<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 30, 2000
-------------------------------------------------
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 SEPTEMBER 30, 2000
----- ------------------
<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)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------ ------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash equivalents $ 3,457 5,135
-------- --------
Trade accounts receivable 9,704 8,455
Less allowance for discounts and doubtful accounts 282 325
-------- --------
9,422 8,130
-------- --------
Inventories 8,156 6,841
Prepaid expenses and other current assets 270 166
-------- --------
Total current assets 21,305 20,272
-------- --------
Property, plant and equipment, at cost 8,233 8,127
Less accumulated depreciation and amortization 5,416 5,185
-------- --------
2,817 2,942
-------- --------
Other assets 40 125
-------- --------
$ 24,162 23,339
======== ========
(Continued)
</TABLE>
- 2 -
<PAGE> 3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND DEFICIT 2000 1999
----------------------- ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt:
Revolving credit $418,208 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Accrued interest 165,748 147,490
Accounts payable 2,491 3,015
Due to affiliate 3,964 4,032
Accrued expenses 2,477 3,611
Federal and state income taxes 133 133
-------- --------
Total current liabilities 841,802 327,062
-------- --------
Long-term debt:
Revolving credit - 372,736
Senior subordinated debentures - 80,000
-------- --------
- 452,736
-------- --------
Other liabilities 3,630 2,771
-------- --------
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 loss ( 1,644) ( 1,644)
Accumulated deficit ( 875,674) ( 813,634)
-------- --------
( 821,370) ( 759,330)
-------- --------
$ 24,162 23,339
======== ========
</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 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 14,894 9,771 43,404 87,728
------- ------- ------- -------
Cost of sales 11,645 10,738 34,433 84,746
Selling, administrative and
general expenses 2,200 2,490 7,153 12,844
------- ------- ------- -------
13,845 13,228 41,586 97,590
------- ------- ------- -------
Operating income (loss) 1,049 ( 3,457) 1,818 ( 9,862)
Interest income 30 119 107 145
Interest on indebtedness ( 21,304) ( 20,224) ( 63,880) ( 57,206)
Loss from flood - ( 707) - ( 707)
Loss on sale of Stratford
Division - ( 97) - ( 1,064)
Other income 14 13 - 115
------- ------- ------- -------
Loss before income taxes ( 20,211) ( 24,353) ( 61,955) ( 68,579)
Provision for income taxes - ( 133) - ( 133)
------- ------- ------- -------
Net loss $( 20,211) ( 24,486) ( 61,955) ( 68,712)
======= ======= ======= =======
</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 30, October 2,
2000 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 61,955) ( 68,712)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 278 1,086
Gain on disposal of property, plant and equipment - ( 21)
Loss on disposal of Stratford Division - 1,064
Changes in assets and liabilities, net of effect
of disposition:
Accounts receivable ( 1,292) 2,408
Inventories ( 1,315) 2,559
Prepaid expenses and other current assets ( 104) 285
Accounts payable ( 609) 5,060
Federal and state income taxes - ( 4 360)
Accrued expenses 17,124 17,629
Other, net 944 540
-------- -------
Cash used - operating activities ( 46,929) ( 42,462)
-------- -------
Cash flows from investing activities:
Disposition of property, plant and equipment - 21
Disposition of Stratford Division - 13,950
Capital expenditures ( 153) ( 412)
Repayment of Affiliate Note receivable - 500
------- -------
Cash provided (used) - investing activities ( 153) 14,059
------- -------
Cash flows from financing activities:
Repayment of overdraft - ( 2,212)
Proceeds from revolving credit 45,472 61,766
Repayment of long-term debt - ( 18)
Repayment of credit line - ( 27,480)
Advances from (to) affiliate ( 68) 32
------- -------
Cash provided - financing activities 45,404 32,088
------- -------
Increase (decrease) in cash and cash equivalents ( 1,678) 3,685
Cash and cash equivalents:
Beginning of period 5,135 2,165
------- -------
End of period $ 3,457 5,850
======= =======
Supplemental schedule of cash flow information
----------------------------------------------
Cash paid during year for:
Interest $ 45,491 37,459
Income tax refunds (payments), net 38 ( 4,493)
</TABLE>
Supplemental schedule of noncash operating and financing activities
-------------------------------------------------------------------
In the nine month periods ending September 30, 2000 and October 2, 1999 the
Company recognized $85 thousand and $71 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, necessary to present fairly the
results of operations for the three and nine months ended September 30,
2000 and October 2, 1999, the financial position at September 30, 2000
and December 31, 1999 and the cash flows for the nine months ended
September 30, 2000 and October 2, 1999. The results of operations for
the three and nine month periods ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made for 1999 amounts to conform to
the 2000 presentations.
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 1999
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 Furniture Comfort Corporation
("Furniture Comfort", formerly Futorian Furnishings, Inc.), whose
operating division, Barcalounger Division ("Barcalounger") manufactures
motion upholstered residential furniture.
On June 3, 1999, Furniture Comfort, Consolidated Furniture's operating
subsidiary, sold substantially all of the assets of the Stratford
Division. The proceeds from the sale were used to pay-down Furniture
Comfort's revolving credit and term loan. The sale included
substantially all of the business and assets of the Stratford Division,
including its office and showroom in Bannockburn, Illinois and the
assignment of leases for certain other manufacturing and showroom
facilities.
3. Fairwood's comprehensive loss includes a minimum pension liability on
its subsidiaries retirement plan, which is calculated and reported
annually. As a result, the minimum pension liability has no effect on
the quarterly unaudited condensed consolidated statements of operations.
4. 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 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
Raw materials $ 4,707 4,486
In process 1,717 2,144
Finished goods 3,041 1,612
------ ------
Inventories at
first-in, first out 9,465 8,242
LIFO reserve 1,309 1,401
------ ------
Inventories at LIFO $ 8,156 6,841
====== ======
</TABLE>
- 6 -
<PAGE> 7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
5. In the second quarter of 1999, Fairwood paid an estimated tax liability
to the Internal Revenue Service ("IRS") arising out of an IRS
examination. Fairwood continues to be obligated to the extent of any
adjustment by the IRS to the interest component of the settlement and
the state tax effect of this settlement. An accrual for additional
interest of $3.6 million and taxes of $0.1 million remains at September
30, 2000. These accruals for interest and taxes are included in accrued
interest and Federal and state income taxes, respectively, on the
accompanying consolidated balance sheet. The Company has not reached
final settlement with all taxing authorities, therefore the amount of
the accruals are subject to change.
With the exception of adjustments resulting from the IRS settlement, no
provision for Federal income taxes has been provided during the nine
months ended September 30, 2000 and October 2, 1999, 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. On April 1, 1995 and each semi-annual interest payment date thereafter,
Fairwood failed to make the required interest payments due on its 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 $162.2 million on
the Fairwood Debentures, which includes $98.4 million due to Court
Square Capital Limited ("CSCL"), is included in accrued interest on the
accompanying unaudited condensed consolidated balance sheet as of
September 30, 2000. 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, Furniture
Comfort Corporation, as well as its operating division, 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. On March 10, 2000, the
District Court entered an Order affirming the Bankruptcy Court's
decision in all respects. By notice dated April 11, 2000, the
Bondholder's have appealed the District Court's decision to the Second
Circuit Court of Appeals.
- 7 -
<PAGE> 8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The appeal has been fully briefed, but the Court has not yet scheduled
oral argument. During the pendency of the appeal, Consolidated Furniture
and subsidiaries are expecting to continue to operate in the normal
course of business.
Based on uncertainties involved with respect to these matters, Fairwood
continues to accrue interest on the Fairwood Debentures. The Fairwood
Debentures and related accrued interest are liabilities subject to
compromise.
7. Consolidated Furniture's revolving credit under its Credit Agreement
with CSCL, an affiliate (the "Credit Agreement") and senior subordinated
debentures mature on January 2, 2001 and, accordingly, have been
classified as current liabilities in the accompanying unaudited
condensed consolidated balance sheet of the Company as of September 30,
2000. Consolidated Furniture intends to negotiate an extension of these
maturity dates or refinance such indebtedness prior to January 2, 2001.
However, there can be no assurance that Consolidated Furniture will be
able to negotiate such an extension with its affiliate, 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 September 30, 2000.
8. Until June 3, 1999 Stratford provided new product development and
selling activities to Simmons, an affiliate. Under the agreement to
provide services, Stratford recognized approximately $0.3 million for
the period January 1, 1999 through June 3, 1999. Stratford was also
reimbursed approximately $2.6 million for the period January 1, 1999
through June 3, 1999 for various overhead costs.
9. Prior to the sale of Stratford, Fairwood's reportable segments were
strategic business units that offer different products. They were
managed separately because each business had distinctly different
markets and they had separate marketing and manufacturing facilities.
- 8 -
<PAGE> 9
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The segment financial information, in thousands, is as follows:
Nine months ended September 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ - $ 43,404 $ - $ - $ 43,404
Interest expense
(income), net 1 ( 46) 63,818 - 63,773
Segment profit (loss) ( 469) 3,790 ( 65,276) - ( 61,955)
</TABLE>
Nine months ended October 2, 1999
(unaudited)
<TABLE>
<CAPTION>
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 49,739 $ 37,989 $ - $ - $ 87,728
Intersegment income 882 - - ( 882) -
Interest expense
(income), net 1,464 ( 88) 55,685 - 57,061
Segment profit (loss) ( 13,971) 2,106 ( 56,847) - ( 68,712)
</TABLE>
Three months ended September 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ - $ 14,894 $ - $ - $ 14,894
Interest expense
(income), net - ( 11) 21,285 - 21,274
Segment profit (loss) ( 101) 1,419 ( 21,529) - ( 20,211)
</TABLE>
Three months ended October 2, 1999
(unaudited)
<TABLE>
<CAPTION>
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ - $ 9,771 $ - $ - $ 9,771
Intersegment income - - - - -
Interest expense
(income), net - ( 71) 20,176 - 20,105
Segment profit (loss) ( 3,651) ( 246) ( 20,589) - ( 24,486)
</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 September 30, 2000, the Company had long-term debt of approximately $667.0
million, all of which is classified as current liabilities and of which
approximately $604.1 is owed to Court Square Capital Limited ("CSCL"), an
affiliate. Long-term debt was approximately $621.5 million at December 31, 1999,
of which $168.8 million was current and approximately $558.6 million was owed to
CSCL. Accrued interest on long-term debt was approximately $162.2 million and
$145.6 million at September 30, 2000 and December 31, 1999, respectively.
Approximately $98.4 million and $89.7 million of the accrued interest was owed
to CSCL at September 30, 2000 and December 31, 1999, 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. Fairwood has effectively no
cash flow from its subsidiaries because the cash produced by the operations of
the subsidiaries is not expected 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 capital stock. CSCL, as holder of Fairwood's senior
subordinated pay-in-kind debentures, has a first priority collateral interest in
all of the outstanding capital stock of Consolidated Furniture, and the holders
of the merger debentures have a second priority collateral interest in such
capital stock. The Fairwood Debentures are obligations
- 10 -
<PAGE> 11
of Fairwood. Consolidated Furniture is not an obligor under the Fairwood
Debentures. However, Consolidated Furniture is an obligor under a revolving
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 capital
stock of Furniture Comfort Corporation ("Furniture Comfort", formerly named
Futorian Furnishings, Inc.), which has operations that it conducts through its
one remaining division, Barcalounger. Furniture Comfort 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. Furniture Comfort is
not an obligor under the Fairwood Debentures.
On April 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 date. Accrued
interest of $162.2 million on the Fairwood Debentures, which includes $98.4
million due to CSCL, is included in accrued interest in the accompanying
unaudited condensed consolidated balance sheet as of September 30, 2000.
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 and Furniture Comfort Corporation, as well as its
operating division, 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. On March 10, 2000, the
District Court entered an Order affirming the Bankruptcy Court's decision in all
respects. By notice dated April 11, 2000, the Bondholder's have appealed the
District Court's decision to the Second Circuit Court of Appeals. The appeal has
been fully briefed, but the Court has not yet scheduled oral argument. During
the pendency of the appeal, Consolidated Furniture and subsidiaries are
expecting to continue to operate in the normal course of business.
- 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
September 30, 2000.
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 1999 and the first nine months of 2000, 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 2000 were approximately $45.5 million. There
were no principal repayments to CSCL during the first nine months of 2000.
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 and the
Fairwood 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, 2000.
Consolidated Furniture's revolving credit and senior subordinated debentures
mature on January 2, 2001 and, accordingly, have been classified as current
liabilities in the accompanying unaudited condensed consolidated balance sheet
as of September 30, 2000. Consolidated Furniture intends to negotiate an
extension of these maturity dates with CSCL or refinance such indebtedness prior
to January 2, 2001. However, there can be no assurance that 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
consolidated financial statements as of December 31, 1999 included in Fairwood's
Form 10-K, and footnote 5 to Fairwood's condensed consolidated financial
statements included herein.
Results of Operations
Three Months Ended September 30, 2000 Versus Three Months Ended October 2, 1999
The following discussion presents the material changes in results of operations,
which have occurred in the third quarter of 2000 in comparison to the same
period in 1999.
- 12 -
<PAGE> 13
Net sales on a consolidated basis were approximately $14.9 million in the third
quarter of 2000, an increase of 52.0% from last year's third quarter
consolidated net sales of approximately $9.8 million. Cost of sales on a
consolidated basis increased 8.4% in the third quarter of 2000 to $11.6 million,
or 77.9% of net sales, as compared to $10.7 million, or 109.2% of net sales, in
1999. These sales and cost of sales increases were impacted largely by the flood
related closure in 1999. The decrease in cost of sales as a percentage of net
sales was primarily due to the result of additional Stratford expenses incurred
after the sale and the elimination of intercompany profit in inventory in 2000.
Third quarter 2000 net sales by Barcalounger increased 52.0% to approximately
$14.9 million as compared to $9.8 million in 1999. This increase in sales
reflects an increase of 6.8% in the average selling prices and an increase in
sales volume of 37.8% in the third quarter of 2000 versus 1999. The increase is
due to the lost sales from the flood related closure in the third quarter of
1999. Barcalounger's cost of sales decreased to 78.5% of net sales in the third
quarter of 2000, as compared to 80.0% of net sales for the third quarter of
1999. The decrease in the cost of sales percentage was attributable to price
increases made in April 2000 and decreases in the number of lower margin items
sold.
Selling, administrative and general expenses on a consolidated basis for the
third quarters of 2000 and 1999 were approximately $2.2 million and $2.5
million, respectively, representing a decrease of 12.0%. This decrease is due
primarily to the June 3, 1999 sale of the Stratford division.
Interest expense, was approximately $21.3 million and $20.2 million for the
third quarters of 2000 and 1999, respectively, an increase of 5.4%. The increase
was primarily due to increased borrowings on the Credit Agreement.
Nine Months Ended September 30, 2000 Versus Nine Months Ended October 2, 1999
The following discussion presents the material changes in results of operations,
which have occurred in the first nine months of 2000 in comparison to the same
period in 1999. The comparability of these periods is impacted by the June 3,
1999 sale of the Stratford division.
Net sales on a consolidated basis were approximately $43.4 million in the first
nine months of 2000, a decrease of 50.5% from last year's first nine months
consolidated net sales of approximately $87.7 million. Cost of sales on a
consolidated basis decreased 59.4% in first nine months of 2000 to approximately
$34.4 million, or 79.3% of net sales, as compared to $84.7 million, or 96.6% of
net sales, in 1999. These sales and cost of sales decreases were impacted
largely by the sale of Stratford, offset by the effects from the flood related
closure in 1999. The decrease in cost of sales as a percentage of net sales was
primarily the result of the elimination of lower margin Stratford sales.
Barcalounger net sales for the first nine months of 2000 were approximately
$43.4 million, an increase of 14.2%, as compared to 1999 nine month sales of
$38.0 million, reflective of a 6.3% increase in the number of pieces sold and a
6.8% increase in average selling prices. The increase is due to the increase in
sale of products with more expensive upper grade leather. Barcalounger's cost of
sales decreased to 79.7% of net sales in the first nine months of 2000, as
compared to 80.3% of net sales in the first nine months of 1999. The decrease in
the cost of sales percentage was attributable to price increases made in April
2000 and decreases in the number of lower margin items sold.
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Selling, administrative and general expenses on a consolidated basis for the
first nine months of 2000 and 1999 were approximately $7.2 million and $12.8
million, respectively, representing a decrease of 43.8%. This decrease is due
primarily to the June 3, 1999 sale of the Stratford division.
Interest expense, was approximately $63.9 million and $57.2 million for the
first nine months of 2000 and 1999, respectively, an increase of 11.7%. The
increase was primarily due to increased borrowings on the Credit Agreement and
additional accrued interest to the IRS.
With the exception of adjustments resulting from the IRS settlement, no
provision for Federal income taxes has been provided during the nine months
ended September 30, 2000 and October 2, 1999, 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.
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, 1999 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
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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 14, 2000
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