Back to GetFilings.com
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 September 1, 2002 Commission File Number 1-10226
----------------- -----------
THE ROWE COMPANIES
(Exact name of registrant as specified in its charter)
NEVADA 54-0458563
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Tysons Boulevard, Suite 710, McLean, Virginia 22102
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703-847-8670
- --------------------------------------------------------------------------------
None
- --------------------------------------------------------------------------------
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 ____
---
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 September 1, 2002
- --------------------------------------- --------------------------------
Common stock, par value $1.00 per share 13,166,864 shares
THE ROWE COMPANIES
INDEX
Part I. Financial Information Page
----
Consolidated Balance Sheets - September 1, 2002 and
December 2, 2001 3
Consolidated Statements of Operations - Three Months And
Nine Months Ended September 1, 2002 and September 2, 2001 4
Consolidated Statements of Cash Flows - Nine Months Ended
September 1, 2002 and September 2, 2001 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Quantitative and Qualitative Disclosures about Market Risk 17
Forward Looking Statements 17
Part II. Other Information 19
2
PART 1 - FINANCIAL INFORMATION
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 1, December 2,
2002 2001
------------ ------------
(Unaudited) (Audited)
ASSETS ($ in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 4,003 $ 9,457
Restricted cash collateralizing letters of credit 1,938 -
Accounts receivable, net 27,631 23,525
Notes receivable 241 325
Tax refunds receivable, net - 2,514
Inventories (Note 4) 38,694 41,070
Deferred income taxes 1,477 2,371
Prepaid expenses and other 2,080 1,949
------------ ----------
Total current assets 76,064 81,211
PROPERTY AND EQUIPMENT, net 53,186 31,452
GOODWILL, net 28,090 29,061
OTHER NONCURRENT ASSETS 12,353 13,391
------------ ----------
$ 169,693 $ 155,115
LIABILITIES ============ ==========
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5) $ 3,225 $ 7,006
Short term bank borrowings (Note 5) - 9,368
Accounts payable and accrued liabilities 29,206 25,599
Income taxes payable 286 -
Customer deposits 9,256 7,112
------------ ----------
Total current liabilities 41,973 49,085
LONG-TERM DEBT (Note 5) 76,497 52,096
DEFERRED LIABILITIES 4,632 7,238
------------ ----------
Total liabilities 123,102 108,419
------------ ----------
STOCKHOLDERS' EQUITY
COMMON STOCK, par value $1 per share: 50,000,000 shares
authorized; issued shares 16,584,907 and 16,547,715, respectively;
outstanding shares 13,166,864 and 13,135,025, respectively 16,585 16,548
CAPITAL IN EXCESS OF PAR VALUE 23,083 23,082
OTHER COMPREHENSIVE INCOME (Note 9) (1,215) (1,201)
RETAINED EARNINGS 30,091 30,204
Less treasury stock, 3,418,043 shares in 2002 and
3,412,690 shares in 2001, at cost (21,953) (21,937)
------------ ----------
Total stockholders' equity 46,591 46,696
------------ ----------
$ 169,693 $ 155,115
============ ==========
See notes to consolidated financial statements
3
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 1, 2002 AND SEPTEMBER 2, 2001
UNAUDITED
Three Months Ended Nine Months Ended
September 1, September 2, September 1, September 2,
2002 2001 2002 2001
------------ -------------- ------------ ------------
($ in thousands - except per share amounts)
Net shipments $ 85,536 $ 82,402 $ 247,472 $ 240,859
Cost of shipments 57,210 56,382 163,951 163,854
------------ ------------- ------------ ------------
Gross profit 28,326 26,020 83,521 77,005
Selling and administrative expenses 25,925 26,904 78,269 84,959
Retail restructuring and other charges (Note 6) - - 2,089 -
------------ ------------- ------------ ------------
Operating income (loss) 2,401 (884) 3,163 (7,954)
Interest expense (1,860) (1,303) (4,211) (3,724)
Other income 470 512 1,480 1,320
------------ ------------- ------------ ------------
Earnings (loss) before taxes 1,011 (1,675) 432 (10,358)
Tax expense (benefit) 457 (551) 545 (3,550)
------------ ------------- ------------ ------------
Net earnings (loss) $ 554 $ (1,124) $ (113) $ (6,808)
============ ============= ============ ============
Net earnings (loss) per common share $ 0.04 $ (0.09) $ (0.01) $ (0.52)
Weighted average common shares 13,166 13,133 13,147 13,134
============ ============= ============ ============
Net earnings (loss) per common share assuming dilution $ 0.04 $ (0.09) $ (0.01) $ (0.52)
Weighted average common shares and equivalents 13,195 13,133 13,147 13,134
============ ============= ============ ============
See notes to consolidated financial statements
4
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 1, 2002 AND SEPTEMBER 2, 2001
UNAUDITED
2002 2001
--------- --------
($ in thousands)
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Cash received from customers $ 245,143 $ 242,645
Cash paid to suppliers and employees (233,364) (245,677)
Income tax refunds received, net of payments 3,167 96
Interest paid (4,211) (3,724)
Interest received 615 513
Other receipts - net 999 791
--------- ---------
Net cash and cash equivalents provided by
(used in) operating activities 12,349 (5,356)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment - 978
Capital expenditures (2,138) (3,070)
--------- ---------
Net cash used in investing activities (2,138) (2,092)
--------- ---------
Cash flows from financing activities:
Restricted cash deposited to collateralize letters of credit (1,938) -
Net borrowings (repayments) under line of credit (9,368) 4,695
Proceeds from issuance of long-term debt 43,139 4,799
Payments to reduce long-term debt (47,521) (3,583)
Proceeds from issuance of common stock 39 22
Dividends paid - (1,378)
Purchase of treasury stock (16) (11)
--------- ---------
Net cash provided by (used in) financing activities (15,665) 4,544
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,454) (2,904)
Cash and cash equivalents at beginning of period 9,457 3,393
--------- ---------
Cash and cash equivalents at end of period $ 4,003 $ 489
========= =========
See notes to consolidated financial statements
5
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 1, 2002 AND SEPTEMBER 2, 2001
UNAUDITED
Reconciliation of Net Earnings (Loss) to Net Cash
Provided By Operating Activities:
2002 2001
-------- --------
($ in thousands)
Net earnings (loss) $ (113) $ (6,808)
-------- --------
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,600 6,379
Provision for deferred compensation 151 (71)
Payments made for deferred compensation (2,742) (465)
Provision for losses on accounts receivable 448 2,786
Loss (gain) on disposition of assets 135 (16)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (4,473) 1,477
Decrease (increase) in inventories 2,377 (2,701)
Decrease (increase) in prepaid expenses and other (345) 517
Decrease (increase) in other assets 1,159 (359)
Increase (decrease) in accounts payable 128 (4,370)
Increase (decrease) in accrued expenses 3,168 1,422
Increase (decrease) in income taxes payable 3,712 (3,455)
Increase (decrease) in customer deposits 2,144 308
-------- --------
Total adjustments 12,462 1,452
-------- --------
Net cash provided by (used in) operating activities $ 12,349 $ (5,356)
======== ========
See notes to consolidated financial statements
6
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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 September 1, 2002 and the results
of operations and cash flows for the nine month periods ended
September 1, 2002 and September 2, 2001. Selling and administrative
expenses include $729,000 and $726,000 of retail delivery expenses for
the three months ended September 1, 2002 and September 2, 2001,
respectively, and $2,088,000 and $2,042,000 for the nine months ended
September 1, 2002 and September 2, 2001, respectively.
Note 3 - The results of operations for the three months and nine months ended
September 1, 2002 and September 2, 2001 are not necessarily indicative
of the results to be expected for the full year.
Note 4 - Inventory components are as follows:
September 1, December 2,
2002 2001
------------ -----------
($ in thousands)
Retail merchandise $ 17,897 $ 17,982
Finished goods 2,681 3,192
Work-in-process 4,100 4,213
Raw materials 14,016 15,683
------------ -----------
$ 38,694 $ 41,070
============ ===========
Note 5 - As part of the refinancing of the Company's debt in May 2002, the
Company utilized approximately $14.1 million in cash on hand to pay
down existing balances, including $9.4 million in short-term bank
debt, $3 million of debentures, and $1.7 million on the Elliston lease
and revolving debt. The Company utilized new debt (described below) to
substantially pay down the existing revolving bank loans. The
remaining balance of $9.6 million carries minimum required principal
payments during the next 15 months, with a requirement for additional
principal repayments if cash flow, as defined, exceeds certain ratios.
The unpaid balance is due December 1, 2003.
As part of this refinancing, the Company arranged a working capital
revolving credit facility, a term loan and two mortgages. 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 (initially) under a $40
million revolving credit facility, maturing in May 2007.
The Company also modified the terms of the lease used to finance the
Elliston facility, resulting in a change in the accounting for the
lease from an operating to a capital lease. Payments under the lease,
previously characterized as rent and included in manufacturing
overhead, have been recorded as interest expense since June 2002. In
addition, minimum monthly principal payments are now required, as well
as additional principal repayments if cash flow, as defined, exceeds
certain ratios. The remaining outstanding principal balance is
included in long-term debt on the Consolidated Balance Sheet. The
lease term has been modified and expires in December 2003. At that
time, the Company must either purchase the property or negotiate a new
lease.
7
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Outstanding debt components are as follows:
September 1, December 2,
2002 2001
------------ -----------
($ in thousands)
Revolving loans $ 37,441 $ 51,000
Industrial revenue bond 5,100 5,102
Term loan 4,750 -
Mortgage debt 9,273 -
Short-term lines of credit - 9,368
Debenture - 3,000
Capitalized lease obligation 23,158 -
------------ -----------
Total long-term debt $ 79,722 $ 68,470
============ ===========
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 was
expected to be complete by the end of the third quarter of 2002 and,
except for the installation of signage at several stores, this was
achieved. 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 $2,089,000 includes
estimated costs to terminate certain leases, write-off leasehold
improvements and signage without future benefit, severance costs for
employees to be terminated, and other restructuring related expenses.
Particularly in regards to the estimate of lease termination costs,
these estimates are based in part on third-party advice regarding the
time required to sub-lease such space as well as the rate per square
foot at which such space may be subleased. Actual time to sublease and
the rate per square foot of any subleases may differ from such
estimates. As conditions warrant, the Company will make appropriate
adjustments to such estimates. The following table outlines the
components of the restructuring and related charges recorded as of
June 2, 2002, including non-cash components of the charges and the
balance of the reserve account at September 1, 2002:
8
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Revisions September 1,
and Fixed 2002
Original Non-Cash Asset Paid Reserve
Charges Write-downs Charges To Date Balance
------- ----------- --------- ------- -------
($ in thousands)
Non-cash write-downs of fixed
assets to net realizable value $ 494 $ 494 $ (65) $ - $ 429
Employee termination benefits
(24 administrative and
5 sales associates) 359 - (108) 217 34
Lease termination costs 720 - - 28 692
Moving and relocation costs 130 - (67) 48 15
Other costs 616 - 175 787 4
-------- ----------- --------- ------- -------
$ 2,319 $ 494 $ (65) $ 1,080 $ 1,174
======== =========== ========= ======= =======
The revisions to employee termination benefits and moving and
relocation costs resulted from changes in the number of employees
receiving benefits and the duration/cost of those benefits, as well as
lower than expected costs of moving office equipment. The increase in
other costs primarily represents costs associated with data conversion
from two retail systems to one.
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 ended September 2, 2001, and the nine months ended
September 1, 2002 and September 2, 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.
9
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Three Months Ended Nine Months Ended
------------------------ -----------------------
Sept. 1 Sept. 2 Sept. 2 Sept. 2
2002 2001 2002 2001
---------- ---------- --------- ----------
(in thousands) (in thousands)
Net earnings (loss) available to basic
and diluted shares $ 554 $ (1,124) $ (113) $ (6,808)
======== ========= ======== ========
Weighted average common shares
outstanding (Basic) 13,166 13,133 13,147 13,134
Effect of dilutive stock options and
convertible debentures 29 - - -
-------- --------- -------- --------
Weighted average common shares and
equivalents outstanding (Diluted) 13,195 13,133 13,147 13,134
======== ========= ======== ========
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
------- ------- ----- ------------ ------------
2002
----
Net shipments $ 183,062 $ 82,187 $ - $ (17,777) $ 247,472
Pre-tax net earnings (loss) from
continuing operations 12,255 (11,193) (621) (9) 432
Total assets 158,141 45,333 36,460 (70,241) 169,693
2001
----
Net shipments $ 173,723 $ 84,430 $ - $ (17,294) $ 240,859
Pre-tax net earnings (loss) (955) (9,002) (427) 26 (10,358)
Total assets 140,059 46,512 23,250 (53,643) 156,178
10
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The consolidated total assets for 2001 exclude $2,013,000 relating to
the discontinued Wexford segment.
Note 9 - The components of comprehensive income (loss) for the three months and
nine months ended September 1, 2002 and September 2, 2001, are shown
below:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 1, 2002 Sept. 2, 2001 Sept. 1, 2002 Sept. 2, 2001
------------- ------------- ------------- -------------
($ in thousands)
Net earnings (loss) $ 554 $ (1,124) $ (113) $ (6,808)
Other comprehensive income (loss),
net of tax:
Unrealized loss on derivatives (382) (283) (570) (1,464)
Payments transferred to expense 189 111 556 191
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 361 $ (1,296) $ (127) $ (8,081)
============ ============ ============ ============
11
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
Results of Operations:
Nine Months Ended September 1, 2002 Compared to Nine Months Ended September 2,
2001
Net shipments during the first nine months of 2002 increased by $6,613,000, or
2.7%, to $247,472,000 from $240,859,000 in 2001. The increase in shipments
resulted from increased wholesale shipments.
For the wholesale segment, net shipments increased $9.3 million, or 5.4%, to
$183.1 million from $173.7 million. The increase resulted primarily from
shipments to existing customers, in a combination of their expansion as well as
more placement of the segment's product on both existing and new selling floors.
In addition, some new customers have been added to the dealer base. In the
retail segment, net shipments declined 2.7%, or $2.2 million, to $82.2 million
from $84.4 million.
Gross profit during the first nine months of 2002 increased by $6,516,000, or
8.5%, to $83,521,000 from $77,005,000 in 2001. Gross margin, or gross profit as
a percent of net shipments, increased to 33.7% from 32.0% in 2001, primarily
from improvements in the wholesale segment.
For the first nine months of 2002, wholesale segment gross profit increased $8.4
million, or 23.7%, from $35.6 million to $44.0 million. Gross margin increased
from 20.5% in 2001 to 24.0% 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 certain
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 nine months declined by 4.6%, or $1.9 million. This is attributable both
to the decline in net shipments as well as markdowns taken to clear slow moving
product, as gross margin has decreased from 49.0% to 48.1%.
Selling and administrative expenses during the first nine months of 2002
decreased by $6,690,000, or 7.9%, to $78,269,000 from $84,959,000 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. Other savings include retail advertising
reductions and cost control and containment efforts in our manufacturing
segment, including national and cooperative advertising and swatch expense.
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 $3,163,000 for the first nine months of 2002 compared to a
loss of $(7,954,000) 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 increased from $3,724,000 in 2001 to $4,211,000, primarily
as a result of reclassifying payments on the Elliston facility lease from rent
to interest expense as a result of the debt restructuring.
12
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
Other income increased $160,000 during the first nine months of 2002, from
$1,320,000 to $1,480,000.
Earnings (loss) before taxes during the first nine months of 2002 improved by
$10,790,000 to income of $432,000 from a loss of $(10,358,000) 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 between 2001 and 2002 due primarily to the impact
of non-deductible goodwill amortization on the calculation of tax expense
(benefit).
Three Months Ended September 1, 2002 Compared to Three Months Ended September 2,
2001
Net shipments during the third quarter of 2002 increased by $3,134,000, or 3.8%,
to $85,536,000 from $82,402,000 in 2001. The increase in shipments resulted from
increased wholesale shipments.
For the wholesale segment, net shipments increased $4.5 million, or 7.6%, to
$63.5 million from $59.0 million. The increase resulted primarily from shipments
to existing customers, in a combination of their expansion as well as more
placement of the segment's product on both existing and new selling floors. In
addition, some new customers have been added to the dealer base. In the retail
segment, net shipments declined 3.2%, or $939,000, to $28.3 million from $29.2
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 third quarter of 2002 increased by $2,306,000, or 8.9%,
to $28,326,000 from $26,020,000 in 2001. Gross margin increased to 33.1% from
31.6% in 2001, primarily from improvements in the wholesale segment.
For the third quarter of 2002, wholesale segment gross profit increased $3.7
million, or 30.5%, from $12.1 million to $15.8 million. Gross margin increased
from 20.5% in 2001 to 24.9% 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 certain
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
third quarter declined by 9.5%, or $1.3 million, on lower shipments and lower
gross margins, which declined from 47.7% to 44.6% due to the impact of clearance
sales for slow moving merchandise and from a substantial changeover of the
merchandise mix on retail sales floors, and inventory adjustments subsequent to
the consolidation.
Selling and administrative expenses during the third quarter of 2002 decreased
by $979,000, or 3.6%, to $25,925,000 from $26,904,000 in 2001. Cost cutting and
control initiatives have generated the savings.
Operating income was $2,401,000 for the third quarter of 2002 compared to a loss
of $(884,000) in the prior year. The improvement results from the improvements
in sales, manufacturing efficiencies and quality control, as well as reductions
in other components of selling and administrative expenses.
13
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
Net interest expense increased from $1,303,000 in 2001 to $1,860,000, primarily
as a result of the reclassification of payments on the Elliston lease from rent
to interest expense as a result of the debt restructuring.
Other income decreased $42,000 during the third quarter of 2002, from $512,000
to $470,000.
Earnings before taxes during the third quarter of 2002 improved by $2,686,000 to
earnings of $1,011,000 from a loss of $(1,675,000) in 2001, reflecting higher
sales, improvements in manufacturing efficiencies and quality control, and
reductions in selling and administrative expenses.
The effective tax rate changed between the 2001 and 2002 third quarters 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:
Cash from Operations
Net cash provided by operating activities was $12,349,000 during the first nine
months of 2002 versus $(5,356,000) 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
income (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 nine-month periods.
Cash from Investing Activities
Net cash used in investing activities was $2,138,000 in 2002 and $2,092,000 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 $300,000, 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
Cash from Financing Activities
Net cash used in financing activities during the first nine months of 2002 was
$15,665,000 versus $4,544,000 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 September 1, 2002.
Refinancing of Outstanding Debt
As part of the refinancing of the Company's debt in May 2002, the Company
utilized approximately $14.1 million in cash on hand to pay down existing
balances, including $9.4 million in short-term bank debt, $3 million of
debentures, and $1.7 million on the Elliston lease and revolving debt. The
Company utilized new debt (described below) to substantially pay down the
existing revolving bank loans. The remaining balance of $9.6 million carries
minimum required principal payments during the next 15 months, with a
requirement for additional principal repayments if cash flow, as defined,
exceeds certain ratios. The unpaid balance is due December 1, 2003.
As part of this refinancing, the Company arranged a working capital revolving
credit facility, a term loan and two mortgages. 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 (initially)
under a $40 million revolving credit facility, maturing in May 2007.
The Company also modified the terms of the lease used to finance the Elliston
facility, resulting in a change in the accounting for the lease from an
operating to a capital lease. Payments under the lease, previously characterized
as rent and included in manufacturing overhead, have been recorded as interest
expense since June 2002. In addition, minimum monthly principal payments are now
required, as well as additional principal repayments if cash flow, as defined,
exceeds certain ratios. The lease term has been modified and expires in December
2003. At that time, the Company must either purchase the property or negotiate a
new lease.
Management believes that net cash provided by operating activities and
availability under the revolving credit facility will be sufficient to meet the
Company's anticipated capital requirements, debt service and operating needs,
including our contractual commitments shown below, for at least the next twelve
months. However, weakening of, or other adverse developments concerning
operating performance or the availability of credit under our revolving credit
facility due to covenant limitations or other factors, could limit the
availability of funds to us, or adversely affect the price at which such funds
may be available.
Contractual Obligations
The following summarizes our significant contractual obligations as of
September 1, 2002:
15
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
Amount of Commitment Expiration Period
---------------------------------------------------------------
Less Than 1-3 4-5 After
1 Year Years Years 5 Years Total
----------- ---------- --------- --------- ----------
($ in thousands)
CONTRACTUAL OBLIGATIONS:
Operating leases $ 12,501 $ 21,500 $ 15,184 $ 10,127 $ 59,312
Capital leases 832 22,326 - - 23,158
Contractual maturities of long-term debt 2,393 11,409 2,600 12,374 28,776
-------- -------- -------- -------- --------
Total contractual cash obligations $ 15,726 $ 55,235 $ 17,784 $ 22,501 $111,246
======== ======== ======== ======== ========
Amount of Commitment Expiration Period
---------------------------------------------------------------
Less Than 1-3 4-5 After
1 Year Years Years 5 Years Total
----------- ---------- --------- --------- ----------
($ in thousands)
OTHER COMMERCIAL COMMITMENTS:
Revolving credit facility $ - $ - $ 27,788 $ - $ 27,788
-------- -------- -------- -------- --------
Total commercial commitments $ - $ - $ 27,788 $ - $ 27,788
======== ======== ======== ======== ========
In addition to the obligations shown above, the purchase agreement under which
the Company acquired Mitchell Gold contains an earn-out provision that allows
for a maximum payment of up to $14 million if certain earnings targets are
attained over a four or five year period. As of the end of fiscal 2002, the
sellers of Mitchell Gold may elect to exercise their right to base their
earn-out payment on the four-year period, which ends December 1, 2002. Based
upon results to date as well as results projected for the fourth quarter of
fiscal 2002, if the sellers exercise their rights to a payout based on the
four-year earnings targets, the Company would be obligated to pay an amount
estimated to be between $9 million and $10 million. At this time, the sellers
have not indicated their intentions concerning this election. Such payment, if
so elected, would be payable during the second quarter of fiscal 2003.
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
16
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
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 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."
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit and Disposal Activities." SFAS 146 is effective for activities
occurring after December 31, 2002.
Currently, the Company is assessing but has not yet determined how the adoptions
of SFAS 141, 142, 144 and 146 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 Iof 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.
Additional risks include:
.. We may be unable to meet ongoing stock exchange listing requirements.
17
THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNAUDITED
The stock exchanges maintain rules for, among other items, minimum market
capitalization and minimum Stockholders' Equity. The Company is currently
not in compliance with such requirements and is subject to an eighteen
month timeframe within which it must achieve compliance with these
requirements. The Company may be unable to achieve such values in
compliance with exchange rules, resulting in the Company's shares
becoming delisted.
.. The furniture industry is highly competitive at both the manufacturing
and the retail levels; loss of market share could adversely impact sales,
earnings and cash flow.
Our manufacturing and our retailing subsidiaries face significant
competition from numerous competitors, many of which are larger and
better capitalized. Our subsidiaries may be at a competitive disadvantage
as a result. If our subsidiaries lose market share to competitors, our
financial performance could be adversely affected.
.. Our retail operations may not become profitable.
Our retail operations are currently unprofitable, and there can be no
assurance that profitability will be achieved.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Controls and Procedures.
During the quarter ended September 1, 2002, we evaluated our disclosure
controls and procedures and believe that they are effective in the timely
recording, processing, summarizing and reporting material financial and
non-financial information in our filings.
During the quarter ended September 1, 2002, we did not make any significant
changes in, nor take any corrective actions regarding, our internal controls or
other factors that could significantly affect these controls. We review our
internal controls for effectiveness on an ongoing basis, including routine
reviews during this period. We plan to continue our review process, including
both internal and external audit examinations, as part of our evaluation of our
disclosure controls and internal controls.
Item 5. Submission of Matters to a Vote of Security Holders.
None
Item 6. Other Information.
None
Item 7. Exhibits and Reports on Form 8-K.
a. Exhibits:
99.1 - Officer Certifications
b. Reports on Form 8-K: None
19
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: October 9th, 2002 /s/ Gene S. Morphis
------------------- -----------------------------
Gene S. Morphis
Chief Financial Officer
20