1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
-------------------------------------------------
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.
Outstanding at
Class September 30, 1995
----- --------------------
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)
September 30, December 31,
Assets 1995 1994
------ ------------- ------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 4,378 4,615
-------- --------
Accounts and notes receivable:
Trade 34,018 38,034
Escrows from sale of subsidiary - 15,750
Other 1,639 1,812
-------- --------
35,657 55,596
Less allowance for discounts and doubtful accounts 2,251 2,756
Less advances from Factor 15,568 -
-------- --------
17,838 52,840
-------- --------
Inventories 18,996 18,813
Prepaid expenses and other current assets 2,559 2,499
-------- --------
Total current assets 43,771 78,767
-------- --------
Property, plant and equipment, at cost 20,048 20,013
Less accumulated depreciation and amortization 6,152 5,948
-------- --------
13,896 14,065
-------- --------
Other assets 2,836 2,732
-------- --------
$ 60,503 95,564
======== ========
(Continued)
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
September 30, December 31,
Liabilities and Deficit 1995 1994
----------------------- ------------- ------------
(Unaudited) (Audited)
Current Liabilites:
Current maturities of long-term debt:
Revolving credit 165,613 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 -
Merger debentures 62,928 -
Other 170 160
Accounts payable 8,931 8,621
Accrued expenses 39,212 20,740
Federal and state income taxes 5,722 5,725
------- -------
Total current liabilities 468,429 35,246
------- -------
Long-term debt:
Revolving credit - 165,870
Senior subordinated debentures - 80,000
Senior subordinated pay-in-kind debentures - 105,853
Merger debentures - 62,928
Other 370 540
------- -------
370 415,191
------- -------
Deferred income taxes 1,359 1,359
Other liabilities 4,203 4,346
------- -------
5,562 5,705
------- -------
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
Minimum pension liability ( 1,367) ( 1,367)
Retained deficit ( 468,539) ( 415,259)
------- -------
( 413,958) ( 360,678)
------- -------
$ 60,503 95,564
======= =======
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
--------------------------- ---------------------------
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
------------- ---------- ------------- ----------
Net sales $ 38,473 51,710 136,277 188,393
-------- ------- ------- -------
Cost of sales 35,015 47,317 123,500 164,565
Selling, administrative and
general expenses 6,070 7,815 21,148 26,881
-------- ------- ------- -------
41,085 55,132 144,648 191,446
-------- ------- ------- -------
Operating loss ( 2,612) ( 3,422) ( 8,371) ( 3,053)
Interest income 84 48 187 102
Interest on indebtedness ( 14,751) ( 13,609) ( 43,808) ( 39,519)
Gain on sale of subsidiary - 20,830 - 20,830
Other income (expenses), net ( 573) 654 ( 1,252) ( 273)
-------- ------- ------- -------
Income (loss) before income
taxes ( 17,852) 4,501 ( 53,244) (21,913)
Provision for income taxes - 532 - 532
-------- ------- ------- -------
Net income (loss) $( 17,852) 3,969 ( 53,244) ( 22,445)
======== ======= ======= =======
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)
Nine Months Ended
-------------------------------------
September 30, 1995 October 1, 1994
------------------ ---------------
Cash flows from operating activities:
Net loss $ ( 53,244) ( 22,445)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,573 2,528
(Gain) loss on sale of property, plant and equipment ( 59) ( 1,629)
Gain on sale of subsidiary - ( 20,830)
Current period interest converted to pay-in-kind
debentures - 18,300
Changes in assets and liabilities:
Proceeds from factoring of receivables 15,568 -
Accounts receivable 3,684 5,588
Inventories ( 183) 2,277
Prepaid expenses and other current assets ( 60) ( 641)
Accounts payable 310 1,245
Accrued expenses 18,472 ( 4,546)
Other, net ( 250) 969
-------- --------
Cash used - operating activities ( 14,189) ( 19,184)
-------- --------
Cash flows from investing activities:
Proceeds from sale of Super Sagless assets 15,750 22,362
Capital expenditures ( 1,772) ( 2,699)
Disposition of property, plant and equipment 427 3,921
-------- --------
Cash provided - investing activities 14,405 23,584
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit agreement 26,743 28,213
Repayment of revolving credit agreement and other ( 27,160) ( 26,900)
Dividends ( 36) ( 29)
-------- --------
Cash provided - financing activities ( 453) 1,284
-------- --------
Increase (decreases) in cash and cash equivalents ( 237) 5,684
Cash and cash equivalents:
Beginning of period 4,615 3,968
-------- --------
End of period $ 4,378 9,652
======== ========
Supplemental schedule of cash flow information
Cash paid during year for:
Interest $ 27,139 24,713
Income taxes 3 471
Conversion of accrued interest to pay-in-kind debentures - 24,091
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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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, to present fairly
the results of operations for the three and nine months ended
September 30, 1995 and October 1, 1994, the financial position at
September 30, 1995 and December 31, 1994 and the cash flows for the
nine months ended September 30, 1995 and October 1, 1994. The
results of operations for the three and nine month periods ended
September 30, 1995 are not necessarily indicative of the results to
be expected for the full year.
2. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with Fairwood Corporation
("Fairwood") and subsidiaries audited financial statements included
in the 1994 annual report on Form 10-K.
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:
September 1, 1995 December 31, 1994
----------------- -----------------
(Unaudited) (Audited)
Raw materials $ 15,800 14,696
In process 4,301 4,193
Finished goods 11,017 11,914
-------- ------
Inventories at first-in,
first-out 31,118 30,803
LIFO reserve 12,122 11,990
-------- ------
Inventories at LIFO $ 18,996 18,813
======== ======
4. No provision for federal income taxes has been provided during the
nine months ended September 30, 1995 and October 1, 1994, as
Fairwood is in a net operating loss carryforward position. The
provision for state income taxes of $0.5 million has been provided
for the nine months ended October 1, 1994, resulted from the sale
of substantially all of the assets and liabilities of Super
Sagless.
5. During the three months ended September 30, 1995, Stratford Company
("Stratford"), an operating division of Furniture Comfort
Corporation ("Furniture Comfort"), a wholly-owned subsidiary of
Consolidated Furniture Corporation ("Consolidated Furniture"), a
wholly-owned subsidiary of Fairwood, entered into a factoring
agreement for certain accounts receivable. Pursuant to the terms
of the factoring agreement, Stratford assigns certain accounts
receivable to a factor on a pre-approved, nonrecourse basis.
Stratford is permitted to receive advances of up to 75% of
uncollected amounts factored. Interest at the greater of 9% or the
prime rate plus 1% and a factoring charge, that is subject to an
annual minimum factoring charge of $540,000, is charged on such
advances. As of September 30, 1995, advances of $15.6 million had
been made under the factoring arrangement.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
6. The Internal Revenue Service ("IRS") has examined Fairwood and
subsidiaries 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 $110
million, including interest through September 30, 1995. Fairwood
believes the IRS's position with respect to these issues is
incorrect and plans to contest vigorously the proposed adjustments.
Fairwood has delivered to the IRS a protest of the proposed
adjustments and subsequently had several conferences with the IRS
Appeals Office regarding the issues. Fairwood cannot predict the
ultimate outcome nor the impact on its financial statement, if any.
7. On April 1 and October 1, 1995, Fairwood failed to make the
required interest payments due on the senior subordinated
pay-in-kind debentures and merger debentures (collectively, the
"Fairwood Debentures"). Counsel for Fairwood has had preliminary
discussions with counsel for a group of Fairwood Debenture holders,
who are in the process of attempting to form an ad hoc committee to
address the payment default under the Fairwood Debentures. This
situation is still at a preliminary state and the likely results of
future discussions is unknown at this time. Consolidated Furniture,
Furniture Comfort and its operating divisions Stratford and
Barcalounger are not obligors under the Fairwood Debentures.
8. Consolidated Furniture's revolving line of credit and senior
subordinated debentures mature on January 2, 1996 and, accordingly,
have been classified as current liabilities in the accompanying
condensed consolidated balance sheet of Fairwood as of July 1,
1995. Consolidated Furniture, however, is in the process of
negotiating an extension of the maturity date of the credit
Agreement and Senior Subordinate debentures with its lender and
expects to sign such an agreement by December 31, 1995 or earlier.
Based on the terms of the Fairwood Debentures, the failure to make
the April 1, 1995 interest payment (See note 7) constitutes an
event of default which permits the acceleration of the Fairwood
Debentures by 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 currently due and payable. Accordingly, the
Fairwood Debentures have been classified as current liabilities in
the accompanying condensed consolidated balance sheet as of
September 30, 1995.
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8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
9. On September 19, 1995 the holders of record of Fairwood Corporation
common stock purchase Warrants ("Warrants") were notified in
writing by the Warrant Agent as follows:
Reference is made to the Warrant Agreement dated of August
15, 1989 (the "Warrant Agreement") between Fairwood
Corporation (formerly named MHS Holdings Corporation) and
Chemical Bank (successor to Pittsburgh National Bank), as
Warrant Agent pursuant to which certain Warrants (the
"Warrants") of Fairwood Corporation were issued. During the
first fiscal quarter of 1995, the exercise of the Warrants
was suspended pursuant to the terms of the Warrant Agreement
(such period of suspension being the "Suspension Period").
You are hereby notified the suspension period has been
lifted.
Thereafter, pursuant to the terms of the Warrant Agreement, the
exercisability of the Warrants expired at 5:00 P.M. Pittsburgh,
Pennsylvania time on September 22, 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 September 30, 1995, Fairwood Corporation ("Fairwood") had short- and
long-term debt of approximately $430.5 million of which approximately $430.1
million was current. At September 30, 1995, $351.5 million of Fairwood's total
debt is owed to Court Square Capital Limited ("CSCL"), an affiliate. Short- and
long-term debt was approximately $415.4 million at December 31, 1994, of which
$351.7 million was owed to CSCL. Fairwood's outstanding indebtedness includes
its senior subordinated pay-in-kind debentures and subordinated pay-in-kind
(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.
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 sufficient to make cash
interest payments on the Fairwood Debentures. Fairwood's sole asset is the
stock of Consolidated Furniture Corporation ("Consolidated Furniture"), its
wholly-owned subsidiary. Fairwood's obligations under the Fairwood Debentures
are secured by Fairwood's pledge of its interest in Consolidated Furniture's
stock. CSCL, as holder of Fairwood's senior subordinated pay-in-kind
debentures, has a first priority security interest in all of the outstanding
stock of Consolidated Furniture, and the holders of the merger debentures have
a second priority security interest in such stock. The Fairwood Debentures are
obligations of Fairwood. Consolidated Furniture is not an obligor under the
Fairwood Debentures. However, Consolidated Furniture is an obligor under the
Credit Agreement with CSCL. 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 secured by substantially all of the assets of
Consolidated Furniture. Consolidated Furniture is also a holding company
without operations. Its primary asset is the outstanding stock of Furniture
Comfort Corporation ("Furniture Comfort"), which has operations that it
conducts through its two divisions, Stratford and Barcalounger. Furniture
Comfort is also a direct obligor under the Credit Agreement but is not an
obligor on the Fairwood Debentures.
On April 1 and October 1, 1995, 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 dates. Accrued interest of $27.0 million on the
Fairwood Debentures, which include $16.4 million due to CSCL, is included in
accrued expenses on the accompanying condensed consolidated balance sheet as of
September 30, 1995. Counsel for Fairwood has had preliminary discussions with
counsel for a group of merger debenture holders, who are in the process of
attempting to form an ad hoc committee to address the payment default under the
merger debentures. This situation is still at too preliminary a stage for the
likely results of future discussions is unknown at this time.
- 9 -
10
Based on the terms of the Fairwood Debentures, the failure to make the April 1,
1995 interest payment (see note 7 to the financial statements) 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 and all accrued
interest would be due and payable. Accordingly, the Fairwood Debentures have
been classified as current liabilities in the accompanying condensed
consolidated balance sheet as of September 30, 1995.
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 1994 and the first nine months of 1995, Consolidated
Furniture funded interest obligations related to long-term indebtedness on the
revolving line of credit and the senior subordinated debentures through
increased borrowings from CSCL under the Credit Agreement. Borrowings from
CSCL during the first nine months of 1995 were approximately $26.7 million.
Repayments to CSCL during the quarter were $27 million, resulting from a
portion of the escrowed proceeds received during the first nine months from the
July 1994 sale of the assets of Super Sagless Corporation ("Super Sagless") and
the proceeds of a factoring arrangement with respect to certain accounts
receivable of the Stratford Company. 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 prohibited 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 line of credit and the senior subordinated debentures through
December 31, 1995.
Consolidated Furniture's revolving line of credit and senior subordinated
debentures mature on January 2, 1996 and, accordingly, have been classified as
current liabilities in the accompanying condensed consolidated balance sheet as
of September 30, 1995. Consolidated Furniture, however, is in the process of
negotiating an extension of the maturity date of the credit Agreement and
Senior Subordinated debentures with its lender and expects to sign such an
agreement by December 31, 1995 or earlier. There can be no guarantee, however,
that Consolidated Furniture will be able to complete such an extension, or that
the terms of such extension or refinancing will not be on terms less favorable
than those currently in place.
During the three months ended September 30, 1995, Stratford entered into a
factoring arrangement for certain accounts receivable. Pursuant to the terms
of the factoring agreement, Stratford assigns certain accounts receivable to a
factor on a pre-approved, nonrecourse basis. Stratford is permitted to receive
advances of up to 75% of uncollected amounts factored. Interest at the greater
of 9% or the prime rate plus 1% and a factoring charge, subject to an annual
minimum factoring charge of $540,000, is charged on such advances. As of
September 30, 1995, advances of $15.6 million had been made under the factoring
arrangement.
- 10 -
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There can be no assurance that Fairwood will be able to continue as a going
concern. The discussions between counsel for Fairwood and counsel for certain
holders of the merger debentures are at too preliminary a stage for the likely
results of such discussions to be known. Consolidated Furniture, however, is
also in the process of negotiating an extension of the maturity date of the
Credit Agreement and senior subordinated debentures with its lender and expects
to complete such an agreement prior to December 31, 1995 or to refinance such
indebtedness prior to its maturity. There can be no guarantee, however, that
Consolidated Furniture will be able to complete such an extension or
refinancing or that the terms of such an extension or refinancing will not be
on terms less favorable to Consolidated Furniture than those currently in
place.
For a discussion of the status of the IRS examination, refer to Fairwood's
audited consolidated financial statements as of December 31, 1994 included in
Fairwood's Form 10-K, and footnote 6 to Fairwood's unaudited condensed
consolidated financial statements included herein.
Results of Operations
Three Months Ended September 30, 1995 Versus Three Months Ended October 1, 1994
The following discussion presents the material changes in results of operations
which have occurred in the third quarter of 1995 in comparison to the same
period in 1994.
Consolidated net sales were approximately $38.5 million in the third quarter of
1995, a decrease of 25.6% from last year's third quarter consolidated net sales
of approximately $51.7 million, due in large part to the sale of substantially
all of the assets and liabilities of Super Sagless. Excluding Super Sagless,
net sales for the third quarter of 1995 were approximately $38.5 million
compared to approximately $47.2 for the third quarter of 1994, a decrease of
18.4%.
Third quarter 1995 net sales (including intercompany sales) by the Stratford
Company decreased to approximately $31.0 million as compared to $39.4 million
for the comparable period in 1994 or 21%. This sales decrease is comprised of
several causes: (1) elimination of unprofitable styles, (2) discontinuance of
sales to certain regional value merchants whose business terms resulted in
unprofitable margins, (3) decrease of sales to national mass merchants due to
store realignment and inventory transfers, the unwillingness of certain
customers to accept price increases, and changes in store pricing policies. An
interrelated factor was the industry wide slowdown in residential furniture
sales, particularly at the mid price point that Stratford targets.
Barcalounger net sales during the third quarter 1995 were 4.55% higher than in
1994. Sales increased to $8.2 million in 1995 from $7.8 million 1994.
Continued sales trends toward higher priced leather furniture helped to
generate an 1.8% increase in sales prices and a 1.6% volume increase.
Barcalounger's sales growth rate has slowed as a result of the general industry
wide slowdown in retail sales of household furniture and downward inventory
adjustments during the first nine months of 1995, but not as severely as
Stratford's because of its positioning in the higher priced end of the market
which was less affected.
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Consolidated cost of sales decreased 26.0% in the third quarter of 1995 to
$35.0 million, or 91.0% of net sales, as compared to $47.3 million, or 91.5% of
net sales, in 1994. Excluding Super Sagless, cost of sales were approximately
$35.0 million and $43.4 million for the third quarters of 1995 and 1994,
respectively, or 91.0% and 91.9% of net sales, respectively. Stratford's cost
of sales increased slightly to 93.8% of net sales in the third quarter of 1995,
as compared to 93.5% in the third quarter of 1994. Barcalounger cost of sales
increased slightly by .95%, but cost controls enabled Barcalounger to improve
earnings 93% from approximately $261,000 in 1994 to $506,000 in 1995.
Consolidated selling, administrative and general expenses for the third
quarters of 1995 and 1994 were approximately $6.1 million and $7.8 million,
respectively, representing a decrease of 22.3%. Excluding Super Sagless,
selling, administrative and general expenses were approximately $6.1 million in
1995 as compared to $7.4 million in 1994, a decrease of 18.0%. The decrease
was due primarily to lower sales commissions as a result of less sales volume
and elimination of certain overhead costs, most notably the elimination of
substantially all of Fairwood's corporate functions and facilities and most of
Consolidated Furniture's corporate functions which were downsized and
outsourced.
Other income (expenses), net, was approximately $(.6) million and $.7 million
for the third quarters of 1995 and 1994, respectively. The difference between
the two years was primarily due to gains and losses on the sales or property
and costs associated with divested operations.
Nine Months Ended September 30, 1995 Versus Nine Months Ended October 1, 1994
The following discussion presents the material changes in results of operations
which have occurred in the first nine months of 1995 in comparison to the same
period in 1994.
Consolidated net sales were approximately $136.3 million in the first nine
months of 1995, a decrease of 27.7% from last year's first nine months
consolidated net sales of approximately $188.4 million. Excluding Super
Sagless, net sales for the nine months of 1995 were approximately $136.3
million compared to approximately $156.6 for the first nine months of 1994, a
decrease of 13.0%.
Stratford net sales (including intercompany sales) for the first nine months of
1995 decreased 14.9% to approximately $110.8 million as compared to $130.3
million for the comparable period in 1994. Total volume has decreased 10.96%
for the first nine months of 1995 as compared to the first nine months of 1994.
Sales volume to the smaller retail customers has increased 1.5%, while national
account sales volume has decreased 21.45% in the first nine months of 1995 as
compared to 1994. The 14.9% Stratford sales decline consists of lost sales
that can be determined as follows: (1) elimination of unprofitable styles that
had been sold to low volume customers, (2) Discontinuance of sales to certain
regional value merchants whose sales terms and unfavorable mix of purchases
made their business unprofitable, (3) decrease of sales to National mass
merchants due to store realignments and inventory transfers, the unwillingness
of certain customers to accept price increases, and changes in store pricing
policies. Stratford believes that a major segment of the foregoing lost sales
to national mass merchants can be recovered in 1996. An interrelated factor
throughout was the industry wide slowdown in residential furniture sales,
particularly at the mid price points that Stratford targets. Weak sales in the
mid price market segment also resulted in downward inventory adjustments
leading to greater reductions in orders and the quantity of purchased furniture
held by retailers in their warehouses and store back rooms.
- 12 -
13
Stratford is in the process of finalizing a 1996 manufacturing subcontract with
an upholstered furniture company that will utilize excess capacity from the
lost sales cited above. It is expected this contract will enable Stratford to
improve margins and profits.
Barcalounger net sales for the first nine months of 1995 increased 4.1% to
approximately $27.4 million as compared to $26.3 million in 1994, reflective of
a 1.8% increase in the number of pieces sold and 2.4% increase in average
selling prices.
Consolidated cost of sales decreased 25.0% in first nine months of 1995 to
approximately $123.5 million, or 90.6% of net sales, as compared to $164.6
million, or 87.4% of net sales, in 1994. Excluding Super Sagless, cost of
sales were approximately $123.5 million and $138.7 million for the first nine
months of 1995 and 1994, respectively, or 90.6% and 88.6% of net sales,
respectively. Stratford cost of sales increased to 92.9% of net sales in the
first nine months of 1995, as compared to 89.7% in the first nine months of
1994. The increase in Stratford's cost of sales was caused by an under
absorption of overhead due to the decrease in volume. Barcalounger's cost of
sales remained essentially flat at 82.3% and 82.8% of net sales for the first
nine months of 1995 and 1994, respectively.
Consolidated selling, administrative and general expenses for the first nine
months of 1995 and 1994 were approximately $21.1 million and $26.9 million,
respectively, representing a decrease of 21.3%. Excluding Super Sagless,
selling, administrative and general expenses were approximately $21.1 million
in 1995 as compared to $23.1 million in 1994, a decrease of 8.4%. The decrease
was due primarily to lower sales commissions as a result of less sales volume
and elimination of certain overhead costs, most notably the elimination of
substantially all of Fairwood's corporate functions and facilities and most of
Consolidated Furniture's corporate functions which were downsized and
outsourced.
Other expense, net, was approximately $1.3 million and $.3 million for the
first six months of 1995 and 1994, respectively. The difference was primarily
attributed to gains on sales of property during 1994.
No provision for federal income taxes has been provided in the first nine
months of 1995 and 1994, respectively, as the Company is in a net operating
loss carryforward position. A provision for state income taxes of $.5 million
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.
- 13 -
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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, 1994 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 Fairwood.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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: October 31, 1995
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