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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 2, 2002 Commission File Number 1-10226
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THE ROWE COMPANIES
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(Exact name of registrant as specified in its charter)
NEVADA 54-0458563
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Tysons Boulevard, Suite 710, McLean, Virginia 22102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703-847-8670
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None
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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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X No _____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding at June 2, 2002
- ---------------------------------------- ---------------------------
Common stock, par value $1.00 per share 13,154,059 shares
THE ROWE COMPANIES
INDEX
Part I. Financial Information Page
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Consolidated Balance Sheets - June 2, 2002 and
December 2, 2001 3
Consolidated Statements of Operations - Three Months
And Six Months Ended June 2, 2002 and June 3, 2001 4
Consolidated Statements of Cash Flows - Six Months Ended
June 2, 2002 and June 3, 2001 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Quantitative and Qualitative Disclosures about Market Risk 16
Forward Looking Statements 16
Part II. Other Information 17
2
PART I - FINANCIAL INFORMATION
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THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 2, December 2,
2002 2001
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(Unaudited) (Audited)
($ in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,007 $ 9,457
Accounts receivable, net 24,924 23,525
Notes receivable 262 325
Tax refunds receivable, net 144 2,514
Inventories (Note 4) 38,431 41,070
Deferred income taxes 1,443 2,371
Prepaid expenses and other 1,424 1,949
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Total current assets 70,635 81,211
PROPERTY AND EQUIPMENT, net 53,997 31,452
GOODWILL, net 28,416 29,061
OTHER NONCURRENT ASSETS 12,160 13,391
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$ 165,208 $ 155,115
========= ==========
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5) $ 2,270 $ 7,006
Short term bank borrowings (Note 5) -- 9,368
Accounts payable and accrued liabilities 27,181 25,599
Customer deposits 7,998 7,112
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Total current liabilities 37,449 49,085
LONG-TERM DEBT (Note 5) 77,055 52,096
DEFERRED LIABILITIES 4,487 7,238
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Total liabilities 118,991 108,419
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STOCKHOLDERS' EQUITY
COMMON STOCK, par value $1 per share: 50,000,000 shares
authorized; issued shares 16,572,102 and 16,547,715, respectively;
outstanding shares 13,154,059 and 13,135,025, respectively 16,572 16,548
CAPITAL IN EXCESS OF PAR VALUE 23,083 23,082
OTHER COMPREHENSIVE INCOME (1,022) (1,201)
RETAINED EARNINGS 29,537 30,204
Less treasury stock, 3,418,043 shares in 2002 and
3,412,690 shares in 2001, at cost (21,953) (21,937)
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Total stockholders' equity 46,217 46,696
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$ 165,208 $ 155,115
========= ==========
See notes to consolidated financial statements
3
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 2, 2002 AND JUNE 3, 2001
UNAUDITED
================================================================================
Three Months Ended Six Months Ended
June 2, June 3, June 2, June 3,
2002 2001 2002 2001
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($ in thousands - except per share amounts)
Net shipments $ 80,313 $ 78,029 $ 161,936 $ 158,457
Cost of shipments 52,621 53,481 106,741 107,472
--------- --------- --------- ---------
Gross profit 27,692 24,548 55,195 50,985
Selling and administrative expenses 26,915 31,383 52,344 58,055
Retail restructuring and other charges (Note 6) 2,089 -- 2,089 --
--------- --------- --------- ---------
Operating income (loss) (1,312) (6,835) 762 (7,070)
Interest expense (1,056) (1,161) (2,351) (2,421)
Other income 528 415 1,010 808
--------- --------- --------- ---------
Earnings (loss) before taxes (1,840) (7,581) (579) (8,683)
Tax expense (benefit) (474) (2,703) 88 (2,999)
--------- --------- --------- ---------
Net earnings (loss) $ (1,366) $ (4,878) $ (667) $ (5,684)
========= ========= ========= =========
Net earnings (loss) per common share $ (0.10) $ (0.37) $ (0.05) $ (0.43)
Weighted average common shares 13,139 13,134 13,137 13,134
========= ========= ========= =========
Net earnings (loss) per common share assuming dilution $ (0.10) $ (0.37) $ (0.05) $ (0.43)
Weighted average common shares and equivalents 13,139 13,134 13,137 13,134
========= ========= ========= =========
Dividends declared and paid per share $ -- $ 0.035 $ -- $ 0.070
See notes to consolidated financial statements
4
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 2, 2002 AND JUNE 3, 2001
UNAUDITED
================================================================================
2002 2001
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($ in thousands)
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Cash received from customers $ 161,058 $ 162,831
Cash paid to suppliers and employees (153,455) (163,208)
Income tax refunds received, net of payments 3,194 (29)
Interest paid (2,351) (2,421)
Interest received 476 278
Other receipts - net 671 548
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Net cash and cash equivalents provided by
(used in) operating activities 9,593 (2,001)
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Cash flows from investing activities:
Proceeds from sales of property and equipment -- 845
Capital expenditures (907) (2,134)
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Net cash used in investing activities (907) (1,289)
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Cash flows from financing activities:
Net borrowings (payments) under line of credit (9,368) 1,935
Proceeds from issuance of long-term debt 40,770 3,597
Payments to reduce long-term debt (45,547) (2,334)
Proceeds from issuance of common stock 25 22
Dividends paid -- (919)
Purchase of treasury stock (16) (9)
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Net cash provided by (used in) financing activities (14,136) 2,292
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Net increase (decrease) in cash and cash equivalents (5,450) (998)
Cash and cash equivalents at beginning of period 9,457 3,393
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Cash and cash equivalents at end of period $ 4,007 $ 2,395
========= =========
See notes to consolidated financial statements
5
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 2, 2002 AND JUNE 3, 2001
UNAUDITED
================================================================================
Reconciliation of Net Earnings (Loss) to Net Cash
Provided By (Used In) Operating Activities:
2002 2001
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($ in thousands)
Net earnings (loss) $ (667) $(5,684)
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Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,348 4,229
Provision for deferred compensation 83 (60)
Payments made for deferred compensation (2,682) (437)
Provision for losses on accounts receivable 425 2,615
Loss (gain) on disposition of assets 136 18
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (1,764) 5,839
Decrease (increase) in inventories 2,640 (2,518)
Decrease (increase) in prepaid expenses and other 357 1,427
Decrease (increase) in other assets 1,094 (404)
Increase (decrease) in accounts payable (2,308) (3,105)
Increase (decrease) in accrued expenses 3,763 572
Increase (decrease) in income taxes payable/receivable, net 3,282 (3,028)
Increase (decrease) in customer deposits 886 (1,465)
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Total adjustments 10,260 3,683
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Net cash provided by (used in) operating activities $ 9,593 $(2,001)
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See notes to consolidated financial statements
6
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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Note 1 - The Rowe Companies is comprised primarily of Rowe Furniture, Inc.,
its core upholstered furniture subsidiary; The Mitchell Gold Co., a
producer of upholstered and leather furniture; and Storehouse,
Inc., a 60 store retail furniture chain doing business under the
Storehouse and Home Elements names. Upon completion of the
restructuring of the retail units, the Home Elements name will be
discontinued. This is expected to occur in the Company's fiscal
fourth quarter.
Note 2 - In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position as of June 2, 2002 and the results of
operations and cash flows for the six month periods ended June 2,
2002 and June 3, 2001. Selling and administrative expenses include
$696,000 and $657,000 of retail delivery expenses for the three
months ended June 2, 2002 and June 3, 2001, respectively, and
$1,359,000 and $1,316,000 for the six months ended June 2, 2002 and
June 3, 2001, respectively.
Note 3 - The results of operations for the three months and six months ended
June 2, 2002 and June 3, 2001 are not necessarily indicative of the
results to be expected for the full year.
Note 4 - Inventory components are as follows:
June 2, December 2,
2002 2001
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($ in thousands)
Retail merchandise $18,110 $17,982
Finished goods 2,919 3,192
Work-in-process 3,767 4,213
Raw materials 13,635 15,683
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$38,431 $41,070
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Note 5 - As previously reported, on May 15, 2002, the Company completed the
refinancing of the Company's bank and other debt. In conjunction with
the financing, the Company paid down approximately $14.1 million of
outstanding debt, and assumed new debt of $40.8 million to replace
previously outstanding debt. In addition, changes to the terms of the
Elliston manufacturing facility lease obligation resulted in a change
in the accounting from an operating to a capital lease. The remaining
outstanding principal balance is included in long-term debt on the
Consolidated Balance Sheet.
7
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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Outstanding debt components are as follows:
June 2, December 1,
2002 2001
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($ in thousands)
Revolving loans $36,475 $51,000
Industrial revenue bond 5,100 5,103
Term loan 5,000 -
Mortgage debt 9,300 -
Short-term lines of credit - 9,368
Debenture - 3,000
Capitalized lease obligation 23,450 -
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Total long-term debt $79,325 $68,471
======= =======
Note 6 - As previously reported, the Company is restructuring its retail
operations by combining the current two subsidiaries into one, to
operate under the Storehouse name. This restructuring should result
in reduced administrative expenses in future periods, as well as
increasing the efficiency of the advertising programs and increasing
the buying power of the combined entity. The restructuring is
expected to be complete by the end of the third quarter of 2002. As
of June 2, 2002, the Company recorded restructuring, store closing
and other charges relating to the restructuring, totaling $2,319,000.
Included in this amount were costs for moving equipment and
relocating employees of $130,000 and training costs of $100,000
relating to training former Home Elements employees on the retail
software utilized by Storehouse, including travel expenses associated
with such training. The remaining $2,089,000 includes estimated costs
to terminate certain leases, write-off leasehold improvements and
signage without future benefit, severance costs for employees to be
terminated, and other restructuring related expenses. Particularly in
regards to the estimate of lease termination costs, these estimates
are based in part on third-party advice regarding the time required
to sub-lease such space as well as the rate per square foot at which
such space may be subleased. Actual time to sublease and the rate per
square foot of any subleases may differ from such estimates. As
conditions warrant, the Company will make appropriate adjustments to
such estimates. The following table outlines the components of the
restructuring and related charges recorded as of June 2, 2002,
including non-cash components of the charges and the balance of the
reserve account at June 2, 2002:
8
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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June 2, 2002
Non-Cash Paid Reserve
Charges Write-downs To Date Balance
------- ------------ ------- -------
($ in thousands)
Non-cash write-downs of fixed
assets to net realizable value $ 494 $ 494 $ -- $ 494
Employee termination benefits
(24 administrative and 5 sales associates) 359 -- 16 343
Lease termination costs 720 -- -- 720
Moving and relocation costs 130 -- -- 130
Other costs 616 -- 334 282
------ ------ ------ ------
$2,319 $ 494 $ 350 $1,969
====== ====== ====== ======
Note 7 - The following table shows the components of the earnings per share
computations shown in the Consolidated Statements of Operations. For
the three months and six months ended June 2, 2002 and June 3, 2001,
stock options and convertible debentures were anti-dilutive and
excluded from the earnings per share computation. Effective November
1, 2001, the debentures were no longer convertible into common stock
of the Company.
Three Months Ended Six Months Ended
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June 2, June 3, June 2, June 3,
2002 2001 2002 2001
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(in thousands) (in thousands)
Net earnings (loss) available to basic shares $(1,366) $(4,878) $ (667) $(5,684)
Add interest expense on assumed conversion
of convertible debentures, net of tax - - - -
------- ------- ------- -------
Net earnings available to diluted shares $(1,366) $(4,878) $ (667) $(5,684)
======= ======= ======= =======
Weighted average common shares
outstanding (Basic) 13,139 13,134 13,137 13,134
Effect of dilutive stock options and
convertible debentures - - - -
------- ------- ------- -------
Weighted average common shares and
equivalents outstanding (Diluted) 13,139 13,134 13,137 13,134
======= ======= ======= =======
The dilutive share base for 2002 and 2001 excludes incremental shares of
1,908,833 and 1,874,544, respectively. These shares are excluded due to their
anti-dilutive effect.
9
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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Note 8 - The Company's operations are classified into two business segments:
wholesale and retail home furnishings. The wholesale home furnishings
segment manufactures upholstered furniture. Upholstered furniture
includes sofas, loveseats, occasional chairs and sleep sofas, covered
with fabric or leather. The retail home furnishings segment sells
home furnishings and accessories to customers through Company-owned
stores. These products consist of upholstered furniture (primarily
obtained from related companies), case goods and home accessories.
The other category is comprised of additional subsidiaries reviewed
by management including parent company expenses.
Wholesale Retail
Home Home Inter-
Furnishings Furnishings Segment
Segment Segment Other Eliminations Consolidated
------- ------- ----- ------------ ------------
($ in thousands)
2002
----
Net shipments $119,579 $53,934 $ - $ (11,577) $ 161,936
Pre-tax net earnings(loss) from
continuing operations 7,215 (7,580) (272) 58 (579)
Total assets 150,978 45,039 102,484 (133,293) 165,208
2001
----
Net shipments $114,708 $55,238 $ - $ (11,489) $ 158,457
Pre-tax net earnings(loss) (2,357) (6,120) (232) 26 (8,683)
Total assets 104,472 49,136 107,094 (106,997) 153,705
The consolidated total assets for 2001 exclude $2,115,000 relating to the
discontinued Wexford segment.
10
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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Note 9- The components of comprehensive income (loss) for the three months
and six months ended June 2, 2002 and June 3, 2001, are shown below
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 2, 2002 June 3, 2001 June 2, 2002 June 3, 2001
------------ ------------ ------------ ------------
($ in thousands)
Net loss $ (1,366) $ (4,878) $ (667) $ (5,684)
Other comprehensive income (loss),
net of tax:
Unrealized loss on derivatives (97) (528) (188) (1,150)
Payments transferred to expense 191 35 367 49
-------- -------- ------- --------
Comprehensive loss $ (1,272) $ (5,371) $ (488) $ (6,785)
-------- -------- ------- --------
11
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
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Results of Operations:
Six Months Ended June 2, 2002 Compared to Six Months Ended June 3, 2001
Net shipments during the first half of 2002 increased by $3,479,000, or 2.2%, to
$161,936,000 from $158,457,000 in 2001. The increase in shipments resulted from
increased wholesale shipments.
For the wholesale segment, net shipments increased $4.9 million, or 4.2%, to
$119.6 million from $114.7 million. The increase resulted primarily from
existing customers, in a combination of their expansion as well as more
placement of the segment's product on both new and existing selling floors. In
addition, some new customers have been added to the dealer base. In the retail
segment, net shipments declined 2.4%, or $1.3 million, to $53.9 million from
$55.2 million. The decrease resulted primarily from an unusually high volume of
shipments in December 2000, the first month of the 2001 six-month period.
Gross profit during the first half of 2002 increased by $4,210,000, or 8.3%, to
$55,195,000 from $50,985,000 in 2001. Gross margin increased to 34.1% from 32.2%
in 2001, primarily from improvements in the wholesale segment.
For the first half of 2002, wholesale segment gross profit increased $4.7
million, or 20.2%, from $23.5 million to $28.2 million. Gross margin, or gross
profit as a percent of net shipments, increased from 20.5% in 2001 to 23.6% in
the first half of 2002. Significant improvements have been made in manufacturing
efficiencies, quality control, and trucking operations. Trucking operations have
improved primarily through the use of rail transport for "less than truckload"
shipments to the Pacific coast region. This has substantially reduced freight
costs and damage to these goods, while allowing more efficient operation of the
truck fleet with other shipments. In the retail segment, gross profit for the
first half declined by 2.1%, or $566 thousand. This is attributable to the
decline in net shipments, as gross margin has improved slightly, from 49.7% to
49.9%.
Selling and administrative expenses during the first half of 2002 decreased by
$5,711,000, or 9.8%, to $52,344,000 from $58,055,000 in 2001. Approximately $4.2
million of the decrease represents the write-off associated with the Homelife
Furniture Corp. bankruptcy reflected in the 2001 results. In addition, selling
and administrative expenses in 2002 include $230,000 of costs related to the
retail restructuring, such as costs to move equipment, relocate transferred
employees, and train staff from Home Elements how to use the retail software
utilized by Storehouse. These costs are in addition to the $2,089,000 in
segregated restructuring, store closing and other costs. These costs include
costs to shutdown two stores, to terminate (or sublease at a loss) the leases
for these stores and Home Elements' administrative offices, severance benefits
for terminated staff, and other costs of the restructuring.
Operating income was $762,000 for the first half of 2002 compared to a loss of
$(7,070,000) in the prior year. The improvement results from the inclusion in
2001 of the Homelife bankruptcy charges, improvements in sales, manufacturing
efficiencies and quality control, as well as reductions in other components of
selling and administrative expenses, offset by the restructuring, store closing
and other charges and related expenses in the 2002 period.
12
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
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Net interest expense decreased slightly, from $2,421,000 in 2001 to $2,351,000,
primarily as a result of declining balances early in the second quarter, when
approximately $7 million was repaid utilizing cash on hand and proceeds from tax
refunds received.
Other income increased $202,000 during the first half of 2002, from $808,000 to
$1,010,000.
Loss before taxes during the first half of 2002 improved by $9,262,000 to a loss
of $579,000 from a loss of $8,683,000 in 2001, reflecting higher sales,
improvements in manufacturing efficiencies and quality control, reductions in
selling and administrative expenses and the absence of the Homelife bankruptcy
charges in 2001, partially offset by restructuring charges, store closing costs
and certain other expenses, incurred in 2002.
The effective tax rate changed from 34.5% for the first half of 2001 to (15.2)%
for the first half of 2002 due primarily to the impact of non-deductible
goodwill amortization on the calculation of tax expense (benefit).
Three Months Ended June 2, 2002 Compared to Three Months Ended June 3, 2001
Net shipments during the second quarter of 2002 increased by $2,284,000, or
2.9%, to $80,313,000 from $78,029,000 in 2001. The increase in shipments
resulted from increased wholesale shipments.
For the wholesale segment, net shipments increased $3.3 million, or 5.8%, to
$59.9 million from $56.7 million. The increase resulted primarily from existing
customers, in a combination of their expansion as well as more placement of the
segment's product on both new and existing selling floors. In addition, some new
customers have been added to the dealer base. In the retail segment, net
shipments declined 1.5%, or $394,000, to $26.5 million from $26.9 million, due
to four stores that closed in or immediately prior to the first quarter of 2002,
offset by one store opening during the first quarter.
Gross profit during the second quarter of 2002 increased by $3,144,000, or
12.8%, to $27,692,000 million from $24,548,000 million in 2001. Gross margin
increased to 34.5% from 31.5% in 2001, primarily from improvements in the
wholesale segment.
For the second quarter of 2002, wholesale segment gross profit increased $3.1
million, or 27.6%, from $11.3 million to $14.4 million. Gross margin, or gross
profit as a percent of net shipments, increased from 19.9% in 2001 to 24.1% in
2002. Significant improvements have been made in manufacturing efficiencies,
quality control, and trucking operations. Trucking operations have improved
primarily through the use of rail transport for "less than truckload" shipments
to the Pacific coast region. This has substantially reduced freight costs and
damage to these goods, while allowing more efficient operation of the truck
fleet with other shipments. In the retail segment, gross profit for the second
quarter improved by 0.1%, or $8 thousand, as lower shipments were offset by
gross margins, which have improved slightly, from 49.3% to 50.1%.
Selling and administrative expenses during the second quarter of 2002 decreased
by $4,468,000, or 14.2%, to $26,915,000 from $31,383,000 in 2001. Approximately
$4.2 million of the decrease represents the write-off associated with the
Homelife Furniture Corp. bankruptcy reflected in the 2001 results. In addition,
selling and administrative expenses in 2002 include $230,000 of costs related to
the retail restructuring, such as costs to
13
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
- --------------------------------------------------------------------------------
move equipment, relocate transferred employees, and train staff from Home
Elements how to use the retail software utilized by Storehouse. These costs are
in addition to the $2,089,000 in segregated restructuring, store closing and
other costs. These costs include costs to shutdown two stores, to terminate (or
sublease at a loss) the leases for these stores and Home Elements'
administrative offices, severance benefits for terminated staff, and other costs
of the restructuring.
Operating loss was $1,312,000 for the second quarter of 2002 compared to
$6,835,000 in the prior year. The improvement results from the inclusion in 2001
of the Homelife bankruptcy charges, improvements in sales, manufacturing
efficiencies and quality control, as well as reductions in other components of
selling and administrative expenses, offset by the restructuring, store closing
and other charges and related expenses in the 2002 period.
Net interest expense decreased slightly, from $1,161,000 in 2001 to $1,056,000,
primarily as a result of declining balances early in the second quarter, when
approximately $7 million was repaid from operating cash and tax refunds
received.
Other income increased $113,000 during the second quarter of 2002, from $415,000
to $528,000.
Loss before taxes during the second quarter of 2002 improved by $5,741,000 to a
loss of $1,840,000 from a loss of $7,581,000 in 2001, reflecting higher sales,
improvements in manufacturing efficiencies and quality control, reductions in
selling and administrative expenses and the absence of the Homelife bankruptcy
charges in 2001, partially offset by restructuring charges, store closing costs
and certain other expenses, incurred in 2002.
The effective tax rate changed from 35.7% for the second quarter of 2001 to
25.8% for the 2002 due to the impact of non-deductible goodwill amortization on
the calculation of tax expense (benefit).
Critical Accounting Policies:
The Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
Certain estimates and assumptions have been made that affect the amounts and
disclosures reported in the consolidated financial statements and the related
accompanying notes. Actual results could differ from these estimates and
assumptions. Management uses its best judgment in valuing these estimates and
may solicit external advice. Estimates are based on current facts and
circumstances, prior experience and other assumptions believed to be reasonable.
Critical accounting policies that may affect the consolidated financial
statements include self-insurance, restructuring liabilities, long-lived asset
valuations and impairments and inventory reserves.
Liquidity and Source of Capital:
Net cash provided by operating activities was $9,593,000 during the first six
months of 2002 versus $(2,001,000) used in 2001. Fluctuations in net cash used
in operating activities are primarily the result of changes in operating income
and changes in working capital accounts. The impact on cash flow from operating
losses has been offset by tax refunds received, distributions under certain
deferred compensation arrangements and non-cash accruals for restructuring and
related charges and includes changes in inventory levels between the two
six-month periods.
Net cash used in investing activities was $907,000 in 2002 and $1,289,000 in
2001, net of proceeds from the sale of Wexford in 2001. Expenditures in 2001
included costs for 4 new retail stores, several renovations of older stores, and
costs for the production planning system deployed in 2001. In 2002, expenditures
were made for systems conversions and upgrades related to the retail
consolidation, as well as routine upgrading and replacing of older equipment.
Additional expenditures related to the retail consolidation will be made during
2002. Such costs, estimated at approximately $1,000,000, include additional
systems conversion costs, signage to reflect the name change on former Home
Elements stores and the expansion of one distribution center.
14
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
- --------------------------------------------------------------------------------
Net cash used in financing activities during the first six months of 2002 was
$14,136,000 versus $2,292,000 provided during 2001. While the Company borrowed
funds to offset operating losses and acquire leather hides in 2001 (in response
to "mad cow" disease concerns), in 2002 the Company repaid approximately $14.1
million in conjunction with the refinancing of the Company's debt, which was
completed during 2002. The Company did not pay common stock dividends during the
six months ended June 2, 2002.
As part of the refinancing of the Company's debt, the short-term bank debt and
debenture were paid off, and the revolving bank loans were substantially paid
down. The remaining balance of approximately $10 million carries minimum
required principal repayments during the next 18 months, with a requirement for
additional principal repayments if cash flow, as defined, exceeds certain
ratios. The unpaid balance is due December 1, 2003. The Company borrowed $9.3
million, net of certain amounts set aside for required repairs and capital
improvements, under mortgages against two real estate investment properties;
borrowed $5 million under a term note repayable in 20 equal quarterly
installments of $250,000; and drew down approximately $26.5 million under a $40
million revolving credit facility. The revolving credit facility matures in May
2007. The Company utilized approximately $14.1 million in cash on hand to pay
down the existing lenders. In addition, the Company modified the term of the
lease used to finance the Elliston facility, resulting in a change in the
accounting for the lease from operating to a capital lease. Payments under the
lease, previously characterized as rent and included in manufacturing overhead,
will going forward be recorded as interest expense. In addition, minimum monthly
principal payments will now be required, as well as additional principal
repayments if cash flow, as defined, exceeds certain ratios. The lease term has
been modified and expires in December 2003. At that time, the Company must
either purchase the property or negotiate a new lease.
Management believes that net cash provided by operating activities and
availability under the revolving credit facility will be sufficient to meet the
Company's anticipated capital requirements, debt service and operating needs
through 2002.
New Accounting Standards
During 2001, the Financial Accounting Standards Board finalized Statements No.
141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially
15
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
- --------------------------------------------------------------------------------
recognized. SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Currently, the Company is assessing but has not yet determined how the adoptions
of SFAS 141, 142 and 144 will impact its financial position and results of
operations.
Interest Risk Disclosures:
Because the Company's obligations under its term loans, revolving loans, lines
of credit and Industrial Revenue Bonds bear interest at variable rates, the
Company is sensitive to changes in interest rates. A 10% fluctuation in market
interest rates would not have a material impact on earnings during the 2002
fiscal year.
Forward Looking Statements:
Certain portions of this report, particularly the Notes to the Consolidated
Financial Statements and the Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part I of this report, contain forward
looking statements. These statements can be identified by the use of future
tense or dates or terms such as "believe," "expect," "anticipate," or "plan."
Important factors could cause actual results to differ materially from those
anticipated by some of the statements made in this report. Some of the factors
include, among other things, changes from anticipated levels of sales, whether
due to future national or regional economic and competitive conditions, customer
acceptance of existing and new products, or otherwise; pending or future
litigation; pricing pressures due to excess capacity; raw material cost
increases; transportation cost increases; the inability of a major customer to
meet its obligations; loss of significant customers in connection with a merger
or acquisition, bankruptcy or otherwise; actions of current or new competitors;
increased advertising costs associated with promotional efforts; change of tax
rates; change of interest rates; future business decisions and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company.
16
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits: None
b. Reports on Form 8-K: On May 24, 2002, an 8-K was filed announcing the
completion of new financing arrangements.
17
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 hereunto duly authorized.
THE ROWE COMPANIES
------------------
Registrant
Date: July 17, 2002 /s/ Garry W. Angle
--------------- ------------------------------------
Garry W. Angle
Vice President - Treasury Management
18