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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-18446
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Fairwood Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3472113
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Center
1201 N. Orange Street, Suite 790
Wilmington, DE 19801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-884-6749
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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None Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was zero as of February 28, 1999.
On February 28, 1999, the registrant had outstanding 500 shares of Class A
Voting common stock, $.01 par value and 999,800 shares of Class B Non-Voting
common stock, $.01 par value.
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PART I
ITEM 1. BUSINESS
Fairwood Corporation ("Fairwood"), is a privately-held Delaware corporation
organized in 1988 by investors including Citicorp Venture Capital Ltd. ("CVCL")
for the purpose of acquiring all of the common stock of Consolidated Furniture
Corporation, formerly named Mohasco Corporation ("Consolidated Furniture"). At
the date of acquisition, Consolidated Furniture's operations were diversified
and included the manufacture of residential furniture and carpet, and the rental
of residential and office furniture. Consolidated Furniture sold its carpet and
rental operations in 1988.
The principal executive offices of Fairwood are located at One Commerce
Center, 1201 Orange St., Suite 790, Wilmington, Delaware 19801. Fairwood is a
holding company with no independent operations: its primary asset is all of the
common stock of Consolidated Furniture.
On January 3, 1996, certain holders of the Fairwood public debentures
(the "Bondholders") filed an involuntary Chapter 7 petition against Fairwood in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain Citicorp
affiliates filed a motion in response to the involuntary filing seeking to
dismiss the petition. By order dated December 4, 1996, the Bankruptcy Court
denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert
the Chapter 7 case to a case under Chapter 11. As of the date hereof, Fairwood
continues to operate as a debtor in possession under Section 1108 of the
Bankruptcy Code. 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. In April 1997 the Bondholders filed a Motion with the Bankruptcy
Court seeking to convert Fairwood's Chapter 11 case to a case under Chapter 7
or, alternatively, by order dated March 2, 1999, the Bondholders' motion to
convert the case or, alternatively, for the appointment of a Chapter 11 trustee,
was denied in its entirety. The Bondholders' have taken an appeal of the
ruling. These companies are expecting to continue to operate in the normal
course of business. Fairwood is in the process of formulating a plan of
reorganization which it expects to file in the next several weeks. The plan will
address, among other things, Fairwood's existing capital structure.
The United States Bankruptcy Court has approved the settlement of issues
arising out of an Internal Revenue Service ("IRS") audit examination of the
consolidated Federal income tax returns of Fairwood and its subsidiaries for the
periods ended July 11, 1988 through December 31, 1991. The exam resulted in a
net federal tax cost of $5.0 million after considering all available carrybacks,
all of which has been accrued in prior years. The net cost includes the
additional tax due, statutory interest, the benefit of a Tentative Refund
provided for as part of the settlement, and the benefit of carrying back 1993
net operating losses to recover a portion of the additional tax paid under the
claim. Also, as part of the settlement, the Company's net operating loss
carryforwards were reduced by approximately $102 million.
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Management is currently reviewing the state tax effect of this settlement
and believes there will not be a material impact. As approved by the Bankruptcy
Court, the settlement will be funded by additional borrowings under Consolidated
Furniture's existing revolving Credit Agreement. 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 Barcalounger 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 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, 1998, 1997 and 1996, net sales, including sales to
Barcalounger, by Stratford were $101.6 million, $100.6 million and $114.0
million, respectively, and net sales by Barcalounger were $54.7 million, $49.7
million and $39.9 million, respectively.
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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 its mid-priced recliner, motion and
stationary upholstered furniture. Stratford sells mainly to large national
retail furniture and department stores and has strong brand recognition.
Barcalounger targets a selected market for its high-end recliner chair and
motion upholstered furniture. Barcalounger sells mainly to furniture stores and
department stores that carry more expensive products and provide interior design
services directly or indirectly. Barcalounger gives extensive warranties for its
products. The value and fine quality of its furniture is apparent as hardwood
frames are emphasized and only the finest leather and fabric coverings are
offered. Barcalounger has significant brand recognition and has a reputation of
having one of the best product lines in terms of value, quality, design and
service in the higher priced segment of the motion furniture industry.
In November 1995, Stratford entered into a manufacturing agreement
("Agreement") with Simmons Upholstered Furniture Corporation ("Simmons"), an
affiliate of the Company. Under this Agreement, Stratford manufactures product
for and supplies product on behalf of Simmons, and provides sales services and
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
$6.7, $11.2 and $12.7 million of revenues in 1998, 1997 and 1996, respectively,
and the reimbursement of $600,000 in each of the three years for new product
development and $2,625,000, $2,029,000 and $2,257,000 for selling expenses in
1998, 1997 and 1996, respectively. This agreement also resulted in the
reimbursement of $2,164,000 of general and administrative expenses in 1998.
Stratford is currently expanding its Simmons production in Okolona,
Mississippi, as a result of its affiliate's decision to close a manufacturing
facility in Paoli, Indiana. The expansion is expected to be completed in 1999.
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.
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Product 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, Fairwood believes that the maintenance of high product quality and
the development of new products are essential to maintaining its competitive
position. In support of these goals, Fairwood 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
$10,366,000 in the past five years for product development programs of
which $2,026,000, $1,945,000, and $1,779,000 was expended in 1998, 1997 and
1996, respectively.
Employees
Fairwood has one employee and its subsidiaries and their operating
divisions employed 2,314 persons at December 31, 1998. The Stratford and
Barcalounger divisions have a long record of generally harmonious relations with
employees.
Backlog
The backlog of orders among Fairwood's furniture operations was
approximately $10,906,000 at December 31, 1998 and approximately $17,830,000 at
December 31, 1997. The 1997 Backlog was unusually high due to production delays
at the end of 1997. It is expected that the backlog at December 31, 1998 will
be filled in the current year. Fairwood does not consider backlog to be a
significant indicator of the sales outlook for its products.
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 8 percent, 9 percent and
13 percent of Futorian's furniture sales during the years 1998, 1997 and 1996,
respectively. Export sales for 1998, 1997 and 1996 were approximately 2 percent
of sales for each of the three years, of which approximately 1% were made to
Canada for each of the three years.
Environmental and Raw Materials
In 1998, 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, 1998, 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 Court Square Capital Limited
("CSCL") granted in connection with the Credit Agreement (See Note 6 to the
Company's Consolidated Financial Statements set forth in item 8).
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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
The United States Bankruptcy Court has approved the settlement of issues
arising out of an Internal Revenue Service ("IRS") audit examination of the
consolidated Federal income tax returns of Fairwood and its subsidiaries for the
periods ended July 11, 1988 through December 31, 1991. The exam resulted in a
net federal tax cost of $5.0 million after considering all available carrybacks,
all of which has been accrued in prior years. The net cost includes the
additional tax due, statutory interest, the benefit of a Tentative Refund
provided for as part of the settlement, and the benefit of carrying back 1993
net operating losses to recover a portion of the additional tax paid under the
claim. Also, as part of the settlement, the Company's net operating loss
carryforwards were reduced by approximately $102 million.
Management is currently reviewing the state tax effect of this settlement
and believes there will not be a material impact. As approved by the Bankruptcy
Court, the settlement will be funded by additional borrowings under
Consolidated Furniture's existing revolving Credit Agreement.
Fairwood has accrued the estimated Federal and state obligations, net of
expected recoveries of previous taxes paid, in Federal and state income taxes on
the accompanying balance sheet. See note 5 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.
The Company is involved in a case involving a house fire allegedly started
by a cigarette lighter allegedly applied to a sofa sold by Stratford division.
Plantiffs seek unspecified compensatory and punitive damages. The case was filed
in June 1998 and is in discovery. This case is covered by insurance, subject to
a $100,000 deductible. The Company has reserved $100,000 for this case. The
ultimate outcome of this case or the ultimate obligation to the Company cannot
be reasonably estimated.
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On January 3, 1996, certain holders of the Fairwood public debentures
(the "Bondholders") filed an involuntary Chapter 7 petition against Fairwood in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain Citicorp
affiliates filed a motion in response to the involuntary filing seeking to
dismiss the petition. By order dated December 4, 1996, the Bankruptcy Court
denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert
the Chapter 7 case to a case under Chapter 11. As of the date hereof, Fairwood
continues to operate as a debtor in possession under Section 1108 of the
Bankruptcy Code. 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. In
April 1997 the Bondholders filed a Motion with the Bankruptcy Court seeking to
convert Fairwood's Chapter 11 case to a case under Chapter 7 or,
alternatively, by order dated March 2, 1999, the Bondholders' motion to
convert the case or, alternatively, for the appointment of a Chapter 11
trustee, was denied in its entirety. The Bondholders' have taken an appeal of
the ruling. These companies are expecting to continue to operate in the
normal course of business. Fairwood is in the process of formulating a plan of
reorganization which it expects to file in the next several weeks. The plan
will address, among other things, Fairwood's existing capital structure.
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, 1998 and 1997,
there were three shareowners of Fairwood's common stock. No dividends were
declared on Fairwood's common stock in 1998 and 1997. 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 6 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,
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1998 1997 1996 1995 1994
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Net sales $ 154.2 148.1 151.3 176.8 244.9
Operating income (loss) ( 13.8) ( 20.6) ( 6.4) ( 11.8) ( 8.2)
Interest expense, net ( 71.7) ( 65.5) ( 61.2) ( 58.6) ( 53.4)
Gain on sale of subsidiary - - - - 20.8
Net loss ( 85.5) ( 86.1) ( 67.4) ( 70.7) ( 39.4)
Total assets 58.2 56.8 46.6 54.1 95.6
Long-term debt, including
current maturities * 556.7 505.8 453.1 420.7 415.4
Redeemable preferred stock .1 .1 .1 .1 .1
* - Does not include accrued interest for 1998, 1997, 1996 and 1995 of $118.5
million, $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 is not comparable with 1998, 1997, 1996
and 1995.
For additional information, see the Company's Consolidated Financial
Statements included with this report, including Notes 5 and 14 thereto regarding
certain tax and liquidity matters.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES
Certain information in this annual report on Form 10-K, including but not
limited to the Management's Discussion and Analysis of Financial Condition and
Results of Operations, may constitute forward-looking statements as such term is
defined in Section 27A of the Securities Act of 1933 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934. Certain forward-looking
statements can be identified by the use of forward-looking terminology such as,
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimated," or "anticipates" or the negative thereof or
other comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements involve risks and uncertainties, which
could cause actual results to be materially different than those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company assumes no obligation to update such information.
1998 vs 1997 Results of Operations
Consolidated net sales of approximately $154.2 million for 1998 increased
4.1% from 1997 net sales of approximately $148.1 million, primarily due to
increased sales at Barcalounger.
Net sales (including intercompany sales) for 1998 by Stratford increased
.8% to approximately $101.6 million as compared to $100.6 million for 1997.
During 1998 and 1997 net sales by Stratford include $6.7 million and $11.2
million, respectively, of sales to Simmons Upholstered Furniture Corporation
("Simmons"), an affiliate of the Company. Excluding these sales, net sales by
Stratford increased 5.9% in 1998. Total sales volume, excluding frame and coil
sales which accounted for 7.8% of sales in 1998 and 10.6% in 1997, increased
3.6%, while average selling prices remained approximately the same. Sales in
1998 to Stratford's larger, national retail customers increased 32.6%, while
sales to smaller retail customers decreased 15.8%. The increase in sales to
Stratford's larger, national retail accounts was a result of increased focus on
these accounts, which resulted in increased business of approximately $12
million to three customers. The decrease in sales to Stratford's smaller
accounts was attributable to the focus on the larger accounts, which resulted in
a reduction in service to these accounts. Approximately $5 million of the
decrease to the smaller accounts was attributable to the loss of seven
customers.
Net sales for 1998 by Barcalounger increased 10.1% to approximately $54.7
million as compared to $49.7 million for 1997. This increase in sales reflects
an increase of 5.4% in the number of pieces sold in 1998 versus 1997, and a 3.7%
increase in average selling prices. Barcalounger continues to add 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 1998 and 1997 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 1.3% in 1998 to approximately $143.9
million, or 93.3% of net sales as compared to $142.0 million, or 95.9% of net
sales, in 1997. Stratford cost of sales, including intercompany sales, decreased
to 100.5% of net sales in 1998, as compared to 103.5% in 1997. Barcalounger cost
of sales decreased to 80.4% of net sales in 1998, as compared
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to 80.6% in 1997. Stratford cost of sales as a percentage of sales decreased in
1998 because of costs savings achieved from the movement of product lines from
the Okolona facility to the New Albany facility, improved overhead efficiencies
and a more favorable sales mix. Stratford's cost of sales as a percentage of
sales have been excessively high because of unprofitable customers, intense
price competition and underutilized fixed overhead expenses. Stratford expects
to further reduce cost of sales as a percentage of sales by eliminating
unprofitable customers, reducing excess overhead and substantial increasing in
sales to Simmons, which will close its Paoli, Indiana manufacturing facility in
1999.
Consolidated selling, administrative and general expenses decreased 9.7%
to approximately $24.1 million in 1998 from approximately $26.7 million in 1997.
Stratford selling, administrative and general expenses decreased 12.5% to
approximately $16.1 million in 1998 from approximately $18.4 million in 1997.
The decrease in selling, administrative and general expenses was primarily
attributable to the decrease in bad debt expense from the prior year when two of
Stratford's major customers declared bankruptcy. Barcalounger selling,
administrative and general expenses increased 6.8% to approximately $6.3 million
in 1998 from approximately $5.9 million in 1997. Barcalounger selling,
administrative and general expenses increased in order to support sales
increases of 10.1% in 1998.
Consolidated interest expense increased 9.8% to $71.9 million from $65.5
million due primarily to additional borrowings under the Credit Agreement, as
discussed in Liquidity and Capital Resources. Stratford interest expense
increased 66.7% to $3.0 million from $1.8 million due primarily to additional
borrowings under Futorian's Revolving credit and term loan agreement, as
discussed in Liquidity and Capital Resources.
Stratford pretax loss decreased 19.9% to approximately ($19.3) million in
1998 from approximately ($24.1) million in 1997. Barcalounger pretax earnings
increased 22.2% to approximately $4.4 million in 1998 from approximately $3.6
million in 1997.
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.
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 11.7% 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
- 11 -
12
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.
Stratford selling, administrative and general expenses decreased 35.3% to
approximately $18.4 million in 1997 from approximately $13.6 million in 1996.
The increase was due primarily to costs related to two of Stratford's major
customers declaring bankruptcy in 1997. Barcalounger selling, administrative and
general expenses decreased 13.5% to approximately $5.9 million in 1997 from
approximately $5.2 million in 1996.
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. Stratford interest expense was approximately
$1.8 million in 1997 and 1996.
Stratford pretax loss increased 205.1% to approximately ($24.1) million in
1997 from approximately ($7.9) million in 1996. Barcalounger pretax earnings
increased 38.5% to approximately $3.6 million in 1997 from approximately $2.6
million in 1996.
Liquidity and Capital Resources
Capital requirements for operations during 1998 and 1997 were provided
primarily by financing channels and operating cash flows at the Barcalounger
division.
Fairwood had a working capital deficit of approximately $(292.2) million
and $(258.8) million at December 31, 1998 and 1997, respectively. At December
31, 1998, Fairwood had long-term debt of approximately $556.7 million of which
$168.8 million was current. Long-term debt at December 31, 1997 was
approximately $505.8 million of which $169.0 million was current. Accrued
interest on long-term debt was $118.5 million at December 31, 1998 and $91.4
million at December 31, 1997. Accrued interest is classified as a current
liability.
- 12 -
13
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 collateral 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 1999.
Throughout 1998, 1997 and 1996, Consolidated Furniture funded interest
obligations related to long-term indebtedness through increased borrowings from
CSCL. Outstanding borrowings from CSCL under the Credit Agreement during the
years ended December 31, 1998, 1997 and 1996 were approximately $51.1 million,
$50.7 million and $32.6 million, respectively. All outstanding debt and accrued
interest at December 31, 1998, excluding the $62.9 million of outstanding merger
debentures plus $45.1 million accrued interest thereon, $27.5 million
outstanding under a Futorian revolving credit and term loan agreement and $2.1
million of a Futorian 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 2000. 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 7.75% at December 31, 1998. Interest
on the senior subordinated debentures of Consolidated Furniture is payable
semi-annually at 18%. Interest on the senior subordinated pay-in-kind debentures
and merger debentures of Fairwood is payable semi-annually at 15-1/2% and
16-7/8%, respectively.
Interest payments during the years ended December 31, 1998, 1997 and 1996
of approximately $44.8 million, $38.5 million and $34.4 million, respectively
were primarily made through increased borrowings and the issuance of additional
pay-in-kind debentures. Principal payments of approximately $.2 million, $.2
million and $.1 million were made during the years ended December 31, 1998, 1997
and 1996, respectively.
Annual maturities on debt for the years ended December 31, 1999 and 2000,
are approximately $168.8 million and $385.9 million, respectively. Interest
payments expected to be made through increased borrowings and cash from
operations for the years ended December 31, 1999, 2000 and 2001 are estimated to
be approximately $50.4 million, $55.4 million and $60.4 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 $114.8 million on the
Fairwood Debentures, which includes $69.7 million due to CSCL, is included in
accrued interest on the consolidated balance sheet as of December 31, 1998. See
Note 6 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
- 13 -
14
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, 1998.
Capital additions were approximately $1.4 million, $3.0 million and $0.7
million for the years 1998, 1997 and 1996, respectively. The operating units,
Stratford and Barcalounger anticipate making capital expenditures of
approximately $1.1 million during 1999, primarily for the purpose of maintaining
and upgrading their manufacturing equipment, machinery and facilities. Stratford
and Barcalounger have no firm commitments for the purchase of capital equipment
or facilities. It is anticipated that necessary capital expenditures will be
funded through cash flow generated from operations of the Barcalounger division,
available credit facilities under the Consolidated Furniture's 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 CSCL for funding of their debt service costs. Instruments relating to the
Credit Agreement and senior subordinated debentures have been amended and
certain provisions thereof waived at various times through January 1999 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 1999
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 1999 on
the Fairwood senior subordinated pay-in-kind debentures and merger debentures.
Consolidated Furniture's obligations under the Credit Agreement are
collateralized 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 ("agreement") with a domestic corporation which replaced the two
factoring agreements of its two operating divisions, 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 collateralized by accounts receivable, inventory, property and
equipment and other assets and has priority over Fairwood's Long-term debt (Note
6 to the consolidated financial statements included in Item 8). Other loan costs
include a monthly servicing fee of $5,000
- 14 -
15
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. The terms of the
agreement provide for maintenance of certain financial covenants which have been
waived for 1998. The amount outstanding under the revolving line of credit and
term loan, including accrued interest, totaled $27,480,000 at December 31, 1998,
and Futorian continues to use the facility. The fair market value of this
revolving credit and term loan agreement cannot be reasonably estimated because
of Fairwood's ongoing financial difficulties. The interest rate at December 31,
1998 was 8.75 percent.
On January 3, 1996, certain holders of the Fairwood public debentures
(the "Bondholders") filed an involuntary Chapter 7 petition against Fairwood in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain Citicorp
affiliates filed a motion in response to the involuntary filing seeking to
dismiss the petition. By order dated December 4, 1996, the Bankruptcy Court
denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert
the Chapter 7 case to a case under Chapter 11. As of the date hereof, Fairwood
continues to operate as a debtor in possession under Section 1108 of the
Bankruptcy Code. 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. In April 1997 the Bondholders filed a Motion with the Bankruptcy
Court seeking to convert Fairwood's Chapter 11 case to a case under Chapter 7
or, alternatively, by order dated March 2, 1999, the Bondholders' motion to
convert the case or, alternatively, for the appointment of a Chapter 11 trustee,
was denied in its entirety. The Bondholders' have taken an appeal of the
ruling. These companies are expecting to continue to operate in the normal
course of business. Fairwood is in the process of formulating a plan of
reorganization which it expects to file in the next several weeks. The plan will
address, among other things, Fairwood's existing capital structure.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits to define the applicable year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause system failures and other computer errors, resulting in business and
operational disruptions. The Company recognizes the need to identify and correct
problems associated with its existing computer systems and certain
non-information technology systems as the Year 2000 approaches. Both internal
and external resources are being used to identify, correct, and to test these
financial, information and operational systems for Year 2000 compliance.
While a number of the Company's systems have been determined to be Year
2000 compliant, certain applications required remediation. The Company has
substantially completed its remediation and is currently replacing certain
non-Year 2000 compliant hardware and software as well as testing Year 2000
software changes. The Company anticipates that its remediation efforts and
necessary testing related to the Year 2000 issue will be completed by September
1999 and does not expect the impact of Year 2000 issues to have a material
impact on the financial position or results of operations of the Company.
- 15 -
16
Cost and expenses incurred through December 31, 1998 in addressing the Year
2000 issue has been less than $400,000. It is estimated that less than $100,000
in costs will be incurred in 1999 in order to replace voice mail and personal
computer equipment and complete a post implementation phase of an update to
human resource software.
The Company has made inquiries of key third parties to assess the potential
impact on the Company's operations if such parties are not successful in
remediating their systems in a timely manner; however, the Company is awaiting
some responses which are expected before the end of the second quarter. The
Company is in the process of developing contingency plans in the event Year 2000
failures of its key suppliers and service providers, and anticipates that these
contingency plans will be in place by September 1999.
The Company's expectations about future costs necessary to achieve Year
2000 compliance, the impact on its operations and its ability to bring each of
its systems into Year 2000 compliance are subject to a number of uncertainties
that could cause actual results to differ materially. Such factors include the
following:(i) The Company may not be successful in properly identifying all
systems and programs that contain two-digit year codes;(ii) The nature and
number of systems which require reprogramming, upgrading or replacement may
exceed the Company's expectations in terms of complexity and scope;(iii) The
Company may not be able to complete all remediation and testing necessary in a
timely manner;(iv) The Company has no control over the ability of its key
suppliers and customers to achieve Year 2000 compliance; and (v) The impact of
the Year 2000 problems on key customers may be of such magnitude that it may
adversely affect their demand for the Company's products and services. Fairwood
is not able to estimate the potential, worst-case-scenario as a result of Year
2000 failure from these, or other, unanticipated factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fairwood is exposed to risks related to fluctuations in interest rates on
the revolving credit facility and term loan agreement and the Credit Agreement.
Fairwood does not utilize interest rate swaps, forwards or option contracts on
foreign currencies or commodities, or other types of derivative instruments.
Fairwood has other borrowing facilities, however these have fixed interest
rates.
For fixed rate debt, changes in interest rates generally affect the fair
value of the underlying indebtedness, but not earnings or cash flows.
Conversely, for variable rate debt, changes in interest rates generally do not
impact fair value, but do affect future earnings and cash flows.
Assuming the amount outstanding under the revolving credit facility and
term loan agreement and the Credit Agreement remains at $333.3 million, the
balance at December 31, 1998, each one percentage point increase in the prime
interest rate would result in an increase in interest expense for the coming
year of approximately $3.3 million.
The fixed rate debt includes the following (in thousands):
Interest rate
At December 31, 1998
Senior subordinated debentures, due 2000 $ 80,000 18%
Senior subordinated pay-in kind
debentures, due 2001 105,853 15-1/2%
Merger debentures, due 2004 62,928 16-7/8%
Mortgage payable, due 2017 2,051 8-1/2%
-------
$ 250,832
=======
The fair value of the fixed rate debt, and changes in fair value due to
fluctuations in market rates cannot be reasonably estimated considering
Fairwood's ongoing financial difficulties. $185,933 of the fixed rate debt is
due to CSCL, and Fairwood plans to attempt to refinance, or renegotiate an
extension of the debt payable to CSCL when due.
- 16 -
17
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 as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareowner's Equity (Deficit) for the Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
- 17 -
18
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, 1998 and 1997, and
the related consolidated statements of operations, shareowners' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998. We also have audited the related financial statement schedule
as listed in the accompanying index for Item 14(a)2 on page 46. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fairwood Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, 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 Notes 6 and 14
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, 1997 and 1998 and does not expect to be able
to make such payments in the future. Also, as described in notes 1 and 14,
Fairwood continues to operate as a debtor in possession under Section 1108 of
the U.S. Bankruptcy Code. 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 1 and 14. The
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of this uncertainty.
- 18 -
19
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands except share data)
Assets (note 5) 1998 1997
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 2,165 605
------- -------
Accounts and notes receivable
Trade (notes 2 and 6) 22,662 28,119
Notes receivable, affiliate (Note 4) 500 500
Due from affiliate (Note 10) 4,089 1,420
Other - 48
------- -------
27,251 30,087
Less allowance for discounts and doubtful accounts 1,317 4,216
------- -------
25,934 25,871
------- -------
Inventories (note 1) 14,666 13,950
Prepaid expenses and other current assets (note 5) 2,567 1,904
------- -------
Total current assets 45,332 42,330
------- -------
Property, plant and equipment, at cost:
Land 84 84
Buildings and improvements 13,456 13,055
Machinery and equipment 16,633 15,727
Leasehold improvements 2,696 2,385
Construction in progress 5 267
------- -------
32,874 31,518
Less accumulated depreciation and amortization 20,380 18,517
------- -------
12,494 13,001
------- -------
Other assets 337 1,434
------- -------
$58,163 56,765
======= =======
Liabilities and Shareowners' equity (deficit)
Current liabilities:
Revolving credit facilities (Notes 2 and 3) $ 27,480 15,554
Overdraft 2,212 -
Current maturities of long-term debt (notes 6 and 14):
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 45 233
Accrued interest (Note 6) 118,462 91,436
Accounts payable:
Trade 5,760 9,111
Other 1,332 1,945
Accrued expenses 8,389 9,035
Federal and state income taxes (Note 5) 5,027 5,027
--------- ---------
Total current liabilities 337,488 301,122
--------- ---------
Long-term debt, less current maturities (notes 6 and 14):
Revolving credit 305,855 254,714
Senior subordinated debentures 80,000 80,000
Mortgage payable 2,006 2,052
--------- ---------
387,861 336,766
--------- ---------
Deferred Federal income taxes (note 5) 1,957 1,179
Other liabilities (note 9) 72 1,653
--------- ---------
2,029 2,832
--------- ---------
Redeemable preferred stock (note 7):
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 6 and 8):
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 9) ( 27) ( 353)
Accumulated deficit (725,236) (639,650)
--------- ---------
(669,315) (584,055)
--------- ---------
Commitments and contingencies (notes 1, 2, 5, 6, 9,
10, 11, 12, 13 and 14) $ 58,163 56,765
========= =========
See accompanying notes to consolidated financial statements.
- 19 -
20
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Net sales (notes 10 and 12) $ 154,174 148,113 151,316
------- ------- -------
Cost of sales (note 10) 143,885 142,024 136,242
Selling, administrative
and general expenses (note 10) 24,110 26,705 21,461
------- ------- -------
167,995 168,729 157,703
------- ------- -------
Operating loss ( 13,821) ( 20,616) ( 6,387)
Interest income 150 111 198
Interest on indebtedness (notes 2 and 6) ( 71,863) ( 65,547) ( 61,433)
Other income (expenses), net 29 ( 72) 249
------- ------- -------
Loss before income taxes ( 85,505) ( 86,124) ( 67,373)
Provision for income
taxes (note 5) - - -
------- ------- -------
Net loss $ ( 85,505) ( 86,124) ( 67,373)
======= ======= =======
See accompanying notes to consolidated financial statements.
- 20 -
21
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareowners' Equity (Deficit)
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
Additional
Common stock Paid-in Comprehensive
Class A Class B Capital Income
------- ------- ---------- -------------
Balance, January 1, 1996 $ - 10 55,938
Comprehensive loss
Net loss ( 67,373)
Other comprehensive income, net of tax
Adjustment to minimum
pension liability (note 9) 417
-------
Comprehensive loss ( 66,956)
=======
Preferred stock dividends
------- ------- -------
Balance, December 31, 1996 - 10 55,938
Comprehensive loss
Net loss ( 86,124)
Other comprehensive income, net of tax
Adjustment to minimum
pension liability (note 9) 186
-------
Comprehensive loss ( 85,938)
=======
Preferred stock dividends
------- ------- -------
Balance, December 31, 1997 - 10 55,938
Comprehensive loss
Net loss ( 85,505)
Other comprehensive income, net of tax
Adjustment to minimum
pension liability (note 9) 326
-------
Comprehensive loss ( 85,179)
=======
Preferred stock dividends
------- ------- -------
Balance, December 31, 1998 $ - 10 55,938
======= ======= =======
Accumulated
Other
Comprehensive Shareowners'
Accumulated Income Equity
deficit (Loss) (Deficit)
----------- ------------- ------------
Balance, January 1, 1996 (486,027) ( 956) (431,035)
Comprehensive loss
Net loss ( 67,373) ( 67,373)
Other comprehensive income, net of tax
Adjustment to minimum
pension liability (note 9) 417 417
Comprehensive loss
Preferred stock dividends ( 57) ( 57)
------- ------- -------
Balance, December 31, 1996 (553,457) ( 539) (498,048)
Comprehensive loss
Net loss ( 86,124) ( 86,124)
Other comprehensive income, net of tax
Adjustment to minimum
pension liability (note 9) 186 186
Comprehensive loss
Preferred stock dividends ( 69) ( 69)
------- ------- -------
Balance, December 31, 1997 (639,650) ( 353) (584,055)
Comprehensive loss
Net loss ( 85,505) ( 85,505)
Other comprehensive income, net of tax
Adjustment to minimum
pension liability (note 9) 326 326
Comprehensive loss
Preferred stock dividends ( 81) ( 81)
------- ------- -------
Balance, December 31, 1998 (725,236) ( 27) (669,315)
======= ======= =======
See accompanying notes to consolidated financial statements.
- 21 -
22
FAIRWOOD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- ------
(In thousands)
Cash flows from operating activities:
Net loss ( 85,505) ( 86,124) ( 67,373)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,870 1,886 2,170
Loss (gain) on sale of property, plant and equipment ( 13) 361 59
Changes in assets and liabilities:
Accounts receivable ( 63) ( 846) 5,350
Inventories ( 716) ( 325) 769
Prepaid expenses and other current assets 115 564 262
Accounts payable ( 4,045) 1,151 2,098
Accrued interest and expenses 26,380 29,376 25,369
Federal and state income taxes - ( 24) ( 20)
Other, net ( 158) ( 193) ( 427)
------- ------- -------
Cash used in operating activities ( 62,135) ( 54,174) ( 31,743)
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment ( 1,371) ( 3,010) ( 679)
Proceeds from disposition of property,
plant and equipment 21 87 159
Loan to affiliate ( -) ( 500) -
------- ------- -------
Cash used in investing activities ( 1,350) ( 3,423) ( 520)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 51,141 52,817 32,623
Proceeds from revolving line of credit and term loan, net 27,480 - -
Overdraft 2,212 ( 715) ( 6)
Proceeds from sale (repurchases) of
receivables to (from) Factor, net ( 15,554) 5,851 ( 4,740)
Repayment of long-term debt ( 234) ( 180) ( 170)
------- ------- -------
Cash provided by financing activities 65,045 57,773 27,707
------- ------- -------
Increase (decrease) in cash and cash equivalents 1,560 176 ( 4,556)
Cash and cash equivalents:
Beginning of period 605 429 4,985
------- ------- -------
End of period $ 2,165 605 429
======= ======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $ 44,837 38,516 34,406
Income taxes - - -
Adjustment to minimum pension liability ( 326) ( 186) ( 417)
See accompanying notes to consolidated financial statements.
- 22 -
23
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.
As further described in Note 14, Fairwood Corporation is currently
operating as debtor in possession under Section 1108 of the United States
Bankruptcy Code. The Chapter 11 case pertains only to Fairwood Corporation.
- 23 -
24
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Description of Business
(continued)
Inventories
All inventories (comprised of materials, labor and overhead costs) are
valued at the lower of cost or market using the last-in, first-out (LIFO)
method. A LIFO liquidation occurred during 1997 that resulted in reductions of
cost of sales of approximately $52,000.
The components of inventory are as follows (in thousands):
1998 1997
---- ----
Raw materials $ 10,740 11,809
In process 3,054 3,591
Finished goods 8,579 6,220
------ ------
Inventories at first-in, first-out 22,373 21,620
LIFO reserve 7,707 7,670
------ ------
Inventories at LIFO $ 14,666 13,950
====== ======
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 improvements 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 an allowance for 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.
- 24 -
25
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.
Use of Estimates
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 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 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.
- 25 -
26
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Description of Business
(continued)
Comprehensive Income
On January 1, 1998, Fairwood adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presenting of financial statements. Comprehensive income of Fairwood
consists of an additional pension liability and net loss. The Statement
requires only additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position or results of
operations.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 financial statement presentation.
(2) Revolving credit and term loan agreement
On February 11, 1998, Futorian entered into a revolving credit and term
loan agreement ("agreement") with a domestic corporation which replaced the
two factoring agreements of its two operating divisions, 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 collateralized by accounts
receivable, inventory, property and equipment and other assets and has
priority over Fairwood's Long-term debt (Note 6). 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. The terms of the agreement provide for maintenance of
certain financial covenants which were waived for 1998. The amount
outstanding under the revolving line of credit and term loan, including
accrued interest, totaled $27,480,000 at December 31, 1998, and Futorian
continues to use the facility. The fair market value of this revolving
credit and term loan agreement approximates book value. The interest rate at
December 31, 1998 was 8.75 percent.
- 26 -
27
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Factoring Agreement
Pursuant to a factoring agreement, the majority of Stratford's, a
division of Futorian, trade receivables were factored on a recourse and
nonrecourse basis. Receivables sold for which Stratford had not received
written credit approval from the factor were with recourse. Only those
receivables sold for which Stratford had 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. Futorian had $15,554 outstanding under this agreement
at December 31, 1997. This agreement was replaced with the revolving credit
and term loan agreement in 1998.
- 27 -
28
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) 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.
(5) 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.
The United States Bankruptcy Court has approved the settlement of
issues arising out of an Internal Revenue Service ("IRS") audit examination
of the consolidated Federal income tax returns of Fairwood and its
subsidiaries for the periods ended July 11, 1988 through December 31, 1991.
The exam resulted in a net federal tax cost of $5.0 million after considering
all available carrybacks, all of which has been accrued in prior years. The net
cost includes the additional tax due, statutory interest, the benefit of a
Tentative Refund provided for as part of the settlement, and the benefit of
carrying back 1993 net operating losses to recover a portion of the additional
tax paid under the claim. Also, as part of the settlement, the Company's net
operating loss carryforwards were reduced by approximately $102 million.
Management is currently reviewing the state tax effect of this
settlement and believes there will not be a material impact. As approved by
the Bankruptcy Court, the settlement will be funded by additional borrowings
under Consolidated Furniture's existing revolving Credit Agreement.
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,
-----------------------------------
1998 1997 1995
-------- -------- ------
Expected tax benefit computed
at U.S. rate $ (29,072) (29,282) (22,906)
Increase in valuation allowance 27,847 32,902 24,802
State taxes, net of
Federal benefit ( 3,370) ( 3,411) ( 2,658)
Nondeductible interest 4,213 - -
Other 382 ( 209) 762
------ ------ ------
Total provision for income taxes $ - - -
====== ====== ======
- 28 -
29
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Income Taxes (continued)
The tax effects of temporary differences as of December 31, in
thousands, are as follows:
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $109,496 118,486
AMT credit carryforward 1,480 -
Accounts receivable 522 1,613
Vacation and holiday pay 333 306
Accrued expenses 2,133 3,214
Interest on merger debentures 3,444 3,963
Valuation allowance (115,451) (126,403)
------- -------
$ 1,957 1,179
======= =======
Deferred tax liabilities:
Property, plant and equipment $ 1,957 1,179
======= =======
The valuation allowance for deferred tax assets as of January 1, 1998
and 1997 were $126,403,000 and $93,501,000, respectively. The net changes in
the total valuation allowance for the years ended December 31, 1998 and 1997
was a decrease of $10,952,000 and an increase of $32,902,000, respectively.
At December 31, 1998, the Company's net operating loss carryforwards of
approximately $288,000,000 expire in various years through 2018.
Due to certain changes in the ownership structure of Fairwood's
shareholders', Fairwood's net operating losses and other tax attributes may
be further limited by the Internal Revenue Code (Code) Sections 382 and 383.
Net current deferred income tax assets of $1,957,000 and $1,179,000 at
December 31, 1998 and 1997, respectively, are included in other current
assets in the accompanying consolidated balance sheets.
(6) 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
- 29 -
30
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Long-term Debt (continued)
January 1999. In December 1998, Consolidated Furniture entered into the
Twenty-third Amendment to the Credit Agreement which increased the amount of
the Revolving Credit Commitment to $327,500,000 and extended the due date to
January 3, 2000. The Twenty-third Amendment also 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 4, 1999, which extended the due date to January 3,
2000. The interest rate under the Credit Agreement is prime plus 1.5
percent, which averaged approximately 9.75 percent for 1998.
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 collateralized 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.
The outstanding debt at December 31, was as follows (in thousands):
December 31,
1998
Interest
Debt 1998 1997 Rates
---- -------- -------- ------------
Revolving credit, due 2000 $ 305,855 254,714 9-1/4%
Senior subordinated
debentures, due 2000 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 2,051 2,095 8-1/2%
Other, due 1998 - 190 6%
------- -------
556,687 505,780
Less current maturities 168,826 169,014
------- -------
$ 387,861 336,766
======= =======
All outstanding debt and accrued interest at December 31, 1998,
excluding the $62.9 million of outstanding merger debentures plus $45.1
million accrued interest thereon, and the mortgage amount of $2.1 million is
payable to CSCL.
- 30 -
31
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Long-term Debt (continued)
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 $114.8 million on the Fairwood Debentures, which includes $69.7
million due to CSCL, is included in accrued interest in the accompanying
consolidated balance sheet as of December 31, 1998.
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.
The fair market value of the debentures and revolving credit debt cannot
be reasonably estimated considering Fairwood's ongoing financial difficulties
(Note 14). The fair market value of the mortgage payable approximates book
value.
Annual maturities of long-term debt are as follows:
Years ending December 31, Amount
------------------------- ------
1999 $168,826
2000 385,905
2001 55
2002 60
2003 65
Thereafter 1,776
--------
556,687
Less current portion 168,826
--------
$387,861
========
(7) 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, 1998 and 1997,
dividends payable were approximately $407,000 and $325,000, respectively.
(8) 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.
- 31 -
32
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) 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.
Information with respect to the retirement plans for 1998 and 1997 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):
1998 1997
---- ----
Change in benefit obligations:
Benefit obligation at beginning of year $ 16,901 14,424
Interest cost 1,131 1,111
Actuarial (gain) loss ( 921) 1,847
Monthly benefits paid ( 521) ( 481)
Lump sum distributions ( 4,416) -
Aunnity purchase ( 7,892) -
Income recognized due to plan settlement 564 -
--------- ------
Benefit obligation at end of year 4,846 16,901
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year 14,280 12,331
Actual return on plan assets 3,350 2,289
Employer contributions 813 682
Benefits paid, distributions, and annuity purchase (12,829) ( 481)
Expenses ( 610) ( 541)
------ ------
Fair value of plan assets at beginning of year 5,004 14,280
------ ------
Funded status 158 ( 2,621)
Unrecognized actuarial gain (loss) ( 176) 1,343
------- --------
Net amount recognized $ ( 18) ( 1,278)
===== ======
Amounts recognized in the consolidated balance
sheet consist of:
Accrued benefit liability ( 45) ( 1,631)
Accumulated other comprehensive income ( 27) ( 1,353)
----- -------
Net amount recognized $ ( 18) ( 1,278)
===== ======
- 32 -
33
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Employee Benefit Plans (continued)
Pension expense is summarized, in thousands, as follows:
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Components of net periodic benefit cost
Current service cost $ - - -
Interest cost 1,131 1,111 1,062
Return on assets (2,739) (2,546) ( 785)
Deferral of asset gain (loss) 1,455 1,442 ( 233)
----- ----- -----
Net periodic benefit cost ( 153) 7 44
Income recognized due to plan settlement 294 - -
----- ----- -----
Net pension (income) expense for 1998 $ ( 447) 7 44
===== ===== =====
Assumptions:
Discount rate 6.85% 7.00% 7.00%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
Pay increase N/A N/A N/A
Cost of living 3.00% 3.00% 3.00%
The table presents the aggregate of the plan for salaried employees and
the plan for hourly employees. The salaried employees plan's benefit
obligations and fair value of assets are $2,260,000 and $2,070,000,
respectively. The hourly employees plan's benefit obligations and fair value
of assets are $2,586,000 and $2,933,000, respectively.
During 1998 Fairwood directed the plan to pay lump sum distributions to
settle a portion of Fairwood's obligation under the plan. Furthermore, on
December 29, 1998 Fairwood purchased an annuity contract settling an additional
$7,892,000 of the accumulated pension benefit obligation. As a result
of the settlement, Fairwood recognized a loss of $564,000. The discount rate
for 1998 has been reduced to reflect the actual price of this purchased annuity
contract.
Effective June 1, 1993, the following defined contribution plans were
adopted by the Company's operating companies:
Barcalounger Retirement Plan
This non-contributory plan is designed to provide income at retirement
and covers all Barcalounger employees with at least one year of service.
Annual company contributions are based on individual participant's earnings
and length of service. For the years ended December 31, 1998, 1997 and 1996,
Barcalounger contributions were $144,000, $140,000 and $140,000, respectively.
- 33 -
34
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Employee Benefit Plans (continued)
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, 1998, 1997 and 1996, Barcalounger matching contributions were
$54,000, $47,000 and $42,000, 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, 1998, 1997 and 1996
Stratford obligations were $600,000, $585,000 and $802,000, 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, 1998, 1997 and 1996
Consolidated Furniture contributions were $2,000, $2,000 and $2,000,
respectively.
(10) Related party transactions
In November 1995, Stratford entered into a manufacturing agreement
("Agreement") with Simmons Upholstered Furniture Corporation ("Simmons"), an
affiliate through common ownership of Futorian. Under this agreement,
Stratford manufactures product for and supplies product on behalf of Simmons
and provides sales 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.
As a result of this Agreement, Stratford recognized approximately
$6,665,000, $11,200,000 and $12,722,000 of revenue in 1998, 1997 and 1996,
respectively, from the manufacture and supply of product and was reimbursed by
Simmons $600,000 in each of the three years for new product development and
$2,625,000, $2,029,000 and $2,257,000, 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. Also in 1998 Stratford recognized as a
reduction in general and administrative expenses, $2,164,000 of reimbursements
for general and administrative expenses. 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, 1998 and 1997, approximately $4,089,000 and $1,420,000,
respectively, was due from Simmons under this Agreement.
- 34 -
35
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Rental Commitments
The Company and its subsidiaries lease certain manufacturing and
warehousing facilities, equipment (primarily transportation equipment), and
warehouse and showroom facilities (operating leases).
Future minimum lease payments at December 31, 1998 under all
non-cancelable operating leases are as follows (In thousands):
Years ending December 31, Amount
------------------------- ------
1999 $ 1,659
2000 1,010
2001 506
2002 315
2003 295
Thereafter 3,025
-------
$ 6,810
=======
It is expected that, in the normal course of business, non-cancelable
leases that expire will be renewed or replaced.
Rental expense is summarized, in thousands, as follows:
Years ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Minimum Rentals
(including cancel-
able leases) $ 1,998 2,227 2,115
Sublease rentals ( 262) ( 254) ( 291)
------ ------ ------
$ 1,736 1,973 1,824
====== ====== ======
(12) Significant Customer
Sears Roebuck and Co. accounted for approximately 8 percent, 9 percent,
and 13 percent of the Company's sales in each of the years 1998, 1997 and
1995, respectively.
(13) 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.
- 35 -
36
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Contingencies (continued)
The Company is involved in a case involving a house fire allegedly
started by a cigarette lighter allegedly applied to a sofa sold by Stratford
division. Plantiffs seek unspecified compensatory and punitive damages. The
case was filed in June 1998 and is in discovery. This case is covered by
insurance, subject to a $100,000 deductible. The Company has accrued
$100,000 for this case. The ultimate outcome of this case and the ultimate
obligation to the Company cannot be reasonably estimated.
There are other contingent liabilities at December 31, 1998 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.
(14) 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 6, interest on Fairwood's senior
subordinated pay-in-kind debentures and merger debentures was not paid on
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
collaterize 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 1999.
Throughout portions of 1998, 1997, and 1996, Consolidated Furniture did
not generate sufficient funds from operations to fully meet its interest
obligations related to its long-term indebtedness. Consolidated Furniture
funded these interest obligations through increased borrowings from CSCL
under the Credit Agreement.
Consolidated Furniture is 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 1999 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
- 36 -
37
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Liquidity (continued)
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.
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
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 6, 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.
On January 3, 1996, certain holders of the Fairwood public debentures
(the "Bondholders") filed an involuntary Chapter 7 petition against Fairwood in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain Citicorp
affiliates filed a motion in response to the involuntary filing seeking to
dismiss the petition. By order dated December 4, 1996, the Bankruptcy Court
denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert
the Chapter 7 case to a case under Chapter 11. As of the date hereof, Fairwood
continues to operate as a debtor in possession under Section 1108 of the
Bankruptcy Code. 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. In April 1997 the Bondholders filed a Motion with the Bankruptcy
Court seeking to convert Fairwood's Chapter 11 case to a case under Chapter 7
or, alternatively, by order dated March 2, 1999, the Bondholders' motion to
convert the case or, alternatively, for the appointment of a Chapter 11 trustee,
was denied in its entirety. The Bondholders' have taken an appeal of the
ruling. These companies are expecting to continue to operate in the normal
course of business. Fairwood is in the process of formulating a plan of
reorganization which it expects to file in the next several weeks. The plan will
address, among other things, Fairwood's existing capital structure.
- 37 -
38
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Segment Reporting
In June 1997, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 131 (SFAS No. 131),
"Disclosure about Segments of an Enterprise and Related Information." SFAS
No. 131 requires Fairwood to present certain information about each
identified segment that exceeds certain quantitative thresholds for revenue,
profit or loss, and assets.
Fairwood's reportable segments are strategic business units that offer
different products. They are managed separately because each business has
distinctly different markets and they have separate marketing and
manufacturing facilities.
Stratford Division:
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.
Barcalounger Division:
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 required segment financial information, in thousands, for the years
ending December 31, are as follows:
1998 Stratford Barcalounger Corporate Eliminations Totals
---- --------- ------------ --------- ------------ ------
Revenues from external
customers $ 99,436 $ 54,738 $ - $ - $ 154,174
Intersegment income 2,184 - - (2,184) -
Interest income 98 - 52 - 150
Interest expense 2,968 22 68,873 - 71,863
Depreciation and
amortization 1,570 300 - - 1,870
Segment profit (loss) ( 19,346) 4,353 ( 70,512) - (85,505)
Segment assets 35,816 19,281 3,066 - 58,163
Expenditures for
segment assets 1,124 247 - - 1,371
- 38 -
39
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Segment Reporting (continued)
1997 Stratford Barcalounger Corporate Eliminations Totals
---- --------- ------------ --------- ------------ ------
Revenues from external
customers $ 98,432 $ 49,681 $ - $ - $ 148,113
Intersegment income 2,181 - - (2,181) -
Interest income - 23 88 - 111
Interest expense 1,764 169 63,614 - 65,547
Depreciation and
amortization 1,616 270 - - 1,886
Segment profit (loss) (24,114) 3,559 (65,569) - (86,124)
Segment assets 36,998 16,927 2,840 - 56,765
Expenditures for
segment assets 2,671 339 - - 3,010
1996 Stratford Barcalounger Corporate Eliminations Totals
---- --------- ------------ --------- ------------ ------
Revenues from external
customers $ 111,423 $ 39,893 $ - $ - $ 151,316
Intersegment income 2,537 - - (2,537) -
Interest income - 43 155 - 198
Interest expense 1,783 - 59,650 - 61,433
Depreciation and
amortization 1,922 248 - - 2,170
Segment profit (loss) ( 7,893) 2,605 (62,085) - ( 67,373)
Segment assets 36,637 15,350 4,293 - 56,280
Expenditures for
segment assets 214 465 - - 679
Geographical information
------------------------
Revenues
--------
1998 1997 1996
-------- -------- ------
United States $ 151,017 144,864 148,204
Canada 1,301 1,470 810
Other 1,856 1,779 2,302
------- ------- -------
$ 154,174 148,113 151,316
======= ======= =======
Long-lives assets in
the United States $ 12,494 13,001 12,325
======= ======= =======
- 39 -
40
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 67 1990 Chief Financial Officer, Executive
Vice President, Treasurer and
Controller since September 1989.
Mr. Sganga has also been, inter
alia, Chief Financial Officer,
Executive Vice President,
Controller and Treasurer of
Consolidated Furniture and Vice
President and Treasurer 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 51 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.
- 40 -
41
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, 1998:
Date Assumed
Name Age Position Position
---- --- -------- --------
Lawrence Adelman 53 Chief Operating Officer May 1997
Stratford Division of
Futorian Furnishings, Inc.
Wayne T. Stephens 48 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:
Effective March 1999, Lawrence Adelman resigned as Chief Executive
Officer of Stratford, a Division of Futorian Furnishings, Inc. Prior to his
resignation he had been employed by Stratford since May 1997. 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.
- 41 -
42
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers' Compensation
Information concerning the compensation earned by the above named
executive officers is set forth in the Summary Compensation Table.
Summary Compensation Table
Name and Annual Compensation
Principal ------------------- All Other
Position Year Salary Bonus Compensation
- -------- ---- ------ ----- ------------
John B. Sganga 1998 $150,000 $ - $ 7,500 (1)
Executive VP 1997 150,000 - 7,500 (1)
and CFO 1996 150,000 25,000 9,113 (1)
Lawrence Adelman 1998 275,000 - -
Chairman and CEO 1997 170,994 - -
Stratford
Gary L. Parks 1997 154,641 - 39,409 (2)
Stratford 1996 96,058 9,250 2,290 (2)
Wayne T. Stephens 1998 185,000 217,375 4,211 (3)
President & CEO 1997 185,000 217,375 1,910 (3)
Barcalounger 1996 185,000 96,885 3,661 (3)
(1) 1998 and 1997 amounts represent 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.
(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) 1998 amount represents company contributions to the investment plan of
$3,018 and $1,193 for the value of the use of a company vehicle. 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.
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.
- 42 -
43
Retirement Plan
Messrs. Sganga, Stephens, Adelman and Parks, 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 1998, 1997 and 1996, such contributions for Mr. Sganga were $1,500,
$1,500 and $1,750, 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 $3,018, $705 and $2,203 in 1998, 1997 and 1996, 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 1998 Plan Year were $588,563,
including awards of $232,712 for Mr. Stephens. 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.
Directors' Compensation
As of the date of this Annual Report on Form 10-K, the Company has not
determined what compensation directors who are not officers of the Company
will receive for their service as director. No compensation was paid to
directors for their services as directors in 1996, 1997 or 1998.
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.
- 43 -
44
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, 1999, 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, 1999. 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.
- 44 -
45
Ownership by Directors and Officers
As of February 28, 1999, 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, 1998 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 1998 and at December 31, 1998, the largest aggregate amount of
indebtedness outstanding that was payable to CSCL was approximately $491.7
million. See Note 5, Long-term Debt, in the Notes to Consolidated Financial
Statements set forth in Item 8. During 1998, the Company borrowed
approximately $51.1 million from CSCL and made no payments to CSCL. During
1999 it is anticipated that approximately $55.5 million will be borrowed from
CSCL and that no repayments to CSCL will be made. It is also anticipated
that interest due to CSCL on the senior subordinated pay-in-kind debentures,
which interest approximates $16.4 million, will not be paid.
399 Venture Partners, Inc. ("VPI"), an affiliate of CVCL owns a
majority of Furnishings International Inc. (formerly 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 entered into a
manufacturing agreement ("Agreement") with Simmons Upholstered Furniture
Corporation ("Simmons"), an affiliate through common ownership of Futorian.
Under this agreement, Stratford manufactures product for and supplies product
on behalf of Simmons and provides sales 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.
(See Note 10 to the Company's Consolidated Financial Statements set forth in
Item 8).
- 45 -
46
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................................... 18
Consolidated Balance Sheets as of December 31, 1998 and 1997... 19
Consolidated Statements of Operations for the Years ended
December 31, 1998, 1997 and 1996............................. 20
Consolidated Statements of Shareowners' Equity (Deficit)
for the Years ended December 31, 1998, 1997 and 1996......... 21
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996............................. 22
Notes to Consolidated Financial Statements .................... 23-39
2. Financial Statement Schedule
----------------------------
For the three years ended December 31, 1998:
Schedule II--Valuation and Qualifying Accounts
and Reserves................................... 52
Other schedules are omitted because of the absence of
conditions under which they are required.
- 46 -
47
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).
(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")).
- 47 -
48
(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).
(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).
- 48 -
49
(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).
(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")).
- 49 -
50
(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, (incorporated by reference to Exhibit 4.47 of
the 1997 Form 10-K).
(4.48) Eighteenth Amendment, dated as of July 1, 1997, to Credit
Agreement, (incorporated by reference to Exhibit 4.48 of
the 1997 Form 10-K).
(4.49) Mortgage, Security Agreement, Assignment of Rents and
Financing Statement, dated November 12, 1997, by Futorian
Furnishings, Inc. in favor of Banco Popular, (incorporated
by reference to Exhibit 4.49 of the 1997 Form 10-K).
(4.50) Mortgage Note, dated November 12, 1997, by Futorian
Furnishings, Inc. and Banco Popular, (incorporated by
reference to Exhibit 4.50 of the 1997 Form 10-K).
(4.51) Nineteenth Amendment, dated as of January 30, 1998, to
Credit Agreement, (incorporated by reference to Exhibit
4.51 of the 1997 Form 10-K).
(4.52) Twentieth Amendment, dated as of January 31, 1998, to
Credit Agreement, (incorporated by reference to Exhibit
4.52 of the 1997 Form 10-K).
(4.53) Loan and Security Agreement, dated February 11, 1998,
between Congressional Financial Corporation (CENTRAL) and
Futorian Furnishings, Inc., formerly Furniture Comfort
Corporation, (incorporated by reference to Exhibit 4.53 of
the 1997 Form 10-K).
(4.54) Seventh Amendment, dated as of January 2, 1998, to the
Senior Subordinated Debentures, (incorporated by reference
to Exhibit 4.54 of the 1997 Form 10-K).
(4.55) Twenty-first Amendment, dated as of February 1, 1998, to
Credit Agreement.
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(4.56) Twenty-second Amendment, dated as of September 30, 1998, to
Credit Agreement.
(4.57) Twenty-third Amendment, dated as of December 15, 1998, to
Credit Agreement.
(4.58) Eighth Amendment, dated as of January 4, 1999, to the
Senior Subordinated Debentures.
(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, 1998.
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52
Schedule II
FAIRWOOD CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
(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:
1998
----
Allowance for discounts $ 51 398 378 71
Allowance for doubtful
accounts 4,165 ( 544) 2,374 1,247
Allowance for estimated
loss on claims - - - -
------ ------ ------ ------
$ 4,216 ( 146) 2,752 1,318
====== ====== ====== ======
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
====== ====== ====== ======
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53
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, 1999
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated.
Title
/s/ John B. Sganga Director and Chief
- ---------------------- Financial Officer,
John B. Sganga Executive Vice President,
Secretary and Treasurer
(principal executive,
financial and accounting
officer)
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54
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1999 by the following person on
behalf of the Registrant and in the capacity indicated.
Title
-----
/s/ M. Saleem Muqaddam Director
- ------------------------------
M. Saleem Muqaddam
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