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 OCTOBER 2, 1999
-----------------------------------------------
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 OCTOBER 2, 1999
----- -----------------
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)
October 2, December 31,
Assets 1999 1998
------ ------------- ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 5,850 2,165
-------- --------
Accounts and notes receivable:
Trade 5,598 22,662
Notes receivable, affiliate - 500
Due from affiliate - 4,089
Insurance proceeds receivable 5,298 -
-------- --------
10,896 27,251
Less allowance for discounts and doubtful accounts 238 1,317
-------- --------
10,658 25,934
-------- --------
Inventories 3,239 14,666
Prepaid expenses and other current assets 279 2,567
-------- --------
Total current assets 20,026 45,332
-------- --------
Property, plant and equipment, at cost 8,030 32,874
Less accumulated depreciation and amortization 5,209 20,380
-------- --------
2,821 12,494
-------- --------
Other assets 125 337
-------- --------
$ 22,972 58,163
======== ========
(Continued)
- 2 -
3
FAIRWOOD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
October 2, December 31,
Liabilities And Deficit 1999 1998
----------------------- ------------ ------------
(Unaudited)
Current Liabilities:
Line of credit and term loan $ - 27,480
Overdraft - 2,212
Current maturities of long-term debt:
Revolving credit 367,621 -
Senior subordinated debentures 80,000 -
Senior subordinated pay-in-kind debentures 105,853 105,853
Merger debentures 62,928 62,928
Other - 45
Accounts payable 3,978 7,092
Due to affiliate 32 -
Accrued interest 137,262 118,462
Accrued expenses 2,671 8,389
Federal and state income taxes 113 5,027
-------- --------
Total current liabilities 760,478 337,488
-------- --------
Long-term debt:
Revolving credit - 305,855
Senior subordinated debentures - 80,000
Mortgage payable - 2,006
-------- --------
- 387,861
-------- --------
Deferred income taxes - 1,957
Other liabilities 492 72
-------- --------
492 2,029
-------- --------
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
Accumulated other comprehensive income ( 27) ( 27)
Accumulated deficit ( 794,019) ( 725,236)
-------- --------
( 738,098) ( 669,315)
-------- --------
$ 22,972 58,163
======== ========
See accompanying notes to the Unaudited Condensed
Consolidated Financial Statements.
- 3 -
4
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 2, September 26, October 2, September 26,
1999 1998 1999 1998
---------- ------------- ---------- -------------
Net sales $ 9,771 32,675 87,728 113,943
------- ------- ------- -------
Cost of sales 10,738 30,928 84,746 106,241
Selling, administrative and
general expenses 2,490 6,165 12,844 20,529
------- ------- ------- -------
13,228 37,093 97,590 126,770
------- ------- ------- -------
Operating loss ( 3,457) ( 4,418) ( 9,862) ( 12,827)
Interest income 119 65 145 135
Interest on indebtedness ( 20,224) ( 18,177) ( 57,206) ( 53,313)
Loss from flood ( 707) - ( 707) -
Loss on sale of Stratford
Division ( 97) - ( 1,064) -
Other income (expenses), net 13 72 115 192
------- ------- ------- -------
Loss before income taxes ( 24,353) ( 22,458) ( 68,579) ( 65,813)
Provision for income taxes ( 133) - ( 133) -
------- ------- ------- -------
Net loss $( 24,486) ( 22,458) ( 68,712) ( 65,813)
======= ======= ======= =======
See accompanying notes to the Unaudited Condensed
Consolidated Financial Statements.
- 4 -
5
FAIRWOOD CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
------------------------------
October 2, September 26,
1998 1998
-------- ------
Cash flows from operating activities:
Net loss $( 68,712) ( 65,813)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,086 1,383
Gain on disposal of property, plant and equipment ( 21) -
Loss on disposal of Stratford Division 1,064 -
Changes in assets and liabilities, net of effect of disposition:
Accounts receivable 2,408 1,064
Inventories 2,559 45
Prepaid expenses and other current assets 285 ( 482)
Accounts payable 5,060 ( 5,124)
Federal and state income taxes ( 4,360) ( 28)
Accrued expenses 17,629 32,072
Other, net 540 1,251
-------- -------
Cash used - operating activities ( 42,462) ( 35,632)
-------- -------
Cash flows from investing activities:
Disposition of property, plant and equipment 21 -
Disposition of Stratford Division 13,950 -
Capital expenditures ( 412) ( 1,314)
Repayment of Affiliate Note receivable 500 -
------- -------
Cash provided (used) - investing activities 14,059 ( 1,314)
------- -------
Cash flows from financing activities:
(Repayments) borrowings - overdraft ( 2,212) 1,430
Proceeds from revolving credit 61,766 29,674
Repayment of long-term debt ( 18) ( 222)
(Repayment of) proceeds from credit line, net ( 27,480) 22,582
Advances from affiliate 32 -
Repayments to factor, net - ( 15,554)
------- -------
Cash provided (used) - financing activities 32,088 37,910
------- -------
Increase in cash and cash equivalents 3,685 964
Cash and cash equivalents:
Beginning of period 2,165 605
------- -------
End of period $ 5,850 1,569
======= =======
Supplemental schedule of cash flow information
- ----------------------------------------------
Cash paid during year for:
Interest $ 37,459 22,598
Income tax refunds (payments), net ( 4,493) ( 28)
Supplemental schedule of noncash operating and financing activities
- -------------------------------------------------------------------
In the nine month periods ending October 2, 1999 and September 26, 1998 the
Company recognized $71 thousand and $60 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.
- 5 -
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 October 2, 1999 and
September 26, 1998, the financial position at October 2, 1999 and
December 31, 1998 and the cash flows for the nine months ended October
2, 1999 and September 26, 1998. The results of operations for the three
and nine month periods ended October 2, 1999 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 1998
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 Futorian Furnishings, Inc.
("Futorian", formerly Furniture Comfort Corporation), whose two
operating divisions, Stratford Division ("Stratford") and Barcalounger
Division ("Barcalounger") manufacture stationary and motion upholstered
residential furniture.
On June 3, 1999, Fairwood sold substantially all of the assets of the
Stratford Division for approximately $14 million in cash plus the
assumption of certain liabilities. The proceeds from the sale were used
to pay-down the line of credit and term loan ("the Futorian Loan
Agreement"). The sale included substantially all of the business and
assets of the Stratford Division, including the sale of its owned
manufacturing plant in New Albany, Mississippi and its office and
showroom in Bannockburn, Illinois and the assignment of leases for
certain other manufacturing and showroom facilities. The revenues and
segment losses from the Stratford Division are disclosed in note 11. As
a result of this sale, Fairwood recognized a loss of approximately $1
million.
In October 1999, the purchaser of Stratford submitted claims of
approximately $2.0 million for expenses that they allege belong to
Futorian. A thorough review of their claims is being made and at this
time Futorian does not believe that the claims are valid. There is no
provision for these claims in the financial statements. To the extent
that any of the claims prove to be valid, they would first offset the
$.5 million held in escrow by the purchaser. The Company cannot predict
the outcome of the claims.
On September 16, 1999, Barcalounger Division incurred substantial damage
due to floods caused by the heavy rains of Hurricane Floyd. The damage to
inventory was approximately $5.8 million. This amount includes the
destruction of all finished inventory, approximately 95% of work in
process and approximately 50% of raw materials. Lost sales of
approximately $4 million resulted from the plant being closed for
approximately three weeks.
The Company is in the process of completing its assessment of the
flood-related damages. Barcalounger is covered under an insurance policy
for business interruption and the damage to inventory and property, plant
and equipment. In accordance with the insurance policy, Barcalounger sold
its damaged inventory to the insurance company, at an amount slightly
above cost, resulting in a receivable of approximately $5.2 million at
October 2, 1999. The receivable was collected subsequent to October 2,
1999.
The Company has recognized a $0.7 million loss from the flood in the
accompanying statement of operations, representing the net of the gain
on sale of inventory and $1.0 million insurance deductible. The Company
is in the process of assessing the damage to property, plant and
equipment and related loss amount, if any, accordingly no loss has been
recognized as of October 2, 1999. Furthermore, no amount has been
recognized as of October 2, 1999 for insurance proceeds that may
ultimately be received for business interruption or for damaged
property, plant and equipment, as such the amount of the recognized loss
may change.
- 6 -
7
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
3. Fairwood's comprehensive income includes a minimum pension liability
which is calculated and reported annually. As a result, the minimum
pension liability has no effect on the quarterly unaudited condensed
consolidated statement of operations.
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:
October 2, 1999 December 31, 1998
--------------- -----------------
(Unaudited)
Raw materials $ 3,451 10,740
In process 742 3,054
Finished goods 568 8,579
------ ------
Inventories at
first-in, first out 4,761 22,373
LIFO reserve 1,522 7,707
------ ------
Inventories at LIFO $ 3,239 14,666
====== ======
5. In October 1998, the United States Bankruptcy Court (the "Bankruptcy
Court") approved the settlement of issues arising out of an Internal
Revenue Service ("IRS") audit examination of the consolidated Federal
income tax returns of Fairwood and its subsidiaries for the periods
ended July 11, 1988 through December 31, 1991. In the second quarter of
1999, payment of the Fairwood Group's estimated Federal tax liability
was made to the IRS. The tax payment, including estimated interest, was
approximately $4.5 million and was provided for in the financial
statements in previous years.
As approved by the Bankruptcy Court, the settlement was funded by
additional borrowings under Consolidated Furniture's existing revolving
credit agreement, with any refund obtained returned to the lender under
that facility. The settlement significantly reduced Fairwood's available
net operating loss carryforwards.
Fairwood is obligated to the extent of any adjustment by the IRS to the
interest component of the settlement and the state effect of this
settlement. A provision for additional interest of $1.4 million and
taxes of $0.1 million has been made in the quarter ended October 2,
1999. The provision for interest and provision for the taxes are included
in accrued interest and Federal and state income taxes, respectively on
the accompanying unaudited condensed consolidated balance sheet. The
Company has not reached final settlement with all taxing authorities,
therefore the amount of the provisions are subject to change.
- 7 -
8
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
With the exception of adjustments resulting from the IRS settlement, no
provision for federal income taxes has been provided during the nine
months ended October 2, 1999 and September 26, 1998, as the Company is
in a net operating loss carryforward position, and the valuation
allowance has been increased to offset any future benefit from this
position.
6. On 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 date.
Accrued interest of $135.1 million on the Fairwood Debentures, which
includes $82.0 million due to Court Square Capital Limited ("CSCL"), is
included in accrued interest on the accompanying unaudited condensed
consolidated balance sheet as of October 2, 1999. On January 3, 1996,
certain holders of the Fairwood public debentures (the "Bondholders")
filed an involuntary Chapter 7 petition against Fairwood in the United
States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain
Citicorp affiliates filed a motion in response to the involuntary filing
seeking to dismiss the petition. By order dated December 4, 1996, the
Bankruptcy Court denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to
convert the Chapter 7 case to a case under Chapter 11. As of the date
hereof, Fairwood continues to operate as a debtor in possession under
Section 1108 of the Bankruptcy Code. The Chapter 11 case pertains only
to Fairwood Corporation. Fairwood Corporation's direct and indirect
subsidiaries, including Consolidated Furniture Corporation, Futorian
Furnishings, Inc., as well as its remaining operating division,
Barcalounger, are not parties to the bankruptcy. In April 1997 the
Bondholders' filed a Motion with the Bankruptcy Court seeking to convert
Fairwood's Chapter 11 case to a case under Chapter 7 or, alternatively,
for the appointment of a Chapter 11 trustee. By order dated March 2,
1999, the Bondholders' motion to convert the case or, alternatively, for
the appointment of a Chapter 11 trustee, was denied in its entirety. The
Bondholders' have appealed that ruling. The Company cannot predict the
outcome of this appeal.
7. Consolidated Furniture's revolving credit under its Credit Agreement
with CSCL (the "Credit Agreement") and senior subordinated debentures
mature on January 3, 2000 and, accordingly, have been classified as
current liabilities in the accompanying unaudited condensed consolidated
balance sheet of the Company as of October 2, 1999. Consolidated
Furniture expects to negotiate an extension of these maturity dates or
refinance such indebtedness prior to January 3, 2000. 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.
- 8 -
9
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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. 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 October 2, 1999.
8. Until June 3, 1999 Stratford provided new product development and
selling activities to Simmons, an affiliate. Under the agreement to
provide services, Stratford recognized approximately $0.0 million and
$0.5 million for the three-month periods ended October 2, 1999 and
September 26, 1998, respectively, and approximately $0.3 million and
$1.4 million for the period January 1, 1999 through June 3, 1999 and the
nine-month period ended September 26, 1998, respectively. Stratford was
also reimbursed approximately $0.0 million and $.6 million for the
three-month periods ended October 2, 1999 and September 26, 1998,
respectively, and approximately $2.6 million and $1.2 million for the
period January 1, 1999 through June 3, 1999 and the nine-month period
ended September 26, 1998, respectively for various overhead costs.
9. Fairwood's reportable segments include the Stratford division and the
Barcalounger division. These segments were managed separately because of
their distinctly different markets and facilities. Stratford was sold on
June 3, 1999.
The segment financial information, in thousands, are as follows:
Nine months ended October 2, 1999
---------------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ ------
Revenues from external
customers $ 49,739 $ 37,989 $ - $ - $ 87,728
Intersegment income 882 - - ( 882) -
Interest expense, net 1,464 ( 88) 55,830 - 57,206
Segment profit (loss) ( 13,971) 1,292 ( 56,033) - ( 68,712)
Nine months ended September 26, 1998
------------------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ ------
Revenues from external
customers $ 74,177 $ 39,766 $ - $ - $ 113,943
Intersegment income 1,638 - - ( 1,638) -
Interest expense, net 2,106 15 51,057 - 53,178
Segment profit (loss) ( 15,263) 1,733 ( 52,283) - ( 65,813)
- 9 -
10
FAIRWOOD CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended October 2, 1999
----------------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ ------
Revenues from external
customers $ - $ 9,771 $ - $ - $ 9,771
Intersegment income - - - - -
Interest expense, net - ( 105) 20,329 - 20,224
Segment profit (loss) ( 3,651) ( 1,060) ( 19,775) - ( 24,486)
Three months ended September 26, 1998
-------------------------------------
(unaudited)
Stratford Barcalounger Corporate Eliminations Totals
--------- ------------ --------- ------------ ------
Revenues from external
customers $ 20,171 $ 12,504 $ - $ - $ 32,675
Intersegment income 546 - - ( 546) -
Interest expense, net 693 4 17,415 - 18,112
Segment profit (loss) ( 5,334) 270 ( 17,394) - ( 22,458)
- 10 -
11
Item 2.
FAIRWOOD CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information in this quarterly report on Form 10-Q, including but not
limited to the Management's Discussion and Analysis of Financial Condition and
Results of Operations, may constitute forward-looking statements as such term
is defined in Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934. Certain forward-looking
statements can be identified by the use of forward-looking terminology such as,
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimated," or "anticipates" or the negative thereof or
other comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements involve risks and uncertainties,
including those described in the Company's Annual Report on Form 10-K, which
could cause actual results to be materially different than those in the
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof.
The Company assumes no obligation to update such information.
Liquidity and Capital Resources
At October 2, 1999, the Company had total indebtedness of approximately $616.4
million, all of which is classified as current liabilities and approximately
$553.5 was owed to Court Square Capital Limited ("CSCL"), an affiliate.
Long-term debt was approximately $556.7 million at December 31, 1998, of which
$168.8 million was current and approximately $491.7 million was owed to CSCL.
Accrued interest on total indebtedness was approximately $136.7 million and
$118.5 million at October 2, 1999 and December 31, 1998, respectively.
Approximately $82.0 million and $73.3 million of the accrued interest was owed
to CSCL at October 2, 1999 and December 31, 1998, 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.
On June 3, 1999, Fairwood sold substantially all of the assets of the Stratford
Division for approximately $14 million in cash plus the assumption of certain
liabilities. The proceeds from the sale were used to pay-down the line of
credit and term loan ("the Futorian Loan Agreement"). The sale included
substantially all of the business and assets of the Stratford Division,
including the sale of its owned manufacturing plant in New Albany, Mississippi
and its office and showroom in Bannockburn, Illinois and the assignment of
leases for certain other manufacturing and showroom facilities. The revenues
and segment losses from the Stratford Division are disclosed in footnote 9. As
a result of this sale, Fairwood recognized a loss of approximately $1 million.
In October 1999, the purchaser of Stratford submitted claims of approximately
$2.0 million for expenses that they allege belong to Futorian. A thorough
review of their claims is being made and at this time Futorian does not believe
that the claims are valid. There is no provision for these claims in the
financial statements. To the extent that any of the claims prove to be valid,
they would first offset the $.5 million held in escrow by the purchaser. The
Company cannot predict the outcome of the claims.
On September 16, 1999, Barcalounger Division incurred substantial damage due to
floods caused by the heavy rains as a result of Hurricane Floyd. The damage to
inventory was approximately $5.8 million. This amount includes the destruction
of all finished inventory, approximately 95% of work in process and
approximately 50% of raw materials. Lost sales of approximately $4 million
resulted from the plant being closed for approximately three weeks.
- 11 -
12
The Company is in the process of completing its assessment of the flood-related
damages. Barcalounger is covered under an insurance policy for business
interruption and the damage to inventory and property, plant and equipment. In
accordance with the insurance policy, Barcalounger sold its damaged inventory
to the insurance company, at an amount slightly above cost, resulting in a
receivable of approximately $5.2 million at October 2, 1999. The receivable was
collected subsequent to October 2, 1999.
The Company has recognized a $0.7 million loss from the flood in the
accompanying statement of operations, representing the net of the gain on sale
of inventory and $1.0 million insurance deductible. The Company is in the
process of assessing the damage to property, plant and equipment and related
loss amount, if any, accordingly no loss has been recognized as of October 2,
1999. Furthermore, no amount has been recognized as of October 2, 1999 for
insurance proceeds that may ultimately be received for business interruption or
for damaged property, plant and equipment, as such the amount of the recognized
loss may change.
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. Fairwood's sole asset is
the stock of Consolidated Furniture, its wholly-owned subsidiary. Fairwood's
obligations under the Fairwood Debentures (as defined below) are collateralized
by Fairwood's pledge of its interest in Consolidated Furniture's capital stock.
CSCL, as holder of Fairwood's senior subordinated pay-in-kind debentures, has a
first priority collateral interest in all of the outstanding capital stock of
Consolidated Furniture, and the holders of the merger debentures have a second
priority collateral interest in such capital 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 a revolving credit
agreement with CSCL (the "Credit Agreement"). 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 collateralized by substantially all
of the assets of Consolidated Furniture. Consolidated Furniture is also a
holding company without operations. Its primary asset is the outstanding
capital stock of Futorian, which has operations that it conducts through its
one remaining division, Barcalounger. Futorian is also a direct obligor under
the Credit Agreement and has pledged substantially all of its assets to
collateralize the obligations under the Credit Agreement. Futorian is not an
obligor under the Fairwood Debentures.
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 date. Accrued interest of $135.1 million on the
Fairwood Debentures, which includes $82.0 million due to CSCL, is included in
accrued interest in the accompanying unaudited condensed consolidated balance
sheet as of October 2, 1999.
- 12 -
13
There can be no assurance that Fairwood will be able to continue as a going
concern. On January 3, 1996, certain holders of the Fairwood public debentures
(the "Bondholders") filed an involuntary Chapter 7 petition against Fairwood in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court.") Fairwood, Consolidated Furniture and certain Citicorp
affiliates filed a motion in response to the involuntary filing seeking to
dismiss the petition. By order dated December 4, 1996, the Bankruptcy Court
denied the motion to dismiss the petition.
Thereafter, on December 26, 1996, Fairwood exercised its right to convert the
Chapter 7 case to a case under Chapter 11. As of the date hereof, Fairwood
continues to operate as a debtor in possession under Section 1108 of the
Bankruptcy Code. The Chapter 11 case pertains only to Fairwood Corporation.
Fairwood Corporation's direct and indirect subsidiaries, including Consolidated
Furniture Corporation, Futorian, as well as its remaining operating division,
Barcalounger, are not parties to the bankruptcy. In April 1997 the Bondholders'
filed a Motion with the Bankruptcy Court seeking to convert Fairwood's Chapter
11 case to a case under Chapter 7 or, alternatively, for the appointment of a
Chapter 11 trustee. By order dated March 2, 1999, the Bondholders' motion to
convert the case or, alternatively, for the appointment of a Chapter 11 trustee,
was denied in its entirety. The Bondholders' have appealed that ruling. The
Company cannot predict the outcome of this appeal.
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 October 2, 1999.
Consolidated Furniture, Fairwood's wholly-owned subsidiary, expects 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 1998 and the first three quarters of 1999 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 1999 were approximately $61.8 million. There
were no principal repayments to CSCL during the first nine months of 1999.
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 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, 1999.
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14
Consolidated Furniture's revolving credit and senior subordinated debentures
mature on January 3, 2000 and, accordingly, have been classified as current
liabilities in the accompanying unaudited condensed consolidated balance sheet
as of October 2, 1999. Consolidated Furniture expects to negotiate an extension
of these maturity dates with CSCL or refinance such indebtedness prior to
January 3, 2000. 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 footnote 5 to
Fairwood's unaudited condensed consolidated financial statements included
herein.
Results of Operations
Three Months Ended October 2, 1999 Versus Three Months Ended September 26, 1998
The following discussion presents the material changes in results of operations
which have occurred in the third quarter of 1999 in comparison to the same
period in 1998. The comparability of these periods is impacted by the June 3,
1999 sale of the Stratford division.
Net sales on a consolidated basis were approximately $9.8 million in the third
quarter of 1999, a decrease of 70.0% from last year's third quarter
consolidated net sales of approximately $32.7 million. Cost of sales on a
consolidated basis decreased 65.4% in the third quarter of 1999 to $10.7
million, or 109.2% of net sales, as compared to $30.9 million, or 94.5% of net
sales, in 1998. These sales and cost of sales decreases were impacted largely
by the sale of Stratford. The increase in cost of sales as a percentage of net
sales was primarily the result of $2.8 million of Stratford costs incurred in
the third quarter of 1999 terminating unsold obligations, offset by the
elimination of lower margin Stratford sales.
Third quarter 1999 net sales by Barcalounger decreased 21.6% to approximately
$9.8 million as compared to $12.5 million for the comparable period in 1998.
This decrease in sales is the result of lost sales from the flood related
closure offset by a 3.7% increase in average sales prices. The increase is the
result of the sale of products with more expensive upper grade leather.
Barcalounger cost of sales remained approximately 80% of net sales.
Selling, administrative and general expenses on a consolidated basis for the
third quarters of 1999 and 1998 were approximately $2.5 million and $6.2
million, respectively, representing a decrease of 59.7%. The decrease was
largely a result of the sale of Stratford. The $2.5 million for the third
quarter of 1999 includes approximately $0.9 million of Stratford costs to
terminate unsold operations.
On September 16, 1999, Barcalounger Division incurred substantial damage due to
floods caused by the heavy rains of Hurricane Floyd. The damage to inventory was
approximately $5.8 million. This amount includes the destruction of all finished
inventory, approximately 95% of work in process and approximately 50% of raw
materials. Lost sales of approximately $4 million resulted from the plant being
closed for approximately three weeks.
The Company is in the process of completing its assessment of the flood-related
damages. Barcalounger is covered under an insurance policy for business
interruption and the damage to inventory and property, plant and equipment. In
accordance with the insurance policy, Barcalounger sold its damaged inventory
to the insurance company, at an amount slightly above cost, resulting in a
receivable of approximately $5.2 million at October 2, 1999. The receivable was
collected subsequent to October 2, 1999.
The Company has recognized a $0.7 million loss from the flood in the
accompanying statement of operations, representing the net of the gain on sale
of inventory and $1.0 million insurance deductible. The Company is in the
process of assessing the damage to property, plant and equipment and related
loss amount, if any, accordingly no loss has been recognized as of October 2,
1999. Furthermore, no amount has been recognized as of October 2, 1999 for
insurance proceeds that may ultimately be received for business interruption or
for damaged property, plant and equipment, as such the amount of the recognized
loss may change.
Interest expense, was approximately $20.2 million and $18.2 million for the
third quarters of 1999 and 1998, respectively, an increase of 11.0%. The
increase was primarily due to increased borrowings on the Credit Agreement,
interest accrued on tax obligations, off-set partially by the repayment
of the Futorian line of credit and term loan.
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15
Nine Months Ended October 2, 1999 Versus Nine Months Ended September 26, 1998
The following discussion presents the material changes in results of operations
which have occurred in the first nine months of 1999 in comparison to the same
period in 1998. The comparability of these periods is impacted by the June 3,
1999 sale of the Stratford division.
Net sales on a consolidated basis were approximately $87.7 million in the first
nine months of 1999, a decrease of 23.0% from last year's first nine months
consolidated net sales of approximately $113.9 million, due primarily to the
sale of Stratford operations in 1999. Cost of sales on a consolidated basis
decreased 20.2% in the first nine months of 1999 to $84.7 million, or 96.6% of
net sales, as compared to $106.2 million, or 93.2% of net sales, in 1998. These
sales and cost of sales decreases were impacted largely by the sale of
Stratford.
On June 3, 1999, Fairwood sold substantially all the assets of the Stratford
Division. For the period through June 3, 1999 the Stratford Division had net
sales (including intercompany sales) of $50.6 million as compared to $75.8
million for the first nine months of 1998. The Stratford Division cost of sales
were $55.1 million for the first nine months of 1999 compared to $75.8 million
for the first nine months of 1998.
Barcalounger net sales for the first nine months of 1999 were approximately
$38.0 million, a decrease of 4.5%, as compared to 1998 third quarter sales of
$39.8 million, reflective of the result of lost sales from the flood related
closure offset by a 3.9% increase in average selling prices. The increase is the
result of sale of products with more expensive upper grade leather. Barcalounger
cost of sales decreased to $30.5 million, or 80.3% of net sales in the third
quarter of 1999, as compared to $32.1 million, or 80.6% of net sales in the
third quarter of 1998.
Selling, administrative and general expenses on a consolidated basis for the
first nine months of 1999 and 1998 were approximately $12.8 million and $20.5
million, respectively, representing a decrease of 37.6%. The decrease was
largely a result of the sale of Stratford.
On September 16, 1999, Barcalounger Division incurred substantial damage due to
floods caused by the heavy rains of Hurricane Floyd. The damage to inventory was
approximately $5.8 million. This amount includes the destruction of all finished
inventory, approximately 95% of work in process and approximately 50% of raw
materials. Lost sales of approximately $4 million resulted from the plant being
closed for approximately three weeks. Barcalounger currently recognized a
reduction in earnings of $0.7 million representing primarily the gain on sale
of destroyed inventory to the insurance company net of the $1.0 million
deductible.
Interest expense, was approximately $57.2 million and $53.3 million for the
first nine months of 1999 and 1998, respectively, an increase of 7.3%. The
increase was primarily due to increased borrowings on the Credit Agreement,
interest accrued as part of the IRS settlement, off-set partially by the
repayment of the Futorian line of credit and term loan.
With the exception of adjustments resulting from the IRS settlement, no income
taxes have been provided in the first nine months of 1999 and 1998,
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.
Year 2000
The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits to define the applicable year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause system
failures and other computer errors, resulting in business and operational
disruptions. The Company recognizes the need to identify and correct problems
associated with its existing computer systems and certain non-information
technology systems as the Year 2000 approaches. Both internal and external
resources are being used to identify, correct, and to test these financial,
information and operational systems for Year 2000 compliance.
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16
While a number of the Company's systems have been determined to be Year 2000
compliant, certain applications required remediation. The Company has completed
its remediation and believes that all the Company's systems are Year 2000
compliant and does not expect the impact of Year 2000 issues to have a material
impact on the financial position or results of operations of the Company.
Costs and expenses incurred through October 2, 1999 in addressing the Year 2000
issue have been less than $400,000. It is estimated that less than $10,000 in
additional costs will be incurred in the remainder of 1999 for certain
incidental items.
The Company has made inquiries of key third parties to assess the potential
impact on the Company's operations if such parties are not successful in
remediating their systems in a timely manner. The Company has essentially
completed contingency plans in the event Year 2000 failures of its
key suppliers and service providers.
The Company's expectations about future costs necessary to achieve Year 2000
compliance, the impact on its operations and its ability to bring each of its
systems into Year 2000 compliance are subject to a number of uncertainties that
could cause actual results to differ materially. Such factors include the
following:(i) the Company may not be successful in properly identifying all
systems and programs that contain two-digit year codes;(ii) the nature and
number of systems which require reprogramming, upgrading or replacement may
exceed the Company's expectations in terms of complexity and scope;(iii) the
Company may not be able to complete all remediation and testing necessary in a
timely manner;(iv) the Company has no control over the ability of its key
suppliers and customers to achieve Year 2000 compliance; and (v) the impact of
the Year 2000 problems on key customers may be of such magnitude that it may
adversely affect their demand for the Company's products and services. Fairwood
estimates the potential, worst-case-scenario as a result of Year 2000 failure
from these, or other, unanticipated factors, would delay production no more
than a week because of the non technical aspects of furniture manufacturing.
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, 1998 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
Filed October 6, 1999 regarding flood loss at the Barcalounger Division
due to Hurricane Flood.
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17
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 19, 1999
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