<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15 (d) of
the Securities and Exchange Act of 1934 for the
quarterly period ended September 28, 1997, or
[ ] Transition Report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934 for the
transition period from to .
Commission File No.: 0-22188
RIVER OAKS FURNITURE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Mississippi 64-0749510
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 McCullough Blvd.
Belden, Mississippi 38826
- ------------------------------- ----------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (601) 891-4550
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (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 NO X
----- ------
As of December 5, 1997, 5,605,641 shares of the registrant's Common
Stock were outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RIVER OAKS FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
------- -------
<S> <C> <C>
ASSETS
CURRENT:
Cash & cash equivalents $ 454 $ 218
Accounts receivable, less allowance for possible
losses of $1,803 and $1,316 5,010 5,961
Income taxes refundable 1,127 3,415
Inventories (Note 2) 19,204 19,565
Prepaid expenses and other current assets 778 811
Deferred income taxes 719 719
------- -------
Total Current Asset 27,292 30,689
------- -------
PROPERTY AND EQUIPMENT,
less accumulated depreciation 30,965 31,000
Other Assets, primarily costs in excess of net assets
acquired 6,030 6,403
Deferred Income Taxes 2,858 306
------- -------
TOTAL ASSETS $67,145 $68,398
======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 138 --
Accounts payable 12,522 $12,511
Accrued expenses 2,529 1,066
Commitments and contingencies (Note 3) 2,439 2,439
Current maturities of long-term debt (Note 4) 1,931 1,993
------- -------
Total Current Liabilities 19,559 18,009
LONG-TERM DEBT, less current maturities (Note 4) 25,709 24,574
------- -------
TOTAL LIABILITIES 45,268 42,583
SHAREHOLDERS' EQUITY:
Preferred stock: $.10 par value - 5,000,000 shares -- --
authorized: no shares issued
Common stock: $.10 par value - 20,000,000 shares
authorized 5,605,641 and 5,605,641 issued, respectively 561 561
Additional paid-in-capital (Note 3) 24,345 24,345
Retained earnings (Note 3) (2,735) 1,203
Notes receivable from shareholders (262) (262)
Treasury stock, at cost, 2,500 shares (32) (32)
------- -------
TOTAL SHAREHOLDERS' EQUITY 21,877 25,815
------- -------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $67,145 $68,398
======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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RIVER OAKS FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES (Note 5) $87,975 $89,188 $29,029 $28,499
COST OF GOODS SOLD 79,937 78,415 26,668 25,087
--------- --------- --------- ---------
Gross profit 8,038 10,773 2,361 3,412
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,970 10,423 3,520 3,260
--------- --------- --------- ---------
Operating income (loss) (2,932) 350 (1,159) 152
INTEREST EXPENSE - Net 3,231 2,956 1,190 924
--------- --------- --------- ---------
Income (loss) before income taxes (benefit) and (6,163) (2,606) (2,349) (772)
extraordinary loss
Income taxes (benefit) (2,224) (925) (698) (274)
----------- ---------- ---------- ----------
NET INCOME (LOSS) (Note 5) (3,939) (1,681) (1,651) (498)
========== ========== ========== ==========
Net income (loss) per share ($0.70) ($0.30) ($0.29) ($0.09)
========== =========== ========== =========
Weighted average common shares and share
equivalents outstanding: 5,606 5,606 5,606 5,606
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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RIVER OAKS FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 28, September 29,
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) (Note 5) ($3,939) ($1,681)
Depreciation & amortization 1,738 1,714
Deferred income taxes (2,552) 30
Changes in operating assets and liabilities
Accounts receivable 951 (930)
Inventories 361 (1,471)
Prepaid expenses and other assets 33 (946)
Accounts payable and accrued expenses 1,475 2,814
Refundable income taxes 2,288 1,114
------- -------
Net cash provided by operating activities 355 644
------- -------
Cash flows from investing activities
Purchase of property and equipment (1,330) (3,109)
------- -------
Net cash (used) by investing activities (1,330) (3,109)
------- -------
Cash flows from financing activities
Principal payments on long-term debt (1,493) (577)
Proceeds from long-term lines of credit 2,566 37,883
Proceeds from issuance of short-term notes 150 --
Principal payments on short-term debt (12) --
Net repayments under long-term lines of credit -- (36,301)
Net proceeds from issuance of common stock -- 1,131
------- -------
Net cash provided by financing activities 1,211 2,136
------- -------
Net increase (decrease) in cash and cash equivalents 236 (329)
Cash and cash equivalents, beginning of period 218 499
------- -------
Cash and cash equivalents, end of period $ 454 $ 170
======= =======
Supplemental disclosure of cash flows information:
September 28, September 29,
1997 1996
------- -------
Cash paid (received) during the three quarters ending:
Interest 3,231 3,233
Income taxes (2,288) (1,114)
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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RIVER OAKS FURNITURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of River
Oaks Furniture, Inc. (the "Company") and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
The financial statements are presented in accordance with the
requirements of Form 10-Q and, consequently, do not include all of the
disclosures made in an Annual Report on Form 10-K. Accordingly, the financial
statements included herein should be reviewed in conjunction with the financial
statements and the footnotes thereto included within the Company's 1996 Annual
Report on Form 10-K.
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. Actual results could differ from those estimates.
The interim financial information has been prepared in accordance with
the Company's customary accounting practices and has not been audited. In the
opinion of management, such information presented reflects all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of interim results. The results of operations for the first three quarters ended
September 28, 1997 are not necessarily indicative of the results of operations
to be expected for the full year ending December 31, 1997 or any other period.
2. INVENTORIES
Inventories are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
------- -------
<S> <C> <C>
Finished goods $ 5,305 $ 3,800
Work-in-process 4,112 3,934
Raw materials 9,787 11,831
------- -------
Total $19,204 $19,565
======= =======
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
On October 4, 1993, the trustees of the Ansin Foundation, established
by a former shareholder of the Company, and an executor of the estate of the
former shareholder, filed a complaint in the United States District Court,
District of Massachusetts, against the Company and the Chief Executive Officer
and the Secretary of the Company, both of whom are also Company directors,
alleging fraud, breach of fiduciary duty and unfair and deceptive business
practices in connection with the repurchase of the former shareholder's shares
(the "Ansin Litigation"). On April 8, 1996, a verdict was returned in favor of
the Ansin Foundation awarding compensatory damages
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against the Company in the amount of $2.3 million. Additionally, compensatory
and punitive damages were awarded against each of the Company's Chief Executive
Officer and Secretary in their individual capacities. The United States Court of
Appeals for the First Circuit affirmed these awards, together with interest
accrued thereon, on February 3, 1997. The Company filed a petition for
certiorari with the United States Supreme Court, which petition was denied on
October 6, 1997. The litigation is, therefore, concluded. Because of this
verdict against the Company, the Company, in 1996, reduced its additional
paid-in-capital in the amount of $1,082,000, representing compensatory damages
for the amount the former shareholder would have received if he had participated
in the Company's initial public offering in September 1993. Additionally, the
balance of the judgment against the Company, $1,357,000, was charged as an
expense in 1996. The Company satisfied the judgment entered against the Company
in the Ansin Litigation on November 12, 1997.
4. LONG-TERM DEBT
The Company has a Revolving Credit and Term Loan Agreement (the "Credit
Agreement") with BNY Financial Corporation ("BNYFC") and other lenders (the
"Banks"). The Credit Agreement was amended as of November 10, 1997 by the
execution and delivery of that certain Amendment No. 1 to Credit Agreement (the
"Amended Credit Agreement"). The Amended Credit Agreement with BNYFC and other
lenders together with related agreements (collectively, the "Financing
Documents") provides the Company and its direct and indirect subsidiaries with a
$40.5 million revolving credit facility (with a $3 million overadvance
sublimit), a $9 million term loan, and certain factoring arrangements
(collectively, the "BNYFC Facility"). Proceeds of the BNYFC Facility have been
used to refinance the Company's indebtedness to CIT, the Company's previous
lender, with the CIT credit facility being terminated effective July 26, 1996.
Additional proceeds are available under the BNYFC Facility to the Company and
its direct and indirect subsidiaries for working capital purposes, subject to
the satisfaction of the terms and conditions established by the Financing
Documents, including without limitation, compliance with borrowing base
requirements. The BNYFC Facility is secured by substantially all of the
Company's assets, excluding certain real property.
Revolving loans under the BNYFC Facility bear interest at a floating
rate per annum equal to 1.50% over the one month London Interbank Offered Rate
(7.16% at September 30, 1997) subject to a 0.50% increase if any overadvances
are outstanding for more than four days in any month. The term loan under the
BNYFC Facility bears interest at a floating rate equal to 2.50% over the one
month London Interbank Offered Rate (8.16% at September 30, 1997), to a 0.50%
reduction if the outstanding principal amount of the term loan is $7 million or
less and no default or event of default exists.
The BNYFC Facility terminates on July 26, 2000, subject to successive
one year extensions thereafter unless notice of non-renewal is given by the
Banks or the Company 90 days prior to the termination date. The BNYFC Facility
is subject to earlier termination at the option of the Banks upon the occurrence
of certain "Events of Default" enumerated in the Loan Documents. All amounts due
to the Banks are payable upon the termination of the BNYFC Facility for any
reason. The term loan requires 59 equal monthly payments of principal in the
amount of $107,143 commencing September 1, 1996, with all remaining principal
and other amounts owing to the Banks being payable in full on the earlier to
occur of (i) the termination of the Credit Facility and (ii) July 26, 2001.
The Financing Documents contain provisions that are customary for
financing transactions of this type, including representations, warranties,
conditions, covenants, and default provisions. Among other things, the Company
is required to maintain profitability and certain consolidated financial ratios
while the Credit Facility is in place, including ratios relating to tangible net
worth, interest coverage, debt service coverage, indebtedness to tangible net
worth, working capital, and the
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excess of current assets over current liabilities. At December 31, 1996 and at
September 28, 1997, the Company was in default of certain of the above
requirements.
On June 17, 1997, BNYFC agreed to waive the Company's breach of the
financial covenants contained in the BNYFC Facility for the Company's fiscal
year ended December 31, 1996 (the "June Agreement"). Also on June 17, 1997,
BNYFC and the Company agreed that, based upon BNYFC's review of the Company's
audited financial statements for the fiscal year ended December 31, 1996 in
relation to the financial covenants of the BNYFC Facility, BNYFC shall propose,
in BNYFC's sole discretion, certain revised financial covenants to be applicable
to the Company under the BNYFC Facility. The Amended Credit Facility was
executed and delivered as of November 10, 1997, but did not contain revised
financial covenants to be applicable to the Company under the BNYFC Facility. In
the June Agreement, the Company and BNYFC agreed to decrease the notice of
non-renewal to 60 days prior to and effective as of the fourth anniversary of
the Effective Date (as defined in the BNYFC Facility) in any subsequent year, to
the BNYFC Facility, to promptly execute and deliver to BNYFC a second priority
Deed of Trust, Security Agreement and Assignment of Leases with respect to the
premises owned at 501 North Glenfield, New Albany, Mississippi and to pay BNYFC
a waiver fee of $150,000. On December 11, 1997, BNYFC agreed to waive the
Company's breach of certain of the financial covenants contained in the BNYFC
Facility for the three quarters ended September 28, 1997.
On October 24, 1997, and as consideration for the agreement of BNYFC
to continue funding the overadvance feature of the BNYFC Facility, the Company
granted BNYFC a warrant to purchase 112,000 shares of the Company's Common
Stock, exercisable until October 23, 2002, for the lesser of (i) $2.00 per
share or (ii) the closing bid price per share of the Common Stock on the first
day it is relisted for trading on Nasdaq or any national exchange (the "First
BNYFC Warrant"). The First BNYFC Warrant contains antidilution protections and
piggyback and demand registration rights.
Also on November 10, 1997, the Company and its direct and indirect
subsidiaries executed a $1,000,000 Promissory Note (the "$1.0 Million Note") and
a $2,000,000 Promissory Note (the "$2.0 Million Note") in favor of BNYFC. The
$1.0 Million Note bears interest at the Prime Rate (as defined in the Amended
Credit Agreement) plus 1% per annum, is secured by all of the Collateral (as
defined in the Amended Credit Agreement), and is payable in twelve consecutive,
monthly installments, commencing on February 1, 1999. The $2.0 Million Note
bears interest at 12% per annum, is secured by all of the Collateral, and is
payable on January 1, 1999. The $2.0 Million Note also permits BNYFC to require
the creation of a reserve account for cash collateral to be funded monthly in an
amount of $100,000 per month. In connection with the execution of the Amended
Credit Agreement, the $1.0 Million Note and the $2.0 Million Note, the Company
granted BNYFC a second warrant to purchase 112,000 shares of the Company's
Common Stock, exercisable until November 9, 2002, for the lesser of (i) $2.50
per share or (ii) the closing bid price per share of the Common Stock on the
first day it is relisted for trading on Nasdaq or any national exchange (the
"Second BNYFC Warrant"). The Second BNYFC Warrant contains antidilution
protections and piggyback and demand registration rights.
On November 12, 1997, the Company issued 12% Subordinated Convertible
Notes Due November 12, 1998 in the aggregate principal amount of $1,000,000 to
certain of its directors and executive officers (the "Subordinated Notes"). The
Subordinated Notes are convertible prior to repayment into shares of the
Company's Common Stock at $2.50 per share, as the same may be adjusted. The
Company also granted to holders of the Subordinated Notes warrants to purchase
an aggregate of 112,000 shares of the Company's Common Stock on the same terms
as set forth in the Second BNYFC Warrant.
The Company has a $2,000,000 fully secured real estate loan with
Deposit Guaranty National Bank which was utilized to purchase a new
manufacturing facility in New Albany, Mississippi. The loan is secured by the
building and land and matures on October 1, 2000. The loan requires monthly
payments of $24,500, including interest. Outstanding borrowings under this
facility at September 28, 1997 were $1,741,000 and bear interest at LIBOR plus
175 basis points (7.41% at September 30, 1997). At December 31, 1996, and based
upon the application of existing provisions of the term loan, the Company was,
and is currently, in default of the financial covenants for the loan. DGNB has
waived the Company's defaults of the financial covenants of this loan for the
Company's 1996 fiscal year and through September 28, 1997.
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Further, the Company has a $5,650,000 long-term real estate loan and a
$100,000 short-term real estate loan with the Bank of Mississippi (the "BOM Real
Estate Loans"), bearing interest, payable monthly at the bank's prime rate
(8.50% at September 30, 1997). The long-term real estate loan provides for
monthly principal payments of $31,390, with the balance due in May 2001. The
short-term real estate loan provides for monthly principal payments of $8,335,
with the balance due in May 1997. On May 15, 1997, the short-term real estate
loan was paid in full and retired. Outstanding borrowings on the long-term real
estate loan is $5,150,000. At December 31, 1996 and based upon the application
of existing provisions of the term loan, the Company was, and is currently, in
default of the financial covenants for the loan. BOM has waived the Company's
defaults of the financial covenants of this loan for the Company's 1996 fiscal
year and through September 30, 1997.
The Company has an $810,000 term note with Deposit Guaranty National
Bank. The note was utilized to purchase equipment and machinery and will fully
amortize over an 84-month period. Outstanding borrowings on the equipment line
were $640,000 at September 28, 1997 and bear interest at LIBOR plus 175 basis
points (7.41% as of September 30, 1997). At December 31, 1996 and based upon the
application of existing provisions of the term loan, the Company was, and is
currently, in default of the financial covenants for the loan. DGNB has waived
the Company's defaults of the financial covenants of this loan for the Company's
1996 fiscal year and through September 28, 1997.
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
------- -------
<S> <C> <C>
BNYFC line of credit $12,433 $ 9,853
BNYFC term loan 7,668 8,632
BOM real estate loans 5,150 5,474
DGNB real estate loan 1,741 1,845
DGNB equipment note 640 721
Capitalized lease obligations 8 31
Other -- 11
------- -------
Total debt 27,640 26,567
Less current maturities (1,931) (1,993)
======= =======
Total long-term debt $25,709 $24,574
======= =======
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements and notes thereto.
RECENT DEVELOPMENTS
Background. During the course of its efforts to prepare for
the audit of its fiscal year ended December 31, 1996, the Company discovered
that certain of the Company's accounts were out of balance. As a result, the
Company, together with outside legal counsel and its independent accountants at
the time, BDO Seidman, LLP, undertook a detailed analysis of certain of the
Company's accounts and accounting reconciliation procedures for the fiscal year
ended December 31, 1996, and prior fiscal years. On April 10, 1997, in the
course of the Company's analysis, a long-time employee of the Company admitted
to falsifying certain account reconciliation statements and underlying
documents. The Company believes that these actions contributed to imbalances in
the Company's cash account. This employee resigned from the Company soon after
these admissions were made. Based on the Company's review and the issuance of
the Company's audited financial statements for the Company's fiscal years ended
December 31, 1996, 1995, and 1994, the Company has concluded that these actions
were not taken to conceal any misappropriation of the Company's assets and that
no other employees were involved.
In addition, the Company utilizes a factoring arrangement with
a financial institution to finance a significant portion of its operations. This
arrangement allows the Company to receive advances for a portion of the face
amount of its sales invoices, and customers remit payment directly to the
factoring institution. On occasion, the customer objects to certain charges on
invoice, notifies the factor of such objection or objections, and deducts such
amounts from its payment. At such time, the factor reduces the factored
receivables by the amount objected to (the "chargebacks"), and the Company
becomes responsible for appropriate follow-up and collection of the chargebacks.
From 1991 to 1996, the Company failed to properly record chargebacks of disputed
amounts to the accounts of individual customers. This practice caused the
individual customer accounts to be understated and, as a result, the Company has
not yet attempted to collect these accounts receivable. These unrecorded
chargeback receivables contributed to the imbalances in the Company's cash
account. Management believes that, due to the passage of time, such receivables
are now uncollectible. As a result, the Company chose to take charges to net
sales of approximately $1,592,000 and $2,225,000 for its fiscal years ended 1996
and 1995, respectively.
On June 5, 1997, BDO resigned as the Company's independent
certified public accountants. On June 10, 1997, the Company retained the Horne
CPA Group, PA as the Company's independent certified public accountants and
authorized BDO to respond fully to the informational requests of Horne. In a
letter dated June 17, 1997, BDO advised the Company that it had withdrawn its
opinions on the 1990, 1991, 1992, 1993, 1994 and 1995 annual financial
statements of the Company.
Restatement of Financial Statements. On September 27, 1997,
Horne issued audited financial statements for the Company's fiscal year ended
December 31, 1996 and also issued restated and audited financial statements for
the Company's fiscal years ended December 31, 1995 and 1994. The respective
reductions to net sales (gross) and net income (loss), net of tax effect, of the
adjustments made to the Company's financial statements are: $1,592,000 and
$1,020,000, respectively, for the year ended December 31, 1996; $2,225,000 and
$1,426,000, respectively, for the year ended December 31, 1995; and $849,000 and
$544,000, respectively, for the year ended December 31, 1994. Retained earnings
at the beginning of 1994 have been adjusted for the net of tax
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amount of $2,350,000 for the effect of this accounting error on prior periods.
The Company was a subchapter S corporation prior to its initial public offering.
Therefore, the amount of $2,146,000, applicable to pre-initial public offering
operations, has been reclassified as additional paid-in capital. The amount of
$204,000 applicable to operations of the C Corporation prior to 1994 has been
recorded as an adjustment against the December 31, 1993 retained earnings. These
adjustments resulted from management's decision to write off the unrecoverable
chargeback receivables discussed above.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information
derived from the Company's unaudited consolidated statements of income expressed
as a percentage of the Company's total net sales:
<TABLE>
<CAPTION>
Three Quarters Quarter
Ended Ended
---------------------------- ----------------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.9 87.9 91.9 88.0
----- ----- ----- -----
Gross profit 9.1 12.1 8.1 12.0
Selling, general and
administrative
expenses 12.4 11.7 12.1 11.4
----- ----- ----- -----
Operating income (loss) (3.3) 0.4 (4.0) 0.6
Interest expense - net 3.7 3.3 4.1 3.3
----- ----- ----- -----
Income before income
tax (benefit) (7.0) (2.9) (8.1) (2.7)
Income tax (benefit) (2.5) (1.0) (2.4) (1.0)
----- ----- ----- -----
Net (loss) (4.5)% (1.9)% (5.7)% (1.7)%
===== ===== ===== =====
</TABLE>
QUARTER ENDED SEPTEMBER 28, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 29, 1996
Net sales for the third quarter ended September 28, 1997 increased by
$530,000, or 1.9%, to $29,029,000 from $28,499,000 for the third quarter ended
September 29, 1996. The increase in sales volume resulted primarily from the
incremental sales contributed by the new River Oaks Motion product line. This
incremental increase was largely offset, management believes, by a weak national
furniture retail environment, as well as the temporary loss of revenue from one
of the Company's largest customers that filed Chapter 11 bankruptcy. Overall
sales volume of the River Oaks product lines decreased by $431,000, or 1.9% to
$22,450,000 for the third quarter of 1997 from $22,881,000 for the third quarter
of 1996. The startup of the River Oaks Motion product line in July 1996
contributed volume increases to net sales of the River Oaks product lines of
approximately $3,424,000 for the third quarter of 1997. Sales of the Gaines
River Oaks product line also increased by $961,000 in the third quarter of 1997
as compared to the third quarter of 1996.
Cost of sales for the third quarter of 1997 increased 6.3% to
$26,668,000 from $25,087,000 for the third quarter of 1996. The aggregate
increase resulted primarily from labor inefficiencies due to reduced backlogs
and difficulty in obtaining raw materials due to a tightening of credit by some
of
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the Company's suppliers which consequently lowered volume production runs. As a
percentage of net sales, costs of sales for the second quarter of 1997 increased
to 91.9% from 88.0% for the third quarter of 1996. The increase in cost of sales
and resulting decline in gross profit margin was due primarily to reduced levels
of production without a corresponding reduction in relatively fixed overhead
levels, as well as the factors discussed above.
Selling, general and administrative expenses for the third quarter of
1997 increased by 8.0% to $3,520,000 from $3,260,000 for the third quarter of
1996. As a percentage of net sales, such expenses for the second quarter of 1997
increased to 12.1% from 11.4% for the third quarter of 1996. The aggregate
increase, as well as the increase as a percentage of net sales, is due primarily
to increased legal and auditing expenses in the third quarter of 1997.
Operating income (loss) for the third quarter of 1997 decreased 862.5%
to a (loss) of $(1,159,000) as compared to income of $152,000 for the third
quarter of 1996. As a percentage of net sales, operating income (loss) for the
third quarter of 1997 decreased to an operating loss of (4.0)% as compared to
operating income of 0.6% for the third quarter of 1996, primarily as a result of
the factors discussed above.
Net interest expense for the third quarter of 1997 increased 28.8% to
$1,190,000 from $924,000 for the third quarter of 1996. As a percentage of net
sales, such expenses for the third quarter of 1997 increased to 4.1% from 3.3%
for the third quarter of 1996. The aggregate increase, as well as the increase
as a percentage of net sales, was primarily the result of additional borrowings
under the new credit facility, necessary for working capital and capital
expenditure requirements and additional interest paid in connection with the
satisfaction of the judgment in the Ansin Litigation. The increased expense
relative to additional borrowings was partially offset by reduced interest rates
in the third quarter of 1997, as compared to the third quarter of 1996, due to
the Company changing its senior lender to BNY Financial Corporation in
July 1996.
Income tax (benefit) for the third quarter of 1997 increased 154.7% to
a (benefit) of $(698,000) from a (benefit) of $(274,000) for the third quarter
of 1996. As a percentage of net sales, the income tax (benefit) for 1997
increased to (2.4)% from (1.0)% for the third quarter of 1996. The aggregate
increase, as well as the increase as a percentage of net sales, was primarily
the result of the effective tax rate on an increased (loss) before income taxes
in the third quarter of 1997. The income tax (benefit) for the third quarter of
1997 was reduced by an IRS assessment of approximately $241,000 relative to an
audit of the Company's 1995 and 1994 tax years.
Net (loss) for the third quarter of 1997 increased by 231.5% to
$(1,651,000) from $(498,000) for the third quarter of 1996. As a percentage of
net sales, net (loss) for the third quarter of 1997 increased to (5.7)% compared
to a net (loss) of (1.7)% for the third quarter of 1996, primarily as a result
of the factors discussed above.
THREE QUARTERS ENDED SEPTEMBER 28, 1997 COMPARED TO THREE QUARTERS ENDED
SEPTEMBER 29, 1996
Net sales for the three quarters ended September 28, 1997 decreased by
$1,213,000 or 1.4% to $87,975,000 from $89,188,000 for the three quarters ended
September 29, 1996. The decline in sales volume resulted primarily, management
believes, from a weak national furniture retail environment, as well as the
temporary loss of revenue from one of the Company's largest customers that filed
Chapter 11 bankruptcy and from tornado damage suffered at the Company's
McKenzie, Tennessee manufacturing facility that interrupted production for
approximately two weeks during the first quarter. This decline was partially
offset by incremental sales of approximately $7,729,000 contributed by the new
River Oaks Motion production line. Overall sales volume of the River Oaks
product lines decreased by $1,757,000, or 2.6%, to $66,872,000 for the first
three quarters of 1997 from $68,629,000 for the first three quarters of 1996.
Sales of the Gaines product line increased by
12
<PAGE> 13
$544,000 in the first three quarters of 1997 as compared to the first three
quarters of 1996. The Company's backlog at September 28, 1997 was approximately
$17,000,000 as compared to approximately $16,700,000 at September 29, 1996.
Cost of sales for the first three quarters of 1997 increased 1.9% to
$79,937,000 from $78,415,000 for the first three quarters of 1996. The aggregate
increase resulted primarily from decreased sales volume in the first three
quarters of 1997, in addition to labor inefficiencies due to reduced backlogs
and difficulty in obtaining raw materials due to a tightening of credit by some
of the Company's suppliers which consequently lower volume production runs in
the first three quarters of 1997. As a percentage of net sales, cost of sales
for the first three quarters of 1997 increased to 90.9% from 87.9% for the first
three quarters of 1996. The increase in cost of sales, as a percentage of sales,
and resulting decline in gross profit margin, was due primarily to the increase
in aggregate levels of cost of sales as compared to decreased sales volume for
the first three quarters of 1997 as compared to the first three quarters of
1996. To a lesser degree, reduced levels of production without a corresponding
reduction in relatively fixed overhead levels account for a portion of the
relatively constant level of cost of sales, as well as the factors discussed
above.
Selling, general and administrative expenses for the first three
quarters of 1997 increased by 5.2% to $10,970,000 from $10,423,000 for the first
three quarters of 1996. As a percentage of net sales, such expenses for the
first three quarters of 1997 increased to 12.4% from 11.7% for the first three
quarters of 1996. The aggregate increase, as well as the increase as a
percentage of net sales, is due primarily to increased legal and auditing
expenses in the first three quarters of 1997, as compared to the first three
quarters of 1996. These increased costs were partially offset by reduced
commission expenses in 1997 as compared to 1996, relative to a decrease in the
sales volume.
Operating income (loss) for the first three quarters of 1997 decreased
937.7% to a loss of $(2,932,000) as compared to income of $350,000 for the first
three quarters of 1996. As a percentage of net sales, operating income (loss)
for the first three quarters of 1997 decreased to a loss of (3.3)% as compared
to income of 0.4% for the first three quarters of 1996, primarily as a result of
the factors discussed above.
Net interest expense for the first three quarters of 1997 increased
9.3% to $3,231,000 from $2,956,000 for the first three quarters of 1996. As a
percentage of net sales, such expenses for the three quarters of 1997 increased
to 3.7% from 3.3% for the three quarters of 1996. The aggregate increase, as
well as the increase as a percentage of net sales, was primarily the result of
additional borrowings under the new credit facility, necessary for working
capital and capital expenditure requirements and additional interest paid in
connection with the satisfaction of the judgment in the Ansin Litigation. The
increased expense relative to additional borrowings was partially offset by
reduced interest rates in the first two quarters of 1997, as compared to the
first two quarters of 1996, due to the Company's changing its senior lender to
BNY Financial Corporation in July 1996.
Income tax (benefit) for the first three quarters of 1997 increased
140.4% to a (benefit) of $(2,224,000) from a (benefit) of $(925,000) for the
third quarter of 1996. As a percentage of net sales, the income tax (benefit)
for 1997 increased to (2.5)% from (1.0)% for the third quarter of 1996. The
aggregate increase, as well as the increase as a percentage of net sales, was
primarily the result of the effective tax rate on an increased (loss) before
income taxes in the first three quarters of 1997. The income tax (benefit) for
the first three quarters of 1997 was reduced by an IRS assessment of
approximately $241,000 relative to an audit of the Company's 1995 and 1994 tax
years.
Net (loss) for the first three quarters of 1997 increased by 134.3% to
$(3,939,000) from $(1,681,000) for the first three quarters of 1996. As a
percentage of net sales, net (loss) for the first three quarters of 1997
increased to (4.5)% compared to net (loss) of (1.9)% for the first three
quarters of 1996, primarily as a result of the factors discussed above.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing for its operations and capital requirements
historically has been a combination of long-term borrowings, factoring of
accounts receivable and internally generated funds. The Company's capital
requirements have increased historically because of capital requirements for
capacity expansion and working capital needs to support sales growth. A
significant portion of capital expansion has historically been financed with
long-term mortgage indebtedness. Factoring of accounts receivable has played an
important role in providing cash to fund increased inventory requirements
necessary for sales growth.
In the absence of current financial information throughout the first
three quarters of 1997, the Company experienced some tightening of credit among
several of its key trade suppliers. This tightening of credit was usually in the
form of reduced credit lines and not in less-favorable payment terms. As of the
date of this filing, however, the Company believes it has completed all
accelerations of payments necessary to be within the reduced credit lines of its
key trade suppliers. Furthermore, management believes, based upon verbal
communications, that most of credit lines which had previously been reduced will
be increased following the publication of current financial information
regarding the Company
After reflecting changes in current assets and current liabilities,
operating activities provided net cash of $355,000 in the first three quarters
of 1997 as compared to providing $644,000 in the first three quarters of 1996.
Cash provided by operations was primarily the result of increases in accounts
payable and collections of accounts receivable and income tax refunds.
Net cash used by investing activities was $1,330,000 in the first three
quarters of 1997 compared to $3,109,000 used in the first three quarters of
1996. Net capital expenditures in the first three quarters of 1997 were
$1,330,000 as compared to $3,109,000 in the first three quarters of 1996 and
were incurred primarily in connection with general replacement and improvement
of equipment, purchasing approximately $150,000 of previously leased equipment
for the River Oaks Motion facility, line development costs incurred at the
Company's New Albany facility in order to begin to produce Motion furniture at
that facility and additional incremental labor costs associated with the
implementation of the Company's fully integrated computer system. Capital
expenditures were funded primarily with long-term borrowings.
Management anticipates that the Company's capital expenditures for the
remaining quarter of 1997 will be approximately $150,000. These estimated
capital expenditures consist primarily of routine equipment replacement and the
completion of any construction in process.
In the first three quarters of 1997, financing activities provided net
cash of $1,211,000 compared to $2,136,000 provided in the first three quarters
of 1996 and reflected, primarily, additional proceeds under its long-term line
of credit of $2,566,000 and repayment of long-term borrowings of $1,493,000.
The Company has a Revolving Credit and Term Loan Agreement (the "Credit
Agreement") with BNY Financial Corporation ("BNYFC") and other lenders (the
"Banks"). The Amended Credit Agreement was amended as of November 10, 1997 by
the execution and delivery of that certain Amendment No. 1 to Credit Agreement
(the "Amended Credit Agreement"). The Amended Credit Agreement with BNYFC and
other lenders together with related agreements (collectively, the "Financing
Documents") provides the Company and its direct and indirect subsidiaries with a
$40.5 million revolving credit facility (with a $3 million overadvance
sublimit), a $9 million term loan, and certain factoring arrangements
(collectively, the "BNYFC Facility"). Proceeds of the BNYFC Facility have been
used to refinance the Company's indebtedness to CIT, the Company's previous
lender, with the CIT Facility being terminated effective July 26, 1996.
Additional proceeds are available under the BNYFC Facility to the Company and
its direct and indirect subsidiaries for working
14
<PAGE> 15
capital purposes, subject to the satisfaction of the terms and conditions
established by the Financing Documents, including without limitation, compliance
with borrowing base requirements. The BNYFC Facility is secured by substantially
all of the Company's assets, excluding certain real property.
Revolving loans under the BNYFC Facility bear interest at a floating
rate per annum equal to 1.50% over the one month London Interbank Offered Rate
(7.16% at September 30, 1997) subject to a 0.50% increase if any overadvances
are outstanding for more than four days in any month. The term loan under the
BNYFC Facility bears interest at a floating rate equal to 2.50% over the one
month London Interbank Offered Rate (8.16% at September 30, 1997), to a 0.50%
reduction if the outstanding principal amount of the term loan is $7 million or
less and no default or event of default exists.
The BNYFC Facility, as amended, terminates on July 26, 2000, subject to
successive one year extensions thereafter unless notice of non-renewal is given
by the Banks or the Company 90 days prior to the termination date. The BNYFC
Facility is subject to earlier termination at the option of the Banks upon the
occurrence of certain "Events of Default" enumerated in the Loan Documents. All
amounts due to the Banks are payable upon the termination of the BNYFC Facility
for any reason. The term loan requires 59 equal monthly payments of principal in
the amount of $107,143 commencing September 1, 1996, with all remaining
principal and other amounts owing to the Banks being payable in full on the
earlier to occur of (i) the termination of the Credit Facility and (ii) July 26,
2001.
The Financing Documents contain provisions that are customary for
financing transactions of this type, including representations, warranties,
conditions, covenants, and default provisions. Among other things, the Company
is required to maintain profitability and certain consolidated financial ratios
while the Credit Facility is in place, including ratios relating to tangible net
worth, interest coverage, debt service coverage, indebtedness to tangible net
worth, working capital, and the excess of current assets over current
liabilities. At December 31, 1996 and at September 28, 1997, the Company was in
default of certain of the above requirements.
On June 17, 1997, BNYFC agreed to waive the Company's breach of the
financial covenants contained in the BNYFC Facility for the Company's fiscal
year ended December 31, 1996 (the "June Agreement"). Also on June 17, 1997,
BNYFC and the Company agreed that, based upon BNYFC's review of the Company's
audited financial statements for the fiscal year ended December 31, 1996 in
relation to the financial covenants of the BNYFC Facility, BNYFC shall propose,
in BNYFC's sole discretion, certain revised financial covenants to be applicable
to the Company under the BNYFC Facility. The Amended Credit Facility was
executed and delivered as of November 10, 1997, but did not contain revised
financial covenants to be applicable to the Company under the BNYFC Facility. In
the June Agreement, the Company and BNYFC agreed to decrease the notice of
non-renewal to 60 days prior to and effective as of the fourth anniversary of
the Effective Date (as defined in the BNYFC Facility) in any subsequent year, to
the BNYFC Facility, to promptly execute and deliver to BNYFC a second priority
Deed of Trust, Security Agreement and Assignment of Leases with respect to the
premises owned at 501 North Glenfield, New Albany, Mississippi and to pay BNYFC
a waiver fee of $150,000. On December 11, 1997, BNYFC agreed to waive the
Company's breach of certain of the financial covenants contained in the BNYFC
Facility for the three quarters ended September 28, 1997.
On October 24, 1997, and as consideration for the agreement of BNYFC
to continue funding the overadvance feature of the BNYFC Facility, the Company
granted BNYFC a warrant to purchase 112,000 shares of the Company's Common
Stock, exercisable until October 23, 2002, for the lesser of (i) $2.00 per
share or (ii) the closing bid price per share of the Common Stock on the first
day it is relisted for trading on Nasdaq or any national exchange (the "First
BNYFC Warrant"). The First BNYFC Warrant contains antidilution protections and
piggyback and demand registration rights.
Also on November 10, 1997, the Company and its direct and indirect
subsidiaries executed a $1,000,000 Promissory Note (the "$1.0 Million Note") and
a $2,000,000 Promissory Note (the "$2.0 Million Note") in favor of BNYFC. The
$1.0 Million Note bears interest at the Prime Rate (as defined in the Amended
Credit Agreement) plus 1% per annum, is secured by all of the Collateral (as
defined in the Amended Credit Agreement), and is payable in twelve consecutive,
monthly installments, commencing on February 1, 1999. The $2.0 Million Note
bears interest at 12% per annum, is secured by all of the Collateral, and is
payable on January 1, 1999. The $2.0 Million Note also permits BNYFC to require
the creation of a reserve account for cash collateral to be funded monthly in an
15
<PAGE> 16
amount of $100,000 per month. In connection with the execution of the Amended
Credit Agreement, the $1.0 Million Note and the $2.0 Million Note, the Company
granted BNYFC a second warrant to purchase 112,000 shares of the Company's
Common Stock, exercisable until November 9, 2002, for the lesser of (i) $2.50
per share or (ii) the closing bid price per share of the Common Stock on the
first day it is relisted for trading on Nasdaq or any national exchange (the
"Second BNYFC Warrant"). The Second BNYFC Warrant contains antidilution
protections and piggyback and demand registration rights.
On November 12, 1997, the Company issued 12% Subordinated Convertible
Notes Due November 12, 1998 in the aggregate principal amount of $1,000,000 to
certain of its directors and executive officers (the "Subordinated Notes"). The
Subordinated Notes are convertible prior to repayment into shares of the
Company's Common Stock at $2.50 per share, as the same may be adjusted. The
Company also granted to holders of the Subordinated Notes warrants to purchase
an aggregate of 112,000 shares of the Company's Common Stock on the same terms
as set forth in the Second BNYFC Warrant.
The Company has a $2,000,000 fully secured real estate loan with
Deposit Guaranty National Bank which was utilized to purchase a new
manufacturing facility in New Albany, Mississippi The loan is secured by the
building and land and matures on October 1, 2000. The loan requires monthly
payments of $24,500, including interest. Outstanding borrowings under this
facility at September 28, 1997 were $1,741,000 and bear interest at LIBOR plus
175 basis points (7.41% at September 30, 1997). At December 31, 1996 and based
upon the application of existing provisions of the term loan, the Company was,
and is currently, in default of the financial covenants for the loan. DGNB has
waived the Company's defaults of the financial covenants of this loan for the
Company's 1996 fiscal year and through September 28, 1997.
Further, the Company has a $5,650,000 long-term real estate loan and a
$100,000 short-term real estate loan with the Bank of Mississippi (the "BOM Real
Estate Loans"), bearing interest, payable monthly at the bank's prime (8.50% at
September 30, 1997). The long-term real estate loan provides for monthly
principal payments of $31,390, with the balance due in May 2001. The short-term
real estate loan provides for monthly principal payments of $8,335, with the
balance due in May 1997. On May 15, 1997, the short-term real estate loan was
paid in full and retired. Outstanding borrowings on the long-term real estate
loan at September 28, 1997 was $5,150,000. At December 31, 1996 and based upon
the application of existing provisions of the term loan, the Company was, and is
currently, in default of the financial covenants for the loan. BOM has waived
the Company's defaults of the financial covenants of this loan for the Company's
1996 fiscal year and through September 30, 1997.
The Company has an $810,000 term note with Deposit Guaranty National
Bank. The note was utilized to purchase equipment and machinery and will fully
amortize over an 84-month period. Outstanding borrowings on the equipment line
were $640,000 at September 28, 1997 and bear interest at LIBOR plus 175 basis
points (7.41% as of September 31, 997). At December 31, 1996 and based upon the
application of existing provisions of the term loan, the Company was, and is
currently, in default of the financial covenants for the loan. DGNB has waived
the Company's defaults of the financial covenants on this loan for the Company's
1996 fiscal year and through September 28, 1997.
16
<PAGE> 17
On August 13, 1997, the Company retained Scott & Stringfellow, Inc.,
(the "Investment Bank") on an exclusive basis, to advise the Company with
respect to its strategic options, including the placement of the Company's
securities or the sale or merger of all or a portion of the Company to provide
additional working capital for the Company, including, without limitation, funds
to satisfy the verdict awarded in the Ansin Litigation. There can be no
assurance, however, that the Company can successfully identify and consummate
any such transaction or sell shares of its Common Stock or issue subordinated
debt in order to raise sufficient capital.
The issuance of any additional debt by the Company will further
leverage the Company and will have a negative effect on the per share earnings
of the Company, through additional interest expense, during the period that such
debt remains outstanding. The issuance of additional equity would also have a
dilutive effect on the per share earnings of the Company. The failure to obtain
additional financing would have a material adverse effect on the Company,
including defaults under the Company's credit facilities. Any such issuance of
additional shares of Common Stock or of subordinated debt must be approved by
the Company's senior lender. The Company's ability to satisfy its obligations
and to raise working capital are dependent, in part, upon the Company's
financial performance, which is subject to prevailing economic conditions,
business trends and financial, business and other factors, including factors
beyond the control of the Company and those described under the caption
"Forward-Looking Statements."
RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") issued by FASB is effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The disclosure requirements of FAS 123 are also effective for financial
statements for fiscal year beginning after December 15, 1995. The new standard
encourages entities to adopt a fair value method of accounting for employee
stock-based compensation plans and requires such accounting for transactions in
which an entity acquires goods or services from non-employees through issuance
of equity instruments. As allowed under the provisions of FAS 123, the Company
will continue to measure compensation cost of employee stock-based compensation
plans using the intrinsic value based method of accounting prescribed by the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As such, the Company will make pro forma disclosures in its annual
financial statements of net income and earnings per share as if the fair value
based method of accounting had been applied.
Statement of Financial Accounting Standards No. 128, "Accounting for
Earnings per Share" ("FAS 128"), issued by the FASB is effective for financial
statements issued for periods ending after December 15. 1997. The disclosure
requirements of FAS 128 are also effective for financial statements for fiscal
years beginning after December 15, 1997. The new statement establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly-held common stock. This standard simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share", and makes them comparable to international
EPS standards. The Company does not expect adoption to have a material effect on
its financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," issued by the FASB is effective for years beginning after
December 15, 1997. The new statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This standard
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company does not expect
adoption to have a material effect on its financial position or results of
operations.
17
<PAGE> 18
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," issued by the FASB is
effective for years beginning after December 15, 1997. The new statement
establishes standards for the way public enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This standard requires that a public business enterprise report
financial and descriptive information about its reportable operating segments
Operating segments are a component of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company does not expect adoption to have a material effect on
its financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
(including statements concerning or containing a projection of revenues, income
(including income loss), earnings (including earnings loss) per share, capital
expenditures, dividends, capital structure or other financial items; statements
regarding plans and objectives for future operations, including plans or
objectives relating to the Company's products; the effects of the reorganization
of certain of the Company's facilities; the implementation of new information
systems; expected capital expenditures; and the efforts of the Company to become
a single source supplier) are forward-looking in nature. Such forward-looking
statements are necessarily estimates reflecting the Company's best judgment of
its expected future results of operations and performance or events, based upon
current financial and other information and, as a result, involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, general economic and business conditions; the cyclical and
seasonal nature of the furniture market; the uncertainties necessarily
associated with litigation; the availability and cost of labor and raw
materials; the Company's ability to expand the geographic scope of its
operations; general conditions in the capital markets; the willingness of
potential investors to purchase securities of the Company notwithstanding the
Company's recent results of operations and the delisting of the Company's Common
Stock; the willingness of third parties to consider and consummate strategic and
other important transactions with the Company, including the granting of waivers
of defaults by the Company's financing sources; changes in furniture styles or
consumer tastes; demographic changes; competition; import protection and
regulation; changes in business strategy or development plans; availability,
terms and deployment of capital; business ability and judgment of management and
other personnel; and other factors which may be identified from time to time in
the Company's Securities and Exchange Commission (the "Commission") filings and
other public announcements.
INFLATION
Although the effects on the Company cannot be accurately determined,
inflation in recent years has primarily affected the Company's manufacturing
costs in the areas of labor, manufacturing overhead and raw materials, including
lumber. The Company does not believe that inflation has had a significant impact
on its result of operations for the periods presented. Historically, the Company
believes it has been able to minimize the effects of inflation by improving its
purchasing efficiency, increasing its employee productivity and, to a lesser
degree, increasing selling prices of its products.
18
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 4, 1993, the trustees of the Ansin Foundation, established
by a former shareholder of the Company, and an executor of the estate of the
former shareholder, filed a complaint in the United States District Court,
District of Massachusetts, against the Company and the Chief Executive Officer
and the Secretary of the Company, both of whom are also Company directors,
alleging fraud, breach of fiduciary duty and unfair and deceptive business
practices in connection with the repurchase of the former shareholder's shares
(the "Ansin Litigation"). On April 8, 1996, a verdict was returned in favor of
the Ansin Foundation awarding compensatory damages against the Company in the
amount of $2.3 million. Additionally, compensatory and punitive damages were
awarded against each of the Company's Chief Executive Officer and Secretary in
their individual capacities. The United States Court of Appeals for the First
Circuit affirmed these awards, together with interest accrued thereon, on
February 3, 1997. The Company filed a petition for certiorari with the United
States Supreme Court, which petition was denied on October 6, 1997. The
litigation is, therefore, concluded. Because of this verdict against the
Company, the Company reduced its additional paid-in-capital in the amount of
$1,082,000, representing compensatory damages for the amount the former
shareholder would have received if he had participated in the Company's initial
public offering in September 1993. Additionally, the balance of the judgment
against the Company, $1,357,000, has been charged as an expense in 1996. The
Company satisfied the judgment entered against the Company in the Ansin
Litigation on November 12, 1997.
On August 6, 1997, the Company filed a complaint in the Circuit Court
of Lee County, Mississippi against BDO Seidman, LLP ("BDO"), the Company's
former independent accountants, alleging, among other things, professional
malpractice, negligence, breach of contract and breach of professional
responsibilities and fiduciary duties. The Company is seeking actual damages in
the amount of not less than $30,000,000, together with punitive damages, from
BDO. On September 5, 1997, BDO removed the case to the United States District
Court for the Northern District of Mississippi, Eastern Section. On September
15, 1997, the Company filed an amended complaint to add a count for defamation.
BDO's Answer and Counterclaim were served on the Company on October 20, 1997.
The Counterclaim alleges breach of contract, fraud, and breach of the covenant
of good faith and fair dealing. No assurance can be given that the Company will
prevail on any of these allegations or that it will ultimately recover any
damages, actual or punitive, from BDO.
Additionally, the Company is, from time to time, a party to litigation
which arises in the normal course of its business. Except as described above,
the Company is not currently a party to any litigation which, if adversely
determined, would have a material adverse effect on the Company's liquidity or
results of operations.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Descriptions of Exhibits
------ ------------------------
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K (Item 5) on August 29, 1997 with
respect to (a) the delisting from the Nasdaq Stock Market of the Company's
Common Stock and (b) the filing of the Company's complaint against BDO Seidman,
LLP, the Company's former independent certified public accountants.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
RIVER OAKS FURNITURE, INC.
Date: December 10, 1997 /s/ John D. Nail
---------------------------
John D. Nail
President
Date: December 10, 1997 /s/ Johnny C. Walker
---------------------------
Johnny C. Walker
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Exhibits
- ----------- -----------------------------------------
27 Financial Data Schedule (for SEC use only)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVER OAKS FURNITURE, INC. FOR THE 9 MONTH PERIOD ENDED
SEPTEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-28-1997
<EXCHANGE-RATE> 1
<CASH> 454
<SECURITIES> 0
<RECEIVABLES> 6,813
<ALLOWANCES> 1,803
<INVENTORY> 19,204
<CURRENT-ASSETS> 27,292
<PP&E> 37,122
<DEPRECIATION> 6,157
<TOTAL-ASSETS> 67,145
<CURRENT-LIABILITIES> 19,559
<BONDS> 0
0
0
<COMMON> 561
<OTHER-SE> 21,316
<TOTAL-LIABILITY-AND-EQUITY> 67,145
<SALES> 87,975
<TOTAL-REVENUES> 87,975
<CGS> 79,937
<TOTAL-COSTS> 90,907
<OTHER-EXPENSES> 10,907
<LOSS-PROVISION> 487
<INTEREST-EXPENSE> 3,231
<INCOME-PRETAX> (6,163)
<INCOME-TAX> (2,224)
<INCOME-CONTINUING> (3,939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,939)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
