-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0nxdxgyHyNWYmc9hfxkojHwFl7ZlNqmmzwd2oX1LtGjqp2ZUm6I04P5lPHyYUHJ Wuaxfv7hjxQGysCOjC4tkw== 0000931814-02-000002.txt : 20020507 0000931814-02-000002.hdr.sgml : 20020507 ACCESSION NUMBER: 0000931814-02-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WINSLOEW FURNITURE INC CENTRAL INDEX KEY: 0000931814 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 631127982 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-85476 FILM NUMBER: 02637000 BUSINESS ADDRESS: STREET 1: 160 VILLAGE STREET CITY: BIRMINGHAM STATE: AL ZIP: 35242 BUSINESS PHONE: 2054087600 MAIL ADDRESS: STREET 1: 160 VILLAGE STREET CITY: BIRMINGHAM STATE: AL ZIP: 35242 10-Q 1 wlfi10qyr2002q1.txt WINSLOEW FURNITURE 10Q FOR 2002 QUARTER 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended March 29, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ Commission File Number 0-25246 -------- WINSLOEW FURNITURE, INC. (Exact name of registrant as specified in its charter) FLORIDA 63-1127982 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 160 VILLAGE STREET, BIRMINGHAM, ALABAMA 35242 - - ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) (205) 408-7600 -------------- (Registrant's telephone number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ------ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Shares Outstanding at May 6, 2002 - - --------------- ----------------------------------- $ .01 par value 1,000 WINSLOEW FURNITURE, INC. INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 5-6 Notes to Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements WinsLoew Furniture, Inc. and SubsidiariesConsolidated Balance Sheets (Unaudited) (In thousands) March 29, December 31, 2002 2001 --------- ----------- Assets Cash and cash equivalents $ 6,739 $ 5,107 Accounts receivable, less allowances for doubtful accounts 97,025 86,534 Inventories 30,005 28,111 Prepaid expenses and other current assets 12,140 12,463 ------- -------- Total current assets 145,909 132,215 Property, plant and equipment, net 36,972 37,258 Goodwill, net 343,160 343,027 Other assets 14,733 15,518 ------- ------- Total Assets $540,774 $528,018 ======== ======== Liabilities and Stockholder's Equity Current portion of long-term debt $ 7,200 $ 7,200 Accounts payable 41,295 35,300 Accrued interest 1,925 5,214 Other accrued liabilities 23,606 21,879 ------- ------- Total current liabilities 74,026 69,593 Long-term debt, net of current portion 292,002 287,878 Deferred income taxes 2,576 2,182 ------- ------- Total liabilities 368,604 359,653 ------- ------- Commitments and contingencies Stockholder's Equity: Common stock; par value $.01 per share, 1,000 shares authorized and issued at March 29, 2002 and December 31, 2001. and December 31, 2000, respectively $ -- $ -- Additional paid-in capital 164,735 164,735 Retained earnings 8,297 5,084 Accumulated other comprehensive loss (862) (1,454) ------- ------- Total stockholder's equity 172,170 168,365 ------- ------- Total liabilities and stockholder's equity $540,774 $528,018 ========= ========= See accompanying notes. WinsLoew Furniture, Inc and Subsidiaries Consolidated Statements of Operations (Unaudited) (In thousands) For The Quarters Ended ---------------------- March 29, March 30, 2002 2001 --------- --------- Net sales $124,919 $39,718 Cost of sales 97,194 24,717 --------- --------- Gross profit 27,725 15,001 Selling, general and administrative expenses 13,435 7,142 Amortization 182 1,877 -------- -------- Operating income 14,108 5,982 Interest expense 8,172 7,267 -------- -------- Income(loss) before income taxes 5,936 (1,285) Provision for income taxes 2,722 (711) -------- -------- Net income(loss) $ 3,214 $ (574) ======== ======== See accompanying notes. WinsLoew Furniture, Inc. and Subsidiaries Consolidated Statements of Cash Flows(Unaudited) (In thousands) For the Three Months Ended ------------------------- March 29, March 30, 2002 2001 --------- ---------- Cash flows from operating activities: Net income/(loss) $ 3,214 $ (574) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,759 2,744 Provision for losses on accounts receivable (149) (661) Provision for losses on inventory 443 --- Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable (10,342) (3,953) Inventories 2,337) (2,273) Prepaid expenses and other current assets 324 69 Other assets 68 (78) Accounts payable 5,995 638 Accrued interest (3,919) (3,501) Other accrued liabilities 3,341 (714) ------- -------- Total adjustments (4,817) (7,729) Net cash used in operating activities (1,603) (8,303) ------- -------- Cash flows from investing activities: Capital expenditures, net of disposals (766) (120) Investment in subsidiaries -- (229) ------- ------- Net cash used in investing activities (766) (349) -------- ------- Cash flows from financing activities: Net borrowings under revolving credit agreements 4,001 8,156 Net borrowings for acquisitions -- 288 Proceeds from issuance of common stock, net -- 20 Deferred financing costs -- (86) ------- ------- Net cash provided by financing activities 4,001 8,378 ------- ------- Net increase(decrease)in cash and cash equivalents 1,632 (274) WinsLoew Furniture, Inc. and Subsidiaries Consolidated Statements of Cash Flows(Unaudited) (In Thousands) For the Three Months Ended ------------------------- March 29, March 30, 2002 2001 --------- ---------- Cash and cash equivalents at beginning of year $ 5,107 $ 602 --------- ---------- Cash and cash equivalents at end of period $ 6,739 $ 328 ======= ======== For the Three Months Ended ------------------------- March 29, March 31, 2002 2001 -------- --------- Supplemental disclosures: Interest paid $ 8,640 $ 10,397 Income taxes paid 199 261 ======== ======== Investing activities in the first quarter of 2001 included the acquisition of The Woodsmiths Company: Initial Investment $ -- $ 287 Cash acquired -- (58) ======== ======== Initial Investment $ -- 229 See accompanying notes WINSLOEW FURNITURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. WLFI HOLDINGS Prior to the acquisition of Brown Jordan International ("BJI"), WinsLoew Furniture, Inc. ("WinsLoew" or the "Company") completed a recapitalization transaction wherein; the Company became a wholly-owned subsidiary of a new holding company called WLFI Holdings, Inc. (Holdings), a Florida corporation. In order to accomplish the recapitalization, Holdings was initially formed as the Company's wholly-owned subsidiary. In addition to Holdings, the Company formed another company called WLFI Merger, Inc., a Florida corporation, as a wholly-owned subsidiary of Holdings. Then, immediately prior to the consummation of the Brown Jordan acquisition, the Company merged with WLFI Merger, Inc. and was the surviving corporation of the merger. As a result of these transactions, the Company became a wholly-owned subsidiary of the new holding company, Holdings. All shares of common stock that were outstanding immediately prior to the merger (850,497 shares) were converted into shares of common stock of Holdings. In addition, each warrant or option to purchase shares of the Company's common stock was converted into a warrant or option to purchase an equivalent number of shares of common stock of Holdings. 1,000 shares of the Company's common stock was then issued to WLFI Holdings, Inc. Finally, by operation of the merger the separate corporate existence of WLFI Merger ended. Because there was no change in the stock ownership of the Company as a result of the recapitalization, there was no change in the basis of the Company's assets or liabilities. 2. Basis of Presentation The accompanying unaudited consolidated financial statements of WinsLoew Furniture, Inc. and subsidiaries that are for interim periods do not include all disclosures provided in the annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission. All material intercompany balances and transactions have been eliminated. The preparation of the consolidated financial statements requires the use of estimates in the amounts reported. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the results for the interim periods. The results of operations are presented for the Company's first quarter, which is from January 1, 2002 through March 29, 2002. The results of operations for this period are not necessarily indicative of the results to be expected for the full year. 3. Inventories Inventories consisted of the following: (In thousands) March 29, December 31, 2002 2001 ---------- ------------ Raw materials $22,019 $22,335 Work in process 3,183 2,824 Finished Goods 4,803 2,952 ------- ------- $30,005 $28,111 ======= ======= 4. Capital Stock At December 31, 2001, there were 1,000 shares issued and outstanding. Since December 31, 2001 and as of March 29, 2002, the Company has not issued any additional shares of stock or repurchased any outstanding shares. 5. Acquisitions On March 9, 2001 the Company purchased all of the assets of The Woodsmiths Company. Woodsmiths, a manufacturer of custom tabletops for the contract and hospitality industry, is located in Pompano Beach, Florida. The purchase price of approximately $2.8 million was paid in cash of approximately $0.3 million and a $2.5 note payable to the sole shareholder of Woodsmiths. In addition, the stock purchase agreement provides for an additional contingent deferred payment of up to $1,000,000 based upon Woodsmiths' earnings before interest, taxes, depreciation, amortization and management fees. The maximum contingent payment amount of $1,000,000 was recorded at the time of purchase as an addition to goodwill and an accrued liability of the Company. The amount of any such contingent payment will be made directly to the former sole shareholder and serves as a financial incentive. The acquisition resulted in goodwill of approximately $3.4 million and was accounted for under the purchase method of accounting. The operating results of Woodsmiths have been included in the consolidated operating results beginning with the month of March. On May 8, 2001 WinsLoew Furniture, Inc. and its parent WLFI Holdings, Inc. acquired all of the outstanding stock of Brown Jordan International, Inc. at a purchase price of $78.6 million. The Stock Purchase Agreement by and among WLFI Holdings, Inc., the Company, BJI and the Stockholders of BJI also called for the repayment of outstanding BJI indebtedness at closing, which approximated $44.6 million. The amount of consideration paid by the Company for the BJI stock was determined through an arm's length negotiation between representatives of the Company and BJI. The total purchase price of $123.2 million, including estimated transaction costs and funded indebtedness, was allocated to the assets acquired on a preliminary basis using the fair value of the assets acquired. This preliminary basis is subject to review and subject to change. Pursuant to the purchase method of accounting, the excess of the purchase price over the $44.6 million fair value of net assets after payment of BJI indebtedness at closing, has been recorded as goodwill in the amount of $78.6 million. The operating results of BJI have been included in the consolidated operating results since the date of acquisition. In order to complete the acquisition, the merger described in Note 1 was con-summated simultaneously. WLFI Holdings, Inc. raised $50.9 million of equity and issued $22 million of subordinated notes to the sellers for BJI stock. Holdings contributed the cash of $50.9 million to the Company as additional equity. The stock of BJI, obtained in the exchange of subordinated notes, was also contributed to the Company. The balance of the proceeds was provided through a refinancing of the Company's existing Senior Credit Facility. The new Senior Credit Facility consists of a $165 million Term Loan and a $60 million revolving credit facility. The operating results of the above acquisitions have been included in the consolidated operating results since the dates of acquisition. The following unaudited pro forma information has been prepared assuming that the acquisitions of Woodsmiths and Brown Jordan International occurred on January 1, 2001. Three months ended (In thousands) March 29, March 30, 2002 2001 ------ ------ Net sales $124,919 $ 99,087 Income before taxes 5,936 458 Net income 3,214 509 ======== ======== 6. Segment Information The Company has three segments organized and managed based on the products sold. The Company evaluates performance and allocates resources based on gross profit. There are no intersegment sales/transfers. Export revenues are not material. (In thousands) Three Months Ended ---------------------- March 29, March 30, 2002 2001 --------- -------- NET SALES: Casual products $110,100 $19,974 Contract and Hospitality products 12,771 17,503 Ready to assemble products 2,048 2,241 ------- ------- Total net sales $124,919 $39,718 ======= ======= (In thousands) March 29, March 30, 2002 2001 -------- -------- SEGMENT GROSS PROFIT: Casual products $ 23,505 $ 8,737 Contract and Hospitality products 3,882 5,918 Ready to assemble products 338 346 ------- ------- Total segment gross profit 27,725 15,001 Reconciling items: Selling, general and administrative expenses 13,435 7,142 Amortization 182 1,877 ------- ------- Operating income 14,108 5,982 Interest expense 8,172 7,267 ------- ------- Income/(loss) before income taxes $ 5,936 $ (1,285) ======== ======== (In thousands) March 29, March 30, 2002 2001 -------- -------- SEGMENT ASSETS: Casual products $286,641 $126,432 Contract and Hospitality products 47,372 51,581 Ready to assemble products 5,686 5,901 ------- ------- Total 339,699 183,914 Reconciling items: Corporate 201,075 192,267 -------- -------- Total consolidated assets $540,774 $376,181 ======== ======== 7. Accounting Pronouncements In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of the statement. The Company is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Pursuant to the provisions of Statement 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of the statement. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. The Company has not determined the impact that adoption of Statement 142 will have on its consolidated financial statements. Transitional Disclosure for Adoption of SFAS 142 Pro forma results for the three months ended, assuming the elimination of goodwill amortization, are summarized below: (In thousands) March 29, March 30, 2002 2001 -------- -------- Net Income(loss): As reported $3,214 $ (574) Goodwill amortization (net of tax) -- 1,624 -------- -------- Pro forma net income $3,214 $1,068 ======== ========= The Company will complete the first step of the two-step test for goodwill impairment by June 30, 2002. If impairment is indicated, the Company will complete the second step and, if necessary, record any impairment loss as a cumulative effect of an accounting change, effective as of January 1, 2002. 8. DERIVATIVES On January 1, 2001 the Company adopted SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138. The Company enters into short term currency forward contracts to hedge currency exposures associated with the purchase of certain raw materials and the funding of foreign operations. At March 29, 2002 the change in fair value of these hedges was not material. On August 6, 2001 the Company entered into an interest rate swap agreement to fix the interest rate on $100 million principal amount of variable rate debt outstanding under the Senior Credit Facility. The interest rate swap is designed to fix the adjusted LIBOR interest rate on $100 million at 5.09% through March 31, 2004 and on $80 million from March 31, 2004 to March 31, 2005. As of March 29, 2002, the fair value of the swap was recorded as a liability of $1,437,000 with an offsetting entry to other comprehensive loss, net of taxes of $575,000. The portion of ineffectiveness of the hedge, as determined by the change in variable cash flows of the interest rate swap to the Senior Credit Facility, is not material. From the period of January 1, 2002 through March 29, 2002 the 3-month LIBOR interest rate increased approximately 13.9 basis points. While the Company's interest on LIBOR-based borrowing increased during this period, the fair value of the interest rate swap increased also. Future movements in interest rates, particularly the 3-month LIBOR rate, will correspondingly impact the Company's cash interest expense and the fair value of the swap. 9. Statement Of Comprehensive Loss The components of other comprehensive income(loss) and total comprehensive income(loss) for the three months ended March 29, 2002 and March 30, 2001 are as follows: (In thousands) Three Months Ended March 29, March 30, 2002 2001 ---------------------------------- Net income(loss) $3,214 $(574) Change in fair value of forward contracts - - Change in fair value of interest rate swap, net of taxes 592 - ---------------------------------- Comprehensive income(loss) $3,806 $(574) ================================== Management's Discussion and Analysis of Financial Condition And Results of Operations Prior to the acquisition of Brown Jordan International ("BJI"), the Company completed a restructuring transaction involving two new legal entities, the final result of which, was the formation of a new holding company called WLFI Holdings, Inc.("Holdings"). Holdings, a Florida corporation, became the Company's parent company. In order to accomplish this restructuring transaction, Holdings was initially formed as the Company's wholly-owned subsidiary. In addition to Holdings, the Company formed another company called WLFI Merger, Inc., a Florida corporation, as a wholly-owned subsidiary of Holdings. Then, immediately prior to the consummation of the Brown Jordan acquisition, we merged with WLFI Merger, Inc. and we were the surviving corporation of the merger. As a result of this transaction, we became the wholly-owned subsidiary of the new holding company, Holdings, and the Company's shares of common stock which were outstanding immediately prior to the merger were converted into shares of common stock of the new holding company. In addition, each warrant or option to purchase shares of the Company's common stock was converted into a warrant or option to purchase common stock of the holding company. Finally, by operation of the merger the separate corporate existence of WLFI Merger ended. General We are a leading designer, manufacturer and distributor of a broad offering of casual indoor and outdoor furniture and contract and hospitality products. We also manufacture certain ready-to-assemble furniture products. Our casual furniture includes chairs, chaise lounges, tables, umbrellas and related accessories, which are generally constructed from aluminum, wrought iron, wood or fiberglass. In addition, our casual line includes a variety of tables, chairs, benches and swings for the site amenity market. Our seating products include wood, metal and upholstered chairs, sofas and loveseats, which are offered in a wide variety of finish and fabric options. All of our casual furniture, excluding Wabash, and contract and hospitality products are manufactured pursuant to customer orders. We sell our furniture products to the residential market and to the contract and hospitality market, consisting of commercial and institutional users. Business We market our casual furniture products to the residential market under the Winston, Pompeii, Brown Jordan, Vineyard and Shae Designs brand names through approximately 67 independent sales representatives and to over 800 active customers, which are primarily specialty patio furniture stores located throughout the United States. In addition, we market our casual products to the mass merchandise market under the Casual Living, Better Homes and Gardens and Samsonite brand names. We also market a broad line of casual furniture products in the contract markets under the Texacraft, Tropic Craft, Pompeii and Brown Jordan brand names, primarily through our in-house sales force, to lodging and restaurant chains, country clubs, apartment developers and property management firms, architectural design firms, municipalities and other commercial and institutional users. In addition, we market a variety of products under the Wabash brand name. These products are targeted at educational facilities, municipality and recreation centers, hotels and motels and other institutional and corporate users. We market our seating products to a broad customer base in the contract and hospitality market under the Loewenstein, Lodging By Charter and Charter brand names through approximately 24 regional independent sales organizations. Our customers include lodging and restaurant chains, architectural design firms, professional sports complexes, schools, healthcare facilities, office furniture dealers, retail store planners and other commercial and institutional users in the contract and hospitality market. We manufacture over 300 distinct models of seating products ranging from traditional to contemporary styles of chairs, as well as reception area love seats, sofas and stools. We design, assemble and finish our seating products with component parts from a variety of suppliers, including a number of Italian manufacturers. Over the past several years, we have undertaken a number of initiatives to strengthen and grow our core casual furniture and seating businesses. We have focused resources on our core business and disposed of non-core or unprofitable operations. In 1997, we sold our wrought iron furniture business, and in 1998 we discontinued and sold or liquidated certain of our ready-to-assemble furniture operations. We also embarked on a focused acquisition program to broaden our core product offering in the casual segment that, to date, has resulted in the acquisitions of Tropic Craft, a manufacturer of casual furniture sold into the contract markets; Pompeii, a manufacturer of upper-end casual furniture sold into both the residential and contract markets; Brown Jordan, a manufacturer whose products serve the premium to unlimited market categories in both retail and contract markets and Casual Living Worldwide who markets to national retailers and specialty patio stores under a variety of brand names in the moderate to lower price points; and Wabash Valley, a manufacturer of site amenities products in the institutional and corporate markets. Our balanced approach to growth has also resulted in acquisitions to complement our seating segment. These acquisitions included Stuart Clark and Charter during 2000, both of which manufacture upholstered furniture for the hospitality industry. In addition, the Company purchased The Woodsmiths Company in March 2001. Woodsmiths is a manufacturer of custom tabletops for the contract and hospitality markets. Results of Operations The following table sets forth net sales, gross profit, and gross margin as a percent of net sales for the respective periods for each of the Company's product lines (in thousands, except for percentages): Three Months Ended ------------------------------------------------ March 29, 2002 March 30, 2001 ------------------------ ----------------------- Net Gross Gross Net Gross Gross Sales Profit Margin Sales Profit Margin ------- ------- ------ ------- ------ ------ Casual furniture $110,100 $23,505 21.3% $19,974 $ 8,737 43.7% Contract/Hosp. 12,771 3,882 30.4% 17,503 5,918 33.8% RTA 2,048 338 16.5% 2,241 346 15.4% ------- ------- ------- ------ Total $124,919 $27,725 22.2% $39,718 $15,001 37.8% ======= ======= ======= ======= The following table sets forth certain information relating to the Company's operations expressed as a percentage of the Company's net sales: Three Months Ended ------------------ March 29, March 30, 2002 2001 -------- -------- Gross margin 22.2% 37.8% Selling, general and administrative expense 10.8% 18.0% Amortization 0.1% 4.7% Operating income 11.3% 15.1% Interest expense, net 6.5% 18.3% Income before income taxes 4.8% (3.2)% Net income 2.6% (1.4)% Comparison of Three Months Ended March 29, 2002 and March 30, 2001 For purposes of this discussion, "pro forma" refers to the estimated consolidated results had the acquisitions of Woodsmiths and Brown Jordan International occurred on January 1, 2001. Net Sales WinsLoew's actual consolidated net sales for the first quarter 2001, $124.9 million increased $85.2 million or 214.6% from $39.7 million in the first quarter of 2001. WinsLoew's consolidated net sales for the first quarter of 2002 increased $25.8 million or 26.0% compared to pro forma net sales of $99.1 million in the first quarter of 2001. Casual pro forma net sales for the first quarter of 2002 increased by 39.9% from the same period in 2001 as a result of the release of mass market orders being delayed in the 2002 season relative to the same period last season. This increase has been slightly offset by slowness in the residential market resulting from a slow economic recovery. The contract and hospitality product line experienced a pro forma net sales decrease of 29.7% resulting from the continued slowdown in new construction and refurbishing projects in the hospitality market. This market has been particularly negatively impacted by the slowdown in travel. The RTA product line experienced a sales decrease of 8.6% due to lost floor space with a major mass merchandiser and a significant customer exiting the catalog market. Gross Margin Actual gross margin in the first quarter of 2002 increased $12.7 million or 84.6% to $27.7 million compared to $15.0 million in the first quarter of 2001. Actual gross margin percentage decreased from 37.8% in the first quarter of 2001 to 22.2% in the first quarter of 2002. This decline results primarily from product mix in the casual segment, where volume was heavily weighted toward the lower margin mass merchandise market, during the first quarter of 2002. On a pro forma basis, consolidated gross margin increased $1.4 million in the first quarter of 2002 or 1.9% compared to $26.4 million in the first quarter of 2001. Consolidated gross margin as a percent of net sales decreased in the first quarter of 2002 to 22.2% compared to pro forma gross margin of 26.6% for the same period in 2001. Specifically, volume increases in the casual product line in the first quarter of 2002 were in the mass merchandise market which carries lower gross margins than the residential casual market. While pro forma gross margins in the casual market increased by $3.6 million in the first quarter of 2002, the pro forma margin percent decreased from 25.3% in the first quarter of 2001 to 21.3% in the corresponding period of 2002, reflecting this shift in product mix. The gross margin for contract and hospitality declined to 30.4% in the first quarter of 2002, compared to 33.8% in the first quarter of 2001. The decline is primarily volume related. Gross margins in the RTA product line increased from 15.4% in the first quarter of 2001 to 16.5% during the first quarter of 2002 reflecting a favorable sales mix and cost reduction measures. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $6.3 million in the first quarter of 2002, compared to the first quarter of 2001. This increase reflects the impact of acquisitions in 2001. On a pro forma basis, expenses increased $0.2 million or 0.2% over the first quarter of 2001. Amortization Amortization expense decreased by $1.7 million in the first quarter of 2002, compared to the first quarter of 2001. This decrease results from the Company adopting the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. (See Note 7) As a result of this pronouncement, Goodwill has not been amortized during the first quarter of 2002. Other definite lived intangible assets such as non-compete agreements and patents and trademarks continue to be amortized. Operating Income As a result of the above, operating income increased by $8.1 million, to $14.1 million (11.3% of net sales) in the first quarter of 2002, compared to $6.0 million (15.1% of net sales) in the first quarter of 2001. Interest Expense Interest expense increased by $0.9 million in the first quarter of 2002, compared to the first quarter of 2001. The increase is the result of additional debt assumed in support of acquisitions which has been partially offset by lower borrowing interest rates. Provision for Income Taxes The Company's effective tax rate for the first quarter of 2002 was 45.9% compared to 55.3% for the first quarter of 2001. The decrease in effective tax rates is due to the Company's adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. (See Note 7) As a result of this pronouncement, goodwill has not been amortized during the first quarter of 2002. The effective tax rate is greater than the federal statutory rate in the first quarter of 2002, due primarily to the effect of state income taxes. The effective tax rate for the first quarter of 2001 is greater than the federal statutory rate primarily due to the effect of state income taxes and non-deductible goodwill amortization. Seasonality and Quarterly Information Sales of retail casual products are typically higher in the second quarter of each year as a result of high retail demand for casual furniture preceding the summer months. Mass merchandise casual products are typically higher in the fourth and first quarters as mass merchants warehouse product in preparation for the spring season. Weather conditions during the peak retail selling season and the resulting impact on consumer purchases of outdoor furniture products can also affect sales of our casual products. The furniture industry is cyclical and sensitive to changes in general economic conditions, consumer confidence, discretionary income, and interest rate levels and credit availability. The results of operations for any interim quarter are not necessarily indicative of results for a full year. Liquidity and Capital Resources The Company's short-term cash needs are primarily for debt service and working capital, including accounts receivable and inventory requirements. The Company has historically financed its short-term liquidity needs with internally generated funds and revolving line of credit borrowings. The Company actively monitors its cash balances and applies available funds to reduce borrowings under its long-term revolving line of credit. At March 29, 2002, the Company had $71.9 million of working capital and $21.7 million of unused and available funds under its revolving credit facility. We have significant amounts of debt requiring interest and principal repayments. The notes require semi-annual interest payments, which commenced in February 2000 and will mature in August 2007. Borrowings under the new senior credit facility require quarterly interest payments, which commenced in June 2001. The Company's Senior Credit Facility restricts the Company from making cash interest payments on the notes issued by Holdings, the parent. Such interest payments are satisfied through the issuance of additional notes in amounts equal to the interest due. These notes are the result of debt incurred in the acquisition of BJI. We believe that existing sources of liquidity and funds expected to be generated from operations will provide adequate cash to fund our anticipated working capital needs. Significant expansion of our business or the completion of any material strategic acquisitions may require additional funds which, to the extent not provided by internally generated sources, could require us to seek access to debt or equity markets. Operating cash flows are closely correlated to demand for the Company's products. A decrease in demand for the Company's products would impact the availability of these internally generated funds. Further, the Company's revolving line of credit is contingent upon the Company maintaining particular debt covenants. Failure to comply with these covenants would impact the availability of funds on the revolving credit line. Cash Flows from Operating Activities. Cash used in operating activities was $1.6 million and $8.3 million for the first three months of 2002 and 2001 respectively. The decrease in cash used results primarily from: increases in net income, the use of trade payables credit and other accrued liabilities being partially offset by increases in accounts receivable. Cash Flows from Investing Activities. Cash used in investing activities was $0.8 million and $0.3 million for the first three months of 2002 and 2001 respectively. The increase results primarily from additional capital expenditures in the first quarter of 2002 compared to the same period in 2001. Cash Flows From Financing Activities. Net cash provided by financing activities during the first three months of 2001 was $4.0 million compared to net cash provided in financing activities of $8.4 million in the first three months of 2001. The decrease in cash provided through financing in the first quarter of 2002 reflects lower borrowing against the Company's working capital line of credit. Foreign Exchange Forward Contracts WinsLoew purchases some raw materials from several Italian suppliers. In addition, the Company funds some expenses for its Juarez, Mexico manufacturing facility. These transactions expose the Company to the effects of fluctuations in the value of the U.S. dollar versus the Euro and Mexican Peso. If the U.S. dollar declines in value versus these foreign currencies, the Company will pay more in U.S. dollars for these transactions. To reduce its exposure to loss from such potential foreign exchange fluctuations, the Company will occasionally enter into foreign exchange forward contracts. These contracts allow the Company to buy Euros and Mexican Pesos at a predetermined exchange rate and thereby transfer the risk of subsequent exchange rate fluctuations to a third party. Consequently, the Company elected to hedge a portion of its exposure to purchases made in 2002 by entering into foreign currency forward contracts for the Euro, with a value of $1.5 million, of which $1.2 million was outstanding and unsettled at March 29, 2002. Further, the Company entered into Mexican Peso forward contracts during the quarter. Currently the Company has forward contracts on the Mexican Peso extending through December 2002, with $3.8 million outstanding and unsettled at March 29, 2002. The Company did not incur significant gains or losses during 2002 as a result of these foreign currency transactions. The Company's hedging activities relate solely to its component purchases in Italy and operations funding in Mexico. The Company does not speculate in foreign currency. Inflation has not had a significant impact on us in the past three years and management does not expect inflation to have a significant impact in the foreseeable future. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings From time to time, we are subject to legal proceedings and other claims arising in the ordinary course of our business. We maintain insurance coverage against potential claims in an amount that we believe to be adequate. Based primarily on discussions with counsel and management familiar with the underlying disputes and except as described below, we believe that we are not presently a party to any litigation, the outcome of which would have a material adverse effect on our business, financial condition, results of operations or future prospects. Item 4. Submission of Matters to a Vote of Security Holders (a) None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (1) Filed herewith (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WINSLOEW FURNITURE,INC By:/s/ Bruce Albertson May 7, 2002 ------------------------ Bruce Albertson President and Chief Executive Officer May 7, 2002 By:/s/ Vincent A.Tortorici, Jr. ------------------------ Vincent A. Tortorici, Jr. Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----