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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 October 1, 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 October 1, 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)
October 1, December 31,
Assets 1994 1993
------ ----------- ------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 9,652 3,968
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Accounts and notes receivable:
Trade 35,906 47,734
Escrows receivable from sale of subsidiary 15,750 -
Other 1,388 1,718
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53,044 49,452
Less allowance for discounts and doubtful accounts 2,713 4,062
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50,331 45,390
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Inventories 22,236 31,175
Prepaid expenses and other current assets 2,487 3,678
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Total current assets 84,706 84,211
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Property, plant and equipment, at cost 19,595 54,428
Less accumulated depreciation and amortization 5,785 28,685
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13,810 25,743
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Other assets 2,986 3,601
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$ 101,502 113,555
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(Continued)
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
October 1, December 31,
Liabilities and Deficit 1994 1993
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(Unaudited) (Audited)
Current Liabilities:
Current maturities of long-term debt $ 160 150
Accounts payable 11,472 13,945
Accrued expenses 9,708 21,070
Federal and state income taxes 5,776 5,709
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Total current liabilities 27,116 40,874
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Long-term debt, less current maturities:
Revolving credit 161,891 160,427
Senior subordinated debentures 80,000 80,000
Senior subordinated pay-in-kind debentures 105,853 91,173
Merger debentures 62,928 53,517
Other notes and leases 540 700
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411,212 385,817
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Deferred income taxes 1,325 2,827
Other liabilities 4,103 3,816
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5,428 6,643
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Redeemable preferred stock:
Junior preferred, cumulative, par value $.01 per share 100 100
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Common stock and other shareowners' deficit:
Common stock and additional paid-in capital 55,948 55,948
Retained deficit (398,302) (375,827)
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(342,354) (319,879)
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$ 101,502 113,555
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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 Nine Months Ended
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October 1, October 2, October 1, October 2,
1994 1993 1994 1993
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Net sales $ 51,710 60,923 188,393 185,460
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Cost of sales 47,317 51,901 164,565 159,024
Selling, administrative and
general expenses 7,815 9,096 26,881 28,646
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55,132 60,997 191,446 187,670
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Operating loss 3,422 74 3,053 2,210
Interest income 48 27 102 133
Interest on indebtedness 13,609 11,713 39,519 34,438
Gain on sale of subsidiary 20,830 - 20,830 -
Other income (expenses), net 654 ( 633) ( 273) ( 2.052)
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Income (loss) before income
taxes and cumulative effect of
change in accounting principle 4,501 (12,393) (21,913) (38,567)
Provision for income taxes 532 - 532 -
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Income (loss) before cumulative
effect of change in accounting
principle 3,969 (12,393) (22,445) (38,567)
Cumulative effect of change in
accounting principle for
income taxes - - - 2,100
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Net income (loss) $ 3,969 (12,393) (22,445) ( 36,467)
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See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In Thousands)
Year-to-date
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October 1, 1994 October 2, 1993
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Cash flows from operating activities:
Net loss $ ( 22,445) ( 36,467)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - ( 2,100)
Depreciation and amortization 2,528 3,067
(Gain) loss on sale of property, plant and equipment ( 1,629) 409
Gain on sale of subsidiary ( 20,830) -
Loss, recognized in 1992, on sale of property 4,562
Current period interest converted to pay-in-kind
debentures 18,300 15,686
Changes in assets and liabilities:
Accounts receivable 5,588 ( 4,396)
Inventories 2,277 ( 5,515)
Prepaid expenses and other current assets ( 641) ( 878)
Accounts payable 1,245 2,078
Accrued expenses ( 4,546) ( 7,778)
Federal and state income taxes 67 2,448
Other, net 902 ( 477)
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Cash used - operating activities ( 19,184) ( 29,361)
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Cash flows from investing activities:
Capital expenditures ( 2,699) ( 2,701)
Disposition of property, plant and equipment 3,921 3,930
Proceeds from sale of subsidiary, net of
transaction costs 22,362 -
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Cash provided - investing activities 23,584 1,229
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Cash flows from financing activities:
Proceeds from long-term debt 28,213 38,653
Repayment of long-term debt ( 26,900) ( 10,150)
Dividends ( 29) ( 24)
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Cash provided - financing activities 1,284 28,479
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Increase in cash and cash equivalents 5,684 347
Cash and cash equivalents:
Beginning of period 3,968 5,993
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End of period $ 9,652 6,340
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Supplemental schedule of cash flow information
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Cash paid during year for:
Interest $ 24,713 22,282
Income taxes 471 937
Conversion of accrued interest to pay-in-kind
debentures 24,091 20,649
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 nine months ended October 1, 1994 and October 2,
1993, the financial position at October 1, 1994 and December 31,
1993 and the cash flows for the nine months ended October 1,
1994 and October 2, 1993.
2. The results of operations for the three and nine month periods ended
October 1, 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:
October 1, 1994 December 31, 1993
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(Unaudited) (Audited)
Raw materials $ 14,754 20,371
In process 5,332 9,487
Finished goods 14,051 14,346
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Inventories at first-in,
first-out 34,137 44,204
LIFO reserve 11,901 13,029
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Inventories at LIFO $ 22,236 31,175
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4. 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 $96 million, including interest through
October 1, 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
statement, if any.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
5. On July 29, 1994, substantially all of the assets and liabilities of
Super Sagless Corporation ("Super Sagless"), a wholly-owned subsidiary of
the Company were sold to a third party for $40 million cash. Of the
total sales price, $24.25 million was received upon closing. Of the
remaining $15.75 million, $.75 million 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 and representations. After considering the estimated costs
of disposition, the Company has recognized a gain before income taxes of
approximately $21 million. The net proceeds from the sale were used to
pay existing debt.
During the seven months ended July 29, 1994, Super Sagless generated
net earnings, exclusive of the gain on sale, of approximately
$2,300,000. During the nine months ended October 2, 1993, Super
Sagless generated net earnings of approximately $1,150,000.
6. 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 federal income taxes has been provided during the nine
months ended October 1, 1994 and October 2, 1993, as the Company is in
a net operating loss carryforward position. A provision for state
income taxes of $532 thousand has been provided for the nine months
ended October 1, 1994, as a result of the sale of substantially all
of the assets and liabilities of Super Sagless.
7. On October 1, 1994, the Company tendered additional debentures
in payment of interest on its senior subordinated pay-in-kind debentures
and merger debentures. On October 3, 1994, the trustee for the merger
debentures informed the Company that it would notify holders of the
merger debentures of its decision to decline to accept the additional
merger debentures in satisfaction of the October 1, 1994 installment of
interest and that the Company failed to make payment of interest in
cash. The Company informed the trustee that the Company disputes the
trustee's view that the October 1, 1994 interest payment was required by
the indenture governing the merger debentures to be made entirely in
cash.
The Company's cash flow from operations cannot be expected to be
sufficient to permit the Company to make cash interest payments on the
senior debt obligations of Mohasco and the Company's senior subordinated
pay-in-kind debentures and merger debentures. In addition, Mohasco's
credit facilities do not permit it to borrow funds to enable the Company
to make cash interest payments on the senior subordinated pay-in-kind
debentures and merger debentures. Accordingly, depending on the
interpretation of the indentures governing the senior subordinated
pay-in-kind debentures and merger debentures, the Company may have
failed to make the interest payments required on October 1, 1994 and
will probably fail to make the cash interest payments required on
April 1, 1995.
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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 October 1, 1994 the Company had short and long term debt of $411.4 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 payments of interest due
April 1, 1994 and October 1, 1994 on the senior subordinated pay-in-kind
debentures and merger debentures, amounting to approximately $14.7 million and
$9.4 million, respectively.
On July 29, 1994, substantially all of the assets and liabilities of Super
Sagless Corporation ("Super Sagless"), a wholly-owned subsidiary of the Company
were sold to a third party for $40 million cash. Of the total sales price,
$24.25 million was received upon closing. Of the remaining $15.75 million,
$.75 million was placed in escrow for a period of one year and $15 million was
placed in escrow for a period od six months, in both cases to secure certain of
the Company's post-closing obligations and representations. After considering
the estimated costs of disposition, the Company has recognized a gain before
income taxes of approximately $21 million. The net proceeds from the sale were
used to pay existing debt.
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 three quarters of 1994, Mohasco funded interest
obligations related to long-term indebtedness through asset dispostions,
operations and increased borrowings from Court Square Capital Limited ("CSCL"),
an affiliate, under Mohasco's Credit Agreement with CSCL (the "Credit
Agreement"). 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.
On October 1, 1994, the Company tendered additional debentures in payment of
interest on its senior subordinated pay-in-kind debentures and merger
debentures. On October 3, 1994, the trustee for the merger debentures informed
the Company that it would notify holders of the merger debentures of its
decision to decline to accept the additional merger debentures in satisfaction
of the October 1, 1994 installment of interest and that the Company failed to
make payment of interest in cash. The Company informed the trustee that the
Company disputes the trustee's view that the October 1, 1994 interest payment
was required by the indenture governing the merger debentures to be made
entirely in cash.
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The Company's cash flow from operations cannot be expected to be sufficient to
permit the Company to make cash interest payments on the senior debt
obligations of Mohasco and the Company's senior subordinated pay-in-kind
debentures and merger debentures. In addition, Mohasco's credit facilities do
not permit it to borrow funds to enable the Company to make cash interest
payments on the senior subordinated pay-in-kind debentures and merger
debentures. Accordingly, depending on the interpretation of the indentures
governing the senior subordinated pay-in-kind debentures and merger
debentures, the Company may have failed to make the interest payments required
on October 1, 1994 and will probably fail to make the cash interest payments
required on April 1, 1995.
On September 22, 1989, the Company issued 918,168 warrants to purchase an
aggregate of 142,900 shares of the Company's Class A Common Stock. In
mid-October, 1994, the Company notified the holders of the warrants that the
warrants may be exercised at any time before the close of business on September
21, 1995. The Company's notice also stated that the value of the shares
appeared to be significantly less than the exercise price of the warrants and
that therefore a registration statement had not been filed with the Securities
and Exchange Commission covering the issuance of the shares upon exercise of
the warrants. The Company noted that in the event that holders of the warrants
do exercise them, issuance of the shares may be delayed pending the filing of
a registration statement covering the issuance and its effectiveness under the
Securities Act of 1933, as amended.
Results of Operations
THREE MONTHS ENDED OCTOBER 1, 1994 VERSUS THREE MONTHS ENDED OCTOBER 2, 1993
The following discussion presents the material changes in results of operations
which have occurred in the third quarter of 1994 in comparison to the same
period in 1993.
Net sales were approximately $51.7 million in the third quarter of 1994, a
decrease from last year's third quarter sales of approximately $60.9 million,
due primarily to the disposition of Super Sagless. Excluding Super Sagless,
sales for the third quarter of 1994 were approximately $47.1 million compared
to approximately $49.5 million for the third quarter of 1993. The decrease was
primarily in the sales of upholstered furniture. Cost of sales were
approximately $47.3 million in the third quarter of 1994, a decrease from last
year's third quarter cost of sales of approximately $51.9 million. Excluding
Super Sagless, cost of sales for the third quarter of 1994 were approximately
$43.4 million compared to approximately $42.6 million for the third quarter of
1993. Cost of sales, excluding Super Sagless, as a percentage of sales was
92.1% in the third quarter of 1994 compared to 86.1% for the same period in
1993, primarily due to increased material costs of upgraded product content
and delays in implementing price increases.
Selling, administrative and general expenses were approximately $7.8 million
and $9.1 million for the third quarter of 1994 and 1993, respectively. Selling,
administrative and general expenses, excluding Super Sagless, for the nine
months of 1994 were approximately $7.4 million compared to approximately $7.5
for the nine months of 1993. The decrease was due primarily to decreased
variable selling costs.
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NINE MONTHS ENDED OCTOBER 1, 1994 VERSUS NINE MONTHS ENDED OCTOBER 2, 1993
The following discussion presents the material changes in results of operations
which have occurred in the first nine months of 1994 in comparison to the same
period in 1993.
Net sales for the first nine months of 1994 increased from last year's sales of
approximately $185.5 million to approximately $188.4 million. Excluding Super
Sagless, sales for the nine months of 1994 were approximately $156.6 million
compared to approximately $152.1 million for the nine months of 1993. The
increase was primarily in the sales of upholstered furniture.
Cost of sales for the first nine months of 1994 increased from last year's cost
of sales of approximately $159.0 million to approximately $164.6 million.
Excluding Super Sagless, cost of sales for the nine months of 1994 were
approximately $138.9 million compared to approximately $131.4 million for the
nine months of 1993. Cost of sales, excluding Super Sagless, as a percentage
of sales was 88.7% for the nine months of 1994 compared to 86.4% for the same
period in 1993, primarily due to increased material costs of upgraded product
content and delays in implementing price increases.
Selling, administrative and general expenses were approximately $26.9 million
and $28.6 million for the first nine months of 1994 and 1993, respectively.
Selling, administrative and general expenses, excluding Super Sagless, for the
nine months of 1994 were approximately due primarily to decreased variable
selling costs.
Other expenses, net, decreased to approximately $.3 million for the first nine
months of 1994 from approximately $2.1 million for the same period in 1993
primarily due to gains and losses on the sales of property and costs associated
with divested operations.
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.
Due to the taxable income generated as a result of the disposition of Super
Sagless, the nine months ended October 2, 1994 included a state provision of
approximately $.5 million.
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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
(Registrant)
/s/ John B. Sganga
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John B. Sganga
Chief Financial Officer,
Executive Vice President,
Secretary and Treasurer
Date: October 28, 1994
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