<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
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 March 28, 1998
<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>
March 28, December 31,
Assets 1998 1997
------- ------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 617 605
------- ------
Accounts and notes receivable:
Trade 26,195 28,119
Notes receivable, affiliate 500 500
Due from affiliate 4,636 1,420
Other 656 696
------- ------
31,987 30,735
Less allowance for discounts and doubtful accounts 1,515 4,216
------- ------
30,472 26,519
------- ------
Inventories 16,137 13,950
Prepaid expenses and other current assets 2,435 1,911
------- ------
Total current assets 49,661 42,985
------- ------
Property, plant and equipment, at cost 31,900 31,518
Less accumulated depreciation and amortization 18,976 18,517
------- ------
12,924 13,001
------- ------
Other assets 1,441 1,434
------- ------
$64,026 57,420
======= ======
</TABLE>
(Continued)
- 2 -
<PAGE> 3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
March 28, December 31,
Liabilities and Deficit 1998 1997
--------- --------
(Unaudited) (Audited)
<S> <C> <C>
Current Liabilites:
Notes payable $ 19,241 15,554
Overdraft 2,247 --
Current maturities of long-term debt:
Revolving credit 259,014 --
Senior subordinated debentures 80,000 --
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 209 233
Accounts payable 8,389 11,056
Accrued interest 107,937 91,436
Accrued expenses 11,465 9,035
Federal and state income taxes 5,652 5,682
--------- --------
Total current liabilities 662,935 301,777
--------- --------
Long-term debt:
Revolving credit -- 254,714
Senior subordinated debentures -- 80,000
Mortgage payable 2,065 2,052
--------- --------
2,065 336,766
Deferred income taxes 1,179 1,179
Other liabilities 1,999 1,653
--------- --------
3,178 2,832
--------- --------
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
Accumulated other comprehensive income (353) (353)
Retained deficit (659,847) (639,650)
--------- --------
(604,252) (584,055)
--------- --------
$ 64,026 57,420
========= ========
</TABLE>
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
- 3 -
<PAGE> 4
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 28, March 29,
1998 1997
-------- -------
<S> <C> <C>
Net sales $ 43,024 37,271
-------- -------
Cost of sales 39,900 33,819
Selling, administrative and
general expenses 6,222 5,789
-------- -------
46,122 39,608
-------- -------
Operating loss (3,098) (2,337)
-------- -------
Interest income 4 5
Interest on indebtedness (17,134) (15,527)
Other income (expenses), net 50 53
-------- -------
Loss before income taxes (20,178) (17,806)
Provision for income taxes -- --
-------- -------
Net loss $(20,178) (17,806)
======== =======
</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
------------------
March 28, March 29,
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(20,178) (17,806)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 459 474
(Gain) loss on disposal of property, plant and equipment -- (9)
Changes in assets and liabilities:
Accounts receivable (3,953) (620)
Inventories (2,187) (937)
Prepaid expenses and other current assets (524) (217)
Accounts payable (2,686) (3,012)
Accrued expenses and interest 18,931 18,177
Federal and state income taxes (30) 14
Other, net 339 345
-------- -------
Cash used - operating activities (9,829) (3,591)
-------- -------
Cash flows from investing activities:
Disposition of property, plant and equipment -- 9
Capital expenditures (382) (69)
-------- -------
Cash used - investing activities (382) (60)
-------- -------
Cash flows from financing activities:
Overdraft 2,247 3,506
Proceeds from long-term debt 4,300 69
Proceeds from revolving credit facility and term loan, net 19,241 --
Repayments of long-term debt (11) --
Repayments of factoring facility, net (15,554) --
-------- -------
Cash provided - financing activities 10,223 3,575
-------- -------
Increase (decrease) in cash and cash equivalents 12 (76)
Cash and cash equivalents:
Beginning of period 605 429
-------- -------
End of period $ 617 353
======== =======
Supplemental schedule of cash flow information
Cash paid during year for:
Interest $ 615 378
Income tax refunds (payments), net 30 14
</TABLE>
Supplemental schedule of noncash operating and financing activities In the three
month periods ending March 28,1998 and March 29, 1997 the Company recognized $19
thousand and $16 thousand, respectively, of accrued dividends payable to
shareholders, which dividends have not been paid.
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 March 28, 1998 and
March 29, 1997, and the financial position at March 28, 1998 and
December 31, 1997. The results of operations for the three-month period
ended March 28, 1998 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 Fairwood Corporation's ("Fairwood or
Company") audited consolidated financial statements included in the
1997 annual report on Form 10-K. Fairwood is a holding company as is
its subsidiary, Consolidated Furniture Corporation ("Consolidated
Furniture") which is the parent of Futorian Furnishings, Inc.
("Futorian", formerly Furniture Comfort Corporation), whose two
operating divisions, Stratford Division ("Stratford") and Barcalounger
Division ("Barcalounger") manufacture motion upholstered residential
furniture.
The Company adopted the provision of Statement of Accounting Standard
No. 130, Reporting Comprehensive Income (FAS 130), for the periods
presented. Fairwood's comprehensive income includes a minimum pension
liability which is calculated and reported annually. As a result, FAS
130 had no effect on the quarterly condensed consolidated statement of
operations.
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>
March 28, 1998 December 31, 1997
(Unaudited) (Audited)
------- ------
<S> <C> <C>
Raw materials $12,263 11,809
In process 3,773 3,591
Finished goods 7,878 6,220
------- ------
Inventories at
first-in, first out 23,914 21,620
LIFO reserve 7,777 7,670
------- ------
Inventories at LIFO $16,137 13,950
======= ======
</TABLE>
4. On February 11, 1998, Futorian entered into a revolving credit and term
loan agreement with a domestic corporation which replaced its two
factoring agreements for Barcalounger and Stratford. The new agreement
provides for an aggregate maximum commitment of $30,750,000 and expires
in 2001. The agreement consists of a term loan in the amount of
$1,020,000 and a revolving credit loan with a limit of $29,730,000 and
borrowings under the agreements are classified as notes payable in the
accompanying condensed unaudited consolidated balance sheets. These
loans bear interest at either the prime rate plus 1% or the adjusted
eurodollar rate plus 3-1/4% at the option of the borrower providing
certain conditions are met. The loan is secured by accounts receivable,
inventory, property and equipment and other assets. Other loan costs
include a monthly servicing fee of $5,000 and a monthly unused line fee
at a rate equal to three-eights (3/8%) percent per annum calculated
upon the amount by which $21,500,000 exceeds the average daily
principal balance on the outstanding Revolving Loans and Letter of
Credit Accommodations during the immediately preceding month.
- 6 -
<PAGE> 7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
5. No provision for income taxes have been provided during the three
months ended March 28, 1998 and March 29, 1997 as the Company is in a
net operating loss carryforward position.
6. Fairwood is contesting an Internal Revenue Service ("IRS") Agent's
report resulting from an IRS audit examination of the consolidated
Federal income tax returns of Fairwood and its subsidiaries for the
years ended July 11, 1988 through December 1991. The report proposed to
adjust Fairwood's taxable income in the years in issue and in prior
years to which net operating losses of the Consolidated tax group were
carried back. Fairwood estimates that the aggregate proposed liability,
if all issues were resolved unfavorably would, together with statutory
interest and state income tax, total approximately $138 million and
eliminate substantially all of the net operating loss carryforwards.
Fairwood believes that the proposed adjustments are in error and is
vigorously contesting this matter. Under available administrative
procedures, Fairwood had protested the proposed adjustments and,
through negotiations with the IRS Appeals Division, has reached an
agreement in principle for a potential settlement of the issues in the
case. A final settlement based on the foregoing is estimated to be
approximately $4.4 million and is included in Federal and state income
taxes on the accompanying condensed unaudited consolidated balance
sheets. The agreement in principle will also eliminate substantially
all of the Fairwood's available net operating loss carryforwards and
may preclude the deduction of certain future interest expense. The
terms of the proposed settlement are subject to final approval by the
IRS and no assurance can be given that such approvals will be given.
However, should the outcome of the reviews in question be unfavorable
to Fairwood on one or more issues in the case then Fairwood and its
Subsidiaries may exercise their rights to litigate these issues.
Fairwood and its Subsidiaries cannot predict the ultimate outcome of
these issues, nor the impact on its financial statements.
7. On each of April 1, 1995, October 1, 1995, and each semi-annual
interest payment date thereafter, Fairwood failed to make the required
interest payments due on the senior subordinated pay-in-kind debentures
and merger debentures (collectively, the "Fairwood Debentures") and
Fairwood does not expect to make the cash interest payments required
under the Fairwood Debentures on any future semi-annual interest
payment dates. Accrued interest of $94.6 million on the Fairwood
Debentures, which includes $57.4 million due to Court Square Capital
Limited ("CSCL"), is included in accrued interest on the accompanying
unaudited condensed consolidated balance sheet as of March 28, 1998. An
involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York
against Fairwood Corporation by certain bondholders. In response to the
bankruptcy filing, on April 22, 1996, Fairwood and certain other
entities filed a cross-motion seeking the dismissal of the petition. On
November 26, 1996, the motion to dismiss was denied. On December 26,
1996, Fairwood exercised its right to convert the pending involuntary
bankruptcy case to a voluntary Chapter 11 proceeding as
debtor-in-possession. On May 2, 1997, certain holders of the Fairwood
Debentures filed a Motion seeking to convert Fairwood's Chapter 11 case
to a Chapter 7 liquidation or,
- 7 -
<PAGE> 8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
alternatively, to appoint a Chapter 11 trustee. On July 21, 1997, the
Bankruptcy Court denied the request to convert the case and held in
abeyance pending further proceedings the request to appoint a Chapter
11 trustee. Fairwood cannot predict how the Court may rule on the
request to appoint a Chapter 11 trustee or when such ruling may occur.
Fairwood has indicated in Bankruptcy Court papers that if the Motion
for the appointment of a Chapter 11 trustee is denied, it intends to
propose a plan of reorganization with the Bankruptcy Court at some time
in the future. The Chapter 11 case pertains only to Fairwood
Corporation. Its direct and indirect subsidiaries, including
Consolidated Furniture Corporation, Futorian Furnishings, Inc., as well
as their operating divisions, Stratford and Barcalounger, are not
parties to the bankruptcy, nor are such operations under the
supervision of the Bankruptcy Court. It is currently expected that
these companies will continue to operate in the normal course of
business.
8. Consolidated Furniture's revolving line of credit and senior
subordinated debentures mature on January 2, 1999 and, accordingly,
have been classified as current liabilities in the accompanying
unaudited condensed consolidated balance sheet of the Company as of
March 28, 1998. Consolidated Furniture expects to negotiate an
extension of these maturity dates or refinance such indebtedness prior
to January 2, 1999.
Fairwood's failure to make the April 1, 1995 and subsequent period
interest payments constitutes an event of default which permits the
acceleration of the Fairwood Debentures by the demand of the holders of
the requisite aggregate principal amount of the debentures. Upon
acceleration, the Fairwood Debentures would be currently due and
payable. Accordingly, the Fairwood Debentures have been classified as
current liabilities in the accompanying unaudited condensed
consolidated balance sheet as of March 28, 1998.
- 8 -
<PAGE> 9
Item 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information set forth or incorporated by reference herein contains
forward-looking statements as such term is defined in Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended.
Liquidity and Capital Resources
At March 28, 1998, The Company had total indebtedness of approximately $529.3
million of which approximately $527.2 million current and approximately $444.9
was owed to Court Square Capital Limited ("CSCL"), an affiliate. Total
indebtedness was approximately $521.3 million at December 31, 1997, of which
$184.6 million was current and approximately $440.6 million was owed to CSCL.
Accrued interest on total indebtedness was approximately $107.9 million and
$91.4 million at March 28, 1998 and December 31, 1997, respectively.
Approximately $70.8 million and $56.9 million of the accrued interest was owed
to CSCL at March 28, 1998 and December 31, 1997, respectively. The Company's
outstanding indebtedness includes its senior subordinated pay-in-kind debentures
and merger debentures (collectively, the "Fairwood Debentures"). Fairwood 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. During such five-year period, Fairwood distributed
additional securities in satisfaction of its interest obligations.
Fairwood 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 Fairwood. Fairwood's sole asset is
the stock of 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. 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 Fairwood. 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 and transfer
them to Fairwood to enable Fairwood 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 Futorian Furnishings, Inc. ("Futorian", formerly Furniture
Comfort Corporation), which has operations that it conducts through its two
divisions, Stratford and Barcalounger. Futorian is also a direct obligor under
the Credit Agreement and has pledged substantially all of its assets to secure
the obligations under the Credit Agreement. Futorian is not an obligor on the
Fairwood Debentures.
- 9 -
<PAGE> 10
On each of April 1, 1995 and October 1, 1995, and each semi-annual interest
payment date thereafter, Fairwood failed to make the required interest payments
due on the senior subordinated pay-in-kind debentures and merger debentures
(collectively, the "Fairwood Debentures") and Fairwood does not expect to make
the cash interest payments required under the Fairwood Debentures on any future
semi-annual interest payment dates. Accrued interest of $94.6 million on the
Fairwood Debentures, which includes $57.4 million due to CSCL, is included in
accrued interest in the accompanying unaudited condensed consolidated balance
sheet as of March 28, 1998.
There can be no assurance that Fairwood will be able to continue as a going
concern. An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
Fairwood Corporation by certain merger debenture holders. In response to the
bankruptcy filing, on April 22, 1996, Fairwood and certain other entities filed
a cross-motion seeking dismissal of the petition. On November 26, 1996, the
motion to dismiss was denied. On December 26, 1996, Fairwood exercised its right
to convert the pending involuntary bankruptcy case to a voluntary Chapter 11
proceeding as debtor-in-possession. On May 2, 1997, certain holders of the
Fairwood Debentures filed a Motion seeking to convert Fairwood's chapter 11 case
to a chapter 7 liquidation or, alternatively, to appoint a chapter 11 trustee.
On July 21, 1997, the Bankruptcy Court denied the request to convert the case
and held in abeyance pending further proceedings the request to appoint a
chapter 11 trustee. Fairwood cannot predict how the Court may rule on the
request to appoint a chapter 11 trustee or when such ruling may occur. Fairwood
has indicated in Bankruptcy Court papers that if the Motion or the appointment
of a chapter 11 trustee is denied, it intends to propose a plan of
reorganization with the Bankruptcy Court at some time in the future. There is no
way to know what the outcome of the proceeding will be. The Chapter 11 case
pertains only to Fairwood Corporation. Fairwood's direct and indirect
subsidiaries, including Consolidated Furniture Corporation, Futorian
Furnishings, Inc., as well as their operating divisions, Stratford and
Barcalounger, are not parties to the bankruptcy, nor are such operations under
the supervision of the Bankruptcy Court. It is currently expected that
Fairwood's direct and indirect subsidiaries will continue to operate in the
normal course of business.
Fairwood's failure to make the April 1, 1995 and subsequent period interest
payments constitutes an event of default which permits the acceleration of the
Fairwood Debentures by the demand of the holders of the requisite aggregate
principal amount of the debentures, 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 unaudited condensed consolidated balance sheet as of March
28, 1998.
Consolidated Furniture, Fairwood's wholly-owned subsidiary, is expected to
service its interest payment obligations under the Credit Agreement and senior
subordinated debentures from its cash flow from operations and available credit
facilities. Throughout 1997 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 three months of 1998 were
approximately $4.3 million. There were no repayments to CSCL during the first
three months of 1998. Consolidated Furniture 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
- 10 -
<PAGE> 11
generally restricted from transferring moneys to Fairwood with the exception of
amounts for (a) specified administrative expenses of Fairwood 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.
On February 11, 1998, Futorian entered into a revolving credit and term loan
agreement with a domestic corporation which replaced its two factoring
agreements for Barcalounger and Stratford. The new agreement provides for an
aggregate maximum commitment of $30,750,000 and expires in 2001. The agreement
consists of a term loan in the amount of $1,020,000 and a revolving credit loan
with a limit of $29,730,000. These loans bear interest at either the prime rate
plus 1% or the adjusted eurodollar rate plus 3-1/4% at the option of the
borrower providing certain conditions are met. The loan is secured by accounts
receivable, inventory, property and equipment and other assets. Other loan costs
include a monthly servicing fee of $5,000 and a monthly unused line fee at a
rate equal to three-eights (3/8%) percent per annum calculated upon the amount
by which $21,500,000 exceeds the average daily principal balance on the
outstanding Revolving Loans and Letter of Credit Accommodations during the
immediately preceding month.
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, 1998.
Consolidated Furniture's revolving line of credit and senior subordinated
debentures mature on January 2, 1999 and, accordingly, have been classified as
current liabilities in the accompanying unaudited condensed consolidated balance
sheet as of March 28, 1998. Consolidated Furniture expects to negotiate an
extension of these maturity dates with CSCL or refinance such indebtedness prior
to January 2, 1999. However, there can be no assurance that the Consolidated
Furniture 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.
For a discussion of the status of the IRS examination, refer to Fairwood's
audited consolidated financial statements as of December 31, 1997 included in
Fairwood's Form 10-K, and footnote 6 to Fairwood's unaudited condensed
consolidated financial statements included herein.
Results of Operations
Three Months Ended March 28, 1998 Versus Three Months Ended March 29, 1997
The following discussion presents the material changes in results of operations
which have occurred in the first quarter of 1998 in comparison to the same
period in 1997.
Consolidated net sales were approximately $43.0 million in the first quarter of
1998, an increase of 15.3% from last year's first quarter consolidated net sales
of approximately $37.3 million, due primarily to an increase of sales at
Stratford.
First quarter 1998 net sales (including intercompany sales) by the Stratford
Company increased 16.0% to approximately $29.7 million as compared to $25.6
million for the comparable period in 1997. First quarter sales in 1998 to
Stratford's larger national retail chain customers increased 49.0%, while sales
to smaller retail furniture store customers increased by .3%. Total Stratford
volume, excluding frame and coil sales and sales to Simmons Upholstered
Furniture Corporation ("Simmons"), an affiliate, increased 26.4% during the
- 11 -
<PAGE> 12
first quarter of 1998 as compared to 1997. Volume to Stratford's larger national
retail chain customers increased 45.4%, while volume to Stratford's smaller
retail furniture store customers increased 9.4%. Sales of frames and coils to
other furniture manufacturers decreased 3.0% during the first quarter of 1998 as
compared to 1997.
Stratford's selling prices decreased 2.3% during the first quarter of 1998 as
compared to 1997. Excluding sales to Simmons, net sales for the first quarter of
1998 were approximately $27.8 million compared to approximately $22.6 million
for the first quarter of 1997, an increase of 23.0%. First quarter sales in 1998
to Simmons were approximately $2.0 million compared to approximately $3.0
million for the first quarter of 1997, a decrease of 33.3%.
First quarter 1998 net sales by Barcalounger increased 13.0% to approximately
$13.9 million as compared to $12.3 million in 1997. This increase in sales
reflects an increase of 7.5% in the number of pieces sold in the first quarter
of 1998 versus 1997, and a 4.7% increase in average selling prices.
Consolidated cost of sales increased 18.0% in the first quarter of 1998 to $39.9
million, or 92.7% of net sales, as compared to $33.8 million, or 90.7% of net
sales in 1997. Stratford's cost of sales increased to 98.5% of net sales in the
first quarter of 1998, as compared to 95.8% in the first quarter of 1997.
Stratford's increased percentage of cost of sales is attributable mainly to
inefficiencies and costs incurred when Stratford moved product lines from the
Okolona facility to the New Albany facility and intense price competition.
Barcalounger's cost of sales was 80.7% of net sales for the first quarters of
1998 and 1997.
Consolidated selling, administrative and general expenses for the first quarters
of 1998 and 1997 were approximately $6.2 million and $5.8 million, respectively,
representing an increase of 6.9%. This increase is due to primarily to $.6
million of restructuring costs and increases in variable selling costs due to
increased sales offset by a $.7 million gain on the sale of receivables from a
company in bankruptcy which had previously been fully reserved.
Interest expense, was approximately $17.1 million and $15.5 million for the
first quarters of 1998 and 1997, respectively, an increase of approximately
10.3%. The increase was primarily due to increased borrowings on the line of
credit.
No income taxes have been provided in the first quarters of 1998 and 1997,
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, 1997 included in
the Company's Form 10-K, and footnote 6 to the Company's unaudited condensed
consolidated financial statements included herein.
- 12 -
<PAGE> 13
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, 1997 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 13 -
<PAGE> 14
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: May 12, 1998
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
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