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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 2, 1994
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18446
Fairwood Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3472113
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Mohasco Corporation
4401 Fair Lakes Court, Fairfax, VA 22033
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(Address of principal executive offices) (Zip Code)
(703) 968-8015
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(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
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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 28, 1994
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Class A Voting, $.01 Par Value 500
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Class B Non-Voting, $.01 Par Value 999,800
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
April 2, December 31,
Assets 1994 1993
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(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 6,767 3,968
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Accounts and notes receivable:
Trade 47,760 47,734
Other 1,351 1,718
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49,111 49,452
Less allowance for discounts and doubtful accounts 4,522 4,062
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44,589 45,390
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Inventories 31,065 31,175
Prepaid expenses and other current assets 3,996 3,678
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Total current assets 86,417 84,211
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Property, plant and equipment, at cost 55,004 54,428
Less accumulated depreciation and amortization 29,500 28,685
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25,504 25,743
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Other assets 3,336 3,601
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$ 115,257 113,555
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(Continued)
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
April 2, December 31,
Liabilities and Deficit 1994 1993
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(Unaudited) (Audited)
Current Liabilities:
Current maturities of long-term debt $ 150 150
Accounts payable 13,442 13,945
Accrued expenses 13,313 21,070
Federal and state income taxes 5,685 5,709
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Total current liabilities 32,590 40,874
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Long-term debt, less current maturities:
Revolving credit 171,637 160,427
Senior subordinated debentures 80,000 80,000
Senior subordinated pay-in-kind debentures 98,239 91,173
Merger debentures 58,032 53,517
Other notes and leases 700 700
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408,608 385,817
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Deferred income taxes 2,827 2,827
Other liabilities 4,012 3,816
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6,839 6,643
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Redeemable preferred stock:
Junior preferred, cumulative, par value $.01 per share 100 100
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Common stock and other shareowners' deficit:
Common stock and additional paid-in capital 55,948 55,948
Retained deficit (388,828) (375,827)
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(332,880) (319,879)
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$ 115,257 113,555
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See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
Three Months Ended
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April 2, April 3,
1994 1993
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Net sales $ 68,193 65,234
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Cost of sales 58,453 54,794
Selling, administrative and
general expenses 9,781 11,215
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68,234 66,009
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Operating loss ( 41) ( 775)
Interest income 21 85
Interest on indebtedness 12,471 11,101
Other expenses, net 501 1,000
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Loss before income taxes and
cumulative effect of change
in accounting principle (12,992) (12,791)
Provision for income taxes (benefit) - -
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Loss before cumulative effect of
change in accounting principle (12,992) (12,791)
Cumulative effect of change in
accounting principle for income taxes - 2,100
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Net loss $(12,992) (10,691)
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See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
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April 2, 1994 April 3, 1993
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Cash flows from operating activities:
Net loss $( 12,992) ( 10,691)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - ( 2,100)
Depreciation and amortization 1,018 1,122
Loss on disposal of property, plant, and equipment - 451
Loss, recognized in 1992, on sale of property - 4,562
Current period interest converted to pay-in-kind
debentures 5,790 4,964
Changes in assets and liabilities:
Accounts receivable 801 ( 1,822)
Inventories 110 ( 2,079)
Prepaid expenses and other current assets ( 318) ( 813)
Accounts payable ( 503) 1,027
Accrued expenses ( 1,966) ( 5,743)
Federal and state income taxes ( 24) 3,331
Other, net 461 ( 316)
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Cash provided (used) - operating activities ( 7,623) ( 8,107)
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Cash flows from investing activities:
Capital expenditures ( 779) ( 844)
Disposition of property, plant and equipment - 3,814
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Cash provided (used) - investing activities ( 779) 2,970
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Cash flows from financing activities:
Proceeds from long-term debt 13,710 16,090
Repayment of long-term debt ( 2,500) ( 8,005)
Dividends ( 9) ( 8)
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Cash provided (used) - financing activities 11,201 8,077
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Increase (decrease) in cash and cash equivalents 2,799 2,940
Cash and cash equivalents:
Beginning of period 3,968 5,993
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End of period $ 6,767 8,933
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Supplemental schedule of cash flow information
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Cash paid during year for:
Interest $ 10,246 9,612
Income taxes 54 58
Conversion of accrued interest to pay-in-kind
debentures 11,581 9,927
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.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting of only normal recurring
adjustments, and present fairly the results of operations for the three
months ended April 2, 1994 and April 3, 1993, the financial position at
April 2, 1994 and December 31, 1993 and the cash flows for the three
months ended April 2, 1994 and April 3, 1993.
2. The results of operations for the three month period ended April 2, 1994
are not necessarily indicative of the results to be expected for the full
year.
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:
April 2, 1994 December 31, 1993
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(Unaudited) (Audited)
Raw materials $ 17,913 20,371
In process 8,806 9,487
Finished goods 17,483 14,346
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Inventories at
first-in, first out 44,202 44,204
LIFO reserve 13,137 13,029
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Inventories at LIFO $ 31,065 31,175
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4. The Company adopted Financial Accounting Standard No. 109, "Accounting for
Income Taxes", effective January 1, 1993. The cumulative effect of the
change in accounting principle resulted in a $2.1 million reduction of the
first quarter loss.
No provision for income taxes has been provided during the quarter ended
April 2, 1994 and April 3, 1993 as the Company is in a net operating loss
carryforward position.
5. The Internal Revenue Service ("IRS") has examined the Company's Federal
income tax returns for the years 1988 through 1991 and is challenging
certain deductions, of which the most significant involves an effort to
recharacterize interest deductions as dividend distributions. The IRS
has delivered proposed adjustments that approximate a net tax cost of $92
million, including interest through April 2, 1994. The Company believes
the IRS's position with respect to these issues is incorrect and plans to
contest vigorously the proposed adjustments. The Company cannot predict
the ultimate outcome nor the impact on its financial statements, if any.
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ITEM 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
THREE MONTHS ENDED APRIL 2, 1994 VERSUS THREE MONTHS ENDED APRIL 3, 1993
The following discussion presents the material changes in results of operations
which have occurred in the first quarter of 1994 in comparison to the same
period in 1993.
Net sales were approximately $68.2 million in the first quarter of 1994, an
increase from last year's first quarter sales of approximately $65.2 million,
due primarily to increased sales of upholstered furniture.
Cost of sales were approximately $58.5 million and $54.8 million for the first
quarters of 1994 and 1993, respectively, or 85.7% and 84.0% of sales for the
first quarters of 1994 and 1993, respectively. Cost of sales as a percentage
of sales increased 1.7% from the first quarter of 1993 to the first quarter of
1994 due primarily to unfavorable manufacturing variances during the first
quarter of 1994 caused primarily by lower production as a result of severe
winter weather in those southern states where subsidiary company operating
plants are located.
Selling, administrative and general expenses for the first quarters of 1994 and
1993 were approximately $9.8 million and $11.2 million, respectively, the
decrease due primarily to more effective utilization of resources and reduction
of personnel due to the consolidation of administrative functions.
Other expense, net, was approximately $.5 million and $1.0 million for the
first quarters of 1994 and 1993, respectively. The first quarter of 1993
included losses on the sales of property of approximately $.5 million.
Effective January 1, 1993, the Company adopted Financial Accounting Standard
No. 109, "Accounting for Income Taxes", which resulted in a $2.1 million
cumulative effect of change in accounting principle, which reduced the first
quarter 1993 loss. Refer to note 5 in the Notes to Unaudited Condensed
Consolidated Financial Statements.
No income taxes have been provided in the first quarters of 1994 and 1993,
respectively, as the Company is in a net operating loss carryforward position.
Liquidity and Capital Resources
At April 2, 1994, the Company had short and long-term debt of approximately
$408.8 million of which approximately $.2 million was current. Short and
long-term debt was approximately $386.0 million at December 31, 1993. The
Company has the option until April 1, 1995 to pay interest on its senior
subordinated pay-in-kind debentures and merger debentures either by cash or by
the distribution of additional securities. Additional securities were issued
in lieu of the cash payment of interest due April 1, 1994 on both the senior
subordinated pay-in-kind debentures and merger debentures, amounting to
approximately $7.1 million and approximately $4.5 million, respectively.
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Mohasco, the Company's principal operating subsidiary, is expected to service
debt from its cash flow from operations and available credit facilities.
Throughout 1993 and the first quarter of 1994, Mohasco funded interest
obligations related to long-term indebtedness through increased borrowings from
Court Square Capital Limited ("CSCL"), an affiliate, under Mohasco's Credit
Agreement with CSCL (the "Credit Agreement"), relating to the revolving credit
facility. The Company is dependent upon CSCL for funding of its debt service
costs. CSCL has in the past increased its revolving credit line to Mohasco in
order for Mohasco to meet its debt service obligations. Under the Credit
Agreement, Mohasco and its subsidiaries are generally restricted from
transferring monies to the Company with the exception of amounts for (a)
specified administra- tive expenses of the Company not exceeding $275,000 per
year and (b) payment of income taxes. The senior subordinated debentures,
senior subordinated pay-in-kind debentures and merger debentures also have
certain restrictions as to the payment and transfer of monies. Management
believes that cash flow from operations and funding from CSCL will be adequate
to meet the Company's obligations through December 31, 1994.
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, 1993 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
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(Registrant)
/s/ JOHN B. SGANGA
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John B. Sganga
Chief Financial Officer,
Executive Vice President,
Secretary and Treasurer
Date: April 28, 1994
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