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 27, 1997
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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
--------------------
(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 September 27, 1997
----- ------------------
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 27, December 31,
Assets 1997 1996
------ ------------- ------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 709 429
------- --------
Accounts and notes receivable:
Trade 23,368 23,673
Due from affiliate 3,675 2,418
Other 648 648
------- --------
27,691 26,739
Less allowance for discounts and doubtful accounts 4,826 1,566
Less advances from factor 14,519 9,703
------- --------
8,346 15,470
------- --------
Inventories 14,472 13,625
Prepaid expenses and other current assets 2,455 2,468
------- --------
Total current assets 25,982 31,992
------- --------
Property, plant and equipment, at cost 30,859 31,034
Less accumulated depreciation and amortization 19,787 18,709
------- --------
11,072 12,325
------- --------
Other assets 1,821 2,260
------- --------
$ 38,875 46,577
======= ========
(Continued)
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands except share data)
September 28, December 31,
Liabilities and Deficit 1997 1996
----------------------- ------------- ------------
(Unaudited) (Audited)
Current Liabilites:
Overdraft $ - 715
Current maturities of long-term debt:
Revolving credit 229,408 -
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 8,115 9,836
Accrued expenses 104,824 71,095
Federal and state income taxes 5,718 5,699
-------- --------
Total current liabilities 597,036 256,306
-------- --------
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 2,867 2,513
-------- --------
4,391 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 ( 618,061) ( 553,457)
-------- --------
( 562,652) ( 498,048)
-------- --------
$ 38,875 46,577
======== ========
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 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales $ 32,918 34,422 104,664 110,413
Cost of sales 32,222 31,528 99,095 101,958
Selling, administrative and
general expenses 6,373 4,996 22,432 16,870
------- ------- ------- -------
38,595 36,524 121,527 118,828
------- ------- ------- -------
Operating loss ( 5,677) ( 2,102) ( 16,863) ( 8,415)
Interest income 8 19 96 189
Interest on indebtedness ( 16,466) ( 15,073) ( 48,073) ( 44,700)
Other income (expenses), net 91 ( 76) 287 ( 440)
------- ------- ------- -------
Income (loss) before income
taxes ( 22,044) ( 17,232) ( 64,553) ( 53,366)
Provision for income taxes - - - -
------- ------- ------- -------
Net income (loss) $( 22,044) ( 17,232) ( 64,553) ( 53,366)
======= ======= ======= =======
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 27, September 28,
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $( 64,553) ( 53,366)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,427 1,623
Gain on disposal of property, plant and equipment ( 60) ( 122)
Changes in assets and liabilities:
Accounts receivable 2,308 3,990
Inventories ( 847) 838
Prepaid expenses and other current assets 13 457
Accounts payable ( 1,772) ( 477)
Federal and state income taxes 19 -
Accrued expenses 33,729 29,919
Other, net 793 360
-------- -------
Cash used - operating activities ( 28,943) ( 16,778)
-------- -------
Cash flows from investing activities:
Dispostion of property, plant and equipment 60 156
Capital expenditures ( 174) ( 523)
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Cash used - investing activities ( 114) ( 367)
------- -------
Cash flows from financing activities:
Overdraft ( 715) 1,457
Proceeds from long-term debt 25,416 15,853
Repayment of long-term debt ( 180) ( 170)
Proceeds from Factor, net 4,816 ( 3,356)
------- -------
Cash provided - financing activities 29,337 13,784
------- -------
Increase (decrease) in cash and cash equivalents 280 ( 3,361)
Cash and cash equivalents:
Beginning of period 429 4,264
------- -------
End of period $ 709 903
======= =======
Supplemental schedule of cash flow information
Cash paid during year for:
Interest $ 18,709 16,328
Income tax refunds (payments), net ( 19) 28
Supplemental schedule of noncash operating and financing activities In the nine
month periods ending September 27, 1997 and September 28, 1996 the Company
recognized $51 thousand and $42 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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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 27, 1997
and September 28, 1996, the financial position at September 27, 1997
and December 31, 1996 and the cash flows for the nine months ended
September 27, 1997 and September 28, 1996. The results of operations
for the three and nine month periods ended September 27, 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 ("Fairwood")
and subsidiaries audited financial statements included in the 1996
annual report on Form 10-K. Certain reclassifications of 1996 balances
have been made to conform with 1997 presentation.
3. As of September 27, 1997 and pursuant to the terms of the accounts
receivable Factoring Agreement entered into during 1995 by Stratford
Company ("Stratford"), a division of a wholly-owned subsidiary of
Fairwood, receivables sold which remain to be collected approximated
$17.1 million, of which approximately $8.2 million were sold with
recourse.
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:
September 27, 1997 December 31, 1996
------------------ -----------------
(Unaudited) (Audited)
Raw materials $ 11,754 13,047
In process 3,321 3,028
Finished goods 6,707 5,163
------ ------
Inventories at first-in,
first-out 21,782 21,238
LIFO reserve 7,310 7,613
------ ------
Inventories at LIFO $ 14,472 13,625
====== ======
5. No provision for federal income taxes has been provided during the nine
months ended September 27, 1997 and September 28, 1996, as the Company
is in a net operating loss carryforward position, and the valuation
allowance has been increased to offset any future benefit from these
positions.
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 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 $131 million and
eliminate substantially all of the
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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 $81.1 million on the Fairwood
Debentures, which includes $49.2 million due to Court Square Capital
Limited ("CSCL"), is included in accrued expenses on the accompanying
unaudited condensed consolidated balance sheet as of September 27,
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, Futorian Furnishings, Inc. (formerly 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 these companies will continue to operate in
the normal course of business.
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FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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
September 27, 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
September 27, 1997.
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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 September 27, 1997, The Company had total indebtedness of approximately
$478.4 million of which all was current and approximately $415.3 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 $93.8 million and $64.4 million at
September 27, 1997 and December 31, 1996, respectively. Approximately $61.9
million and $40.5 million of the accrued interest was owed to CSCL at September
27, 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"). 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.
During such five-year period, Fairwood distributed additional securities in
satisfaction of its interest obligations.
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 Futorian Furnishings, Inc. ("Futorian Furnishings"
formerly Furniture Comfort Corporation), which has operations that it conducts
through its two divisions, Stratford and Barcalounger. Futorian Furnishings 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.
Futorian Furnishings is not an obligor on the Fairwood Debentures.
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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 $81.1 million on the
Fairwood Debentures, which includes $49.2 million due to CSCL, is included in
accrued expenses in the accompanying consolidated balance sheet as of September
27, 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, Futorian
Furnishings, 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
September 27, 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 nine months of 1997 were
approximately $25.4 million. There were no repayments to CSCL during the first
nine 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 service obligations on the revolving line of credit and the senior
subordinated debentures. Under the Credit Agreement, Consolidated Furniture and
its subsidiaries are
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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
September 27, 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 September 27, 1997 Versus Three Months Ended September 28,
1996
The following discussion presents the material changes in results of operations
which have occurred in the third quarter of 1997 in comparison to the same
period in 1996.
Consolidated net sales were approximately $32.9 million in the third quarter of
1997, a decrease of 4.4% from last year's third quarter consolidated net sales
of approximately $34.4 million, due primarily to a reduction of sales at
Stratford.
Third quarter 1997 net sales (including intercompany sales) by the
Stratford Company decreased to approximately $22.1 million as compared to $25.6
million for the comparable period in 1996 or 13.7%. Third quarter sales in 1997
to Stratford's larger national retail chain customers decreased 10.7%, while
sales to smaller retail furniture store customers decreased 28.0%. Total
Stratford volume, excluding sales to Simmons Upholstered Furniture Corporation
("Simmons"), decreased 22.0% during the third quarter of 1997 as compared to
1996. Volume to Stratford's larger national retail chain customers decreased
12.4%, while volume to Stratford's smaller retail furniture store customers
decreased 29.8%. These decreases in sales volume were due to a continuance of
adverse factors that includes a weakness in sales in mid priced furniture that
Stratford targets, intense competition due to the overall softness in industry
sales and the recent bankruptcy of Stratford's second and third largest
customers. Moreover, Stratford's largest customer had reduced its number of
selling units and inventory levels and consequently its purchases. These events
are the main causes for the decrease in sales to the value merchants and the
larger chain store customers who now make up the bulk of Stratford's customer
base. Stratford's previous strategies to improve margins and lower selling
costs was in conflict with certain customers and slowed and blocked Stratford's
attempts to recapture smaller stores' sales in order to address the continued
weakness in sales.
Stratford's top management team recently has been completely restructured and
has reorganized sales and marketing policies, plans and strategies in order to
address the continued weakness in sales.
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Stratford's average selling prices increased an average of 2.4%. Excluding sales
to Simmons, who became an affiliate during November 1995, net sales for the
third quarter of 1997 were approximately $20.1 million compared to approximately
$22.2 million for the third quarter of 1996, a decrease of 9.5%.
Third quarter 1997 net sales by Barcalounger increased 20.1% to approximately
$11.7 million as compared to $9.7 million for the comparable period in 1996.
This increase in sales reflects an increase in total volume of 12.8%, and a 7.0%
increase in average sales prices.
Consolidated cost of sales increased 2.2% in the third quarter of 1997 to $32.2
million, or 97.9% of net sales, as compared to $31.5 million, or 91.6% of net
sales, in 1996. Stratford Company cost of sales increased to 107.4% of net sales
in the third quarter of 1997, as compared to 95.5% in the third quarter of 1996.
The increase is the result of an increase in overhead costs as a percentage of
net sales. Barcalounger cost of sales decreased in the third quarter of 1997 to
80.1% of net sales, as compared to 82.1% of in the third quarter of 1996.
Consolidated selling, administrative and general expenses for the third quarters
of 1997 and 1996 were approximately $6.4 million and $5.0 million, respectively,
representing an increase of 28.0%. The increase was due primarily to bankruptcy
write-offs of certain Stratford customers.
Other income (expenses), net, was approximately $.1 million and $(.1) million
for the third quarters of 1997 and 1996, respectively. The difference between
the two years was primarily due to costs associated with divested operations.
Interest expense was approximately $16.5 million and $15.1 million for the third
quarters of 1997 and 1996, respectively, representing an increase of 9.3%. The
increase was due primarily to increased debt due to CSCL.
Nine Months Ended September 27, 1997 Versus Nine Months Ended September 28, 1996
The following discussion presents the material changes in results of operations
which have occurred in the first nine months of 1997 in comparison to the same
period in 1996.
Consolidated net sales were approximately $104.7 million in the first nine
months of 1997, a decrease of 5.2% from last year's first nine months
consolidated net sales of approximately $110.4 million, due primarily to a
reduction of sales at Stratford.
Stratford net sales (including intercompany sales) for the first nine months of
1997 decreased 15.6% to approximately $70.5 million as compared to $83.5 million
for the comparable period in 1996. Total Stratford volume, excluding sales to
Simmons, has decreased 22.3% for the first nine months of 1997 as compared to
the first nine months of 1996. Sales volume to the smaller retail customers has
decreased 24.1%, while national account sales volume has decreased 20.1% in the
first nine months of 1997 as compared to 1996. Stratford's average selling
prices decreased 1.1% for the first nine months of 1997 as compared to the first
nine months of 1996. The decrease in net sales due to decreases in sales volume
and average selling prices is partially offset by a $2.8 million increase in
wood component sales, an increase of 54.4%. These decreases in sales volume were
due to a continuance of adverse factors that includes a weakness in sales in mid
priced furniture that Stratford targets, intense competition due to the overall
softness in industry sales
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13
and the recent bankruptcy of Stratford's second and third largest customers.
Moreover, Stratford's largest customer had reduced its number of selling units
and inventory levels and consequently its purchases. These events are the main
causes for the decrease in sales to the value merchants and the larger chain
store customers who now make up the bulk of Stratford's customer base.
Stratford's previous strategies to improve margins and lower selling costs was
in conflict with certain customers and slowed and blocked Stratford's attempts
to recapture smaller stores' sales.
Stratford's top management team recently has been completely restructured and
has reorganized sales and marketing policies, plans and strategies in order to
address the continued weakness in sales.
Barcalounger net sales for the first nine months of 1997 increased 24.5% to
approximately $36.0 million as compared to $28.9 million in 1996, reflective of
a 17.1% increase in the number of pieces sold and 6.7% increase in average
selling prices. Barcalounger sells higher priced merchandise which merchandise
has not been affected by the industry wide slowdown.
Consolidated cost of sales decreased 2.8% in first nine months of 1997 to
approximately $99.1 million, or 94.7% of net sales, as compared to $102.0
million, or 92.3% of net sales, in 1996. Stratford cost of sales increased to
102.0% of net sales in the first nine months of 1997, as compared to 96.2% in
the first nine months of 1996. 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 decreased to 80.7% of net sales in the first nine
months of 1997, as compared to 81.2% of net sales for the first nine months of
1996. The decrease in the consolidated cost of sales is due to the increase in
Barcalounger as a percentage of total sales from 26.2% for the first nine months
of 1996 to 34.4% for the first nine months of 1997.
Consolidated selling, administrative and general expenses for the first nine
months of 1997 and 1996 were approximately $22.4 million and $16.9 million,
respectively, representing a increase of 32.5%. The increase was due primarily
to bankruptcy write-offs of certain Stratford customers.
Other income (expenses), net, were approximately $0.3 million and ($0.5) million
for the first nine months of 1997 and 1996, respectively.
Interest expense was approximately $48.1 million and $44.7 million for the first
nine months of 1997 and 1996, respectively, representing an increase of 7.6%.
The increase was due primarily to increased debt due to CSCL.
No provision for federal income taxes has been provided in the first nine months
of 1997 and 1996, respectively, as Fairwood is in a net operating loss
carryforward position, and a valuation allowance has been increased to offset
any future benefit from these positions.
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14
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 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: November 10, 1997
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