<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 July 1, 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 July 1, 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>
July 1, December 31,
Assets 2000 1999
------ ------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,048 5,135
-------- --------
Trade accounts receivable 9,882 8,455
Less allowance for discounts and doubtful accounts 313 325
-------- --------
9,569 8,130
-------- --------
Inventories 8,546 6,841
Prepaid expenses and other current assets 245 166
-------- --------
Total current assets 20,408 20,272
-------- --------
Property, plant and equipment, at cost 8,224 8,127
Less accumulated depreciation and amortization 5,374 5,185
-------- --------
2,850 2,942
-------- --------
Other assets 40 125
-------- --------
$ 23,298 23,339
======== ========
</TABLE>
(Continued)
- 2 -
<PAGE> 3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
July 1, December 31,
Liabilities and Deficit 2000 1999
----------------------- ------------ -----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt:
Revolving credit $399,949 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Accrued interest 162,709 147,490
Accounts payable 2,952 3,015
Due to affiliate 4,032 4,032
Accrued expenses 2,436 3,611
Federal and state income taxes 133 133
-------- --------
Total current liabilities 820,992 327,062
-------- --------
Long-term debt:
Revolving credit - 372,736
Senior subordinated debentures - 80,000
-------- --------
- 452,736
-------- --------
Other liabilities 3,335 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 ( 855,433) ( 813,634)
-------- --------
( 801,129) ( 759,330)
-------- --------
$ 23,298 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 Six Months Ended
----------------------- ------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 15,047 33,106 28,510 77,957
------- ------- ------- -------
Cost of sales 12,113 32,018 22,788 74,008
Selling, administrative and
general expenses 2,572 4,602 4,953 10,354
------- ------- ------- -------
14,685 36,620 27,741 84,362
------- ------- ------- -------
Operating income (loss) 362 ( 3,514) 769 ( 6,405)
Interest income 31 19 77 26
Interest on indebtedness ( 22,555) ( 18,715) ( 42,576) ( 36,982)
Loss on sale of Stratford
Division - ( 967) - ( 967)
Other income (expenses), net ( 14) 88 ( 14) 102
------- ------- ------- --------
Loss before income taxes ( 22,176) ( 23,089) ( 41,744) ( 44,226)
Provision for income taxes - - - -
------- ------- ------- -------
Net loss $( 22,176) ( 23,089) ( 41,744) ( 44,226)
======= ======= ======= =======
</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>
Six Months Ended
-----------------------
July 1, July 3,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 41,744) ( 44,226)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 189 956
Gain on disposal of property, plant and equipment - ( 21)
Loss on disposal of Stratford Division - 967
Changes in assets and liabilities, net of disposition:
Accounts receivable ( 1,439) 4,838
Inventories ( 1,705) ( 1,247)
Prepaid expenses and other current assets ( 79) 285
Accounts payable ( 118) 4,504
Accrued expenses 14,044 14,372
Federal and state income taxes - ( 4,493)
Due to affiliate - 1,073
Other, net 649 270
-------- -------
Cash used - operating activities ( 30,203) ( 22,722)
------- -------
Cash flows from investing activities:
Disposition of property, plant and equipment - 21
Disposition of Stratford Division - 14,047
Capital expenditures ( 97) ( 404)
Advances to affiliate - 500
------- -------
Cash provided (used) - investing activities ( 97) 14,164
------- -------
Cash flows from financing activities:
(Repayments) borrowings - overdraft - ( 2,212)
Proceeds from revolving credit 27,213 45,945
Repayment of long-term debt - ( 18)
(Repayment of) proceeds from credit line, net - ( 27,480)
------- -------
Cash provided - financing activities 27,213 16,235
------- -------
Increase (decrease) in cash and cash equivalents ( 3,087) 7,677
Cash and cash equivalents:
Beginning of period 5,135 2,165
------- -------
End of period $ 2,048 9,842
======= =======
Supplemental schedule of cash flow information
----------------------------------------------
Cash paid during year for:
Interest $ 27,188 21,639
Income tax payments, net - 4,493
</TABLE>
Supplemental schedule of noncash operating and financing activities In the six
month periods ending July 1, 2000 and July 3, 1999 the Company recognized $55
thousand and $47 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 six months ended July 1, 2000 and July 3,
1999, the financial position at July 1, 2000 and December 31, 1999 and the
cash flows for the six months ended July 1, 2000 and July 3, 1999. The
results of operations for the three and six month periods ended July 1,
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>
July 1, 2000 December 31, 1999
------------ -----------------
(Unaudited)
<S> <C> <C>
Raw materials $ 4,821 4,486
In process 2,207 2,144
Finished goods 2,827 1,612
------ ------
Inventories at
first-in, first out 9,855 8,242
LIFO reserve 1,309 1,401
------ ------
Inventories at LIFO $ 8,546 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 July 1, 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 six months
ended July 1, 2000 and July 3, 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 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 $155.4 million on
the Fairwood Debentures, which includes $94.3 million due to Court Square
Capital Limited ("CSCL"), is included in accrued interest on the
accompanying unaudited condensed consolidated balance sheet as of July 1,
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
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 (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 July 1, 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,
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 July 1, 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 $0.1 million for the period
April 4, 1999 through June 3, 1999 and approximately $0.3 million for
the period January 1, 1999 through June 3, 1999. Stratford was also
reimbursed approximately $0.5 million and $1.2 million in selling
expenses for the period April 4, 1999 through June 3, 1999 and the period
January 1, 1999 through June 3, 1999, respectively. Also for the period
April 4, 1999 through June 3, 1999 and the period January 1, 1999 through
June 3, 1999, respectively, Stratford recognized approximately $.6 million
and $1.4 million of reimbursements for general and administrative
expenses.
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:
<TABLE>
<CAPTION>
Six months ended July 1, 2000
-----------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ - $ 28,510 $ - $ - $ 28,510
Interest expense
(income), net - ( 31) 42,530 - 42,499
Segment profit (loss) - 2,371 ( 44,115) - ( 41,744)
<CAPTION>
Six months ended July 3, 1999
-----------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 49,739 $ 28,218 $ - $ - $ 77,957
Intersegment income 882 - - ( 882) -
Interest expense, net 1,464 17 35,475 - 36,956
Segment profit (loss) ( 10,320) 2,352 ( 36,258) - ( 44,226)
<CAPTION>
Three months ended July 1, 2000
-------------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ - $ 15,047 $ - $ - $ 15,047
Interest expense
(income), net - ( 9) 22,533 - 22,524
Segment profit (loss) - 1,306 ( 23,482) - ( 22,176)
<CAPTION>
Three months ended July 3, 1999
-------------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 19,240 $ 13,866 $ - $ - $ 33,106
Intersegment income 336 - - ( 336) -
Interest expense, net 780 10 17,906 - 18,696
Segment profit (loss) ( 5,739) 1,188 ( 18,538) - ( 23,089)
</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 July 1, 2000, the Company had long-term debt of approximately $648.7 million,
all of which is classified as current liabilities and of which approximately
$585.8 is owed to Court Square Capital Limited ("CSCL"), an affiliate. Long-term
debt was approximately $625.5 million at December 31, 1999, of which $168.8
million was current and approximately $562.6 million was owed to CSCL. Accrued
interest on long-term debt was approximately $162.7 million and $147.5 million
at July 1, 2000 and December 31, 1999, respectively. Approximately $98.1 million
and $89.7 million of the accrued interest was owed to CSCL at July 1, 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 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 (as defined below) 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 of Fairwood. Consolidated Furniture is not an obligor under the
Fairwood Debentures.
- 10 -
<PAGE> 11
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 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 $155.4 million on the Fairwood Debentures, which includes $94.3
million due to CSCL, is included in accrued interest in the accompanying
unaudited condensed consolidated balance sheet as of July 1, 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, 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. 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 July 1,
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 six 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 six months of 2000 were approximately $27.2 million. There were
no principal repayments to CSCL during the first six 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, 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, 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 July 1, 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 July 1, 2000 Versus Three Months Ended July 3, 1999
The following discussion presents the material changes in results of operations,
which have occurred in the second quarter 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.
- 12 -
<PAGE> 13
Net sales on a consolidated basis were approximately $15.0 million in the second
quarter of 2000, a decrease of 54.7% from last year's second quarter
consolidated net sales of approximately $33.1 million. Cost of sales on a
consolidated basis decreased 62.2% in the second quarter of 2000 to $12.1
million, or 80.7% of net sales, as compared to $32.0 million, or 96.7% of net
sales, in 1999. These sales and cost of sales decreases were impacted largely by
the sale of Stratford. The decrease in cost of sales as a percentage of net
sales was primarily the result of the elimination of lower margin Stratford
sales.
Second quarter 2000 net sales by Barcalounger increased 8.7% to approximately
$15.0 million as compared to $13.8 million in 1999. This increase in sales
reflects an increase of 7.3% in the average selling prices and an increase in
sales volume of 1.3% in the second quarter of 2000 versus 1999. The increase is
due to the increase in sale of products with more expensive upper grade leather.
Barcalounger's cost of sales increased to 80.7% of net sales in the second
quarter of 2000, as compared to 80.4% of net sales for the second quarter of
1999.
Selling, administrative and general expenses on a consolidated basis for the
second quarters of 2000 and 1999 were approximately $2.6 million and $4.6
million, respectively, representing a decrease of 43.5%. This decrease is due
primarily to the June 3, 1999 sale of the Stratford division.
Interest expense, was approximately $22.6 million and $18.7 million for the
second quarters of 2000 and 1999, respectively, an increase of 20.9%. The
increase was primarily due to increased borrowings on the Credit Agreement
off-set partially by the repayment of the Furniture Comfort line of credit and
term loan.
Six Months Ended July 1, 2000 Versus Six Months Ended July 3, 1999
The following discussion presents the material changes in results of operations,
which have occurred in the first six 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 $28.5 million in the first
six months of 2000, a decrease of 63.5% from last year's first six months
consolidated net sales of approximately $78.0 million. Cost of sales on a
consolidated basis decreased 69.2% in first six months of 2000 to approximately
$22.8 million, or 80.0% of net sales, as compared to $74.0 million, or 94.9% of
net sales, in 1999. These sales and cost of sales decreases were impacted
largely by the sale of Stratford. 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 six months of 2000 were approximately $28.5
million, an increase of 1.1%, as compared to 1999 second quarter sales of $28.2
million, reflective of a 4.5% decrease in the number of pieces sold and a 5.7%
decrease 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 80.0% of net sales in the first six months of 2000, as
compared to 80.1% of net sales in the first six months of 1999.
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<PAGE> 14
Selling, administrative and general expenses on a consolidated basis for the
first six months of 2000 and 1999 were approximately $5.0 million and $10.4
million, respectively, representing a decrease of 51.9%. This decrease is due
primarily to the June 3, 1999 sale of the Stratford division.
Interest expense, was approximately $42.6 million and $37.0 million for the
first six months of 2000 and 1999, respectively, an increase of 15.1%. The
increase was primarily due to increased borrowings on the Credit Agreement
offset partially by the repayment of the Furniture Comfort line of credit and
term loan.
No income taxes have been provided in the first six months of 2000 and 1999,
respectively, as the Company is in a net operating loss carry forward position,
and a valuation allowance has been increased to offset any future benefit from
these positions.
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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<PAGE> 15
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: August 14, 2000
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