<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Report): July 31, 1999
-------------
The Rowe Companies
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Nevada 1-10226 54-0458563
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
Incorporation) Number)
1650 Tysons Blvd., 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 or former address, if changed since last report)
<PAGE>
ITEMS OF INFORMATION
--------------------
Forward-Looking Statements
When used in this Form 8-K and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, and in oral statements made with the
approval of an authorized executive officer, the words or phrases "pro forma,"
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results and those presently anticipated or projected. Such risks and
uncertainties include, but are not limited to, the risk that cost savings and
revenues resulting from the acquisition of Storehouse, Inc. may be lower than
expected, industry cyclicality, fluctuations in customer demand and order
patterns, the seasonal nature of the Company's business, changes in pricing and
general economic conditions, as well as other risks and uncertainties detailed
in the Company's other filings with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above and other factors could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Company does not undertake--and specifically declines any obligation--to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Item 2. Acquisition or Disposition of Assets
As previously reported, on July 31, 1999, The Rowe Companies (the "Company")
completed its acquisition of Storehouse, Inc. ("Storehouse") pursuant to the
Stock Purchase Agreement, dated August 25, 1998, among the Company and the
shareholders of Storehouse (the "Agreement"). The acquisition was effected
through the purchase by the Company of all the issued and outstanding shares of
the capital stock of Storehouse from the shareholders in exchange for a purchase
price of $11.7 million. In addition, on August 2, 1999, the Company refinanced
$12.7 million in Storehouse long-term debt. The Agreement was included as an
exhibit to the Company's Current Report on Form 8-K filed on August 26, 1998.
The Company funded the transaction through the utilization of a $25 million
revolving credit facility from Bank of America (formerly NationsBank).
<PAGE>
Storehouse, a retail furniture store chain, is now operated as a wholly-
owned subsidiary of the Company.
Item 7. Financial Statements and Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant hereby amends the following item of its Current Report on Form 8-K,
dated July 31, 1999.
Item 7. Financial Statements and Exhibits
(a) and (b) The financial statements and pro forma financial information
required as part of this item are being filed as Exhibit 99 to this
amendment to the Company's Current Report on Form 8-K, dated July 31, 1999.
The financial statements and pro forma financial information being filed as
Exhibit 99 to this amendment are as follows:
I. Pro Forma Financial Statements (Unaudited)
Pro Forma Combined Financial Statements - Introduction
Pro Forma Combined Statements of Income for the nine months
ended August 29, 1999
Pro Forma Combined Statements of Income for the year ended
November 29, 1998
Notes to Pro Forma Combined Financial Statements
II. Storehouse, Inc. - Audited Financial Statements and Notes to
Audited Financial Statements
Independent Accountants' Report
Balance Sheets as of January 31, 1999 and 1998
Statements of Operations for the years ended January 31, 1999 and
1998
Statements of Stockholders' Equity (Deficit) for the years ended
January 31, 1999 and 1998
Statements of Cash Flows for the years ended January 31, 1999 and
1998
Notes to Financial Statements
III. Storehouse, Inc. - Unaudited Financial Statements
<PAGE>
Balance Sheets as of May 31, 1999 and 1998 (Unaudited)
Statements of Income (Loss) for the four months ended May 31,
1999 and 1998 (Unaudited)
Statements of Cash Flows for the four months ended May 31, 1999
and 1998 (Unaudited)
Notes to Financial Statements
(c) Exhibits.
23. Consent of Arthur Andersen, LLP
99. Financial statements and pro forma financial information
<PAGE>
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: 10-15-99 /s/ Arthur H. Dunkin
-------- -------------------------------
Arthur H. Dunkin
Secretary-Treasurer
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- --- ----------------------
23 Consent of Arthur Andersen, LLP
99 Financial Statements and Pro Forma Financial Information
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Rowe Companies
McLean, Virginia
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 8K of our report dated April 2, 1999 relating to the
financial statements of Storehouse, Inc. as of January 31, 1999 and 1998 into
the previously filed registration statements of The Rowe Companies (file numbers
2-94943, 33-90486, 33-77766, 33-77768 and 333-82571). It should be noted that we
have not audited any financial statements of the Company subsequent to January
31, 1999 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN, LLP
Atlanta, Georgia
October 14, 1999
<PAGE>
Exhibit 99
The Rowe Companies and Wholly-Owned Subsidiaries
Pro Forma Combined Financial Statements
(Unaudited)
The following pro forma statement of income for the nine months ending August
29, 1999, and the combined statement of income for the year ended November 29,
1998 give effect to the acquisition of Storehouse, Inc. (Storehouse) and The
Mitchell Gold Company (MGC or Mitchell Gold) by The Rowe Companies (the Company)
as described in the following paragraphs.
On July 31, 1999, the Company acquired 100% of the issued and outstanding
capital stock of Storehouse, a privately owned company. The purchase price for
Storehouse was $11.7 million. In addition, Rowe retired $12.7 million in
Storehouse long-term debt.
The acquisition of Storehouse was effected pursuant to the stock purchase
agreement dated as of August 25, 1998. The Company has accounted for such
acquisition using the purchase method of accounting. In connection with this
acquisition, the Company recorded cost in excess of net assets of the business
acquired, which will be amortized over 25 years under the straight-line method.
On October 31, 1998, the Company acquired 100% of the issued and outstanding
capital stock of MGC, a privately owned company. The purchase price for MGC
consisted of (i) an initial payment of $13 million, comprised of $10 million in
cash and $3 million of convertible debentures bearing interest at 7% per annum,
and (ii) earn-out provisions allowing for a maximum purchase price of $32
million, if certain earnings targets are attained as defined in the purchase
agreement.
The acquisition of MGC was effected pursuant to the stock purchase agreement
dated as of September 25, 1998. The Company has accounted for such acquisition
using the purchase method of accounting. In connection with this acquisition,
the Company recorded cost in excess of net assets of the business acquired,
which will be amortized over 25 years under the straight-line method.
The pro forma statements of income give effect to these transactions as if they
had occurred at the beginning of the period presented and were carried forward
through the period presented.
The accompanying pro forma statements of income for the year ended November 29,
1998 and nine months ended August 29, 1999 both include the operating results of
Storehouse for the months December, 1998 and January, 1999.
The pro forma combined statements have been prepared by the Company's management
based upon the historical financial statements of the Company, Storehouse and
MGC. These pro forma statements may not be indicative of the results that
actually would have occurred if
<PAGE>
the combination had been in effect on the date indicated or which may be
obtained in the future. The pro forma financial statements should be read in
conjunction with the financial statements and notes of Storehouse and the
Company appearing elsewhere herein and as filed under Forms 10-K, 10-Q and 8K/A
dated October 31, 1998.
<PAGE>
The Rowe Companies and Wholly-Owned Subsidiaries
Pro Forma Combined Statements of Income
For the Nine Months Ended August 29, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historicals
------------------------
The Rowe Storehouse Pro Forma Pro Forma
Companies Inc. Adjustments Combined
--------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net shipments $ 194,095 $ 48,127 (5) ($4,307) $ 237,915
Cost of shipments 138,469 25,631 (5) (3,725) 160,375
---------- -------- ----------- ---------
Gross profit 55,626 22,496 (582) 77,540
(1)
Selling and administrative expenses 41,056 25,682 (4),(6) (351) 66,387
---------- -------- ----------- ---------
Operating income 14,570 (3,186) (231) 11,153
Interest expense 1,803 641 (2) 430 2,874
Other income 1,677 3,779 5,456
---------- -------- ----------- ---------
Earnings before taxes 14,444 (48) (661) 13,735
Taxes on income 5,387 (21) (7) (108) 5,258
---------- -------- ----------- ---------
Net earnings $ 9,057 ($27) ($553) $ 8,477
========== ======== =========== =========
Earnings per common share $ 0.74 $ 0.69
========== =========
Weighted average common shares 12,222 12,222
========== =========
Earnings per common share assuming dilution $ 0.70 0.65
========== =========
Weighted average common shares and equivalents 13,140 13,140
========== =========
</TABLE>
<PAGE>
The Rowe Companies and Wholly-Owned Subsidiaries
Pro Forma Combined Statements of Income
For the Year Ended November 29, 1998
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historicals
------------------------------------
The
The Rowe Mitchell Storehouse Pro Forma Pro Forma
Companies Gold Co. Inc. Adjustments Combined
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net shipments $193,400 $33,444 $64,668 (5) $ (20) $291,492
Cost of shipments 141,326 25,773 35,417 (4),(5) 88 202,604
-------- ------- ------- ------- --------
Gross profit 52,074 7,671 29,251 (108) 88,888
(1),(3)
Selling and administrative expenses* 34,293 5,498 37,779 (4),(6) 830 78,400
-------- ------- ------- ------- --------
Operating income 17,781 2,173 (8,528) (938) 10,488
Interest expense 694 693 1,055 (2) 1,485 3,927
Other income 1,043 231 6,864 0 8,138
-------- ------- ------- ------- --------
Earnings before taxes 18,130 1,711 (2,719) (2,423) 14,699
Taxes on income 6,930 729 (1,012) (7) (545) 6,102
-------- ------- ------- ------- --------
Net earnings $ 11,200 $ 982 $(1,707) $(1,878) $ 8,597
======== ======= ======= ======= ========
Earnings per common share $ 0.90 $ 0.69
======== ========
Weighted average common shares 12,429 12,429
======== ========
Earnings per common share assuming dilution $ 0.87 $ 0.68
======== ========
Weighted average common shares and equivalents 12,844 12,888
======== ========
</TABLE>
*The selling and administrative expenses of Storehouse for the year ended
November 29, 1998 included $502,000 of compensation expense relative to an ESOP
which has been terminated as part of the acquisition. The Company expects to
replace this benefit with a 401(k) Employee Savings Plan.
<PAGE>
The Rowe Companies and Wholly Owned Subsidiaries
Notes to the Pro Forma Combined Financial Statements
(Unaudited)
Pro Forma Adjustments:
- --------------------------------------------------------------------------------
(1) Adjust amortization of goodwill ($9,963,000 for Mitchell Gold and
$14,734,000 for Storehouse) on the acquisitions.
(2) Reflect interest expense associated with the financing agreement used
to pay the cash portion of the purchase prices, (5.76% interest for
Mitchell Gold and 6.5% interest for Storehouse), the convertible
debenture issued in the Mitchell Gold purchase (7% interest), and
reflect interest saved by refinancing existing Storehouse debt
(9.25% - 15.0% interest).
(3) Reflect increase in salary expense to the former shareholders of
Mitchell Gold pursuant to employment contracts.
(4) Depreciation impact of fair value adjustment to identifiable assets
($528,000 for Mitchell Gold and $834,000 for Storehouse). This is a
component of costs of goods sold for Mitchell Gold, and a component
of selling and administrative expense for Storehouse.
(5) Eliminate intercompany sales and profits between Storehouse and Rowe.
(6) Exclude deal costs on a pro forma basis ($834,000 for the nine months
ended August 29, 1999 and $521,999 for the year ended November 29,
1998).
(7) Properly reflect income tax expense on a pro forma basis.
<PAGE>
Storehouse, Inc.
Financial Statements as of January 31, 1999 and 1998
Together With
Auditors' Report
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Storehouse, Inc.:
We have audited the accompanying balance sheets of STOREHOUSE, INC. (a Georgia
corporation) as of January 31, 1999 and 1998 and the related statements of
operations, stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Storehouse, Inc. as of January
31, 1999 and 1998 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Atlanta, Georgia
April 2, 1999
<PAGE>
STOREHOUSE, INC.
BALANCE SHEETS
JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ---------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,609,035 $ 1,405,672
Accounts receivable, net of allowance for doubtful
accounts of $22,000 and $8,165 in 1999 and
1998, respectively 1,213,404 305,371
Inventories, at LIFO cost (Note 1) 11,335,609 11,064,390
Income taxes receivable 0 1,362,993
Prepaid expenses and other 1,164,495 1,132,286
------------ ------------
Total current assets 15,322,543 15,270,712
------------ ------------
LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Leasehold improvements 8,331,659 7,621,276
Furniture, fixtures, and equipment 6,921,254 6,308,941
------------ ------------
15,252,913 13,930,217
Less accumulated depreciation and amortization 8,566,511 7,001,137
------------ ------------
6,686,402 6,929,080
------------ ------------
DEFERRED INCOME TAXES (Note 4) 1,734,000 722,000
------------ ------------
OTHER ASSETS 237,575 234,589
------------ ------------
Total assets $ 23,980,520 $ 23,156,381
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT 1999 1998
- ---------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of capital lease obligations (Note 2) $ 49,571 $ 15,950
Current maturities of long-term debt (Note 3) 600,000 600,000
Customer deposits 6,392,872 5,546,464
Accounts payable:
Trade 5,524,869 6,781,353
Other 1,293,209 1,128,898
Accrued liabilities 3,775,712 5,827,882
------------ ------------
Total current liabilities 17,636,233 19,900,547
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current maturities (Note 2) 59,222 5,660
------------ ------------
LONG-TERM DEBT, less current maturities (Note 3) 10,763,536 8,270,031
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' DEFICIT (Notes 5 and 6):
Common stock, $.01 par value; 500,000 shares
authorized, 137,195 and 131,495 shares issued
and outstanding in 1999 and 1998, respectively 1,372 1,315
Treasury stock (40,798) (40,798)
Additional paid-in capital 1,092,503 894,314
Deferred compensation (Note 7) (2,969,799) (5,020,300)
Accumulated deficit (2,561,749) (854,388)
------------ ------------
Total stockholders' deficit (4,478,471) (5,019,857)
------------ ------------
Total liabilities and stockholders' deficit $ 23,980,520 $ 23,156,381
============ ============
</TABLE>
<PAGE>
STOREHOUSE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $ 64,667,604 $ 58,767,434
COST OF SALES 35,416,680 32,796,662
------------ ------------
Gross profit 29,250,924 25,970,772
COMMISSION INCOME 6,353,995 5,119,435
FRANCHISE AND OTHER OPERATING INCOME 558,392 608,465
------------ ------------
36,163,311 31,698,672
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 36,390,480 31,760,551
COMPENSATION EXPENSE RELATED TO STOCK BONUS AWARD AND EMPLOYEE STOCK
OWNERSHIP PLAN (Notes 6 and 7) 868,422 1,900,000
(1,095,591) (1,961,879)
------------ ------------
NONRECURRING AND INFREQUENT ITEMS (Note 10) 520,521 2,119,871
------------ ------------
Operating loss (1,616,112) (4,081,750)
INTEREST EXPENSE, net (1,054,488) (792,093)
OTHER EXPENSE, net 48,761 34,835
------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (2,719,361) (4,908,678)
BENEFIT FOR INCOME TAXES (Note 4) 1,012,000 1,520,000
------------ ------------
NET LOSS $ (1,707,361) $ (3,388,678)
============ ============
</TABLE>
The accompanying notes an integral part of these statements.
<PAGE>
STOREHOUSE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Treasury Paid-In Deferred
Shares Amount Stock Capital Compensation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 31, 1997 132,100 $1,321) $ 0 $ 886,064 $ 0
Issuance of common stock (Note 6) 100 1 0 8,243 0
Formation of Employee Stock Ownership Plan (Note 7) 0 0 0 0 (6,020,300)
Contribution Paid to Employee Stock Ownership Plan 0 0 0 0 1,000,000
Purchase of treasury stock (Note 6) (705) (7) (40,798) 7 0
Net loss 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
BALANCE, January 31, 1998 131,495 1,315 (40,798) 894,314 (5,020,300)
Issuance of common stock (Note 6) 5,700 57 0 198,189 0
Contribution Paid to Employee Stock Ownership Plan 0 0 0 0 2,050,501
Net loss 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
BALANCE, January 31, 1999 137,195 $ 1,372 $ (40,798) $ 1,092,503 $ (2,969,799)
============ ============ ============ ============ ============
<CAPTION>
Total
Accumulated Stockholders'
Earnings Equity
(Deficit) (Deficit)
------------ ------------
<S> <C> <C>
BALANCE, January 31, 1997 $ 2,534,290 $ 3,421,675
Issuance of common stock (Note 6) 0 8,244
Formation of Employee Stock Ownership Plan (Note 7) 0 (6,020,300)
Contribution Paid to Employee Stock Ownership Plan 0 1,000,000
Purchase of treasury stock (Note 6) 0 (40,798)
Net loss (3,388,678) (3,388,678)
------------ ------------
BALANCE, January 31, 1998 (854,388) (5,019,857)
Issuance of common stock (Note 6) 0 198,246
Contribution Paid to Employee Stock Ownership Plan 0 2,050,501
Net loss (1,707,361) (1,707,361)
------------ ------------
BALANCE, January 31, 1999 $ (2,561,749) $ (4,478,471)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STOREHOUSE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,707,361) $(3,388,678)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 1,726,756 1,320,432
Deferred taxes (1,012,000) (460,000)
Compensation expense recorded on issuance of common stock 198,246 0
Changes in assets and liabilities:
Accounts receivable (908,033) 113,816
Inventories (271,219) (2,193,815)
Income tax receivable 1,362,993 (1,185,498)
Prepaid expenses and other (32,209) (400,510)
Customer deposits 846,408 1,142,529
Accounts payable (1,092,173) 2,577,045
Accrued liabilities (2,052,170) 2,550,267
----------- -----------
Total adjustments (1,233,401) 3,464,266
----------- -----------
Net cash (used in) provided by operating activities (2,940,762) 75,588
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to leasehold improvements and equipment (1,351,930) (3,927,524)
Other assets (2,986) 312,525
----------- -----------
Net cash used in investing activities (1,354,916) (3,614,999)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for employee stock ownership plan 2,050,501 (5,020,300)
Purchase of treasury stock 0 (40,798)
Borrowings under credit facility, net (6,495) 8,870,031
Proceeds from issuance of subordinated promissory note 2,500,000 0
Net payments on capital lease obligations (44,965) (47,040)
Proceeds from issuance of common stock and exercise of stock options 0 8,244
----------- -----------
Net cash provided by financing activities 4,499,041 3,770,137
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 203,363 230,726
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,405,672 1,174,946
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,609,035 $ 1,405,672
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,054,488 $ 709,365
=========== ===========
Income taxes paid $ 16,946 $ 131,081
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
STOREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999 AND 1998
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Storehouse, Inc. (the "Company"), a Georgia corporation, operates retail
home furnishing stores which sell merchandise of contemporary and
transitional design. The stores are located primarily in the Southeast and
Southwest.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.
Revenue Recognition, Receivables, and Customer Deposits
The Company recognizes revenue when goods are delivered to the customer.
Customer deposits represent cash received for items not currently in
inventory and items on hand but not yet delivered to the customer.
The Company has an arrangement with a commercial bank whereby the bank
provides credit lines to preapproved customers for use in the Company's
stores. These credit lines are provided without recourse to the Company.
Commission Income
The Company markets certain merchandise on a percentage-of-sales commission
basis (consignment sales). The Company's policy is to recognize commission
income when the sale is written. The Company recorded commission income of
approximately $6,354,000 and $5,119,000 on consignment sales of
approximately $18,184,000 and $15,843,000 for the years ended January 31,
1999 and 1998, respectively.
Franchise Income
Franchise income is derived from royalties collected based on a percentage
of the franchise sales and from merchandise sold by the Company to the
franchisee. As of January 31, 1999 and 1998, the Company had one franchisee
and recognized franchise income of approximately $68,000 and $64,000,
respectively.
12
<PAGE>
Cash and Cash Equivalents
The Company considers cash on deposit and highly liquid investments with
original maturity dates of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") inventory method for substantially
all inventories. If the inventories had been valued using the first-in,
first-out ("FIFO") retail inventory method of accounting, the inventories
would have been approximately $2,088,000 and $1,778,000 higher than those
reported at January 31, 1999 and 1998, respectively, and the reported net
loss before benefit for income taxes would have been decreased by
approximately $310,000 and $142,000 in fiscal 1999 and fiscal 1998,
respectively. At January 31, 1999 and 1998, the Company's inventories
consisted of the following (in thousands):
1999 1998
-------- --------
Inventories, FIFO $ 13,424 $ 12,842
LIFO reserve (2,088) (1,778)
-------- --------
Inventories, LIFO $ 11,336 $ 11,064
======== ========
Foreign Currency Transactions
In the normal course of business, the Company frequently purchases
merchandise in currencies other than U.S. dollars. Exchange rate movements
which occur between the time such a transaction is recorded and the time of
settlement result in transaction gains or losses. Transaction gains and
losses were immaterial to the Company's financial statements in fiscal 1999
and 1998.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are stated at cost, less accumulated
depreciation. Depreciation of furniture, fixtures, and equipment is
provided over the estimated useful lives (two to five years) of the
respective assets using the straight-line method. Leasehold improvements
are amortized using the straight-line method over the term of the
respective lease or the useful life of the improvement, whichever is
shorter.
Capitalized Software Development Costs
In March 1998, the American Institute of Certified Public Accountants
issued its Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." According to
this statement, companies can capitalize certain costs related to the
development of software for internal use. During fiscal 1998, the Company
underwent a major system conversion that included new inventory management
and executive information systems. The Company capitalized approximately
$251,000 associated with the system conversion and is amortizing it ratably
over a three-year period using the straight-line method.
Income Taxes
The Company provides for income taxes according to Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS
No. 109 requires recognition of deferred
13
<PAGE>
tax assets and liabilities based on the differences between the financial
reporting and income tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for the year ending January 31, 2001. The adoption of this
statement is not expected to have a significant impact on the Company's
financial statements.
2. CAPITAL LEASE OBLIGATIONS
The Company's capital lease obligations totaled approximately $109,000 at
January 31, 1999 and approximately $22,000 at January 31, 1998. The related
net book values of the leased assets were approximately $127,000 and
$33,000 at January 31, 1999 and 1998, respectively. The capital lease
obligations are secured by data processing equipment.
Aggregate maturities of the capital lease obligations at January 31, 1999
are as follows (in thousands):
Fiscal year:
2000 $ 50
2001 45
2002 15
-------
110
Less amount representing interest 1
-------
$ 109
=======
3. LONG-TERM DEBT
On February 28, 1997, the Company entered into a new credit agreement (the
"Agreement") with a bank which provides for a term loan and a revolving
credit facility with an aggregate availability of $11,000,000. Borrowings
under the term loan require monthly principal payments of $50,000 through
March 1, 2000 plus interest, which is computed at 15% per annum. Borrowings
under the line of credit require monthly payments of interest, which is
computed at an interest rate of the prime rate plus 1.5% (9.25% at January
31, 1999). The principal balance outstanding on the line of credit is due
upon the Agreement's expiration on March 1, 2002. Borrowings under the
Agreement are secured by substantially all of the assets of the Company.
The Agreement contains certain restrictive covenants including, but not
limited to, the payment of dividends and the issuance of additional
indebtedness. The Agreement also requires the Company to meet certain
minimum financial ratios. At January 31, 1999, the Company was not in
compliance with one of these financial covenants. The Company has obtained
a waiver with respect to this event of default.
As of January 31, 1999, the Company had an outstanding balance of $700,000
and $8,163,515 on the term loan and revolving credit facility,
respectively. In addition, the Agreement allows for the Company to utilize
letters of credit in amounts not to exceed $500,000. At January 31, 1998,
the
14
<PAGE>
Company had outstanding letters of credit of approximately $64,000. No
letters of credit were outstanding at January 31, 1999.
On August 25, 1998, the Company signed a $2,500,000 subordinated promissory
note in connection with the Rowe Furniture Corporation ("Rowe") stock
purchase agreement (the "Purchase Agreement") (Note 11). The subordinated
promissory note is noninterest bearing. If the closing of the Purchase
Agreement does not occur, then the Company shall repurchase the
subordinated promissory note by the earlier of (a) April 30, 2001, (b) the
date of a change of control of the Company, or (c) a bulk sale of a
substantial portion of the assets of the Company, at a repurchase price
equal to $2,500,000 less 7% of the net sale price of goods sold by Rowe and
any of its existing subsidiaries to the Company and actually paid for by
the Company on or before the repurchase date. If the closing of the
Purchase Agreement does not occur, and within 90 days after the termination
of the Purchase Agreement the Company and Rowe do not enter into a supply
agreement pursuant to which Rowe and its currently existing subsidiaries
agree to sell goods to the Company at an annual rate of at least
$12,000,000 through the period ending April 30, 2001, then the Company
shall repurchase the subordinated promissory note in 14 equal monthly
installments of $100,000, beginning August 31, 1999 and continuing at the
end of each calendar month through September 30, 2000 and with a final
repurchase payment of $1,100,000 on October 31, 2000.
The promissory note is subordinated to the Company's revolving credit
facility and term loan borrowings.
The future minimum principal payments of outstanding debt by fiscal year at
January 31, 1999 are as follows (in thousands):
2000 $ 1,200
2001 2,000
2002 0
2003 8,164
--------
$ 11,364
========
4. INCOME TAXES
The benefit for income taxes for fiscal 1999 and 1998 consists of the
following (in thousands):
1999 1998
-------- --------
Current:
Federal $ (535) $ (1,060)
State (122) 0
Deferred:
Federal (317) (172)
State (38) (288)
-------- --------
$ (1,012) $ (1,520)
======== ========
The benefit for income taxes differed from the amounts resulting from
multiplying the Company's loss before taxes by the statutory federal income
tax rate. The reasons for these differences during fiscal 1999 and 1998
were as follows (in thousands):
15
<PAGE>
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Federal income tax at statutory rate $ (924) $(1,650)
State income tax, net of federal income tax benefit (108) (192)
Other 20 322
------- -------
$(1,012) $(1,520)
======= =======
</TABLE>
The components of the net deferred tax assets as of January 31, 1999
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred income tax assets:
Depreciation and amortization $ 599 $ 466
Deferred employee benefits 201 324
NOL carryforwards 1,194 200
Reserves not currently deductible 256 165
------ ------
2,250 1,155
------ ------
Deferred income tax liabilities:
Inventories (67) (71)
Other (149) (62)
------ ------
(216) (133)
------ ------
Valuation allowance (300) (300)
------ ------
Net deferred tax assets $1,734 $ 722
====== ======
</TABLE>
5. REDEEMABLE PREFERRED STOCK
At January 31, 1999 and 1998, the Company had authorized 500,000
shares of $.01 par value redeemable preferred stock. There were no
shares issued and outstanding as of January 31, 1999 and 1998.
6. STOCKHOLDERS' DEFICIT
The Company maintains an incentive stock option plan (the "Plan") for
key officers and employees. Under the terms of the Plan, the purchase
price of shares subject to each option granted cannot be less than
100% of their estimated fair value at the date of grant.
Options to purchase a total of 14,338 and 11,633 shares were
outstanding and exercisable as of January 31, 1999 and 1998,
respectively, at exercise prices ranging from $16.82 to $57.87 per
share. The weighted average exercise price for options outstanding was
$26.94 and $23.68 at January 31, 1999 and 1998, respectively. The
options expire on various dates ranging from February 12, 2002 to
February 1, 2008. The weighted average remaining contractual life for
options outstanding at January 31, 1999 was 4.5 years.
Options to purchase 2,000 shares of common stock were granted to an
officer of the Company in fiscal year 1999. The weighted average
exercise price for options granted during fiscal year 1999 was $47.10,
which in the opinion of management represented the fair value of the
shares at the date
<PAGE>
of grant. No options were granted in fiscal 1998. Options exercised
for the fiscal years ended January 31, 1999 and 1998 were 0 and 100,
respectively.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No.
123, the Company continues to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." If the Company had applied the
provisions of SFAS No. 123 to its stock-based compensation, its net
income would have been $12,540 and $29,880 lower for the years ended
January 31, 1999 and 1998, respectively.
On April 30, 1997, the Company issued stock bonus agreements to three
key employees which called for the issuance of a maximum of 2,000
shares to each employee, after considering shares issued through the
Company's employee stock ownership plan ("ESOP") (Note 7), and a cash
bonus equal to the tax benefit of the deduction, if any, available to
the Company on its federal income tax return from the issuance of the
shares to the employees. The bonus vested on January 31, 2002 and was
forfeited upon the employee's termination for any reason except in
connection with a change of control, as defined. The Company was
amortizing the value of the bonus ratably over the vesting period on a
straight-line basis. During fiscal 1998, one of the key employees was
voluntarily terminated and thus forfeited his stock bonus under the
terms of the agreement. For the year ended January 31, 1998, the
Company recorded an expense of approximately $111,000, which is
included in the $1,900,000 of compensation expense related to the
stock bonus award and employee stock ownership plan in the
accompanying statement of operations.
On August 25, 1998, the Company issued 5,700 shares of common stock
and paid $168,504 in cash to settle its commitments under these
outstanding bonus agreements in connection with the signing of the
Purchase Agreement (Note 11). In connection with the issuance of these
shares, the Company recorded compensation expense of approximately
$367,000 which has been recorded as compensation expense related to
the stock bonus and employee stock ownership plan in the accompanying
statement of operations.
During fiscal 1998, the Company repurchased 705 shares from a former
employee for $40,798. The shares are recorded at cost in the
accompanying financial statements.
7. EMPLOYEE STOCK OWNERSHIP PLAN
On January 31, 1997, the Company established an ESOP, which covers
substantially all of its employees that have completed at least one
year of service. On February 28, 1997, the Company borrowed $6,020,300
and loaned the ESOP $6,020,300 to purchase 43,294 shares of the
Company's common stock at $139.05 per share. These shares are held in
a trust and will be issued to employees' accounts as the loan is
repaid from contributions made by the Company. The Company recorded
compensation expense of $501,670 and $1,900,000 in fiscal 1999 and
1998, respectively, related to amounts to be contributed to the plan.
As of January 31, 1999 and 1998, $351,169 and $1,900,000,
respectively, is included as a component of accrued liabilities
related to the stock bonus award and ESOP in the accompanying
financial statements. Deferred compensation of $2,969,799 and
$5,020,300 is included in the accompanying balance sheet as of January
31, 1999 and 1998, respectively, and will decrease as amounts are
contributed to the plan in future years.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Legal Actions
The Company is subject to a number of legal actions arising in the
ordinary course of business. In management's opinion, these actions
will not materially affect the Company's financial position or results
of operations.
Operating Leases
The Company leases store locations, three distribution centers, office
facilities, and equipment under non-cancelable operating leases.
Certain of the lease agreements for store locations have, in addition
to base rental, contingent rentals based on sales volume and payments
based on a pro rata distribution of the expenses associated with
common areas in certain shopping centers. Total rent expense amounted
to approximately $6,794,000 and $5,699,000 in fiscal 1999 and 1998,
respectively, which included approximately $713,000 and $655,000 of
contingent rentals and common area expenses in fiscal 1999 and 1998,
respectively.
At January 31, 1999, minimum base rental commitments under these
noncancelable operating leases for each of the next five years are as
follows (in thousands):
2000 $ 6,353
2001 6,006
2002 5,058
2003 4,314
2004 993
Thereafter 11,368
-------
$34,092
=======
9. SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") for its employees
established under Section 401(k) of the Internal Revenue Code. The
Company provides administrative services for the Savings Plan, and
discretionary contributions of the Company to the Savings Plan are
determined by the Company's board of directors. No contributions were
made in fiscal 1998 or 1999.
10. NONRECURRING OR INFREQUENT ITEMS
During fiscal 1998, the Company incurred certain nonrecurring or
infrequent expenses related to an information system conversion
$(1,014,000), key executive bonus $(650,000), and legal expenses
related to the legal formation of the employee stock ownership plan
$(456,000).
The information system conversion costs (Note 1) represent one-time
administrative expenses consisting primarily of additional payroll and
professional fees related to the initial setup and conversion of data
into the system, training of employees, and the reconciliation of data
between the Company's old and new information systems, which are not
capitalizable under the provisions of SOP 98-1.
<PAGE>
Also during the year, the Company awarded a key executive a one-time
bonus of approximately $650,000 pursuant to the terms outlined in his
employee agreement. The amount is fully vested, is payable over a
three-year period, and is subject to acceleration upon a change of
control, as defined in the agreement. In addition, it is included as a
component of accrued liabilities in the accompanying balance sheet.
The Company incurred approximately $456,000 in legal and other fees
associated with the creation of the ESOP (Note 7) which the Company
considers to be nonrecurring.
During fiscal 1999, the Company incurred approximately $521,000 in
nonrecurring expenses primarily related to the negotiation of the
Purchase Agreement with Rowe. Of those costs directly related to the
Purchase Agreement, approximately $372,000 of these expenses represent
legal fees incurred in negotiating the transaction. The remaining
$60,000 in nonrecurring expenses relates to business valuation
services and other professional fees incurred in connection with the
transaction.
11. PURCHASE AGREEMENT
On August 25, 1998, the Company entered in a stock purchase agreement
with Rowe Furniture Corporation under which all of the outstanding
shares of the Company would be acquired by Rowe. Under the terms of
the Purchase Agreement, the purchase price is calculated based on a
multiple of earnings for the twelve month period ending April 30,
1999, less certain contractually defined adjustments. The Purchase
Agreement also includes additional cash payments that are contingent
upon the Company meeting certain earnings before interest, income
taxes, depreciation and amortization ("EBITDA"), and product shipment
targets, as defined.
If the provisions of the Purchase Agreement are not met, as defined,
the Purchase Agreement terminates on August 31, 1999.
<PAGE>
Storehouse, Inc.
Balance Sheets
May 31, 1999 and 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------------------------
<S> <C> <C>
Assets:
Current:
Cash and cash equivalents $ 1,427 $ 270
Accounts receivable, net 568 193
Inventories (Note 3) 12,268 11,728
Other current assets 1,958 3,424
----------------------------
Total current assets 16,221 15,615
----------------------------
Leasehold improvements 8,332 8,014
Furniture, fixtures & equipment 7,200 6,713
----------------------------
15,532 14,727
Accumulated depreciation (9,153) (7,566)
----------------------------
Net 6,379 7,161
Deferred income taxes 1,611 726
Other assets 215 257
----------------------------
Total Assets $24,426 $23,759
============================
Liabilities:
Current:
Current maturites of long-term debt $ 545 $ 5,127
Customer deposits 5,012 4,984
Accounts payable and accrued liabilities 10,890 13,710
----------------------------
Total current liabilities 16,447 23,821
----------------------------
Long-term debt 12,070 5,720
----------------------------
Total Liabilities 28,517 29,541
----------------------------
Stockholders' Deficit:
Common stock 1 1
Treasury stock (41) (41)
Additional paid in capital 1,093 894
Deferred compensation (2,808) (5,003)
Accumulated deficit (2,336) (1,633)
----------------------------
Total stockholders' deficit (4,091) (5,782)
----------------------------
$24,426 $23,759
============================
</TABLE>
See notes to financial statements.
<PAGE>
Storehouse, Inc.
Statements of Income (Loss)
Four months ended May 31, 1999 and 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-----------------------------
<S> <C> <C>
Net sales $ 23,444 $ 20,134
Cost of goods sold 12,342 10,977
-----------------------------
Gross margin 11,102 9,157
Commission income 1,845 1,699
Franchise and other operating income 22 18
-----------------------------
12,969 10,874
Selling, general and administrative expense 12,248 11,769
Interest expense, net 314 336
Other expense, net 43 5
-----------------------------
Income (loss) before taxes on income 364 (1,236)
Tax expense (benefit) 138 (458)
-----------------------------
Net income (loss) $ 226 $ (788)
=============================
</TABLE>
See notes to financial statements.
<PAGE>
Storehouse, Inc.
Statements of Cash Flow
Four months Ended May 31, 1999 and 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-----------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 226 $ (778)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred taxes - (4)
Depreciation and amortization 586 565
Provision for loss on receivables 175 -
Changes in operating assets and liabilities:
Inventories (932) (664)
Accounts receivable 470 112
Other current assets (795) (2,292)
Customer deposits (1,381) (562)
Accounts payable and accrued liabilities 413 (12)
Income taxes payable 168 1,363
-----------------------------
Net cash provided by (used in) operating activities (1,070) (2,272)
-----------------------------
Investing Activities
Purchases of fixed assets (279) (797)
Other assets 23 (22)
-----------------------------
Net cash provided by (used in) investing activities (256) (819)
-----------------------------
Financing Activities
Net borrowings under credit facility 1,264 1,961
Net payments on capital lease obligations (120) (6)
-----------------------------
Net cash provided (used in) financing activities 1,144 1,955
-----------------------------
Net increase (decrease) in cash (182) (1,136)
Cash, beginning of period 1,609 1,406
-----------------------------
Cash, end of period $ 1,427 $ 270
=============================
Supplemental disclosures
Interest paid $ 314 $ 336
Income taxes paid/(received) $ (30) $ (1,363)
</TABLE>
See notes to financial statements.
<PAGE>
Storehouse, Inc.
Notes to Financial Statements
Four months Ended May 31, 1999 and 1998
(Unaudited)
Note 1 - In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of
May 31, 1999 and 1998 and the results of operations and cash flows for
the four months ended May 31, 1999 and 1998.
Note 2 - The results of operations for the four months ended May 31, 1999 and
1998 are not necessarily indicative of the results of operations for the full
year.
Note 3 - Inventory components are as follows:
May 31, May 31,
1999 1998
------------ ------------
Inventories, FIFO $ 14,406 $ 13,516
LIFO reserve (2,138) (1,788)
------------ ------------
Inventories, LIFO $ 12,268 $ 11,728
============ ============
