<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 1995
--------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ---------
Commission file number 0-18446
Fairwood Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3472113
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Center
1201 N. Orange St., Suite 790, Wilmington, DE 19801
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(302) 884-6749
--------------
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
<TABLE>
<CAPTION>
Outstanding at
Class April 1, 1995
----- ----------------
<S> <C>
Class A Voting, $.01 Par Value 500
- ------------------------------ ------------------------
Class B Non-Voting, $.01 Par Value 999,800
- ---------------------------------- ------------------------
</TABLE>
<PAGE> 2
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
April 1, December 31,
Assets 1995 1994
------ ------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,674 4,615
-------- --------
Accounts and notes receivable:
Trade 37,703 38,034
Escrows from sale of subsidiary 750 15,750
Other 1,761 1,812
-------- --------
40,214 55,596
Less allowance for discounts and doubtful accounts 2,922 2,756
-------- --------
37,292 52,840
-------- --------
Inventories 21,559 18,813
Prepaid expenses and other current assets 2,988 2,499
-------- --------
Total current assets 65,513 78,767
-------- --------
Property, plant and equipment, at cost 21,076 20,013
Less accumulated depreciation and amortization 6,348 5,948
-------- --------
14,728 14,065
-------- --------
Other assets 2,587 2,732
-------- --------
$ 82,828 95,564
======== ========
</TABLE>
(Continued)
- 2 -
<PAGE> 3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
April 1, December 31,
Liabilities and Deficit 1995 1994
----------------------- ------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Current Liabilites:
Current maturities of long-term debt:
Revolving credit 163,052 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 -
Merger debentures 62,928 -
Other 160 160
Accounts payable 10,784 8,621
Accrued expenses 25,784 20,740
Federal and state income taxes 5,708 5,725
-------- --------
Total current liabilities 454,269 35,246
-------- --------
Long-term debt:
Revolving credit - 165,870
Senior subordinated debentures - 80,000
Senior subordinated pay-in-kind debentures - 105,853
Merger debentures - 62,928
Other 540 540
-------- --------
540 415,191
-------- --------
Deferred income taxes 1,359 1,359
Other liabilities 4,033 4,346
-------- --------
5,392 5,705
-------- --------
Redeemable preferred stock:
Junior preferred, cumulative, par value $.01 per share 100 100
-------- --------
Common stock and other shareowners' deficit:
Common stock and additional paid-in capital 55,948 55,948
Minimum pension liability ( 1,367) ( 1,367)
Retained deficit ( 432,054) ( 415,259)
-------- --------
( 377,473) ( 360,678)
-------- --------
$ 82,828 95,564
======== ========
</TABLE>
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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<PAGE> 4
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
April 1, April 2,
1995 1994
-------- --------
<S> <C> <C>
Net sales $ 55,443 68,193
------- -------
Cost of sales 49,761 58,453
Selling, administrative and
general expenses 7,835 9,781
------- -------
57,596 68,234
------- -------
Operating loss ( 2,153) ( 41)
------- -------
Interest income 90 21
Interest on indebtedness ( 14,411) ( 12,471)
Other expenses, net ( 310) ( 501)
------- -------
Loss before income taxes ( 16,784) ( 12,992)
Provision for income taxes - -
------- -------
Net loss $( 16,784) ( 12,992)
======= =======
</TABLE>
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements
- 4 -
<PAGE> 5
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
April 1, April 2,
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 16,784) ( 12,992)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 508 1,018
Gain on disposal of property, plant and equipment ( 6) -
Current period interest converted to pay-in-kind
debentures - 5,790
Changes in assets and liabilities:
Accounts receivable 548 801
Inventories ( 2,746) 110
Prepaid expenses and other current assets ( 489) ( 318)
Accounts payable 2,163 ( 503)
Accrued expenses 5,044 ( 1,966)
Federal and state income taxes ( 17) ( 24)
Other, net ( 168) 461
------- -------
Cash provided (used) - operating activities ( 11,947) ( 7,623)
------- -------
Cash flows from investing activities:
Proceeds from sale of Super Sagless assets 15,000
Dispostion of property, plant and equipment 6 -
Capital expenditures ( 1,171) ( 779)
------- -------
Cash used - investing activities 13,835 ( 779)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 11,182 13,710
Repayment of long-term debt ( 14,000) ( 2,500)
Dividends ( 11) ( 9)
------- -------
Cash provided (used) - financing activities ( 2,829) 11,201
------- -------
Increase (decrease) in cash and cash equivalents ( 941) 2,799
Cash and cash equivalents:
Beginning of period 4,615 3,968
------- -------
End of period $ 3,674 6,767
======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $ 11,182 10,246
Income taxes 17 54
Conversion of accrued interest to pay-in-kind debentures - 11,581
</TABLE>
Cash and cash equivalents include cash in banks and highly-liquid short-term
investments having a maturity of three months or less on date of purchase.
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
- 5 -
<PAGE> 6
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, to present fairly the results of
operations and cash flows for the three months ended April 1, 1995 and
April 2, 1994, and the financial position at April 1, 1995 and
December 31, 1994. The results of operations for the three-month
period ended April 1, 1995 are not necessarily indicative of the
results to be expected for the full year.
2. The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial
statements included in the 1994 annual report on Form 10-K.
3. All inventories (materials, labor and overhead) are valued at the
lower of cost or market using the last-in, first-out (LIFO) method.
The components of inventory, in thousands, are as follows:
<TABLE>
<CAPTION>
April 1, 1995 December 31, 1994
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
Raw materials $ 15,833 14,696
In process 4,326 4,193
Finished goods 14,005 11,914
------ ------
Inventories at
first-in, first out 34,164 30,803
LIFO reserve 12,605 11,990
------ ------
Inventories at LIFO $ 21,559 18,813
====== ======
</TABLE>
4. No provision for income taxes have been provided during the three
months ended April 1, 1995 and April 2, 1994 as the Company is in a
net operating loss carryforward position.
5. 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 to the Company that
approximate a net tax cost of $103 million, including interest through
April 1, 1995. The Company believes the IRS's position with respect
to these issues is incorrect and is vigorously contesting the proposed
adjustments. The Company cannot predict the ultimate outcome nor the
impact on its financial statements, if any.
6. On April 1, 1995, the Company failed to make the required interest
payments due on the senior subordinated pay-in-kind debentures and
merger debentures (collectively, the "Fairwood Debentures"). Counsel
for the Company has had preliminary discussions with counsel for a
group of Fairwood Debenture holders, who are in the process of
attempting to form an ad hoc committee to address the payment default
under the Fairwood Debentures.
- 6 -
<PAGE> 7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
7. Consolidated Furniture's revolving line of credit and senior
subordinated debentures mature on January 2, 1996 and, accordingly,
have been classified as current liabilities in the accompanying
consolidated balance sheet of the Company as of April 1, 1995.
Consolidated Furniture expects to negotiate an extension of these
maturity dates or refinance such indebtedness prior to January 2,
1996.
Based on the terms of the Fairwood Debentures, the failure to make the
April 1, 1995 interest payment (See note 6) 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, subject to a 180-day acceleration blockage
provision. Upon acceleration, the Fairwood Debentures would be
currently due and payable. Accordingly, the Fairwood Debentures have
been classified as current liabilities in the accompanying
consolidated balance sheet as of April 1, 1995.
- 7 -
<PAGE> 8
Item 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At April 1, 1995, the Company had short- and long-term debt of approximately
$412.5 million of which approximately $412.0 million was current. Short- and
long-term debt was approximately $415.4 million at December 31, 1994, of which
$348.9 million is owed to Court Square Capital Limited ("CSCL"), an affiliate.
The Company's outstanding indebtedness includes its senior subordinated
pay-in-kind debentures and merger debentures (collectively, the "Fairwood
Debentures"). The Company had the option during the first five years to pay
interest on the Fairwood Debentures either through cash payments or through the
distribution of additional securities.
The Company is a holding company with no operations. The Company has
effectively no cash flow from its subsidiaries because the cash produced by the
operations of the subsidiaries is not expected for the foreseeable future to be
sufficient to permit the subsidiaries to transfer funds to the Company
sufficient to make cash interest payments on the Fairwood Debentures. The
Company's sole asset is the stock of Consolidated Furniture Corporation
("Consolidated Furniture"), its wholly-owned subsidiary. Fairwood's
obligations under the Fairwood Debentures are secured by Fairwood's pledge of
its interest in Consolidated Furniture's stock. Court Square Capital Limited
("CSCL"), as holder of Fairwood's senior subordinated pay-in-kind debentures,
has a first priority security interest in all of the outstanding stock of
Consolidated Furniture, and the holders of the merger debentures have a second
priority security interest in such stock. The Fairwood Debentures are
obligations of the Company. Consolidated Furniture is not an obligor under the
Fairwood Debentures. However, Consolidated Furniture is an obligor under the
Credit Agreement with CSCL. The Credit Agreement does not permit Consolidated
Furniture to borrow funds to enable the Company to make cash interest payments
on the Fairwood Debentures. The borrowings under the Credit Agreement are
secured by substantially all of the assets of Consolidated Furniture.
Consolidated Furniture is also a holding company without operations. Its
primary asset is the outstanding stock of Furniture Comfort Corporation
("Furniture Comfort"), which has operations that it conducts through its two
divisions, Stratford and Barcalounger. Furniture Comfort is also a direct
obligor under the Credit Agreement.
On April 1, 1995, the Company failed to make the required interest payments due
on the Fairwood Debentures and the Company does not expect to make the cash
interest payments required under the Fairwood Debentures on October 1, 1995.
Counsel for the Company has had preliminary discussions with counsel for a
group of Fairwood Debenture holders, who are in the process of attempting to
form an ad hoc committee to address the payment default under the Fairwood
Debentures.
- 8 -
<PAGE> 9
Based on the terms of the Fairwood Debentures, the failure to make the April 1,
1995 interest payment (see note 6) 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, subject
to a 180-day acceleration blockage provision. Upon acceleration, the Fairwood
Debentures would be due and payable. Accordingly, the Fairwood Debentures have
been classified as current liabilities in the accompanying consolidated balance
sheet as of April 1, 1995.
Consolidated Furniture, the Company's subsidiary, is expected to service its
interest payment obligations from its cash flow from operations and available
credit facilities. Throughout 1994 and the first three months of 1995,
Consolidated Furniture funded interest obligations related to long-term
indebtedness on the revolving line of credit and the senior subordinated
debentures through increased borrowings from CSCL under the Credit Agreement.
Borrowings from CSCL during the first quarter of 1995 were approximately $11.7
million. Repayments to CSCL during the quarter were $14 million, which were a
portion of the released escrowed proceeds received during the quarter from the
sale of the assets of Super Sagless Corporation ("Super Sagless"), that took
place in July 1994. The Company is dependent upon CSCL for funding of its debt
service costs. CSCL has in the past increased its revolving credit line to
Consolidated Furniture in order for Consolidated Furniture to meet its debt
service obligations on the revolving line of credit and the senior subordinated
debentures. Under the Credit Agreement, Consolidated Furniture and its
subsidiaries are generally restricted from transferring moneys to the Company
with the exception of amounts for (a) specified administrative expenses of the
Company not exceeding $275,000 per year and (b) payment of income taxes. The
senior subordinated debentures, senior subordinated pay-in-kind debentures and
merger debentures also have certain restrictions as to the payment and transfer
of moneys. Management believes that cash flow from operations and funding from
CSCL will be adequate to meet Consolidated Furniture's obligations on the
revolving line of credit and the senior subordinated debentures through
December 31, 1995.
Consolidated furniture's revolving line of credit and senior subordinated
debentures mature on January 2, 1996 and, accordingly, have been classified as
current liabilities in the accompanying consolidated balance sheet as of April
1, 1995. Consolidated Furniture expects to negotiate an extension of these
maturity dates with CSCL or refinance such indebtedness prior to January 2,
1996. However, there can be no assurance that the Company will be able to
negotiate such an extension, or that the terms of such extension or refinancing
will not be on terms less favorable than those currently in place.
There can be no assurance that Fairwood will be able to continue as a going
concern. The discussions between counsel for Fairwood and counsel for certain
holders of the merger debentures are at too preliminary a stage for the likely
results to be known. Consolidated Furniture, however expects to negotiate an
extension of the maturity date of the Credit Agreement and senior subordinated
debentures, or refinance such indebtedness prior to its maturity. There can be
no assurance, however, that Consolidated Furniture will be able to complete
such an extension or refinancing or that the terms of such extension or
refinancing will not be on terms less favorable to Consolidated Furniture than
those currently in place.
For a discussion of the status of the IRS examination, refer to Fairwood's
audited consolidated financial statements as of December 31, 1994 included in
Fairwood's Form 10-K, and footnote 5 to Fairwood's unaudited condensed
consolidated financial statements included herein.
- 9 -
<PAGE> 10
Results of Operations
Three Months Ended April 1, 1995 Versus Three Months Ended April 2, 1994
The following discussion presents the material changes in results of operations
which have occurred in the first quarter of 1995 in comparison to the same
period in 1994.
Consolidated net sales were approximately $55.4 million in the first quarter of
1995, a decrease of 18.7% from last year's first quarter consolidated net sales
of approximately $68.2 million, due primarily to the sale of substantially all
of the assets and liabilities of Super Sagless Corporation in July 1994.
Excluding Super Sagless, net sales for the first quarter of 1995 were
approximately $55.4 million compared to approximately $56.1 for the first
quarter of 1994, a decrease of 1.1%.
First quarter 1995 net sales (including intercompany sales) by the Stratford
Company decreased 1.9% to approximately $45.3 million as compared to $46.2
million for the comparable period in 1994. Total volume decreased 6.4% during
the first quarter of 1995 as compared to 1994, primarily as a result of lower
sales to smaller retail customers. Sales to the smaller retail customers have
historically generated less favorable gross margins than sales to the larger,
national customers. Sales to the larger, national retail customers increased
8.9%. Average selling prices increased between 3% and 7%, depending on the
type of product and customer.
First quarter 1995 net sales by Barcalounger increased 9.0% to approximately
$10.8 million as compared to $9.9 million in 1994. This increase in sales
reflects an increase of 15.1% in the number of pieces sold in the first quarter
of 1995 versus 1994, and a 2.6% increase in average selling prices.
Consolidated cost of sales decreased 14.9% in the first quarter of 1995 to
$49.8 million, or 89.8% of net sales, as compared to $58.5 million, or 85.7% of
net sales in 1994. Excluding Super Sagless, cost of sales were approximately
$49.8 million and $48.5 million for the first quarters of 1995 and 1994,
respectively, or 89.8% and 86.5% of net sales, respectively. Stratford Company
cost of sales increased to 92.0% of net sales in the first quarter of 1995, as
compared to 87.6% in the first quarter of 1994. The Stratford Company has
upgraded certain content of its products and experienced certain raw material
price increases since the first quarter of 1994 which have been the primary
contributors to the increase in the cost of sales as percentage of net sales.
Barcalounger cost of sales remained flat at 81.1% and 81.5% of net sales for
the first quarters of 1995 and 1994, respectively.
Consolidated selling, administrative and general expenses for the first
quarters of 1995 and 1994 were approximately $7.8 million and $9.8 million,
respectively, representing a decrease of 19.9%. Excluding Super Sagless,
selling, administration and general expenses were approximately $7.8 million in
1995 as compared to $8.2 million in 1994, a decrease of 4.0%. The decrease was
due primarily to decreases in selling commissions as a result of the lower
sales volumes on smaller retail customers which generally have a higher
commission rate, and elimination of certain overhead costs, most notably the
downsizing of substantially all of the Company's corporate functions and
facilities.
- 10 -
<PAGE> 11
Other expense, net, was consistent at approximately $.3 million and $.5 million
for the first quarters of 1995 and 1994, respectively.
No income taxes have been provided in the first quarters of 1995 and 1994,
respectively, as the Company is in a net operating loss carryforward position.
For a discussion of the status of the IRS examination, refer to the Company's
audited consolidated financial statements as of December 31, 1994 included in
the Company's Form 10-K, and footnote 5 to the Company's unaudited condensed
consolidated financial statements included herein.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3, Legal Proceedings, previously reported in
the Registrant's Form 10-K for the year ended December 31, 1994 for a
description of pending legal action.
There are certain legal proceedings arising out of the normal course
of business, the financial risk of which are not considered material
in relation to the consolidated financial position of the Company.
- 11 -
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 12 -
<PAGE> 13
FAIRWOOD CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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
(Registrant)
/s/ John B. Sganga
----------------------
John B. Sganga
Chief Financial Officer,
Executive Vice President,
Secretary and Treasurer
Date: February 21, 1995
- 13 -
