<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 April 3, 1999
--------------------------------------------
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.
Outstanding at
Class April 3, 1999
----- ------------------------
Class A Voting, $.01 Par Value 500
- ------------------------------ ------------------------
Class B Non-Voting, $.01 Par Value 999,800
- ---------------------------------- ------------------------
<PAGE> 2
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
April 3, December 31,
Assets 1999 1998
------ ------------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,679 2,165
-------- --------
Accounts and notes receivable:
Trade 21,123 22,662
Notes receivable, affiliate 500 500
Due from affiliate 3,323 4,089
-------- --------
24,946 27,251
Less allowance for discounts and doubtful accounts 1,587 1,317
-------- --------
23,359 25,934
-------- --------
Inventories 17,975 14,666
Prepaid expenses and other current assets 2,870 2,567
-------- --------
Total current assets 45,883 45,332
-------- --------
Property, plant and equipment, at cost 32,935 32,874
Less accumulated depreciation and amortization 20,824 20,380
-------- --------
12,111 12,494
-------- --------
Other assets 337 337
-------- --------
$ 58,331 58,163
======== ========
</TABLE>
(Continued)
- 2 -
<PAGE> 3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
April 3, December 31,
Liabilities and Deficit 1999 1998
----------------------- ------------ -----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Line of credit and term loan $ 26,356 27,480
Overdraft 1,860 2,212
Current maturities of long-term debt:
Revolving credit 320,030 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 45 45
Accounts payable 9,004 7,092
Accrued interest 121,862 118,462
Accrued expenses 11,544 8,389
Federal and state income taxes 5,027 5,027
-------- --------
Total current liabilities 744,509 337,488
-------- --------
Long-term debt:
Revolving credit - 305,855
Senior subordinated debentures - 80,000
Mortgage payable 1,995 2,006
-------- --------
1,995 387,861
-------- --------
Deferred income taxes 1,957 1,957
Other liabilities 245 72
-------- --------
2,202 2,029
-------- --------
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 ( 27) ( 27)
Accumulated deficit ( 746,396) ( 725,236)
-------- --------
( 690,475) ( 669,315)
-------- --------
$ 58,331 58,163
======== ========
</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
------------------
April 3, March 28,
1999 1998
-------- ---------
<S> <C> <C>
Net sales $ 44,851 43,024
------- -------
Cost of sales 41,990 39,900
Selling, administrative and
general expenses 5,752 6,222
------- -------
47,742 46,122
------- -------
Operating loss ( 2,891) ( 3,098)
Interest income 7 4
Interest on indebtedness ( 18,267) ( 17,134)
Other income (expenses), net 14 50
------- -------
Loss before income taxes ( 21,137) ( 20,178)
Provision for income taxes - -
------- -------
Net loss $( 21,137) ( 20,178)
======= =======
</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 3, March 28,
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 21,137) ( 20,178)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 444 459
(Gain) loss on disposal of property, plant and equipment ( 14) -
Changes in assets and liabilities:
Accounts receivable 2,575 ( 3,953)
Inventories ( 3,309) ( 2,187)
Prepaid expenses and other current assets ( 303) ( 524)
Accounts payable 1,889 ( 2,686)
Accrued expenses and interest 6,555 18,931
Federal and state income taxes - ( 30)
Other, net 173 339
------- -------
Cash used in operating activities ( 13,127) ( 9,829)
------- -------
Cash flows from investing activities:
Disposition of property, plant and equipment 14 -
Capital expenditures ( 61) ( 382)
------- -------
Cash used in investing activities ( 47) ( 382)
------- -------
Cash flows from financing activities:
Overdraft ( 352) 2,247
Proceeds (payments) from line of credit
and term loan facility, net ( 1,124) 4,300
Proceeds from note payable - 19,241
Repayments of long-term debt ( 11) ( 11)
Proceeds from revolving credit 14,175 -
Repayments of factoring facility, net ( -) ( 15,554)
------- -------
Cash provided by financing activities 12,688 10,223
------- -------
Increase (decrease) in cash and cash equivalents ( 486) 12
Cash and cash equivalents:
Beginning of period 2,165 605
------- -------
End of period $ 1,679 617
======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during period for:
Interest $ 14,867 615
Income tax refunds (payments), net - -
Supplemental schedule of noncash operating and financing activities
- -------------------------------------------------------------------
In the three month periods ending April 3, 1999 and March 28, 1998 the Company
recognized $23 thousand and $19 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.
</TABLE>
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 3, 1999 and
March 28, 1998, and the financial position at April 3, 1999 and December
31, 1998. The results of operations for the three-month period ended
April 3, 1999 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 1998
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.
Fairwood's comprehensive income includes a minimum pension liability
which is calculated and reported annually. As a result, the minimum
pension liability has no effect on the quarterly unaudited 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>
April 3, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials $ 14,370 10,740
In process 4,306 3,054
Finished goods 6,892 8,579
------ ------
Inventories at
first-in, first out 25,568 22,373
LIFO reserve 7,593 7,707
------ ------
Inventories at LIFO $ 17,975 14,666
====== ======
</TABLE>
4. On February 11, 1998, Futorian entered into a line of credit and term
loan agreement (the "Futorian Loan Agreement") with a domestic
corporation which replaced the two factoring agreements of its two
operating divisions, Barcalounger and Stratford. The Futorian Loan
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 line of credit with a limit of $29,730,000. These
loans bear interest at either the prime rate plus 1% or the adjusted
eurodollar rate plus 3-1/4% at the option of the borrower provided
certain conditions are met. The loan is collateralized by accounts
receivable, inventory, property and equipment and other assets and has
priority over Fairwood's Long-term debt. Other loan costs include a
monthly servicing fee of $5,000 and a monthly
- 6 -
<PAGE> 7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
unused line fee at a rate equal to three-eighths (3/8%) percent per annum
calculated upon the amount by which $21,500,000 exceeds the average daily
principal balance on the term loans and line of credit accommodations
term loans and line of credit accommodations during the immediately
preceding month. The amount outstanding under the line of credit and term
loan, including accrued interest, totaled $26,356,000 at April 3, 1999,
and Futorian continues to use the facility.
The terms of the Futorian Loan Agreement provide for maintenance of
certain financial covenants. Futorian is in default of certain of these
financial covenants in 1999. As a result, the amounts outstanding under
the revolving credit and term loan are due on demand in 1999. Based on
current estimates of available cash flows, Futorian's management does not
believe it will have sufficient cash to make the mandatory payment,
should it be requested by the lender.
5. No provision for income taxes has been provided during the three months
ended April 3, 1999 and March 28, 1998 as the Company is in a net
operating loss carryforward 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 totaling $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. On 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 date. Accrued
interest of $121.6
- 7 -
<PAGE> 8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
million on the Fairwood Debentures, which includes $73.8 million due to
Court Square Capital Limited ("CSCL"), is included in accrued interest on
the accompanying unaudited condensed consolidated balance sheet as of
April 3, 1999. On January 3, 1996, certain holders of the Fairwood public
debentures (the "Bondholders") filed an involuntary Chapter 7 petition
against Fairwood in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court.") Fairwood, Consolidated
Furniture and certain Citicorp affiliates filed a motion in response to
the involuntary filing seeking to dismiss the petition. By order dated
December 4, 1996, the Bankruptcy Court denied the motion to dismiss the
petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert
the Chapter 7 case to a case under Chapter 11. As of the date hereof,
Fairwood continues to operate as a debtor in possession under Section
1108 of the Bankruptcy Code. The Chapter 11 case pertains only to
Fairwood Corporation. Fairwood Corporation's direct and indirect
subsidiaries, including Consolidated Furniture Corporation, Futorian
Furnishings, Inc., as well as the operating divisions, Stratford and
Barcalounger, are not parties to the bankruptcy. In April 1997 the
Bondholders' filed a Motion with the Bankruptcy Court seeking to convert
Fairwood's Chapter 11 case to a case under Chapter 7 or, alternatively,
for the appointment of a Chapter 11 trustee. By order dated March 2,
1999, the Bondholders' motion to convert the case or, alternatively,
for the appointment of a Chapter 11 trustee, was denied in its entirety.
The Bondholders' have taken an appeal of that ruling. Fairwood is in
the process of formulating a Chapter 11 plan which it expects to file
in the next several weeks. The plan will address, among other things,
Fairwood's existing capital structure.
8. Consolidated Furniture's revolving credit under its Credit Agreement with
CSCL (the "Credit Agreement") and senior subordinated debentures mature
on January 3, 2000 and, accordingly, have been classified as current
liabilities in the accompanying unaudited condensed consolidated balance
sheet of the Company as of April 3, 1999. Consolidated Furniture expects
to negotiate an extension of these maturity dates or refinance such
indebtedness prior to January 3, 2000. 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.
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 April 3, 1999.
- 8 -
<PAGE> 9
9. Stratford continues to provide new product development and selling
activities to Simmons, an affiliate. Under the agreement to provide
services, Stratford was reimbursed by Simmons approximately $150,000 in
each of the three-month periods ended April 3, 1999 and March 28, 1998,
respectively, and approximately $729,000 for selling expenses in the
three months ended April 3, 1999. Also in the three months ended April 3,
1999 Stratford recognized as a reduction in general and administrative
expenses, approximately $850,000 of reimbursements for general and
administrative expenses.
10. On April 7, 1999, Futorian and Simmons entered into preliminary
discussions to sell substantially all the assets and certain liabilities
of Stratford, a division of Futorian, and Simmons, an affiliated company
through common ownership, to an unrelated third party.
11. Fairwood's reportable segments include the Stratford division and the
Barcalounger division. These segments continue to be managed separately
because of their distinctly different markets and facilities.
The segment financial information, in thousands, are as follows:
<TABLE>
<CAPTION>
Three months ended April 3, 1999
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 30,499 $ 14,352 $ - $ - $ 44,851
Intersegment income 546 - - ( 546) -
Interest expense, net 684 7 17,569 - 18,260
Segment profit (loss) ( 4,581) 715 ( 17,271) - ( 21,137)
<CAPTION>
Three months ended March 28, 1998
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 29,166 $ 13,858 $ - $ - $ 43,024
Intersegment income 546 - - ( 546) -
Interest expense, net 608 5 16,517 - 17,130
Segment profit (loss) ( 3,915) 616 ( 16,879) - ( 20,178)
</TABLE>
- 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 April 3, 1999, the Company had long-term debt of approximately $570.9 million
of which approximately $568.9 million is current and approximately $505.9 is
owed to Court Square Capital Limited ("CSCL"), an affiliate. Long-term debt was
approximately $556.7 million at December 31, 1998, of which $168.8 million was
current and approximately $491.7 million was owed to CSCL. Accrued interest on
long-term debt was approximately $121.9 million and $118.5 million at April 3,
1999 and December 31, 1998, respectively. Approximately $74.1 million and $73.3
million of the accrued interest was owed to CSCL at April 3, 1999 and December
31, 1998, 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 collateralized 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
collateral interest in all of the outstanding stock of Consolidated Furniture,
and the holders of the merger debentures have a second priority collateral
interest in such stock. The Fairwood Debentures are obligations of Fairwood.
Consolidated Furniture is not an obligor under the Fairwood Debentures.
- 10 -
<PAGE> 11
However, Consolidated Furniture is an obligor under the Credit Agreement with
CSCL (the "Credit Agreement"). 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 collateralized 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 collateralize 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 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 date. Accrued interest of $121.6 million on the
Fairwood Debentures, which includes $73.8 million due to CSCL, is included in
accrued interest in the accompanying unaudited condensed consolidated balance
sheet as of April 3, 1999.
There can be no assurance that Fairwood will be able to continue as a going
concern. On January 3, 1996, certain holders of the Fairwood public debentures
(the "Bondholders") filed an involuntary Chapter 7 petition against Fairwood in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain Citicorp
affiliates filed a motion in response to the involuntary filing seeking to
dismiss the petition. By order dated December 4, 1996, the Bankruptcy Court
denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert the
Chapter 7 case to a case under Chapter 11. As of the date hereof, Fairwood
continues to operate as a debtor in possession under Section 1108 of the
Bankruptcy Code. The Chapter 11 case pertains only to Fairwood Corporation.
Fairwood Corporation's direct and indirect subsidiaries, including Consolidated
Furniture Corporation, Futorian Furnishings, Inc., as well as the operating
divisions, Stratford and Barcalounger, are not parties to the bankruptcy. In
April 1997 the Bondholders' filed a Motion with the Bankruptcy Court seeking to
convert Fairwood's Chapter 11 case to a case under Chapter 7 or, alternatively,
for the appointment of a Chapter 11 trustee. By order dated March 2, 1999, the
Bondholders' motion to convert the case or, alternatively, for the appointment
of a Chapter 11 trustee, was denied in its entirety. The Bondholders' have
taken an appeal of that ruling. Fairwood is in the process of formulating a
Chapter 11 plan which it expects to file in the next several weeks. The plan
will address, among other things, Fairwood's existing capital structure.
- 11 -
<PAGE> 12
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 April
3, 1999.
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 1998 and the first quarter of 1999 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 1999 were approximately $14.2 million. There were
no principal repayments to CSCL during the first three months of 1999.
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 moneys.
Management believes that cash flow from operations and funding from CSCL will be
adequate to meet Consolidated Furniture's obligations on the revolving credit
and the senior subordinated debentures through December 31, 1999.
Consolidated Furniture's revolving credit and senior subordinated debentures
mature on January 3, 2000 and, accordingly, have been classified as current
liabilities in the accompanying unaudited condensed consolidated balance sheet
as of April 3, 1999. Consolidated Furniture expects to negotiate an extension of
these maturity dates with CSCL or refinance such indebtedness prior to January
3, 2000. 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.
On February 11, 1998, Futorian entered into a line of credit and term loan
agreement (the "Futorian Loan Agreement") with a domestic corporation which
replaced the two factoring agreements of its two operating divisions,
Barcalounger and Stratford. The Futorian Loan Agreement provides for an
aggregate maximum commitment of $30,750,000 and expires in 2001. The Futorian
Loan Agreement consists of a term loan in the amount of $1,020,000 and a line of
credit with a limit of $29,730,000. These loans bear interest at either the
prime rate plus 1% or the adjusted eurodollar rate plus 3-1/4% at the option of
the borrower provided certain conditions are met. The loan is collateralized by
accounts receivable, inventory, property and equipment and other assets and has
priority over Fairwood's Long-term debt (Note 7). Other loan costs include a
monthly servicing fee of $5,000 and a monthly unused line fee at a rate equal
- 12 -
<PAGE> 13
to three-eighths (3/8%) percent per annum calculated upon the amount by which
$21,500,000 exceeds the average daily principal balance on the outstanding
Revolving Loans and Letter of Credit Accommodations during the immediately
preceding month.
The terms of the Futorian Loan Agreement provide for maintenance of certain
financial covenants. Futorian was not in compliance with the financial covenants
in 1998, however, a waiver was obtained from the lender to remedy such
noncompliance. Futorian is in default of certain of these financial covenants in
1999. As a result, the amounts outstanding under the revolving credit and term
loan are due on demand in 1999. Based on current estimates of available cash
flow, Futorian's management does not believe it will have sufficient cash to
make the mandatory payment, should it be requested by the lender.
For a discussion of the status of the IRS examination, refer to Fairwood's
audited consolidated financial statements as of December 31, 1998 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 April 3, 1999 Versus Three Months Ended March 28, 1998
The following discussion presents the material changes in results of operations
which have occurred in the first quarter of 1999 in comparison to the same
period in 1998.
Consolidated net sales were approximately $44.9 million in the first quarter of
1999, an increase of 4.4% from last year's first quarter consolidated net sales
of approximately $43.0 million.
First quarter 1999 net sales (including intercompany sales) by the Stratford
Company increased 4.4% to approximately $31.0 million as compared to $29.7
million for the comparable period in 1998. Excluding sales to Simmons, net sales
for the first quarter of 1999 were approximately $22.3 million compared to
approximately $27.8 million for the first quarter of 1998, a decrease of 19.8%.
First quarter sales in 1999 to Simmons were approximately $8.7 million compared
to approximately $2.0 million for the first quarter of 1998, an increase of
335%.
First quarter sales in 1999 to Stratford's larger national retail chain
customers increased 8.4%, while sales to smaller retail furniture store
customers decreased by 49.9%. Total Stratford volume, excluding frame and coil
sales and sales to Simmons Upholstered Furniture Corporation ("Simmons"), an
affiliate, decreased 16.3% during the first quarter of 1999 as compared to 1998.
Volume to Stratford's larger national retail chain customers increased 8.4%,
while volume to Stratford's smaller retail furniture store customers decreased
49.9%. Sales of frames and coils to other furniture manufacturers decreased
52.7% during the first quarter of 1999 as compared to 1998. Sales to the larger
national retail accounts increased as a result of Stratford's continued focus
on these accounts, which resulted in increased business to existing customers.
Stratford's sales to Simmons increased as a result of a shift of 100% of
Simmons' production to Stratford from approximately 19% in the first quarter of
1998. This shift resulted from the shut down of Simmons' Paoli plant. This
increase in sales to Simmons and the larger national retail chain customers
changed Stratford's sales focus resulting in a decrease in Stratford's smaller
retail furniture store sales and a decrease in frame and coil sales.
Stratford's selling prices remained essentially flat for the first quarters of
1999 and 1998.
- 13 -
<PAGE> 14
First quarter 1999 net sales by Barcalounger increased 3.6% to approximately
$14.4 million as compared to $13.9 million in 1998. This increase in sales
reflects an increase of 3.6% in the average selling prices in the first quarter
of 1999 versus 1998. Barcalounger's sales volume remained consistent for the
first quarters of 1999 and 1998.
Consolidated cost of sales increased 5.3% in the first quarter of 1999 to $42.0
million, or 93.6% of net sales, as compared to $39.9 million, or 92.7% of net
sales in 1998. Stratford's cost of sales increased to 100.1% of net sales in the
first quarter of 1999, as compared to 98.5% in the first quarter of 1998.
Stratford's increased percentage of cost of sales is attributable mainly to
training and setup costs and negative variances (inefficiencies) associated with
the move of Simmons production from Paoli to Stratford's facility in Okolona.
Barcalounger's cost of sales decreased to 79.8% of net sales in the first
quarter of 1999, as compared to 80.7% of net sales for the first quarter of
1998, as a result of continuing production efficiencies.
Consolidated selling, administrative and general expenses for the first quarters
of 1999 and 1998 were approximately $5.8 million and $6.2 million, respectively,
representing a decrease of 6.5%. This decrease is due primarily to a $.5 million
reimbursement for the settlement of a lawsuit in prior years, which was received
in 1999.
Interest expense, was approximately $18.3 million and $17.1 million for the
first quarters of 1999 and 1998, respectively, an increase of approximately
7.0%. The increase was primarily due to increased borrowings on the Credit
Agreement.
No income taxes have been provided in the first quarters of 1999 and 1998,
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, 1998 included in
the Company's Form 10-K, and footnote 6 to the Company's unaudited condensed
consolidated financial statements included herein.
Year 2000
The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits to define the applicable year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause system
failures and other computer errors, resulting in business and operational
disruptions. The Company recognizes the need to identify and correct problems
associated with its existing computer systems and certain non-information
technology systems as the Year 2000 approaches. Both internal and external
resources are being used to identify, correct, and to test these financial,
information and operational systems for Year 2000 compliance.
While a number of the Company's systems have been determined to be Year 2000
compliant, certain applications required remediation. The Company has
substantially completed its remediation and is currently replacing certain
non-Year 2000 compliant hardware and software as well as testing Year 2000
software changes. The Company anticipates that its remediation efforts and
necessary testing related to the Year 2000 issue will be completed by September
1999 and does not expect the impact of Year 2000 issues to have a material
impact on the financial position or results of operations of the Company.
- 14 -
<PAGE> 15
Costs and expenses incurred through March 31, 1999 in addressing the Year 2000
issue has been less than $400,000. It is estimated that less than $100,000 in
costs will be incurred in 1999 in order to replace voice mail and personal
computer equipment and complete a post implementation phase of an update to
human resource software.
The Company has made inquiries of key third parties to assess the potential
impact on the Company's operations if such parties are not successful in
remediating their systems in a timely manner; however, the Company is awaiting
some responses which are expected before the end of the second quarter. The
Company is in the process of developing contingency plans in the event Year 2000
failures of its key suppliers and service providers, and anticipates that these
contingency plans will be in place by September 1999.
The Company's expectations about future costs necessary to achieve Year 2000
compliance, the impact on its operations and its ability to bring each of its
systems into Year 2000 compliance are subject to a number of uncertainties that
could cause actual results to differ materially. Such factors include the
following:(i) the Company may not be successful in properly identifying all
systems and programs that contain two-digit year codes;(ii) the nature and
number of systems which require reprogramming, upgrading or replacement may
exceed the Company's expectations in terms of complexity and scope;(iii) the
Company may not be able to complete all remediation and testing necessary in a
timely manner;(iv) the Company has no control over the ability of its key
suppliers and customers to achieve Year 2000 compliance; and (v) the impact of
the Year 2000 problems on key customers may be of such magnitude that it may
adversely affect their demand for the Company's products and services. Fairwood
is not able to estimate the potential, worst-case-scenario as a result of Year
2000 failure from these, or other, unanticipated factors.
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, 1998 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: May 14, 1999
- 16 -
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