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 2, 1994
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
--------------------
(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.)
c/o Mohasco Corporation
4401 Fair Lakes Court, Fairfax, VA 22033
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(703) 968-8015
--------------
(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 June 30, 1994
----- -------------
Class A Voting, $.01 Par Value 500
- - ------------------------------ -----------------------------
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)
July 2, December 31,
Assets 1994 1993
------ ----------- ------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 7,261 3,968
------- -------
Accounts and notes receivable:
Trade 44,872 47,734
Other 1,388 1,718
------- -------
46,260 49,452
Less allowance for discounts and doubtful accounts 4,881 4,062
------- -------
41,379 45,390
------- -------
Inventories 31,028 31,175
Prepaid expenses and other current assets 3,724 3,678
------- -------
Total current assets 83,392 84,211
------- -------
Property, plant and equipment, at cost 55,961 54,428
Less accumulated depreciation and amortization 30,346 28,685
------- -------
25,615 25,743
------- -------
Other assets 3,418 3,601
------- -------
$ 112,425 113,555
======= =======
(Continued)
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
July 2, December 31,
Liabilities and Deficit 1994 1993
----------------------- ----------- -----------
(Unaudited) (Audited)
Current Liabilities:
Current maturities of long-term debt $ 160 150
Accounts payable 13,353 13,945
Accrued expenses 20,609 21,070
Federal and state income taxes 5,630 5,709
------- -------
Total current liabilities 39,752 40,874
------- -------
Long-term debt, less current maturities:
Revolving credit 175,176 160,427
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 540 700
------- -------
411,987 385,817
------- -------
Deferred income taxes 2,827 2,827
Other liabilities 4,071 3,816
------- -------
6,898 6,643
------- -------
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
Retained deficit (402,260) (375,827)
------- -------
(346,312) (319,879)
------- -------
$ 112,425 113,555
======= =======
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 Six Months Ended
----------------------- -----------------------
July 2, July 3, July 2, July 3,
1994 1993 1994 1993
-------- -------- -------- --------
Net sales $ 68,490 59,303 136,683 124,537
------- ------- ------- -------
Cost of sales 58,795 52,329 117,248 107,123
Selling, administrative and
general expenses 9,285 8,335 19,066 19,550
------- ------- ------- -------
68,080 60,664 136,314 126,673
------- ------- ------- -------
Operating income (loss) 410 ( 1,361) 369 ( 2,136)
Interest income 33 21 54 106
Interest on indebtedness 13,439 11,624 25,910 22,725
Other expenses, net 426 419 927 1,419
------- ------- -------- -------
Loss before income taxes and
cumulative effect of change
in accounting principle (13,422) (13,383) (26,414) (26,174)
Provision for income taxes
(benefit) - - - -
------- ------- ------- -------
Loss before cumulative effect of
change in accounting principle (13,422) (13,383) (26,414) (26,174)
Cumulative effect of change in
accounting principle for
income taxes - - - 2,100
------- ------- ------- -------
Net loss $ (13,422) (13,383) (26,414) (24,074)
======= ======= ======= =======
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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5
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Year-to-date
-------------------------------
July 2, 1994 July 3, 1993
------------- ------------
Cash flows from operating activities:
Net loss $( 26,414) ( 24,074)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Cumulative effect of change in accounting principle - ( 2,100)
Depreciation and amortization 1,960 2,095
Loss on sale of property, plant and equipment ( 51) 401
Loss on sale of property recognized in 1992 - 4,562
Current period interest converted to pay-in-kind
debentures 5,790 4,964
Changes in assets and liabilities:
Accounts receivable 4,011 ( 1,889)
Inventories 147 ( 231)
Prepaid expenses and other current assets ( 46) ( 630)
Accounts payable ( 592) ( 911)
Accrued expenses 5,330 ( 546)
Federal and state income taxes ( 79) 2,462
Other, net 438 193
------- --------
Cash used - operating activities ( 9,506) ( 15,704)
------- -------
Cash flows from investing activities:
Capital expenditures ( 1,833) ( 1,571)
Dispositions of property, plant and equipment 52 3,887
------- -------
Cash provided (used) - investing activities ( 1,781) 2,316
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 17,249 21,637
Repayment of long-term debt ( 2,650) ( 9,150)
Dividends ( 19) ( 16)
------- -------
Cash provided (used) - financing activities 14,580 12,471
------- --------
Increase (decrease) in cash and cash equivalents 3,293 ( 917)
Cash and cash equivalents:
Beginning of period 3,968 5,993
------- -------
End of period $ 7,261 5,076
======= =======
Supplemental schedule of cash flow information
- - ----------------------------------------------
Cash paid during year for:
Interest $ 13,824 12,232
Income taxes 80 931
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 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
and six months ended July 2, 1994 and July 3, 1993, the financial position
at July 2, 1994 and December 31, 1993 and the cash flows for the six
months ended July 2, 1994 and July 3, 1993.
2. The results of operations for the three and six month periods ended July
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:
July 2, 1994 December 31, 1993
------------- -----------------
(Unaudited) (Audited)
Raw materials $ 18,702 20,371
In process 9,077 9,487
Finished goods 16,684 14,346
------ ------
Inventories at
first-in, first-out 44,463 44,204
LIFO reserve 13,436 13,029
------ ------
Inventories at LIFO $ 31,027 31,175
====== ======
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 six months
ended July 2, 1994 and July 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 $94
million, including interest through July 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 has delivered to
the IRS a protest of the proposed adjustments and requested a conference
with the IRS Appeals Office regarding the issues. The Company cannot
predict the ultimate outcome nor the impact on its financial statements,
if any.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
6. On July 29, 1994, substantially all of the assets of Super Sagless
Corporation ("Super Sagless"), a wholly-owned subsidiary of the Company's
wholly owned subsidiary, were sold to a third party for $40,000,000 cash.
Of the total sales price, $24,250,000 was received upon closing. Of the
remaining $15,750,000, $750,000 was placed in escrow for a period of one
year and $15,000,000 was placed in escrow for a period of six months, in
both cases to secure certain of the Company's post-closing obligations.
After considering the estimated costs of disposition, the Company will
recognize a gain of approximately $21,000,000. The net proceeds from the
sale were used to pay existing debt.
During the six months ended July 2, 1994 and July 3, 1993, Super Sagless
generated net earnings of approximately $2,100,000 and $600,000,
respectively. See Part II, Item 5 of this Form 10-Q for certain unaudited
pro forma financial information regarding this disposition.
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Item 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At July 2, 1994, the Company had short and long term debt of $412.1 million of
which $.2 million was current. Short and long term debt was $386.0 million at
December 31, 1993. The Company has the option during the first five years to
pay interest on the 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 $4.5 million,
respectively.
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 two quarters of 1994, Mohasco funded interest
obligations related to long-term indebtedness through increased borrowings from
Court Square Capital Limited ("CSCL"), under Mohasco's Credit Agreement with
CSCL (the "Credit Agreement"). During the second quarter of 1994 the Company
failed to comply with the loan agreement covenant regarding consolidated net
worth. On June 3, 1994, CSCL waived compliance of this covenant for each of the
months April, May and June of Fiscal Year 1994. The Company is dependent upon
CSCL for funding of its debt service costs. CSCL has increased its revolving
credit line to Mohasco in order for Mohasco to meet its obligations.
Management believes that cash flow from operations and funding from CSCL will
be adequate to meet the Company's obligations through the end of Fiscal Year
1994.
During Fiscal Year 1995 the Company's option to pay interest on its senior
subordinated pay-in-kind debentures and merger debentures in cash or the
distribution of additional securities will end. The Company's cash flow from
operations cannot be expected to be sufficient to permit the Company to make
cash interest payments on these debt securities and the Company's senior debt
obligations. In addition, the Company's credit facilities do not permit the
Company to borrow funds to make cash interest payments. Accordingly, the
Company will most likely default on its obligation to make cash interest
payments on its senior subordinated pay-in-kind debentures and merger
debentures.
Results of Operations
THREE MONTHS ENDED JULY 2, 1994, VERSUS THREE MONTHS ENDED JULY 3, 1993,
The following discussion presents the material changes in results of operations
which have occurred in the second quarter of 1994 in comparison to the same
period in 1993.
Net sales were approximately $68.5 million in the second quarter of 1994, an
increase over last year's second quarter sales of approximately $59.3 million,
due primarily to increased sales of upholstered furniture.
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9
Cost of sales were approximately $58.8 million and $52.3 million for the second
quarters of 1994 and 1993, respectively, or 85.8% and 88.2% of sales for the
second quarters of 1994 and 1993, respectively. Cost of sales as a percentage
of sales decreased 2.4% from the second quarter of 1993 to the second quarter
of due primarily to favorable manufacturing variances manufacturing variances
during the second quarter of 1994 caused primarily by improvements in plant
layout and the introduction of cellular manufacturing techniques.
Selling, administrative and general expenses were approximately $9.3 million
and $8.3 million for the second quarters of 1994 and 1993, respectively. The
increase in 1994 is due primarily to certain favorable non-recurring items that
took place in 1993 but not 1994. These involve the accrual of certain expenses
at higher rates than were required as a result of adjustments in Co-operative
advertising programs and a reduction of certain Comfort Center (furniture
gallery) expenses. There were also favorable adjustments of previously accrued
legal costs for contingencies that ultimately did not occur and of insurance
premiums on a retrospective basis. If not for these cited one time items
Selling, administrative and general expenses for the second quarter of 1994
would have been somewhat lower than in 1993.
Other expenses, net, were approximately $.4 million for the second quarters of
1994 and 1993.
SIX MONTHS ENDED JULY 2, 1994 VERSUS SIX MONTHS ENDED JULY 3, 1993
The following discussion presents the material changes in results of operations
which have occurred in the first six months of 1994 in comparison to the same
period in 1993.
Net sales for the first six months of 1994 increased from last year's sales of
approximately $124.5 million to approximately $136.7 million, primarily due to
increased sales of upholstered furniture.
Cost of sales were approximately $117.2 million and $107.1 million to
approximately $117.2 million for the first six months of 1994 and 1993,
respectively, or 85.8% and 86.0% of sales for the first six months of 1994
and 1993, respectively.
Selling, administrative and general expenses were approximately $19.1 million
and $19.6 million for the first six months of 1994 and 1993, respectively. The
decrease due primarily to more effective utilization of resources and reduction
of personnel due to the consolidation of administrative functions.
Other expenses, net, were approximately $.9 million and $1.4 million for the
first six months 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 1993
loss. Refer to note 4 in the Notes to Unaudited Condensed Consolidated
Financial Statements.
No income taxes have been provided in the first six months of 1994 and 1993,
respectively, as the Company is in a net operating loss carryforward position.
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10
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 5. Other information
On July 29, 1994, Super Sagless Corporation, a wholly-owned subsidiary of
Mohasco, now named SSC Corporation ("Super Sagless"), sold substantially all of
its assets to Leggett & Platt Furniture Hardware Company, a wholly-owned
subsidiary of Leggett & Platt, Incorporated ("Leggett & Platt"), for $40
million in cash. Leggett & Platt also assumed substantially all of Super
Sagless's liabilities. The purchase price was determined pursuant to arm's
length negotiations between Super Sagless and Leggett & Platt. The net
proceeds of the asset sale were used to repay debt.
Prior to the asset sale, Super Sagless manufactured and sold mechanisms
for motion furniture, such as sleepers, recliners and rockers and office
furniture, hospital beds and related health care products. In connection with
the asset sale, Leggett & Platt and Mohasco Upholstered Furniture Corporation,
a wholly-owned subsidiary of Mohasco ("MUFCO"), entered into two supply
arrangements. Pursuant to these supply arrangements, Leggett & Platt has
agreed to supply at least 85% of the upholstered motion furniture mechanism
requirements of MUFCO's Stratford and Barcalouger operating units.
The following unaudited pro forma condensed consolidated balance sheet and
condensed consolidated statements of operations (collectively, the "pro forma
statements") were prepared as if the sale of Super Sagless were effective as of
January 1, 1993, for purposes of the pro forma condensed consolidated
statements of operations for the year ended December 31, 1993, and for the six
months ended July 2, 1994, and as of July 2, 1994, for the purposes of the pro
forma condensed consolidated balance sheet. The pro forma statements do not
purport to represent what the Company's financial position or results of
operations would actually have been if the sale of Super Sagless had in fact
occured on such dates or to project the Company's financial position or results
of operations as of any future date or for any future period. Information
regarding the Company's actual results of operations for the period presented
may be obtained from the respective filings on Form 10-K and elsewhere within
this Form 10-Q.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited)
Six Months ended July 2, 1994
(In thousands)
Actual Super Sagless Application of Fairwood
Fairwood Corporation(1) Proceeds Pro Forma
-------- ----------- -------- ---------
Net sales $136,683 $(38,625) $ $ 98,058
Cost of sales 117,248 (33,291) 83,957
Selling, administrative
and general expenses 19,066 (3,390) 15,676
------- -------- ------- -------
Operating income (loss) 369 (1,944) - (1,575)
Interest expense, net 25,856 (1,486)(2) 24,370
Other expenses, net 927 108 1,035
------- ------- ------- -------
Loss before taxes (26,414) (2,052) 1,486 (26,980)
Income taxes - - - -
------- ------- ------- -------
Net loss $ (26,414) $ (2,052) $ 1,486 $(26,980)
======== ======== ======= ========
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited)
Year ended December 31, 1993
(In thousands)
Actual Super Sagless Application of Fairwood
Fairwood Corporation(1) Proceeds Pro Forma
-------- ----------- -------- ---------
Net sales $261,451 $(67,913) $ $193,538
Cost of sales 221,519 (59,035) 162,484
Selling, administrative
and general expenses 37,985 (6,468) 31,517
------- -------- ------- -------
Operating income (loss) 1,947 (2,410) - (463)
Interest expense, net 46,641 (2,004)(2) 44,637
Gain on sale of subsidiary - 22,228 (3) 22,228
Other expenses, net 4,296 4,296
------- ------- ------- -------
Loss before taxes (48,990) (2,410) 24,232 (27,168)
Income taxes - - 1,200 (4) 1,200
------- ------- ------- --------
Net loss (5) $ (48,990) $ (2,410) $ 23,032 $(28,368)
======== ======== ======= ========
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
July 2, 1994
(In thousands)
Actual Super Sagless Application of Fairwood
Fairwood Corporation (1) Proceeds Pro Forma
-------- ----------- -------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 7,261 $ $ 24,250 (6)
(24,250) (6) $ 7,261
Accounts and notes
receivable, net 41,379 (5,429) 15,750 (6) 51,700
Inventories 31,028 (6,833) 24,195
Prepaid expenses and
other current assets 3,724 (773) 2,951
------- -------- ------- -------
Total current assets 83,392 (13,035) 15,750 86,107
Property, plant and
equipment, net 25,615 (9,631) 15,984
Other assets 3,418 3,418
------- ------- ------- -------
Total assets $112,425 $(22,666) $ 15,750 $105,509
======= ======== ======= =======
Liabilities and
Shareowners' Equity
Current liabilities:
Current maturities of
long-term debt $ 160 $ $ $ 160
Accounts payable 13,353 (4,699) 3,832 (6) 12,486
Accrued expenses 20,609 (2,682) 17,927
Federal and state
income taxes 5,630 1,200 (4) 6,830
------- -------- ------- -------
Total current liabilities 39,752 (7,381) 5,032 37,403
Long-term debt 411,987 (24,250) (6) 387,737
Deferred income taxes 2,827 2,827
Other liabilities 4,071 4,071
------- -------- -------- -------
Total liabilities 458,637 (7,381) (19,218) 432,038
Redeemable preferred stock 100 100
Common stock and other
shareowner's equity (346,312) (15,285) 34,968 (326,629)
------- ------- -------- ---------
Total liabilities
and shareowners' equity $112,425 $(22,666) $ 15,750 $105,509
======= ======== ======= =======
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1. Reflects the operations and assets, liabilities and equity of Super
Sagless, excluding cash and cash equivalents which remain with the
Company.
2. Reflects the reduction in interest expenses on long-term debt based on the
use of the proceeds from the sale. The sales proceeds, net of associated
expenses, were used to reduce the outstanding balance of the Company's
revolving line of credit. It has been assumed that $15 million of the
total amount escrowed at the time of sale is released to the Company six
months after the date of closing, with the remaining $750,000 released one
year from the closing.
3. Reflects the gain on the sale of Super Sagless.
4. No additional Federal income taxes result from the sale as the Company is
generating sufficient operating losses to fully offset the gain on the
sale. However, for state income tax purposes, the sale is estimated to
result in an additional tax liability of $1.2 million.
5. In accordance with the regulations governing the preparation of pro forma
financial statements, the cumulative effect of the Company's change in
accounting principle as of January 1, 1993, has not been reflected in the
"Actual" column for the year ended December 31, 1993.
6. Reflects receipt of the sale consideration. Of the total sales price of
$40 million, $24.25 million was received at the date of closing and used
to pay down existing indebtedness. Of the remaining $15.75 million,
$750,000 was placed in escrow for a period of one year and $15 million was
placed in escrow for a period of six months, in both cases to secure
certain of the Company's post-closing obligations. The $3.83 million
represents accrued costs associated with the sale.
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15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement for Purchase and Sale of Assets among Super Sagless
Corporation, Mohasco Corporation, Leggett & Platt Hardware Company
and Leggett & Platt, Incorporated, dated July 14, 1994.
(b) Reports on Form 8-K
None
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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: August 15, 1994
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FAIRWOOD CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- - ------- ----------- ----------
2.1 Agreement for Purchase and Sale of Assets among 18
Super Sagless Corporation, Mohasco Corporation,
Leggett & Platt Furniture Hardware Company and
Leggett & Platt, Incorporated, dated July 14, 1994.
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