<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 September 26, 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 September 26, 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>
September 26, December 31,
Assets 1998 1997
------ ------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,569 605
-------- --------
Accounts and notes receivable:
Trade 23,211 28,119
Notes receivable, affiliate 500 500
Due from affiliate 2,400 1,420
Other 4 48
-------- --------
26,115 30,087
Less allowance for discounts and doubtful accounts 1,308 4,216
-------- --------
24,807 25,871
-------- --------
Inventories 13,905 13,950
Prepaid expenses and other current assets 2,393 1,911
-------- --------
Total current assets 42,674 42,337
-------- --------
Property, plant and equipment, at cost 32,832 31,518
Less accumulated depreciation and amortization 19,900 18,517
-------- --------
12,932 13,001
-------- --------
Other assets 406 1,434
-------- --------
$ 56,012 56,772
======== ========
</TABLE>
(Continued)
- 2 -
<PAGE> 3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
September 26, December 31,
Liabilities and Deficit 1998 1997
----------------------- ------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
Current Liabilities:
Notes payable $ 22,582 15,554
Overdraft 1,430 -
Current maturities of long-term debt:
Revolving credit 284,388 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 45 233
Accounts payable 5,992 11,056
Accrued interest 122,151 91,436
Accrued expenses 10,392 9,035
Federal and state income taxes 5,007 5,034
-------- --------
Total current liabilities 700,768 301,129
-------- --------
Long-term debt:
Revolving credit - 254,714
Senior subordinated debentures - 80,000
Mortgage payable 2,017 2,052
-------- --------
2,017 336,766
-------- --------
Deferred income taxes 1,179 1,179
Other liabilities 1,876 1,653
-------- --------
3,055 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 ( 705,523) ( 639,650)
-------- --------
( 649,928) ( 584,055)
-------- --------
$ 56,012 56,772
======== ========
</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 Nine Months Ended
---------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 32,675 32,918 113,943 104,664
------- ------- ------- -------
Cost of sales 30,928 32,222 106,241 99,095
Selling, administrative and
general expenses 6,165 6,373 20,529 22,432
------- ------- ------- -------
37,093 38,595 126,770 121,527
------- ------- ------- -------
Operating loss ( 4,418) ( 5,677) ( 12,827) ( 16,863)
Interest income 65 8 135 96
Interest on indebtedness ( 18,177) ( 16,466) ( 53,313) ( 48,073)
Other income 72 91 192 287
------- ------- ------- -------
Loss before income taxes ( 22,458) ( 22,044) ( 65,813) ( 64,553)
Provision for income taxes - - - -
------- ------- ------- -------
Net loss $( 22,458) ( 22,044) ( 65,813) ( 64,553)
======= ======= ======= =======
</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>
Nine Months Ended
---------------------------
September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 65,813) ( 64,553)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,383 1,427
Gain on disposal of property, plant and equipment - ( 60)
Changes in assets and liabilities:
Accounts receivable 1,064 2,308
Inventories 45 ( 847)
Prepaid expenses and other current assets ( 482) 13
Accounts payable ( 5,124) ( 1,772)
Federal and state income taxes ( 28) 19
Accrued expenses 32,072 33,729
Other, net 1,251 793
-------- -------
Cash used - operating activities ( 35,632) ( 28,943)
-------- -------
Cash flows from investing activities:
Dispostion of property, plant and equipment - 60
Capital expenditures ( 1,314) ( 174)
------- -------
Cash used - investing activities ( 1,314) ( 114)
------- -------
Cash flows from financing activities:
Overdraft 1,430 ( 715)
Proceeds from long-term debt 29,674 25,416
Repayment of long-term debt ( 222) ( 180)
Proceeds from credit line, net 22,582 -
Proceeds from (repayments to) factor, net ( 15,554) 4,816
------- -------
Cash provided - financing activities 37,910 29,337
------- -------
Increase in cash and cash equivalents 964 280
Cash and cash equivalents:
Beginning of period 605 429
------- -------
End of period $ 1,569 709
======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $ 22,598 18,709
Income tax refunds (payments), net ( 28) 19
</TABLE>
Supplemental schedule of noncash operating and financing activities
- -------------------------------------------------------------------
In the nine month periods ending September 26, 1998 and September 27, 1997 the
Company recognized $60 thousand and $51 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 for the three and nine months ended September 26, 1998 and
September 27, 1997, the financial position at September 26, 1998 and
December 31, 1997 and the cash flows for the nine months ended September
26, 1998 and September 27, 1997. The results of operations for the three
and nine month periods ended September 26, 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 stationary and motion upholstered residential furniture.
The Company adopted the provision of Statement of Accounting Standard No.
130 (FAS 130), Reporting Comprehensive Income, 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 unaudited condensed consolidated statement of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about
Segments of an Enterprise and Related Information." FAS No. 131 requires
Fairwood to present certain information about operating segments and
related information, including geographic and major customer data, in its
annual financial statements and in condensed financial statements for
interim periods. The Company is required to adopt the provision of this
statement during fiscal year 1998 and plans to implement the provisions of
this statement at December 31, 1998. Management currently plans to include
additional disclosures about Fairwood's two operating divisions, Stratford
and Barcalounger, to comply with this statement's provisions.
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>
September 26, 1998 December 31, 1997
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
Raw materials $ 10,188 11,809
In process 3,557 3,591
Finished goods 7,974 6,220
------ ------
Inventories at first-in,
first-out 21,719 21,620
LIFO reserve 7,814 7,670
------ ------
Inventories at LIFO $ 13,905 13,950
====== ======
</TABLE>
- 6 -
<PAGE> 7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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 unaudited
condensed 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. At
September 26, 1998 the available unused borrowings under the agreement
were $2.9 million.
5. No provision for federal income taxes has been provided during the nine
months ended September 26, 1998 and September 27, 1997, as the Company is
in a net operating loss carryforward position, and the valuation allowance
has been increased to offset any future benefit from this position.
6. The United States Bankruptcy Court (the "Bankruptcy Court") has approved
the settlement of issues arising out of an Internal Revenue Service
("IRS") audit examination of the consolidated Federal income tax returns
of Fairwood and its subsidiaries for the periods ended July 11, 1988
through December 31, 1991. The net federal tax cost, including statutory
interest and the claim for refund as described below, to Fairwood and its
subsidiaries under the terms of the settlement is estimated to be
approximately $5.0 million. The settlement would also significantly reduce
Fairwood's available net operating loss carryforwards. This settlement
does not include consideration of the state tax impact. Management is
currently reviewing the state tax effect of this settlement and believes
there will not be a material impact. As approved by the Bankruptcy Court,
the settlement would be funded by additional borrowings under Consolidated
Furniture's existing revolving credit agreement, with any refund obtained
(as described below) returned to the lender under that facility.
This settlement provides Fairwood the opportunity to claim a refund of
certain taxes paid through carrying the interest component of the
settlement back up to 10 years. Management believes that it is currently
more likely than not that taxes totally $1.3 million will be recovered.
Fairwood has accrued the estimated Federal and state obligations, net of
expected recoveries of previous taxes paid, in Federal and state income
taxes on the accompanying balance sheet.
- 7 -
<PAGE> 8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated 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 $108.1 million on the Fairwood Debentures, which includes $65.6
million due to Court Square Capital Limited ("CSCL"), is included in
accrued interest on the accompanying unaudited condensed consolidated
balance sheet as of Sepember 26, 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, 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 Fairwood as of September 26, 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 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 unaudited condensed
consolidated balance sheet as of September 26, 1998.
- 8 -
<PAGE> 9
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
9. Stratford continues to provide new product development and selling
activities to Simmons, an affiliate. Under the agreement to provide
services, Stratford recognized approximately $490,801 and $641,532 of
revenues for the three-month periods ended September 26, 1998 and
September 27, 1997, respectively, and approximately $1,414,764 and
$1,944,066 of revenues for the nine-month periods then ended,
respectively. Stratford also billed Simmons $608,001 and $1,216,002 for
Stratford employees that provided services for Simmons for the three-month
and nine-month periods ended September 26, 1998, respectively. Under a
separate agreement, Stratford decreased its advances to Simmons to
$500,000.
10. Certain reclassifications have been made to the December 31, 1997 financial
statements to conform with the September 26, 1998 unaudited condensed
consolidated financial statement presentation.
- 9 -
<PAGE> 10
Item 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information in this quarterly report on Form 10-Q, including but not
limited to the Management's Discussion and Analysis of Financial Condition and
Results of Operations, may constitute forward-looking statements as such term is
defined in Section 27A of the Securities Act of 1933 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934. Certain forward-looking
statements can be identified by the use of forward-looking terminology such as,
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimated," or "anticipates" or the negative thereof or
other comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements involve risks and uncertainties,
including those described in the Company's Annual Report on Form 10-K, which
could cause actual results to be materially different than those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company assumes no obligation to update such information.
Liquidity and Capital Resources
At September 26, 1998, The Company had total indebtedness of
approximately $557.8 million of which approximately $555.8 million were
classified as current liabilities and approximately $470.2 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 were
classified as current liabilities and approximately $440.6 million was owed to
CSCL. Accrued interest on total indebtedness was approximately $122.2 million
and $91.4 million at September 26, 1998 and December 31, 1997, respectively.
Approximately $79.7 million and $56.9 million of the accrued interest was owed
to CSCL at September 26, 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
- 10 -
<PAGE> 11
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.
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 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 $108.1 million on the
Fairwood Debentures, which includes $65.6 million due to CSCL, is included in
accrued interest in the accompanying unaudited consolidated balance sheet as of
September 26, 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, Futorian Furnishings, 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
September 26, 1998.
- 11 -
<PAGE> 12
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 nine months of 1998 were
approximately $29.7 million. There were no repayments to CSCL during the first
nine 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 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 monies.
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. At September 26, 1998 the available unused
borrowings under the agreement were $2.9 million.
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 consolidated balance sheet as
of September 26, 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.
- 12 -
<PAGE> 13
Results of Operations
Three Months Ended September 26, 1998 Versus Three Months Ended September 27,
1997
The following discussion presents the material changes in results of operations
which have occurred in the third quarter of 1998 in comparison to the same
period in 1997.
Net sales on a consolidated basis were approximately $32.7 million in the third
quarter of 1998, a decrease of 0.6% from last year's third quarter consolidated
net sales of approximately $32.9 million.
Third quarter 1998 net sales (including intercompany sales and sales to Simmons
Upholstered Furniture Corporation ("Simmons")), by Stratford decreased 6.7% to
approximately $20.7 million as compared to $22.1 million for the comparable
period in 1997. Third quarter sales to Simmons were approximately $1.5 million,
a decrease of 45.5% from 1997 third quarter sales of $2.7 million. Total
Stratford volume, excluding frame and coil sales which accounted for
approximately 7.8% of third quarter 1998 net sales and 12.0% of third quarter
1997 net sales and excluding sales to Simmons, increased 6.1% during the third
quarter of 1998 as compared to 1997. This increase is due to additional volume
with National Warehouse Clubs.
Stratford's average furniture selling price for the quarter, which is dependent
on the type of product and customer, decreased 2.3% percent from the comparable
period in 1997. Excluding sales to Simmons, net sales for the third quarter of
1998 were approximately $19.2 million compared to approximately $19.4 million
for the third quarter of 1997, a decrease of 1.0%.
Third quarter 1998 net sales by Barcalounger increased 7.0% to approximately
$12.5 million as compared to $11.7 million for the comparable period in 1997.
This increase in sales reflects an increase in total volume of 1.8%, and a 5.1%
increase in average sales prices. The increase is due to the continued strategy
of offering a finer, more exclusive product, with the emphasis on quality,
service and value.
Cost of sales on a consolidated basis decreased 4.0% in the third quarter of
1998 to $30.9 million, or 94.5% of net sales, as compared to $32.2 million, or
97.9% of net sales, in 1997. Stratford's cost of sales decreased to 103.4% of
net sales in the third quarter of 1998, as compared to 107.4% in the third
quarter of 1997. The decrease was attributable to better factory utilization.
Barcalounger cost of sales increased to 80.5% of net sales in the third quarter
of 1998, as compared to 80.1% in the third quarter of 1997.
Selling, administrative and general expenses on a consolidated basis
for the third quarters of 1998 and 1997 were approximately $6.2 million and
$6.4 million, respectively, representing a decrease of 3.1%. The decrease was
due primarily to an increase in allowance for doubtful accounts in the third
quarter of 1997 by Stratford for expected non-collection of amounts due from a
large national retail chain, the write down of non-performing assets and
prepaid expenses, offset partially by costs incurred to transfer certain
administrative operations to Chicago in 1998.
Other income was approximately $0.1 million for the third quarters of 1998 and
1997.
- 13 -
<PAGE> 14
Nine Months Ended September 26, 1998 Versus Nine Months Ended September 27, 1997
The following discussion presents the material changes in results of operations
which have occurred in the first nine months of 1998 in comparison to the same
period in 1997.
Net sales on a consolidated basis were approximately $113.9 million in the first
nine months of 1998, an increase of 8.8% from last year's first nine months
consolidated net sales of approximately $104.7 million, due primarily to an
increase of sales at Stratford.
Stratford Division net sales (including intercompany sales and sales to Simmons)
for the first nine months of 1998 increased 7.5% to approximately $75.8 million
as compared to $70.5 million for the comparable period in 1997. Sales to Simmons
for the nine month period in 1998, were approximately $4.8 million, a decrease
of 42.7% from first nine month of 1997 sales of $8.3 million. Total Stratford
volume, excluding frame and coil sales which accounted for approximately 7.8% of
the first nine months of 1998 net sales and 11.2% of the first nine months of
1997 net sales and excluding sales to Simmons, has increased 19.5% for the first
nine months of 1998 as compared to the first nine months of 1997. The average
furniture selling price for the 1998 nine month period, which is dependent upon
the type of product and customer, decreased 0.3% from the comparable period in
1997. This decrease is due to additional volume of lower priced products with
National Warehouse Clubs.
Barcalounger net sales for the first nine months of 1998 were approximately
$39.8 million, an increase of 10.6%, as compared to 1997 third quarter sales of
$36.0 million, reflective of a 5.5% increase in the number of pieces sold and a
4.8% increase in average selling prices. The increase is due to the continued
strategy of offering a finer, more exclusive product, with the emphasis on
quality, service and value.
Cost of sales on a consolidated basis increased 7.2% in first nine months of
1998 to approximately $106.2 million, or 93.2% of net sales, as compared to
$99.1 million, or 94.7% of net sales, in 1997. Stratford's cost of sales
decreased to 100.0% of net sales in the first nine months of 1998, as compared
to 102.0% in the first nine months of 1997. The decrease was attributable to
better factory utilization and improved pricing. Barcalounger's cost of sales
decreased to 80.6% of net sales in the first nine months of 1998, as compared to
80.7% of net sales in the first nine months of 1997.
Selling, administrative and general expenses on a consolidated basis for the
first nine months of 1998 and 1997 were approximately $20.5 million and $22.4
million, respectively, representing a decrease of 8.5%. The decrease was due
primarily to an increase in allowance for doubtful accounts in the third
quarter of 1997 for expected non-collection of amounts due from a large
national retail chain, the write down of non-performing assets and prepaid
expenses, offset partially by costs incurred in 1998 to transfer certain
administrative operations to Chicago in 1998.
Other income was approximately $0.2 million and $0.3 million for the first nine
months of 1998 and 1997, respectively.
No income taxes have been provided in the first nine months of 1998 and 1997,
respectively, as the Company is in a net operating loss carryforward position,
and a valuation allowance has been increased to offset any future benefit from
these positions.
- 14 -
<PAGE> 15
Year 2000
The Company has completed a comprehensive review of its computer system
identifying the systems that could be affected by the "Year 2000" issue and has
virtually completed the implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs designating time using two digits
rather than four to define the application year. Any of the Company's sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result is a major system failure or miscalculations.
The Company has replaced older software with software that is Year 2000
compliant and modified other older software to be Year 2000 compliant. In
addition, non-critical operational systems are in the process of being converted
or replaced. The Company anticipates that it will be able to test its entire
system using its internal programming staff and outside computer consultants and
intends to make any necessary modifications to prevent disruption to its
operations.
The Company has initiated communications with its critical outside
relationships to determine the extent to which the Company may be affected by
such parties' failure to resolve their own year 2000 issues. Where practical,
the Company will assess and attempt to mitigate its risk with respect to the
failures of these entities to be year 2000 ready. There can be no assurance,
however, that the system of such third parties will be timely converted or that
any such failure to convert by another company would not have a material
adverse effect on the Company. Costs incurred to resolve year 2000 issues
through the third quarter of 1998 are approximately $300,000 and $60,000 for
external and internal expenses, respectively. Management does not expect the
remaining costs to exceed $500,000 for all year 2000 issues.
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
- 15 -
<PAGE> 16
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: November 9, 1998
- 16-
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