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