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 June 28, 1997
--------------------------------------------
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
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(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 June 28, 1997
----- -----------------------
Class A Voting, $.01 Par Value 500
- ------------------------------ -----------------------
Class B Non-Voting, $.01 Par Value 999,800
- ---------------------------------- -----------------------
2
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
June 28, December 31,
Assets 1997 1996
------ ------------- ------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 684 429
-------- --------
Accounts and notes receivable:
Trade 25,261 23,673
Due from affiliate 836 2,418
Other 589 648
-------- --------
26,686 26,739
Less allowance for discounts and doubtful accounts 4,448 1,566
Less advances from factor 12,962 9,703
-------- --------
9,276 15,470
-------- --------
Inventories 13,103 13,625
Prepaid expenses and other current assets 1,859 2,468
-------- --------
Total current assets 24,922 31,992
-------- --------
Property, plant and equipment, at cost 30,868 31,034
Less accumulated depreciation and amortization 19,412 18,709
-------- --------
11,456 12,325
-------- --------
Other assets 2,261 2,260
-------- --------
$ 38,639 46,577
======== ========
(Continued)
- 2 -
3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
June 28, December 31,
Liabilities and Deficit 1997 1996
----------------------- ------------- -----------
(Unaudited) (Audited)
Current Liabilites:
Overdraft $ 967 715
Current maturities of long-term debt:
Revolving credit 216,022 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other 190 180
Accounts payable 9,325 9,836
Accrued expenses 93,398 71,095
Federal and state income taxes 5,718 5,699
-------- --------
Total current liabilities 574,401 256,306
-------- --------
Long-term debt:
Revolving credit - 203,992
Senior subordinated debentures - 80,000
Other - 190
-------- --------
- 284,182
-------- --------
Deferred income taxes 1,524 1,524
Other liabilities 3,204 2,513
-------- --------
4,728 4,037
-------- --------
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 ( 539) ( 539)
Retained deficit ( 595,999) ( 553,457)
-------- --------
( 540,590) ( 498,048)
-------- --------
$ 38,639 46,577
======== ========
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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4
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
Three Months Ended Six Months Ended
----------------------- -----------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- -------- ---------
Net sales $ 34,475 37,702 71,746 75,991
------- ------- ------- -------
Cost of sales 33,054 33,807 66,873 69,330
Selling, administrative and
general expenses 10,270 5,612 16,059 11,874
------- ------- ------- -------
43,324 39,419 82,932 81,204
------- ------- ------- -------
Operating loss ( 8,849) ( 1,717) ( 11,186) ( 5,213)
Interest income 83 148 88 170
Interest on indebtedness ( 16,080) ( 14,970) ( 31,607) ( 29,627)
Other income (expenses), net 143 ( 607) 196 ( 1,464)
------- ------- ------- -------
Loss before income taxes ( 24,703) ( 17,146) ( 42,509) ( 36,134)
Provision for income taxes - - - -
------- ------- ------- -------
Net loss $( 24,703) ( 17,146) ( 42,509) ( 36,134)
======= ======= ======= =======
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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5
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
-----------------------
June 28, June 29,
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $( 42,509) ( 36,134)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 967 1,079
Gain on disposal of property, plant and equipment ( 60) ( 1)
Changes in assets and liabilities:
Accounts receivable 2,935 4,132
Inventories 522 223
Prepaid expenses and other current assets 609 723
Accounts payable ( 544) ( 637)
Accrued expenses 22,303 19,444
Federal and state income taxes 19 -
Other, net 690 136
-------- -------
Cash used - operating activities ( 15,068) ( 11,035)
-------- -------
Cash flows from investing activities:
Dispostion of property, plant and equipment 60 24
Capital expenditures ( 98) ( 161)
------- -------
Cash used - investing activities ( 38) ( 137)
------- -------
Cash flows from financing activities:
Overdraft 252 641
Proceeds from long-term debt 12,030 11,410
Repayment of long-term debt ( 180) ( 170)
Proceeds from Factor, net 3,259 ( 4,097)
------- -------
Cash provided - financing activities 15,361 7,784
------- -------
Increase (decrease) in cash and cash equivalents 255 ( 3,388)
Cash and cash equivalents:
Beginning of period 429 4,264
------- -------
End of period $ 684 876
======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $ 12,830 11,731
Income tax refunds (payments), net ( 19) 712
Supplemental schedule of noncash operating and financing activities
In the six month periods ending June 28, 1997 and June 29, 1996 the Company
recognized $33 thousand and $27 thousand, respectively, of accrued dividends
payable to shareholders, which dividends have not been paid.
Cash and cash equivalents include cash in banks and highly-liquid short-term
investments having a maturity of three months or less on date of purchase.
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
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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 six months ended June 28, 1997 and June 29,
1996, the financial position at June 28, 1997 and December 31, 1996 and
the cash flows for the six months ended June 28, 1997 and June 29, 1996.
The results of operations for the three and six month periods ended June
28, 1997 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's ("Fairwood or
Company") audited consolidated financial statements included in the 1996
annual report on Form 10-K. Fairwood is a holding company as is its
subsidiary, Consolidated Furniture Corporation ("Consolidated Furniture")
which is the parent of Furniture Comfort Corporation ("Furniture
Comfort") whose two operating divisions, Stratford Company ("Stratford")
and Barcalounger Company ("Barcalounger") manufacture stationary and
motion upholstered residential furniture.
3. As of June 28, 1997 and pursuant to the terms of the accounts receivable
Factoring agreement entered into during 1995 by Stratford, receivables
sold which remain to be collected approximated $12.0 million, of which
approximately $7.4 million were sold with recourse. As of June 28, 1997
and pursuant to the terms of the accounts receivable Factoring agreement
entered into during 1996 by Barcalounger, receivables sold with recourse
which remain to be collected approximated $1.0 million.
4. All inventories (materials, labor and overhead) are valued at the lower
of cost or market using the last-in, first-out (LIFO) method. The
components of inventory, in thousands, are as follows:
June 28, 1997 December 31, 1996
-------------- -----------------
(Unaudited) (Audited)
Raw materials $ 11,568 13,047
In process 2,946 3,028
Finished goods 5,896 5,163
------ ------
Inventories at
first-in, first-out 20,410 21,238
LIFO reserve 7,307 7,613
------ ------
Inventories at LIFO $ 13,103 13,625
====== ======
5. No provision for income taxes has been provided during the six months
ended June 28, 1997 and June 29, 1996, as the Company is in a net
operating loss carryforward position.
6. Fairwood is contesting an Internal Revenue Service ("IRS") Agent's report
resulting from an IRS audit examination of the consolidated Federal
income tax returns of Fairwood and its subsidiaries for the years ended
July 11, 1988 through December 1991. The report proposed to adjust
Fairwood's taxable income in the years in issue
- 6 -
7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
and in prior years to which net operating losses of the Consolidated tax
group were carried back. Fairwood estimates that the aggregate proposed
liability, if all issues were resolved unfavorably would, together with
statutory interest and state income tax, total approximately $127 million
and eliminate substantially all of the net operating loss carryforwards.
Fairwood believes that the proposed adjustments are in error and is
vigorously contesting this matter. Under available administrative
procedures, Fairwood had protested the proposed adjustments and, through
negotiations with the IRS Appeals Division, has reached an agreement in
principle for a potential settlement of the issues in the case. A final
settlement based on the foregoing is estimated to be approximately $4.4
million and is included in Federal and state income taxes on the
accompanying audited consolidated balance sheets. The agreement in
principle will also eliminate substantially all of the Company's
available net operating loss carryforwards and may preclude the deduction
of certain future interest expense. The terms of the proposed settlement
are subject to final approval by the IRS and will also require the
approval of the Joint Committee on Taxation, and no assurance can be
given that such approvals will be given. However, should the outcome of
the reviews in question be unfavorable to Fairwood on one or more issues
in the case then Fairwood and its Subsidiaries may exercise their rights
to litigate these issues. Fairwood and its Subsidiaries cannot predict
the ultimate outcome of these issues, nor the impact on its financial
statements.
7. On each of April 1, 1995, October 1, 1995, and each semi-annual interest
payment date thereafter, Fairwood failed to make the required interest
payments due on the senior subordinated pay-in-kind debentures and merger
debentures (collectively, the "Fairwood Debentures") and Fairwood does
not expect to make the cash interest payments required under the Fairwood
Debentures on any future semi-annual interest payment dates. Accrued
interest of $74.3 million on the Fairwood Debentures, which includes
$45.1 million due to CSCL, is included in accrued expenses on the
accompanying unaudited condensed consolidated balance sheet as of June
28, 1997. An involuntary Chapter 7 petition was filed on January 3, 1996
in the United States Bankruptcy Court for the Southern District of New
York against Fairwood Corporation by certain bondholders. In response to
the bankruptcy filing, on April 22, 1996, Fairwood and certain other
entities filed a cross-motion seeking the dismissal of the petition. On
November 26, 1996, the motion to dismiss was denied. On December 26,
1996, Fairwood exercised its right to convert the pending involuntary
bankruptcy case to a voluntary Chapter 11 proceeding as
debtor-in-possession. On May 2, 1997, certain holders of the Fairwood
Debentures filed a Motion seeking to convert Fairwood's chapter 11 case
to a chapter 7 liquidation or, alternatively, to appoint a chapter 11
trustee. On July 21, 1997, the Bankruptcy Court denied the request to
convert the case and held in abeyance pending further proceedings the
request to appoint a chapter 11 trustee. Fairwood cannot predict how the
Court may rule on the request to appoint a chapter 11 trustee or when
such ruling may occur. Fairwood has indicated in Bankruptcy Court papers
that if the Motion for the appointment of a chapter 11 trustee is denied,
it intends to propose a plan of reorganization with the Bankruptcy Court
at some time in the future. The Chapter 11 case pertains only to
Fairwood Corporation. Its direct and indirect subsidiaries, including
Consolidated Furniture Corporation, Furniture Comfort Corporation, as
well as their
- 7 -
8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
operating divisions, Stratford and Barcalounger, are not parties to the
bankruptcy, nor are such operations under the supervision of the
Bankruptcy Court. It is currently expected that these companies will
continue to operate in the normal course of business.
8. Consolidated Furniture's revolving line of credit and senior subordinated
debentures mature on January 2, 1998 and, accordingly, have been
classified as current liabilities in the accompanying unaudited condensed
consolidated balance sheet of Fairwood as of June 28, 1997. Consolidated
Furniture expects to negotiate an extension of these maturity dates or
refinance such indebtedness prior to January 2, 1998.
The failure to make the April 1, 1995 and subsequent period interest
payments constitutes an event of default which permits the acceleration
of the Fairwood Debentures by 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 unaudited condensed consolidated balance sheet as of June
28, 1997.
- 8 -
9
Item 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information set forth or incorporated by reference herein contains
forward-looking statements as such term is defined in Section 27A of the
Securities Act of 1933 as amended and Section 21E of the Securities Exchange
Act of 1934, as amended.
Liquidity and Capital Resources
At June 28, 1997, the Company had total indebtedness of approximately $465.0
million of which all was current and approximately $401.9 million was owed to
Court Square Capital Limited ("CSCL"), an affiliate. Total indebtedness was
approximately $453.1 million at December 31, 1996, of which $169.0 million was
current and approximately $389.8 million was owed to CSCL. Accrued interest on
total indebtedness was approximately $83.2 million and $64.4 million at June
28, 1997 and December 31, 1996, respectively. Approximately $54.0 million and
$40.5 million of the accrued interest was owed to CSCL at June 28, 1997 and
December 31, 1996, respectively. The Company's outstanding indebtedness
includes its senior subordinated pay-in-kind debentures and merger debentures
(collectively, the "Fairwood Debentures"). The Company exercised its option
during the first five years to pay interest on the Fairwood Debentures through
the distribution of additional securities.
Fairwood is a holding company with no operations. The Company has effectively
no cash flow from its subsidiaries because the cash produced by the operations
of the subsidiaries is not expected for the foreseeable future to be sufficient
to permit the subsidiaries to transfer funds to Fairwood. Fairwood's sole
asset is the stock of Consolidated Furniture, its wholly-owned subsidiary.
Fairwood's obligations under the Fairwood Debentures 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, which has
operations that it conducts through its two divisions, Stratford and
Barcalounger. Furniture Comfort is also a direct obligor under the Credit
Agreement and has pledged substantially all of its assets to secure the
obligations under the Credit Agreement. Furniture Comfort is not an obligor on
the Fairwood Debentures.
- 9 -
10
On each of April 1, 1995 and October 1, 1995, and each semi-annual interest
payment date thereafter, Fairwood failed to make the required interest payments
due on the senior subordinated pay-in-kind debentures and merger debentures
(collectively, the "Fairwood Debentures") and Fairwood does not expect to make
the cash interest payments required under the Fairwood Debentures on any
future semi-annual interest payment dates. Accrued interest of $74.3 million on
the Fairwood Debentures, which includes $45.1 million due to CSCL, is included
in accrued expenses in the accompanying consolidated balance sheet as of June
28, 1997.
There can be no assurance that Fairwood will be able to continue as a going
concern. An involuntary Chapter 7 petition was filed on January 3, 1996 in the
United States Bankruptcy Court for the Southern District of New York against
Fairwood Corporation by certain merger debenture holders. In response to the
bankruptcy filing, on April 22, 1996, Fairwood and certain other entities filed
a cross-motion seeking dismissal of the petition. On November 26, 1996, the
motion to dismiss was denied. On December 26, 1996, Fairwood exercised its
right to convert the pending involuntary bankruptcy case to a voluntary Chapter
11 proceeding as debtor-in-possession. On May 2, 1997, certain holders of the
Fairwood Debentures filed a Motion seeking to convert Fairwood's chapter 11
case to a chapter 7 liquidation or, alternatively, to appoint a chapter 11
trustee. On July 21, 1997, the Bankruptcy Court denied the request to convert
the case and held in abeyance pending further proceedings the request to
appoint a chapter 11 trustee. Fairwood cannot predict how the Court may rule on
the request to appoint a chapter 11 trustee or when such ruling may occur.
Fairwood has indicated in Bankruptcy Court papers that if the Motion or the
appointment of a chapter 11 trustee is denied, it intends to propose a plan of
reorganization with the Bankruptcy Court at some time in the future. There is
no way to know what the outcome of the proceeding will be. The Chapter 11 case
pertains only to Fairwood Corporation. Fairwood's direct and indirect
subsidiaries, including Consolidated Furniture Corporation, Furniture Comfort
Corporation, as well as their operating divisions, Stratford and Barcalounger,
are not parties to the bankruptcy, nor are such operations under the
supervision of the Bankruptcy Court. It is currently expected that Fairwood's
direct and indirect subsidiaries will continue to operate in the normal course
of business.
Fairwood's failure to make the April 1, 1995 and subsequent period interest
payments constitutes an event of default which permits the acceleration of the
Fairwood Debentures by the demand of the holders of the requisite aggregate
principal amount of the debentures, subject to a 180-day acceleration blockage
provision. Upon acceleration, the Fairwood Debentures would be due and
payable. Accordingly, the Fairwood Debentures have been classified as current
liabilities in the accompanying unaudited condensed consolidated balance sheet
as of June 28, 1997.
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 1996 Consolidated Furniture funded interest obligations
related to long-term indebtedness on the revolving line of credit and the
senior subordinated debentures through increased borrowings from CSCL under the
Credit Agreement. Borrowings from CSCL during the first six months of 1997
were approximately $12.0 million. There were no repayments to CSCL during the
first six months of 1997. 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
- 10 -
11
service obligations on the revolving line of credit and the senior subordinated
debentures. Under the Credit Agreement, Consolidated Furniture and its
subsidiaries are generally restricted from transferring moneys to Fairwood with
the exception of amounts for (a) specified administrative expenses of Fairwood
and (b) payment of income taxes. The senior subordinated debentures, senior
subordinated pay-in-kind debentures and merger debentures also have certain
restrictions as to the payment and transfer of moneys.
Management believes that cash flow from operations and funding from CSCL will
be adequate to meet Consolidated Furniture's obligations on the revolving line
of credit and the senior subordinated debentures through December 31, 1997.
Consolidated Furniture's revolving line of credit and senior subordinated
debentures mature on January 2, 1998 and, accordingly, have been classified as
current liabilities in the accompanying consolidated balance sheet as of June
28, 1997. Consolidated Furniture expects to negotiate an extension of these
maturity dates with CSCL or refinance such indebtedness prior to January 2,
1998. However, there can be no assurance that the Consolidated Furniture will
be able to negotiate such an extension, or that the terms of such extension or
refinancing will not be on terms less favorable than those currently in place.
For a discussion of the status of the IRS examination, refer to Fairwood's
audited consolidated financial statements as of December 31, 1996 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 June 28, 1997 Versus Three Months Ended June 29, 1996
The following discussion presents the material changes in results of operations
which have occurred in the second quarter of 1997 in comparison to the same
period in 1996.
Net sales on a consolidated basis were approximately $34.5 million in the
second quarter of 1996, a decrease of 8.5% from last year's second quarter
consolidated net sales of approximately $37.7 million, due primarily to a
reduction of sales at Stratford.
Second quarter 1997 net sales (including intercompany sales) by the Stratford
Company decreased 22.2% to approximately $22.8 million as compared to $29.3
million for the comparable period in 1996. Second quarter sales to Simmons
Upholstered Furniture Corporation ("Simmons"), were approximately $2.6 million,
a decrease of 19.3% from 1996 second quarter sales of $3.2 million. Second
quarter sales in 1997 to Stratford's larger national retail chain customers
decreased 33.5%, while sales to smaller retail furniture store customers
decreased 22.4%. Total Stratford volume, excluding sales to Simmons decreased
27.3% during the second quarter of 1997 as compared to 1996. Volume to
Stratford's larger national retail chain customers decreased 33.0%, while
volume to Stratford's smaller retail furniture store customers decreased 22.1%.
These decreases in sales and volume were the result of overall weakness in the
sales of mid priced motion furniture by the furniture dealers that Stratford
targets. Stratford's strategy to improve margins and lower selling costs
continues to proceed slowly.
- 11 -
12
Stratford's average selling price for the quarter, which is dependent on the
type of product and customer, decreased less than 1 percent for the comparable
period in 1996. Excluding sales to Simmons, who became an affiliate during
November 1995, net sales for the second quarter of 1997 were approximately
$20.2 million compared to approximately $26.1 million for the second quarter of
1996, a decrease of 22.63%.
Second quarter 1997 net sales by Barcalounger increased 32.0% to approximately
$12.0 million as compared to $9.1 million for the comparable period in 1996.
This increase in sales reflects a increase in total volume of 24.2%, and a 6.9%
increase in average sales prices.
Cost of sales on a consolidated basis decreased 2.2% in the second quarter of
1997 to $33.1 million, or 95.9% of net sales, as compared to $33.8 million, or
89.7% of net sales, in 1996. Stratford Company cost of sales increased to
103.6% of net sales in the second quarter of 1997, as compared to 92.5% in the
second quarter of 1996. The increase is the result of increased
manufacturing costs and reduced overhead absorption due to lower than planned
production and sales volume. Barcalounger cost of sales were at 81.3% of net
sales in the second quarter of 1997 and the second quarter of 1996.
Selling, administrative and general expenses on a consolidated basis for the
second quarters of 1997 and 1996 were approximately $10.3 million and $5.6
million, respectively, representing a increase of 83.9%. The increase was due
primarily to reserves taken in the second quarter by Stratford for expected
non-collection of amounts due from a large national retail chain and the write
down of non-performing assets and prepaid expenses.
Other income (expenses), net, were approximately $.1 million and ($.6)
million for the second quarters of 1997 and 1996. The increase was primarily
due to startup costs incurred relative to the Simmons contract during 1996.
Six Months Ended June 28, 1997 Versus Six Months Ended June 29, 1996
The following discussion presents the material changes in results of operations
which have occurred in the first six months of 1997 in comparison to the same
period in 1996.
Net sales on a consolidated basis were approximately $71.7 million in the first
six months of 1997, a decrease of 5.7% from last year's first six months
consolidated net sales of approximately $76.0 million, due primarily to a
reduction of sales at Stratford.
Stratford Company net sales (including intercompany sales) for the first six
months of 1997 decreased 16.4% to approximately $48.4 million as compared to
$57.9 million for the comparable period in 1996. Total volume has decreased
22.4% for the first six months of 1997 as compared to the first six months of
1996. Sales volume to the smaller retail customers has decreased 21.5%, while
national account sales volume has decreased 23.4% in the first six months of
1997 as compared to 1996. Industry analysts, retailers and competitors have
reported that a general industry wide slowdown occurred in retail sales of mid
priced motion household furniture and downward inventory adjustments during the
first six months of 1997 and that incoming order rates to furniture
manufacturers deteriorated significantly during that same period. As a result
of these circumstances, Stratford sales have declined sharply.
- 12 -
13
Barcalounger net sales for the first six months of 1997 were approximately
$24.3 million, an increase of 26.6%, as compared to 1996 second quarter sales
of $19.2 million, reflective of a 19.2 increase in the number of pieces sold
and a 6.6% increase in average selling prices.
Cost of sales on a consolidated basis decreased 3.5% in first six months of
1997 to approximately $66.9 million, or 93.2% of net sales, as compared to
$69.3 million, or 91.2% of net sales, in 1996. Stratford Company cost of sales
increased to 99.5% of net sales in the first six months of 1997, as compared to
94.6% in the first six months of 1996. The increase in cost of sales as a
percentage of net sales is primarily due to lower sales volume. Barcalounger's
cost of sales decreased to 81.0% of net sales in the first six months of 1997,
as compared to 81.5% of net sales in the first six months of 1996. The
decrease in cost of sales as a percentage of net sales was the result of
increased second quarter sales and a slight reduction in fixed overhead costs
as a percentage of sales.
Selling, administrative and general expenses on a consolidated basis for the
first six months of 1997 and 1996 were approximately $16.1 million and $11.9
million, respectively, representing an increase of 35.3%. The increase was due
primarily to reserves taken in the second quarter for expected non-collection
of amounts due from a large national retail chain and the write down of
non-performing assets and prepaid expenses
Other income (expenses), net, were approximately $.2 million and ($1.5) million
for the first six months of 1997 and 1996. The decrease was primarily due to
startup costs incurred relative to the Simmons contract during 1996.
No income taxes have been provided in the first six months of 1997 and 1996,
respectively, as the Company is in a net operating loss carryforward position,
and a valuation allowance has been increased to offset any future benefit from
these positions.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3, Legal Proceedings, previously
reported in the Registrant's Form 10-K for the year ended December
31, 1996 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
- 13 -
14
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 11, 1997
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