.3) million at December 31, 1997 and 1996, respectively. At December
31, 1997, Fairwood had long-term debt of approximately $505.8 million of which
$169.0 million was current. Long-term debt at December 31, 1996 was
approximately $453.1 million of which $169.0 million was current. Accrued
interest on long-term debt was $91.4 million at December 31, 1997 and $64.4
million at December 31, 1996. 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,
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 1998.
Throughout 1997, 1996 and 1995, Consolidated Furniture funded interest
obligations related to long-term indebtedness through increased borrowings from
CSCL. Borrowings from CSCL during the years ended December 31, 1997, 1996 and
1995 were approximately $50.8 million, $32.6 million and $32.5 million,
respectively. However, during 1995 a portion of the proceeds to
Consolidated Furniture from the factoring of Stratford's trade accounts
receivable and proceeds from the sale of substantially all of the assets of
Super Sagless of approximately $15 million and $16 million, respectively, were
used to repay debt of Consolidated Furniture and its subsidiaries. All
outstanding debt and accrued interest at December 31, 1997, excluding the $62.9
million of outstanding merger debentures plus $34.5 million accrued interest
thereon, $0.2 million of a capitalized lease obligation and $2.1 million of a
mortgage obligation, 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
1999. Interest on the revolving credit loan of Consolidated Furniture and its
subsidiaries is payable quarterly at 1-1/2% above the applicable prime rate,
which prime rate was 8.5% at December 31, 1997. Interest on the senior
subordinated debentures of Consolidated Furniture is
- 12 -
13
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 1995, proceeds to Consolidated Furniture from the disposition of Super
Sagless 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. In January 1997, Barcalounger
received $1.0 million under a factoring agreement and transferred the funds to
Stratford. At December 31, 1997, $15.6 million was the amount of the advances
due to the Factor from Stratford and Barcalounger.
Interest payments during the years ended December 31, 1997, 1996 and 1995
of approximately $38.5 million, $34.4 million and $31.9 million, respectively
were primarily made through increased borrowings and the issue of additional
pay-in-kind debentures. Principal payments of approximately $.2 million, $.2
million and $27.2 million were made during the years ended December 31, 1997,
1996 and 1995, respectively.
Annual maturities on debt for the years ended December 31, 1997 and 1998,
are approximately $169.0 million and $334.8 million, respectively. Interest
payments expected to be made for the years ended December 31, 1998, 1999 and
2000 are estimated to be approximately $41.9 million, $46.0 million and $50.2
million.
On each of April 1, 1995, October 1, 1995, and each semi-annual interest
payment date thereafter, 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 $87.8 million on the
Fairwood Debentures, which includes $53.3 million due to CSCL, is included in
accrued expenses on the accompanying consolidated balance sheet as of December
31, 1997. See Note 5 to the accompanying Consolidated Financial Statements.
Based on the terms of the Fairwood Debentures, the failure to make the
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, 1997.
Capital additions were approximately $3.0 million, $.7 million and $2.4
million for the years 1997, 1996 and 1995, respectively. The operating units,
Stratford and Barcalounger anticipate making capital expenditures of
approximately $2.4 million during 1998, 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
- 13 -
14
capital expenditures will be funded through cash flow generated from operations
of one of its subsidiaries, available credit facilities under the Consolidated
Furniture's revolving credit agreement with CSCL, and other financing
arrangements. Consolidated Furniture and Futorian intend to pursue other
sources of financing to the extent available and cost effective.
Consolidated Furniture, Futorian and the operating divisions are
dependent upon Court Square Capital Limited ("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 1998 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.
Consolidated Furniture anticipates that funds provided by operations and
available credit facilities under the Credit Agreement will be available in
1998 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 1998 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.
On February 11, 1998, Futorian entered into a revolving credit and term
loan agreement with a domestic corporation which replaced its two factoring
agreements for Barcalounger and Stratford. The new agreement provides for an
aggregate maximum commitment of $30,750,000 and expires in 2001. The agreement
consists of a term loan in the amount of $1,020,000 and a revolving credit loan
with a limit of $29,730,000. These loans bear interest at either the prime
rate plus 1% or the adjusted eurodollar rate plus 3-1/4% at the option of the
borrower providing certain conditions are met. The loan is secured by accounts
receivable, inventory, property and equipment and other assets. Other loan
costs include a monthly servicing fee of $5,000 and a monthly unused line fee
at a rate equal to three-eights (3/8%) percent per annum calculated upon the
amount by which $21,500,000 exceeds the average daily principal balance on the
outstanding Revolving Loans and Letter of Credit Accommodations during the
immediately preceding month.
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
- 14 -
15
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. On May 2, 1997, certain holders of the
Fairwood Debentures filed a Motion seeking to convert Fairwood's Chapter 11
case to a Chapter 7 liquidation or, alternatively, to appoint a Chapter 11
trustee. On July 21, 1997, the Bankruptcy Court denied the request to convert
the case and held in abeyance, pending further proceedings, the request to
appoint a Chapter 11 trustee. Fairwood cannot predict how the Court may rule
on the request to appoint a Chapter 11 trustee or when such ruling may occur.
Fairwood has indicated in Bankruptcy Court papers that if the Motion for the
appointment of a Chapter 11 trustee is denied, 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. The Chapter 11 case
pertains only to Fairwood Corporation. Its direct and indirect subsidiaries,
including Consolidated Furniture Corporation, Futorian Furnishings, Inc., 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.
Year 2000 Compliance
Fairwood has evaluated the costs necessary to make its and its
subsidiaries computer systems year 2000 compliant. The bulk of these costs are
expected to be incurred during fiscal year 1998 and are estimated to be
approximately $250,000.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income (SFAS
130) which will require Fairwood to change the display of comprehensive income
and its components within the consolidated financial statements.
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, 1997 and 1996
Consolidated Statements of Operations for the Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareowners' Equity (Deficit) for the Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
- 15 -
16
Independent Auditor's 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, 1997 and 1996, and
the related consolidated statements of operations, and shareowners' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1997. 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 are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial 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 audit provides 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, 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.
The accompanying consolidated financial statements have been prepared assuming
that Fairwood will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, Fairwood has been notified by the Internal
Revenue Service ("IRS") of proposed adjustments to its Federal income tax
returns for the years 1988 through 1991. Such adjustments would result in a
net tax cost to Fairwood Corporation of approximately $132.3 million, including
interest, through the year ended December 31, 1997. 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 sheet.
- 16 -
17
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, 1996 and 1997 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 Corporation. 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. On May 2, 1997,
certain holders of the Fairwood Debentures filed a motion seeking to convert
Fairwood's Chapter 11 case, to a Chapter 7 liquidation or, alternatively, to
appoint a Chapter 11 trustee. On July 21, 1997, the Bankruptcy Court denied
the request to convert the case and held in abeyance, pending further
proceedings the request to appoint a Chapter 11 trustee. These matters raise
substantial doubt about the ability of Fairwood Corporation to continue as a
going concern. Management's plans in regard to these matters are also
described in Notes 4 and 13. The consolidated financial statements and
financial schedule do not include any adjustments that might result from the
outcome of this uncertainty.
Washington, D.C.
March 13, 1998
- 17 -
18
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In thousands except share data)
Assets (note 5) 1997 1996
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 605 429
------- -------
Accounts and notes receivable
Trade (note 2) 28,119 23,673
Notes receivable, affiliate (Note 3) 500 -
Due from affiliate (Note 9) 1,420 2,418
Other 696 648
------- -------
30,735 26,739
Less allowance for discounts and doubtful accounts 4,216 1,566
------- -------
26,519 25,173
------- -------
Inventories (note 1) 13,950 13,625
Prepaid expenses and other current assets (note 4) 1,911 2,468
------- -------
Total current assets 42,985 41,695
------- -------
Property, plant and equipment, at cost:
Land 84 84
Buildings and improvements 13,055 12,591
Machinery and equipment 15,727 15,949
Leasehold improvements 2,385 2,359
Construction in progress 267 51
------- -------
31,518 31,034
Less accumulated depreciation and amortization 18,517 18,709
------- -------
13,001 12,325
------- -------
Other assets 1,434 2,260
------- -------
$ 57,420 56,280
======== ========
Liabilities and Shareowners' equity (deficit) 1997 1996
- --------------------------------------------- ---- ----
Current liabilities:
Notes payable (Note 2) $ 15,554 9,703
Overdraft - 715
Current maturities of long-term debt (notes 5, 10 and 13):
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 233 180
Accrued interest 91,436 64,413
Accounts payable:
Trade 9,111 6,940
Other 1,945 2,896
Accrued expenses 9,035 6,682
Federal and state income taxes 5,682 5,699
------- -------
Total current liabilities 301,777 266,009
------- -------
Long-term debt, less current maturities (notes 5, 10 and 13):
Revolving credit 254,714 203,992
Senior subordinated debentures 80,000 80,000
Mortgage payable 2,052 -
Capitalized lease obligations - 190
------- -------
336,766 284,182
------- -------
Deferred Federal income taxes (note 4) 1,179 1,524
Other liabilities (note 8) 1,653 2,513
------- -------
2,832 4,037
------- -------
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) ( 353) ( 539)
Accumulated deficit (639,650) (553,457)
------- -------
(584,055) (498,048)
Commitments and contingencies (notes 1, 2, 4, 5, 8, 9, 10, ------- -------
11, 12, 13 and 14)
$ 57,420 56,280
======== ========
See accompanying notes to consolidated financial statements.
- 18 -
19
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Net sales (note 9) $ 148,113 151,316 176,834
------- ------- -------
Cost of sales (note 9) 142,024 136,242 161,091
Selling, administrative
and general expenses (note 9) 26,705 21,461 27,508
------- ------- -------
168,729 157,703 188,599
------- ------- -------
Operating loss ( 20,616) ( 6,387) ( 11,765)
Interest income 111 198 316
Interest on indebtedness (notes 2 and 5) ( 65,547) ( 61,433) ( 58,893)
Other income (expenses), net ( 72) 249 ( 378)
------- ------- -------
Loss before income taxes ( 86,124) ( 67,373) ( 70,720)
Provision for income
taxes (note 4) - - -
------- ------- -------
Net loss $ ( 86,124) ( 67,373) ( 70,720)
======= ======= =======
See accompanying notes to consolidated financial statements.
- 19 -
20
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareowners' Equity (Deficit)
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
Additional Minimum Shareowners'
Common Stock Paid-in Pension Accumulated Equity
----------------
Class A Class B Capital Liability deficit (Deficit)
------- ------- ------- --------- --------- ---------
Balance, January 1, 1995 $ - 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)
Net loss ( 86,124) ( 86,124)
Adjustment to minimum
pension liability (note 8) 186 186
Preferred stock dividends ( 69) ( 69)
----- ----- ------ ------ ------- -------
Balance, December 31, 1997 $ - 10 55,938 ( 353) (639,650) (584,055)
===== ===== ====== ====== ======= =======
See accompanying notes to consolidated financial statements.
- 20 -
21
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net loss ( 86,124) ( 67,373) ( 70,720)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,886 2,170 2,075
Loss (gain) on sale of property, plant and equipment 361 59 ( 58)
Changes in assets and liabilities:
Accounts receivable ( 846) 5,350 6,567
Inventories ( 325) 769 4,419
Prepaid expenses and other current assets 212 262 ( 66)
Accounts payable 1,151 2,098 ( 2,082)
Accrued interest and expenses 29,376 25,369 26,080
Federal and state income taxes ( 17) ( 20) ( 6)
Other, net 152 ( 427) ( 106)
------- ------- -------
Cash used - operating activities ( 54,174) ( 31,743) ( 33,897)
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment ( 3,010) ( 679) ( 2,413)
Proceeds from disposition of property,
plant and equipment 87 159 427
Loan to affiliate ( 500) - -
Proceeds from sale of Super Sagless assets - - 15,750
------- ------- --------
Cash provided (used) - investing activities ( 3,423) ( 520) 13,764
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 52,817 32,623 32,499
Overdraft ( 715) ( 6) 721
Proceeds from sale (repurchases) of
receivables to (from) Factor, net 5,851 ( 4,740) 14,443
Repayment of long-term debt ( 180) ( 170) ( 27,160)
------- ------- -------
Cash provided - financing activities 57,773 27,707 20,503
------- ------- -------
Increase (decrease) in cash and cash equivalents 176 ( 4,556) 370
Cash and cash equivalents:
Beginning of period 429 4,985 4,615
------- ------- -------
End of period $ 605 429 4,985
======= ======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $38,516 34,406 31,866
Income taxes 17 20 6
Adjustment to minimum pension liability ( 186) ( 417) ( 411)
See accompanying notes to consolidated financial statements.
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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") and all of its
subsidiaries. All significant intercompany balances, transactions and profits
have been eliminated in consolidation.
Through its wholly-owned subsidiary, Consolidated Furniture and
Consolidated Furniture's wholly-owned subsidiary Futorian Furnishings, Inc.
("Futorian"), Fairwood 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.
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 the 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. On May 2, 1997, certain holders of the
Fairwood Debentures filed a Motion seeking to convert Fairwood's Chapter 11
case to a Chapter 7 liquidation or, alternatively, to appoint a Chapter 11
trustee. On July 21, 1997, the Bankruptcy Court denied the request to convert
the case and held in abeyance, pending further proceedings, the request to
appoint a Chapter 11 trustee. Fairwood cannot predict how the Court may rule
on the request to appoint a Chapter 11 trustee or when such ruling may occur.
Fairwood has indicated in Bankruptcy Court papers that if the Motion for the
appointment of a Chapter 11 trustee is denied, 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, Futorian
Furnishings, Inc., 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.
- 22 -
23
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Description of Business
(continued)
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 1997, 1996 and 1995 which resulted in reductions
of cost of sales of approximately $52,000, $2,300,000 and $2,300,000,
respectively.
The components of inventory are as follows (in thousands):
1997 1996
-------- ---------
Raw materials $ 11,809 13,047
In process 3,591 3,028
Finished goods 6,220 5,163
------ ------
Inventories at first-in, first-out 21,620 21,238
LIFO reserve 7,670 7,613
------ ------
Inventories at LIFO $ 13,950 13,625
====== ======
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 shorter of the term of the related leases or 10 years.
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.
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.
- 23 -
24
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Description of Business
(continued)
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-Lived 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.
The Company deems an asset to be impaired if a forecast of
undiscounted future operating cash flows directly related to the asset,
including disposal value, if any, is less than its carrying amount. If an
asset 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
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25
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Description of Business
(continued)
Impairment of Long-Lived Assets
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. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less cost to sell. 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 1996 and 1995
financial statements to conform with the 1997 financial statement presentation.
(2) Factoring Agreement
Pursuant to a factoring agreement, the majority of Stratford's, a
division of Futorian, trade receivables are factored on a recourse and
nonrecourse basis. Receivables sold for which Stratford has not received
written credit 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.
Under the factoring agreement, advances may be made to Stratford for
up to 80 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 nine percent or
Capital Bank's prime rate plus 1 percent. As of December 31, 1997, receivables
sold which remain to be collected approximated $18,436,000 of which
approximately $8,132,000 were sold with recourse. 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.
- 25 -
26
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Factoring Agreements (continued)
On December 10, 1996, Barcalounger, a division of Futorian, entered
into a factoring agreement with Capital Factors, Inc. Pursuant to the
factoring agreement, certain of Barcalounger's trade receivables are pledged to
the Factor. Barcalounger retains credit risk for all receivables pledged under
the factoring agreement. Under the factoring agreement, advances may be made
to Barcalounger for up to 80 percent of the aggregate amount of "eligible
receivables" less factoring commissions and other fees and reserves. All
advances are repayable upon demand. 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, 1997,
receivables pledged to the Factor approximated $1,659,000.
The outstanding amounts due under the factoring agreements at December
31, are as follows (in thousands):
December 31, 1997
Debt 1997 1996 Interest Rates
---- -------- -------- -------------------
Stratford $ 14,554 9,703 9.5%
Barcalounger 1,000 - 9.5%
------- -------
15,554 9,703
======= =======
(3) Note receivable, affiliate
In July 1997, Futorian loaned $500,000 to Simmons Upholstered
Furniture Corporation ("Simmons"), an affiliate of the Company. The note bears
interest at the rate of prime plus 1.5% per annum and is due on demand.
(4) Income Taxes
No income taxes have been provided in the accompanying statements of
operations because the Company is in a net operating loss carryforward
position.
- 26 -
27
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Income Taxes (continued)
A reconciliation of the provision for income taxes included in the
statements of operations and the amount computed by applying the U.S. Federal
income tax rate, in thousands, is summarized below:
Years ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Expected tax benefit computed
at U.S. rate $ (29,282) (22,906) (24,045)
Increase in valuation
allowance 32,902 24,802 26,865
State taxes, net of
Federal benefit ( 3,411) ( 2,658) ( 2,820)
Other ( 209) 762 -
------- ------ ------
Total provision for income taxes $ - - -
====== ====== ======
The tax effects of temporary differences as of December 31, in
thousands, are as follows:
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforwards $118,486 86,284
Accounts receivable 1,613 606
Vacation and holiday pay 306 315
Accrued expenses 3,214 3,500
Interest on merger debentures 3,963 4,320
Valuation allowance (126,403) ( 93,501)
------- -------
$ 1,179 1,524
======= =======
Deferred tax liabilities:
Property, plant and equipment $ 1,179 1,524
====== =======
The valuation allowance for deferred tax assets as of January 1, 1996
was $68,699,000. The net changes in the total valuation allowance for the
years ended December 31, 1997 and 1996 were increases of $32,902,000 and
$24,802,000, respectively.
At December 31, 1997, the Company's net operating loss carryforwards
of approximately $312,134,000 expire in various years through 2012. However,
the agreement in principle with the IRS (as discussed below) would result in a
reduction of approximately $95,000,000 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.
- 27 -
28
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Income Taxes (continued)
Net current deferred income tax assets of $1,179,000 and $1,524,000 at
December 31, 1997 and 1996, 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 period 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
$132.3 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
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 consolidated financial statements.
(5) Long-term Debt
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 Court Square Capital Limited ("CSCL"), an
affiliated company, (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, 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 and certain covenants therein have been waived at various times through
January 1998. In September 1996, Consolidated Furniture entered into
- 28 -
29
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Long-term Debt (continued)
the Fifteenth Amendment to the Credit Agreement which changed the covenant for
liens on collateral granted pursuant to that certain 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
and Barcalounger's trade accounts receivable were used to repay a portion of
the debts due under the Credit Agreement with CSCL. In May 1997, Consolidated
Furniture entered into the Seventeenth Amendment to the Credit Agreement which
changed the overadvance on eligible inventory and accounts receivables from
$210,000,000 to $237,000,000. In July 1997, Consolidated Furniture entered
into the Eighteenth Amendment to the Credit Agreement which changed various
covenants and increased the amount of the Revolving Credit Commitment to
$245,000,000. In January 1998, Consolidated Furniture entered into the
Nineteenth Amendment to the Credit Agreement which permitted Futorian to enter
into a new Loan and Security Agreement on February 11, 1998. The Nineteenth
Amendment also waived noncompliance of certain covenants and extended the due
date to January 4, 1999. In January 1998, Consolidated Furniture entered into
the Twentieth Amendment to the Credit Agreement which changed various financial
covenants for 1998 and thereafter. In January 1998, Consolidated Furniture
entered into the Seventh Amendment to the Increasing Rate Senior Subordinated
Debentures due January 2, 1998, which extended the due date to January 4, 1999.
In October 1997, a mortgage was obtained for the purchase of an office
building in Chicago, Illinois. The mortgage bears interest at the rate of 8.5%
per annum and is payable in monthly installments of $18,224 of principal and
interest through October 2017. The mortgage is secured by the real estate.
Substantially all of Fairwood'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. Fairwood plans to attempt to refinance, or negotiate an extension of,
the debt payable to CSCL when due.
- 29 -
30
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Long-term Debt (continued)
The outstanding debt at December 31, was as follows (in thousands):
December 31,
1997
Interest
Debt 1997 1996 Rates
---- -------- -------- ---------
Revolving credit, due 1999 $ 254,714 203,992 10%
Senior subordinated
debentures, due 1999 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%
Mortgage payable, due 2017 2,095 - 8-1/2%
Other, due 1998 190 370 6%
------- -------
505,780 453,143
Less current maturities 169,014 168,961
------- -------
$ 336,766 284,182
======= =======
All outstanding debt and accrued interest at December 31, 1997,
excluding the $62.9 million of outstanding merger debentures plus $34.5 million
accrued interest thereon, $0.2 million of capitalized lease obligations and the
mortgage amount of $2.1 million is payable to CSCL.
On each of April 1, 1995, October 1, 1995, and each semi-annual
interest payment date thereafter, 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 $87.8 million on the Fairwood Debentures, which includes $53.3 million due
to CSCL, is included in accrued interest in the accompanying consolidated
balance sheet as of December 31, 1997.
Based on the terms of the Fairwood Debentures, the failure to make the
April 1, 1995 and subsequent period interest payments constitute 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.
- 30 -
31
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Long-term Debt (continued)
The fair market value of the debentures and revolving credit debt
cannot be reasonably estimated considering Fairwood's ongoing financial
difficulties (Note 13).
Annual maturities of long-term debt are as follows:
Years ending December 31, Amount
------------------------- ------------
1998 $169,014
1999 334,760
2000 50
2001 55
2002 59
Thereafter 1,842
--------
$505,780
========
(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, 1997 and 1996, dividends payable
were approximately $330,000 and $260,000, respectively.
(7) Common Stock
Holders of Class A common stock are entitled to convert their shares
to an equal number of shares of Class B common stock and holders of Class B
common stock are entitled to convert their shares to an equal number of shares
of Class A common stock.
(8) Employee Benefit Plans
All salaried employees, excluding certain key executives, and hourly
paid employees of Fairwood 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.
- 31 -
32
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans (continued)
Pension expense is summarized, in thousands, as follows:
Years ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Current service cost $ - - -
Interest cost 1,111 1,062 954
Return on assets (1,104) (1,018) ( 808)
----- ----- -----
$ 7 44 146
===== ===== ======
Information with respect to the retirement plans for 1997 and 1996 has
been determined by consulting actuaries. The following table sets forth the
plans' funded status at December 31, and reconciles amounts recognized in the
consolidated balance sheets at December 31, (in thousands):
1997 1996
-------- -------
Actuarial present value of obligations:
Vested $ 16,850 14,349
Nonvested 51 75
------ ------
Accumulated and projected benefit obligation 16,901 14,424
Assets at fair value at December 31 15,309 12,331
------ ------
Accumulated and projected benefit obligation
in excess of assets 1,592 2,093
Unrecognized net gain (loss) ( 314) ( 140)
------ ------
Accrued pension cost at December 31 1,278 1,953
Adjustment for minimum liability 353 539
------ ------
Pension liability at December 31 $ 1,631 2,492
====== ======
Assumptions:
Interest rates for obligations 7.00% 7.75%
Long-term rate of return 9.00% 9.00%
Salary increase rate N/A N/A
Effective June 1, 1993, the following defined contribution plans were
adopted by the Company's operating companies:
- 32 -
33
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1997, 1996 and 1995, Barcalounger
contributions were $140,000, $140,000 and $133,000, 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, 1997, 1996
and 1995, Barcalounger matching contributions were $47,000, $42,000 and
$38,000, 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, 1997, 1996 and 1995 company
contributions were $585,000, $802,000 and $648,000, respectively.
Consolidated Furniture also sponsors an investment plan. This
investment plan is a defined contribution plan covering all employees of
Consolidated Furniture and its subsidiaries, who have a minimum of one year of
service. For the years ended December 31, 1997, 1996 and 1995 Consolidated
Furniture contributions were $2,000, $2,000 and $2,000, respectively.
(9) Related party transactions
In November 1995, Stratford entered into a manufacturing agreement
("Agreement") with 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 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 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 1997 and 1996, Stratford earned a
percentage of the Simmons gross margin on products manufactured, in addition to
monthly service charges for new product development and selling activities
performed by Stratford.
- 33 -
34
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Related party transactions (continued)
As a result of this Agreement, Stratford recognized approximately
$11,200,000, $12,722,000 and $2,400,000 of revenue in 1997, 1996 and 1995,
respectively, from the manufacture and supply of product and was reimbursed by
Simmons $600,000, $600,000 and $243,000, respectively, for new product
development and $2,029,000, $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 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 consolidated
statements of operations. At December 31, 1997 and 1996, approximately
$420,000 and $2,418,000, respectively, was due from Simmons under this
Agreement. Under a separate agreement Stratford advanced Simmons $1,000,000.
(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).
Future minimum lease payments at December 31, 1997, under all
non-cancelable leases are as follows (in thousands):
Period Capital Operating
------ ------- ---------
1998 196 1,251
1999 - 1,085
2000 - 500
2001 - 26
----- ------
Total minimum lease payments 196 2,862
======
Less amounts representing interest 6
-----
Capitalized lease obligations $ 190
=====
It is expected that, in the normal course of business, non-cancelable
leases that expire will be renewed or replaced.
- 34 -
35
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Rental Commitments (continued)
Rental expense is summarized, in thousands, as follows:
Years ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Minimum Rentals
(including cancel-
able leases) $ 2,227 2,115 1,946
Sublease rentals ( 254) ( 291) ( 203)
------ ------ ------
$ 1,973 1,824 1,743
====== ====== ======
(11) Significant Customer
The Company is engaged in only one segment of business, the
manufacture of furniture. Sears Roebuck and Co. accounted for approximately 9
percent, 13 percent, and 19 percent of the Company's sales in each of the years
1997, 1996 and 1995, respectively.
(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, 1997
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 as otherwise disclosed in these consolidated
financial statements 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
- 35 -
36
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Liquidity (continued)
April 1, 1995, October 1, 1995, and each semi-annual interest payment date
thereafter 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 moneys 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 1998.
Throughout portions of 1997, 1996, and 1995, Consolidated Furniture
did not generate sufficient funds from operations to 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 1995 the proceeds from the disposition
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, 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 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 moneys to the Company with the exception of amounts for (a)
specified administrative expenses of Fairwood 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. 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, 1998.
However, cash flows from Stratford, Barcalounger and their parent
companies, Futorian and Consolidated Furniture, will not be sufficient to permit
the Company to make cash interest payments on Fairwood's senior
- 36 -
37
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Liquidity (continued)
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 since 1995, 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.
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, Futorian, 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.
(14) Subsequent event
On February 11, 1998, Futorian entered into a revolving credit and
term loan agreement with a domestic corporation which replaced the two
factoring agreements for Barcalounger and Stratford. The new agreement
provides for an aggregate maximum commitment of $30,750,000 and expires in
2001. The agreement consists of a term loan in the amount of $1,020,000 and a
revolving credit loan with a limit of $29,730,000. These loans bear interest
at either the prime rate plus 1% or the adjusted eurodollar rate plus 3-1/4% at
the option of the borrower provided certain conditions are met. The loan is
secured by accounts receivable, inventory, property and equipment and other
assets. Other loan costs include a monthly servicing fee of $5,000 and a
monthly unused line fee at a rate equal to three-eights (3/8%) percent per
annum calculated upon the amount by which $21,500,000 exceeds the average daily
principal balance on the outstanding Revolving Loans and Letter of Credit
Accommodations during the immediately preceding month.
- 37 -
38
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 66 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 Futorian Furnishings,
Inc. since February 1990. Mr. Sganga is also a director of Simmons Upholstered Furniture
Corporation.
M. Saleem Muqaddam 50 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, Futorian, Chromcraft Revington,
Inc., Pamida Holdings, Inc., Plantronics, Inc., Furnishings International Inc. and
Simmons Upholstered Furniture Corporation.
- 38 -
39
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, 1997:
Date Assumed
Name Age Position Position
---- --- -------- --------
Lawrence Adelman 52 Chief Operating Officer May 1997
Stratford Division of
Futorian Furnishings, Inc.
Wayne T. Stephens 47 President and Chief October 1992
Executive Officer
Barcalounger Division of
Futorian Furnishings, Inc.
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:
In May 1997, Lawrence Adelman was named Chief Executive Officer of
Stratford, a Division of Futorian Furnishings, Inc. Previously, Mr. Adelman
was President and Chief Executive Officer of Alliance Capital Group, a
consulting company he founded in 1991. Mr Adelman was responsible for more
than 50 successful engagements involving companies in industries ranging from
manufacturing to retail, growing his from a Chicago-based business to a
national company.
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 Futorian Furnishings, Inc.
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.
Effective October 17, 1997 Gary Parks resigned as Chief Operating
Officer of Stratford, a Division of Futorian Corporation. Prior to his
resignation he had been employed by Stratford since May 1996. From January 1995
to May 1996 he was President of Rosalco. 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.
- 39 -
40
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
Principal Annual Compensation All Other
-------------------
Position Year Salary Bonus Compensation
- --------- ---- ------ ----- ------------
John B. Sganga 1997 $150,000 $ - $ 7,500 (1)
Executive VP 1996 150,000 25,000 9,113 (1)
and CFO 1995 150,000 25,000 9,803 (1)
Gary L. Parks 1997 154,641 - 39,409 (2)
1996 96,058 9,250 2,290 (2)
Lawrence Adelman 1997 170,994 - -
CEO Stratford
Wayne T. Stephens 1997 185,000 217,375 1,910 (3)
President & CEO 1996 185,000 96,885 3,661 (3)
Barcalounger 1995 160,000 108,800 2,788 (3)
(1) 1997 amount represents Consolidated Furniture contributions to the
investment plan of $1,500 and $6,000 for automobile allowance. 1996
amount represents Consolidated Furniture contributions to the
investment plan of $1,750 and $7,363 for the value of the use of a
company vehicle. 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.
(2) 1997 amount represents $37,119 for severance pay and $2,290 for the
use of a company vehicle. 1996 amount represents $2,290 for the value
of the use of a company vehicle.
(3) 1997 amount represents company contributions to the investment plan of
$705 and $1,205 for the value of the use of a company vehicle. 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.
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.
- 40 -
41
Retirement Plan
Messrs. Sganga, Parks 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 1997, 1996 and 1995, such contributions for Mr. Sganga were
$1,500, $1,750 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. Stephens
was $705, $2,203 and $1,776 in 1997, 1996 and 1995, respectively.
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 1997 Plan Year were $483,528
including awards of $217,375 for Mr. Stephens. 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.
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 1995, 1996 or 1997.
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
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
Fairwood's common stock consists of both voting stock and non-voting stock.
The table below sets forth, as of February 28, 1998, 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 Small Business Administration has extended the
December 31, 1997 conversion date to December 31, 1998. 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 -
44
Ownership by Directors and Officers
As of February 28, 1998, 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, 1997 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 1997 and at December 31, 1997, the largest aggregate amount of
indebtedness outstanding that was payable to CSCL was approximately $440.5
million. See Note 5, Long-term Debt, in the Notes to Consolidated Financial
Statements set forth in Item 8. During 1997 the Company borrowed approximately
$50.8 million from CSCL and made no payments to CSCL. During 1998 it is
anticipated that approximately $41.9 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 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 -
45
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, 1997 and 1996...... 18
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995............................ 19
Consolidated Statements of Shareowners' Equity (Deficit)
for the Years ended December 31, 1997, 1996 and 1995........ 20
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995............................ 21
Notes to Consolidated Financial Statements .................... 22-37
2. Financial Statement Schedule
----------------------------
For the three years ended December 31, 1997:
Schedule II--Valuation and Qualifying Accounts
and Reserves................................... 50
Other schedules are omitted because of the absence of conditions
under which they are required.
- 44 -
46
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 Revington
Corporation and Citicorp Capital Investors Ltd. (the "Credit
Agreement"), (incorporated by reference to Exhibit 4.8 of
the Registrant's annual report on Form 10-K for the year
ended December 31, 1989 (the "1989 Form 10-K")).
(4.7) 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 -
47
(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 -
48
(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 -
49
(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, (incorporated by reference to Exhibit 4.36
of the 1993 Form 10-K).
(4.42) Sixteenth Amendment, dated as of December 31, 1996, to
Credit Agreement, (incorporated by reference to Exhibit 4.36
of the 1993 Form 10-K).
(4.43) Sixth Amendment, dated as of January 2, 1997, to the Senior
Subordinated Debentures, (incorporated by reference to
Exhibit 4.43 of the 1996 Form 10-K).
(4.44) Factoring Agreement, dated as of December 10, 1996, between
Capital Factors, Inc. and Barcalounger Company, a division
of Furniture Comfort Corporation, (incorporated by reference
to Exhibit 4.44 of the 1996 Form 10-K).
(4.45) Debt Subordination Agreement, dated as of December 10, 1996,
between Capital Factors, Inc. and Consolidated Furniture
Corporation, formerly Mohasco Corporation, (incorporated by
reference to Exhibit 4.45 of the 1996 Form 10-K).
(4.46) Lien Subordination Agreement, dated as of December 10, 1996,
between Capital Factors, Inc. and Court Square Capital
Limited, (incorporated by reference to Exhibit 4.46 of the
1996 Form 10-K).
(4.47) Seventeenth Amendment, dated as of May 23, 1997, to Credit
Agreement.
(4.48) Eighteenth Amendment, dated as of July 1, 1997, to Credit
Agreement.
(4.49) Mortgage, Security Agreement, Assignment of Rents and
Financing Statement, dated November 12, 1997, by Futorian
Furnishings, Inc. in favor of Banco Popular.
(4.50) Mortgage Note, dated November 12, 1997, by Futorian
Furnishings, Inc. and Banco Popular.
(4.51) Nineteenth Amendment, dated as of January 30, 1998, to
Credit Agreement.
(4.52) Twentieth Amendment, dated as of January 31, 1998, to Credit
Agreement.
(4.53) Loan and Security Agreement, dated February 11, 1998,
between Congressional Financial Corporation (CENTRAL) and
Futorian Furnishings, Inc., formerly Furniture Comfort
Corporation.
(4.54) Seventh Amendment, dated as on January 2, 1998, to the Senior
Subordinated Debentures.
- 48 -
50
(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).
(10.5) Real Estate Purchase Agreement, dated September 15, 1997,
between Furniture Comfort Corporation and American National
Bank and Trust Company, not personally, but solely as
Trustee under Trust Agreement dated July 17, 1978, and known
as Trust No. 43449.
(21.1) 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, 1997.
- 49 -
51
Schedule II
FAIRWOOD CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1997, 1996 and 1995
(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:
1997
----
Allowance for discounts $ 79 408 436 51
Allowance for doubtful
accounts 1,487 3,244 566 4,165
Allowance for estimated
loss on claims - - - -
------ ------ ------ -----
$ 1,566 3,652 1,002 4,216
====== ====== ====== ======
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
====== ====== ====== ======
- 50 -
52
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, 1998
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1998 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)
- 51 -
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1998 by the following person on
behalf of the Registrant and in the capacity indicated.
Title
-----
/s/ M. Saleem Muqaddam Director
- --------------------------------
M. Saleem Muqaddam
- 52 -