UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 28, 2005

Commission File Number 1-10226

THE ROWE COMPANIES

(Exact name of registrant as specified in its charter)


NEVADA		54-0458563
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1650 Tysons Boulevard, Suite 710, McLean, Virginia		22102
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 703-847-8670

N/A

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x No ¨

Indicate by check mark whether the registrant is an accelerated filed (as defined in Rule 12b-2 of the Exchange Act) YES ¨ No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the close of the period covered by this report.


Class		Outstanding at August 28, 2005
Common stock, par value $1.00 per share		13,292,890 shares

THE ROWE COMPANIES

INDEX


		Page
Part I. Financial Information

Consolidated Balance Sheets – August 28, 2005 and November 28, 2004		3

Consolidated Statements of Operations – Three Months and Nine Months Ended August 28, 2005 and August 29, 2004		4

Consolidated Statements of Cash Flows - Nine Months Ended August 28, 2005 and August 29, 2004		5

Notes to Consolidated Financial Statements		7

Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Forward Looking Statements		24

Quantitative and Qualitative Disclosures about Market Risk		28

Part II. Other Information		30

PART I - FINANCIAL INFORMATION

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

UNAUDITED


	August 28, 2005			November 28, 2004
	*(in thousands, except per share amounts)*
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,315		$	5,560
Restricted cash collateralizing letters of credit		1,961			3,564
Refundable income taxes		373			—
Accounts receivable, net		18,400			16,522
Inventories (Note 4)		43,680			37,781
Deferred income tax asset		1,899			1,931
Prepaid expenses and other		4,396			5,500

Total current assets		72,024			70,858
PROPERTY AND EQUIPMENT, net (Note 6)		46,241			43,846
INVESTMENT PROPERTY HELD FOR SALE (Note 11)		—			7,248
GOODWILL		13,182			13,182
OTHER NONCURRENT ASSETS		3,370			3,987

	$	134,817		$	139,121

LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5)	$	35,281		$	1,867
Accounts payable and accrued liabilities		22,009			25,366
Income taxes payable		—			1,064
Customer deposits		13,840			14,296

Total current liabilities		71,130			42,593
LONG-TERM DEBT (Note 5)		—			24,077
LONG-TERM DEBT ASSOCIATED WITH INVESTMENT PROPERTY HELD FOR SALE (Note 11)		—			8,968
DEFERRED RENT (Note 6)		10,196			7,581
DEFERRED LIABILITIES		3,223			3,222

Total liabilities		84,549			86,441

STOCKHOLDERS’ EQUITY
COMMON STOCK, par value $1 per share, 50,000,000 authorized shares; issued shares 16,726,234 and 16,674,653, respectively; outstanding shares 13,292,890 and 13,247,821 respectively		16,726			16,675
CAPITAL IN EXCESS OF PAR VALUE		23,285			23,206
RETAINED EARNINGS		32,213			34,779
ACCUMULATED OTHER COMPREHENSIVE INCOME		63			9
Less treasury stock, 3,433,344 shares in 2005 and 3,426,832 shares in 2004		(22,019	)		(21,989	)

Total stockholders’ equity		50,268			52,680

	$	134,817		$	139,121

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED AUGUST 28, 2005 AND AUGUST 29, 2004

UNAUDITED


	Three Months Ended						Nine Months Ended
	August 28, 2005			August 29, 2004			August 28, 2005			August 29, 2004
	*(in thousands, except per share amounts)*
				Restated						Restated
Net shipments	$	79,466		$	76,149		$	224,892		$	222,132
Cost of shipments		53,564			49,593			154,536			143,745

Gross profit		25,902			26,556			70,356			78,387
Selling and administrative expenses		27,870			25,380			80,598			74,684

Operating income (loss)		(1,968	)		1,176			(10,242	)		3,703
Interest expense		(862	)		(721	)		(2,091	)		(2,184	)
Other income, net (Note 13)		254			195			1,122			585

Earnings (loss) from continuing operations before taxes		(2,576	)		650			(11,211	)		2,104
Tax expense (benefit)		(972	)		219			(4,153	)		767

Net earnings (loss) from continuing operations		(1,604	)		431			(7,058	)		1,337
Discontinued operations (Note 11):
Loss on contingencies associated with operations discontinued in prior years, net of tax benefit of $65		—			—			—			(105	)
Earnings (loss) from discontinued real estate operations, net of tax expense (benefit) of $(8), $37, $43 and $37, respectively		(13	)		59			69			58
Gains on disposal of real estate investment property, net of tax expense of $1,089 and $2,769, respectively		1,740			—			4,423			—

Net earnings (loss)	$	123		$	490		$	(2,566	)	$	1,290

Net earnings (loss) from continuing operations per common share	$	(0.12	)	$	0.03		$	(0.53	)	$	0.10

Net earnings (loss) per common share	$	0.01		$	0.04		$	(0.19	)	$	0.10

Weighted average common shares		13,292			13,201			13,286			13,188

Net earnings (loss) from continuing operations per common share assuming dilution	$	(0.12	)	$	0.03		$	(0.53	)	$	0.10

Net earnings (loss) per common share assuming dilution	$	0.01		$	0.04		$	(0.19	)	$	0.10

Weighted average common shares and equivalents		13,292			13,591			13,286			13,531

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED

AUGUST 28, 2005 AND AUGUST 29, 2004

UNAUDITED


	2005			2004
	*(in thousands)*
				Restated
Increase (Decrease) In Cash
Cash flows from operating activities:
Cash received from customers	$	222,771		$	220,850
Cash paid to suppliers and employees		(238,497	)		(213,117	)
Income taxes received (paid), net		(153	)		(1,045	)
Interest paid		(2,445	)		(2,731	)
Incentive payments received from landlords		2,810			1,403
Other receipts - net		1,616			1,228

Net cash and cash equivalents provided by (used in) operating activities		(13,898	)		6,588

Cash flows from investing activities:
Payments received on notes receivable		—			100
Increase in cash surrender value		(98	)		(77	)
Net proceeds from sale of assets		14,859			—
Capital expenditures		(7,180	)		(4,031	)

Net cash provided by (used in) investing activities		7,581			(4,008	)

Cash flows from financing activities:
Restricted cash released from (deposited to) collateral for letters of credit		1,603			(1,290	)
Draws under revolving loans		14,998			6,310
Repayments under revolving loans		(3,061	)		(6,413	)
Payments to reduce long-term debt		(11,568	)		(2,737	)
Proceeds from issuance of common stock		130			103
Purchase of treasury stock		(30	)		(22	)

Net cash provided by (used in) financing activities		2,072			(4,049	)

Net increase (decrease) in cash and cash equivalents		(4,245	)		(1,469	)
Cash at beginning of period		5,560			3,708

Cash at end of period	$	1,315		$	2,239

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED

AUGUST 28, 2005 AND AUGUST 29, 2004

UNAUDITED


	2005			2004
	*(in thousands)*
				Restated
Net earnings (loss)	$	(2,566	)	$	1,290

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Pre-tax gain on disposition of assets		(7,164	)		—
Depreciation and amortization		4,577			5,460
Provision for deferred compensation		129			189
Payments made for deferred compensation		(181	)		(245	)
Provision for losses on accounts receivable		(213	)		186
Provision for deferred taxes		(57	)		11
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable		(1,665	)		(718	)
Decrease (increase) in inventories		(5,899	)		(1,853	)
Decrease (increase) in prepaid expenses and other		1,104			(139	)
Decrease (increase) in other miscellaneous assets		477			(385	)
Increase (decrease) in accounts payable		(2,664	)		1,051
Increase (decrease) in income taxes payable		(1,437	)		(317	)
Increase (decrease) in accrued expenses		(498	)		1,630
Increase (decrease) in customer deposits		(456	)		(564	)
Increase (decrease) in deferred rent		2,615			992

Total adjustments		(11,332	)		5,298

Net cash provided by (used in) operating activities	$	(13,898	)	$	6,588

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


Note 1 -		The Rowe Companies (the “Company”) operates primarily through Rowe Furniture, Inc., (“Rowe”), its upholstered furniture manufacturing subsidiary, and Storehouse Inc., (“Storehouse”), a multi-channel, lifestyle home furnishings business including 67 retail home furnishings stores.

Note 2 -		In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of August 28, 2005 and the results of operations and cash flows for the three and nine month periods ended August 28, 2005 and August 29, 2004. Selling and administrative expenses included $1,849,000 and $1,424,000 of retail delivery expenses for the three months ended August 28, 2005 and August 29, 2004, respectively, and $5,175,000 and $4,243,000 for the nine months ended August 28, 2005 and August 29, 2004, respectively.

		These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K/A for the fiscal year ended November 28, 2004. See Note 6.

Note 3 -		The results of operations for the nine months ended August 28, 2005 and August 29, 2004 are not necessarily indicative of the results to be expected for the full year.

Note 4 -		Inventory components are as follows:


	August 28, 2005		November 28, 2004
	*(in thousands)*
Retail merchandise	$	24,194	$	21,103
Finished goods		3,140		2,376
Work-in-process		3,739		3,507
Raw materials		12,607		10,795

Total inventories	$	43,680	$	37,781


Note 5 -		As reported on October 13, 2005, the Company has been negotiating with its lenders to modify the terms of the agreement governing the Company’s working capital revolving credit facility and term loan, and the agreement governing the capital lease of the Company’s Elliston, Virginia manufacturing facility, so that the Company would be in compliance with certain covenants under these agreements (specifically, cumulative monthly EBITDA (earnings before interest, taxes, depreciation and amortization) targets) as of August 28, 2005, and based upon projected revenues and expenses, for the next twelve months. The Company has not been able to successfully complete these negotiations. As a result, the Company is in default under these agreements, and the lenders have the right to accelerate the Company’s obligation to repay this debt. To date, the lenders have not exercised such right. Were they to do so, it is unlikely that the Company would be able to repay the debt from existing resources. Further, the Company might be unable to obtain replacement debt from other lenders.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


		In recognition of the lenders’ right to accelerate the Company’s obligation to repay the debt, all of the Company’s outstanding bank debt has been reflected as current on the consolidated balance sheet as of August 28, 2005. The components of the Company’s outstanding debt are as follows:


	August 28, 2005		November 28, 2004
	*(in thousands)*
Capital lease obligation	$	10,356	$	12,206
Revolving bank loan		23,175		11,238
Term loan		1,750		2,500

		35,281		25,944
Less current maturities		35,281		1,867

Total long-term debt	$	—	$	24,077


		In addition, the lenders have increased the spread over base rates on the term and revolving bank loans by 200 basis points effective October 14, 2005. The rate on the revolving bank loan will now be 30 day Libor plus 5%, while the term loan rate will become 30 day Libor plus 5.25%. As of October 14, 2005, 30 day Libor was 4.00%. Based upon the balances as of August 28, 2005, this increase in the spread over base rates will result in an additional interest charge of approximately $125,000 per quarter.

Note 6 -		As previously reported, like many other organizations, the Company completed an internal review in the first quarter of fiscal 2005 to ensure its accounting practices were consistent with the application of lease accounting under Generally Accepted Accounting Principles (GAAP). As a result, the Company corrected its method of accounting for certain leases and restated its consolidated balance sheet as of November 28, 2004 in its 2004 Form 10-K/A.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


		Following is a summary of the effects of the lease accounting corrections on the Company’s consolidated statements of operations for the three and nine months ended August 29, 2004 (in thousands, except per share data):

Consolidated Statements of Operations and Comprehensive Income


	As Previously Reported		Lease Adjustments			As Restated
Three months ended August 29, 2004
Selling and administrative expenses	$	25,353	$	27		$	25,380
Operating income (loss)		1,203		(27	)		1,176
Earnings (loss) from continuing operations before taxes		677		(27	)		650
Tax expense (benefit)		228		(9	)		219
Net earnings (loss) from continuing operations		449		(18	)		431
Net earnings		508		(18	)		490
Comprehensive income		647		(18	)		629
Net earnings (loss) from continuing operations per common share	$	0.03	$	—		$	0.03
Net earnings per common share	$	0.04	$	—		$	0.04
Net earnings (loss) from continuing operations per common share assuming dilution	$	0.03	$	—		$	0.03
Net earnings per common share assuming dilution	$	0.04	$	—		$	0.04


Nine months ended August 29, 2004
Selling and administrative expenses	$	74,719	$	(35	)	$	74,684
Operating income (loss)		3,668		35			3,703
Earnings (loss) from continuing operations before taxes		2,069		35			2,104
Tax expense (benefit)		755		12			767
Net earnings (loss) from continuing operations		1,314		23			1,337
Net earnings		1,267		23			1,290
Comprehensive income		1,776		23			1,799
Net earnings (loss) from continuing operations per common share	$	0.10	$	—		$	0.10
Net earnings per common share	$	0.10	$	—		$	0.10
Net earnings (loss) from continuing operations per common share assuming dilution	$	0.10	$	—		$	0.10
Net earnings per common share assuming dilution	$	0.10	$	—		$	0.10


		Following is a summary of the effects of lease accounting corrections on the Company’s consolidated statements of cash flows for the nine months ended August 29, 2004.


	Consolidated Statements of Cash Flows
Nine months ended August 29, 2004	As Previously Reported			Adjustments			As Restated
Net cash and cash equivalents provided by operating activities	$	5,185		$	1,403		$	6,588
Net cash provided by (used in) investing activities		(2,605	)		(1,403	)		(4,008	)

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


Note 7 -		The following table shows the components of the earnings per share computations shown in the Consolidated Statements of Operations.


	Three Months Ended				Nine Months Ended
	August 28, 2005		August 29, 2004		August 28, 2005			August 29, 2004
	*(in thousands)*
Net earnings (loss) available to basic and diluted shares	$	123	$	490	$	(2,566	)	$	1,290

Weighted average common shares outstanding (Basic)		13,292		13,201		13,286			13,188
Effect of dilutive stock options		—		390		—			343

Weighted average common shares and equivalents outstanding (Diluted)		13,292		13,591		13,286			13,531


		As of August 28, 2005, there were 1,304,359 options with an exercise price equal to or greater than the average market price of the Company’s common stock for the three months then ended, and these options are excluded from the computation of the effect of dilutive stock options shown in the table above. In addition, due to the loss reported for the nine month period ended August 28, 2005, an additional 617,670 options which would have been dilutive if not for the loss for the period (as the exercise prices of these options were less than the average market price of the Company’s common stock for the three and nine months then ended) were also excluded from the computation of the effect of dilutive options shown in the table above.

		As of August 29, 2004, there were 888,731 outstanding options whose exercise price was equal to or greater than the average market price of the Company’s common stock for the three months then ended. These options are excluded from the computation of the effect of dilutive stock options shown in the table above.

Note 8 -		The Company’s operations are classified into two business segments, manufacturing and retail home furnishings. The manufacturing segment, consisting specifically of Rowe, manufactures upholstered furniture (sofas, loveseats, occasional chairs and sleep sofas, covered primarily in fabric) for distribution through home furnishings retailers. The retail segment, consisting specifically of Storehouse, sells home furnishings and accessories to customers through Company-owned stores. These products consist of upholstered furniture (primarily obtained from Rowe), case goods, and home accessories. The other category is comprised of additional subsidiaries reviewed by management, including parent company expenses.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


	Manufacturing Home Furnishings Segment			Retail Home Furnishings Segment			Other			Inter- Segment Eliminations			Consolidated
	*(in thousands)*
2005
Net shipments	$	127,322		$	112,651		$	—		$	(15,081	)	$	224,892
Operating income (loss)		(3,651	)		(1,467	)		(4,989	)		(135	)		(10,242	)
Interest expense		(729	)		(550	)		(812	)		—			(2,091	)
Other income, net		(1,387	)		(619	)		3,128			—			1,122
Earnings (loss) from continuing operations before taxes		(5,767	)		(2,636	)		(2,673	)		(135	)		(11,211	)
Depreciation and amortization		2,355			2,093			129			—			4,577
Capital expenditures		1,117			5,902			161			—			7,180
Total assets		103,798			42,458			44,404			(55,843	)		134,817

2004
Net shipments	$	132,691		$	104,218		$	—		$	(14,777	)	$	222,132
Operating income (loss)		8,164			612			(5,156	)		83			3,703
Interest expense		(1,576	)		(487	)		(121	)		—			(2,184	)
Other income, net		(2,111	)		(742	)		3,438			—			585
Earnings (loss) from continuing operations before taxes		4,477			(617	)		(1,839	)		83			2,104
Depreciation and amortization		3,205			1,955			300			—			5,460
Capital expenditures		1,638			2,261			132			—			4,031
Total assets		115,659			34,247			44,831			(60,877	)		133,860


Note 9 -		The components of comprehensive income for the three months and nine months ended August 28, 2005 and August 29, 2004, are shown below:


	Three Months Ended					Nine Months Ended
	August 28, 2005		August 29, 2004			August 28, 2005			August 29, 2004
	*(in thousands)*
Net earnings (loss)	$	123	$	490		$	(2,566	)	$	1,290
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives		18		(70	)		23			(149	)
Payments transferred to expense		4		209			31			658

Comprehensive income (loss)	$	145	$	629		$	(2,512	)	$	1,799

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


Note 10 -		The Company uses the intrinsic value method to account for stock-based employee compensation. As the Company’s awards of stock options carry an exercise price equal to the fair market value of the stock on the date of grant, no accounting cost is reflected in the Company’s Consolidated Statements of Operations. Had the Company utilized the fair value based method of accounting for stock-based employee compensation, the impact on earnings and earnings per share would have been as follows:


	Three Months Ended				Nine Months Ended
	August 28, 2005		August 29, 2004		August 28, 2005			August 29, 2004
	*(in thousands, except per share amounts)*
Net earnings (loss), as reported	$	123	$	490	$	(2,566	)	$	1,290
Earnings (loss) per share, basic, as reported	$	0.01	$	0.04	$	(0.19	)	$	0.10
Earnings (loss) per share, diluted, as reported	$	0.01	$	0.04	$	(0.19	)	$	0.10
Stock-based employee compensation cost, net of related taxes, included in net earnings as reported		—		—		—			—
Stock-based employee compensation cost, net of related taxes, that would have been included in net earnings if the fair value based method had been applied	$	4	$	8	$	515		$	324
Pro forma net earnings (loss), including the impact of applying the fair value based method	$	119	$	482	$	(3,081	)	$	966
Pro forma earnings (loss) per share, basic	$	0.01	$	0.04	$	(0.23	)	$	0.07
Pro forma earnings (loss) per share, diluted	$	0.01	$	0.04	$	(0.23	)	$	0.07


Note 11 -		During fiscal 2004, the Company’s Board of Directors approved management’s plans to sell two investment real estate properties, and in March 2005 the Company’s Board of Directors approved management’s plan to sell a third real estate property. The first property, located in Sylmar, California, was sold in December, 2004. Net proceeds of $5.2 million were used to pay down debt and expenses of the sale. The Company recognized a gain, net of taxes, of $2.7 million, or $0.20 per share, during the quarter ended February 27, 2005. In July 2005, the Company closed on the sale of the second property located in Jessup, Maryland. Proceeds of $8.2 million were used to pay down debt and expenses of the sale. The Company recognized a gain of $635,000, or $0.05 per share. In August 2005, the Company closed on the sale of the third property located in Christiansburg, Virginia. Proceeds of $2 million were used to reduce the outstanding balance of the capital lease by $1.2 million and for general corporate purposes. The Company recognized an after-tax gain of $1.1 million or $0.08 per share on the sale of this property.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


		Income and expense items associated with these properties have been classified as discontinued operations, and all prior periods have been restated to conform to the current presentation. Included in earnings from discontinued operations in the Company’s consolidated statements of operations were the following amounts associated with these investment properties:


	Three Months Ended						Nine Months Ended
	August 28, 2005			August 29, 2004			August 28, 2005			August 29, 2004
	*(in thousands)*
Other income, net	$	59		$	278		$	466		$	643
Gain on sale		2,829			—			7,191			—
Interest expense		(80	)		(182	)		(354	)		(548	)

Earnings (loss) before taxes	$	2,808		$	96		$	7,303		$	95

Net earnings (loss) per share	$	0.13		$	0.00		$	0.34		$	0.00
Net earnings (loss) per diluted share	$	0.13		$	0.00		$	0.34		$	0.00


		As of the dates indicated, investment properties held for sale and associated long-term debt consisted of the following:


	August 28, 2005		November 28, 2004
Investment property, net of accumulated amortization	$	—	$	7,248
Mortgage loans	$	—	$	8,968


		During February 2004, the Company recorded certain adjustments relating to workers compensation insurance reserves for policy years 1999 and 2000. These adjustments included amounts associated with prior discontinued operations, totaling $170,000 on a pre-tax basis, or $0.01 per share. These charges have also been included in discontinued operations.

Note 12 -		The Company has been named as a defendant in various lawsuits arising in the ordinary course of business. It is not possible at this time to estimate the ultimate outcome of these actions; however, management believes that the resulting liability, if any, will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Note 13 -		During the three months ended February 27, 2005, the Company settled litigation with a vendor. In addition to reversing approximately $460,000 of costs previously included in costs of shipments, the Company reported in other income, net approximately $680,000 before taxes, representing amounts, net of legal expenses, received from the vendor to settle the litigation.

Note 14 -		In December 2004, the FASB released Statement 123R, “Share-Based Payment”. Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, and provides expanded guidance on measuring the fair value of share-based payment transactions. Statement 123R is effective for the Company’s stock option plans beginning in fiscal 2006, in accordance with rules issued by the SEC.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


		In May 2005, the FASB issued Statement 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. The Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, as well as redefining “restatement” as the revision of previously issued financial statements to reflect the correction of an error. This statement is effective for the Company beginning with our 2007 fiscal year.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Rowe Companies operates through two subsidiaries in the home furnishings industry. Rowe manufactures quality, upholstered furniture serving the middle and upper middle market primarily throughout the United States. Storehouse is a multi-channel lifestyle home furnishings retailer with 67 stores from Texas through the Southeast and Mid-Atlantic markets.

During the third quarter of fiscal 2005, Rowe has made progress in resolving many of the problems that resulted from the implementation of its Enterprise Resource Planning (“ERP”) system in late 2004 and related manufacturing process changes undertaken in conjunction with and following the ERP implementation. An ERP system is a fully-integrated set of programs and data bases. In our case, the suite of application programs includes order processing, payroll, human resources, production planning and scheduling, purchasing, inventory management and accounting. Rowe Furniture has not returned to historical levels of manufacturing gross profit. Storehouse also embarked on its aggressive store opening plan for 2005, with six store openings and three store relocations to date and five more openings in process and expected to be completed by the end of the year. New stores increase selling and administrative expenses and these costs are expected to increase in future periods as these additional openings occur.

The Company has experienced recent price increases on and limits on the availability of certain raw materials used in upholstery production due to the recent Gulf Coast hurricanes following the end of the Company’s fiscal third quarter. Additionally, incoming orders for both the manufacturing and retail segments were below our plan, which will likely reduce fourth quarter shipments compared to the third quarter of fiscal 2005, resulting in a loss from operations in the fourth quarter.

As a result of the Company’s continued losses from operations, the Company was in default of certain operating covenants under the agreement governing its term loan and revolving credit facility and the agreement governing the capital lease of the Company’s Elliston, Virginia manufacturing facility as of August 28, 2005. The Company has not been able to negotiate modifications to these covenants with its existing lenders, nor has it been able to complete negotiations with a potential new lender to replace the existing lenders. The Company’s existing debt under these agreements is subject to acceleration, and accordingly, all $35.3 million of such debt as of August 28, 2005 has been reflected as currently due in the consolidated balance sheet as of that date. To date, the Company’s lenders have not exercised their right to accelerate the debt.

As discussed under “Liquidity and Source of Capital,” the Company is pursuing alternative financing options that may enable the Company to reduce the level of its bank debt. This process will take time to complete, however, and in the interim, material unfavorable impacts may be experienced, including, but not necessarily limited to, reductions in force, replacement of vendors, extensions of payments terms for materials and supplier invoices, loss of customers, cancellation of orders, and other potential adverse impacts. The timing and effects of any such changes are difficult to predict. In addition, there can be no assurance that such alternative financing options will be successfully completed on terms favorable to the Company or in a sufficiently timely manner to avoid material adverse effects on the Company’s financial condition, results of operations and cash flows. The following discussion of operating results does not reflect any such potential effects on future operating results.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

RESULTS OF OPERATIONS

Nine Months Ended August 28, 2005 Versus Nine Months Ended August 29, 2004


	August 28, 2005			August 29, 2004			$ Variance			% Variance
	*(in thousands)*
Net shipments:
Manufacturing, total	$	127,322		$	132,691		$	(5,369	)	(4.0	)
Sales to retail segment		(15,081	)		(14,777	)		(304	)	2.1

Manufacturing, net of eliminations		112,241			117,914			(5,673	)	(4.8	)
Retail		112,651			104,218			8,433		8.1

Consolidated net shipments	$	224,892		$	222,132		$	2,760		1.2

Gross profit:
Manufacturing	$	13,718		$	25,762		$	(12,044	)	(46.8	)
Retail		56,638			52,625			4,013		7.6

Consolidated gross profit	$	70,356		$	78,387		$	(8,031	)	(10.2	)

Gross margin:
Manufacturing		12.2	%		21.8	%
Retail		50.3	%		50.5	%
Consolidated gross margin		31.3	%		35.3	%
Selling and administrative expenses:
Manufacturing	$	17,504		$	17,515		$	(11	)	(0.1	)
Retail		58,105			52,013			6,092		11.7
Other		4,989			5,156			(167	)	(3.2	)

Consolidated selling and administrative expenses	$	80,598		$	74,684		$	5,914		7.9

Operating income (loss):
Manufacturing	$	(3,786	)	$	8,247		$	(12,033	)	(145.9	)
Retail		(1,467	)		612			(2,079	)	(339.7	)
Other		(4,989	)		(5,156	)		167		(3.2	)

Consolidated operating income (loss)	$	(10,242	)	$	3,703		$	(13,945	)	(376.6	)

Net shipments:

Net shipments increased 1.2% in 2005 from 2004, due to higher shipments at Storehouse. Rowe’s shipments decreased from prior year levels. Shipments from Rowe to Storehouse increased slightly compared to last year.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Manufacturing segment net shipments decreased in the first nine months of 2005 compared to 2004, primarily as a result of disruptions in order processing, scheduling, and production following the ERP implementation during the fourth quarter of 2004. Rowe also recorded additional costs relating to returns and allowances. Incoming orders declined approximately 5% on a dollar basis compared to last year.

Retail segment net shipments increased in 2005 over 2004. The accessories and textiles categories continued to show growth and were the largest dollar growth and percentage growth categories, respectively. Bedroom and tables were also solid performers, with the second and third largest dollar increases. Overall, same store sales increased 1.8% over 2004. The Company opened six new retail stores during the first nine months of 2005, while three stores were relocated and two closed during the same time period. Five additional stores are slated to open during the second half of fiscal 2005, mostly in the September/October time period. The second closed store referred to above was damaged due to flooding associated with Hurricane Katrina in New Orleans.

Gross profit:

Gross profit declined in the first nine months of 2005 compared to 2004 due to lower shipments at Rowe and the costs of production inefficiencies in the manufacturing segment, as well as increases in certain costs discussed below. Gross margin, or gross profit as a percentage of net shipments, declined from 35.3% in 2004 to 31.3% in 2005, due primarily to the decline in gross profit in the manufacturing segment.

Manufacturing segment gross profit and gross margin declined substantially in 2005 from 2004 levels caused principally by disruptions in production, scheduling and manufacturing productivity resulting from ERP implementation and manufacturing process changes. The $5.4 million decrease in total manufacturing shipments would be expected to cause a $2.0 million reduction in gross profit, compared to the actual decline of $12.0 million. Of the approximately $10.0 million not associated with the volume decrease, higher materials costs and usage represents approximately $2.3 million. Direct labor costs increased approximately $2.5 million due to downtime caused by inefficient scheduling, the periodic shortage of internally manufactured frame parts, and out-of stock issues with certain strong selling fabrics. Factory overhead costs increased $2.3 million over last year as a result of overtime costs ($1.0 million) due to low rates of production, increases in customer service costs (approximately $1.0 million) and certain other categories of indirect labor (approximately $0.4 million). Transportation costs increased approximately $1.3 million, largely due to increased use and cost of third party services ($1.1 million) to expedite deliveries and accommodate customers. Increased fuel costs within our fleet of trucks were largely passed through to customers through automatic fuel surcharges.

The Company has not yet achieved a satisfactory level of scheduling and production, as labor productivity remains below targeted levels and shortages of fabric unfavorably impacted production schedules. Staffing has been added to the purchasing department to improve the fabric purchasing and supply chain management, but some level of fabric shortages will continue through the last quarter of fiscal 2005 and possibly longer. The manufacturing segment management plan for the fourth quarter is to improve labor productivity through better in-stock positions in fabric, a new incentive program for hourly workers introduced in September and improved production scheduling.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Retail gross profit increased reflecting the increase in shipments, while retail gross margin decreased slightly from the prior year period, largely due to sales of clearance items at stores that were closing for relocation at points during the period.

Selling and administrative expenses:

Selling and administrative expenses increased by 7.9% overall in 2005. Retail segment expenses accounted for all of the increase. As a percentage of retail net shipments, retail selling and administrative expenses increased 1.7% over 2004.

Retail segment selling and administrative expenses increased in virtually all categories, driven by costs at ten new stores opened since May 2004 (four in fiscal 2004, six to date in fiscal 2005). Storehouse also added costs to support direct marketing (catalog and internet) since the first quarter of fiscal 2004 and in mid 2004 added a cross-dock warehouse facility to support new store openings in New Jersey and Pennsylvania. Offsetting these increases, in part, has been favorable healthcare costs. Storehouse anticipates opening a total of eleven new stores in fiscal 2005. As these additional stores open, retail selling and administrative expenses are expected to increase.

Manufacturing segment selling and administrative expenses were essentially unchanged from 2004. Salary expense in 2005 was higher than 2004 principally due to the capitalization of costs related to the ERP implementation in 2004, but was offset by a reduction in bad debt reserves.

The decline in other selling and administrative expenses largely represents the absence of a provision for management bonuses in 2005. The 2004 management bonus accruals were reversed late in 2004.

Operating earnings:

Operating earnings declined by $13.9 million to a loss of $10.2 million in 2005 as a result of lower shipments at Rowe; manufacturing segment operating inefficiencies, service costs, returns and other manufacturing-related costs; and retail segment selling and administrative expenses primarily resulting from new stores and related costs, as discussed above.

Interest expense:

Interest expense decreased by $93,000 from 2004 to 2005 largely due to the maturity in late 2004 of the interest rate swap agreement entered into in 2000 in conjunction with the original lease agreement for the Elliston manufacturing facility. Interest on increased borrowings in early 2005 under the revolver loan, as well as increased rates (both the base rates and the spread over base rates) largely offset the savings from the swap. The spread over base rates on the Company’s outstanding debt increased by 100 basis points effective with the beginning of the second quarter.

On October 14, 2005, the Company’s lenders increased the spread over base rates applicable to the term and revolving bank loans by an additional 200 basis points effective immediately. Based upon their outstanding balances at August 28, 2005, interest expense will increase by approximately $125,000 per quarter as a result of this change.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Other income, net, increased $537,000 in 2005 over 2004, primarily due to a gain recognized on the settlement of litigation in the first quarter of 2005. The Company collected $725,000, less certain expenses, as a result of the settlement. Offsetting this gain was reduced net rental income, principally due to the absence in 2005 of certain short-term leases in effect during 2004. The Company also recorded a gain of $153,000 based on expected insurance coverage of damage to the New Orleans retail store.

Earnings from continuing operations before taxes declined from earnings of $2,104,000 in 2004 to a loss of $(11,211,000) in 2005, reflecting the factors discussed above.

Three Months Ended August 28, 2005 Versus Three Months Ended August 29, 2004


	August 28, 2005			August 29, 2004			$ Variance			% Variance
	*(in thousands)*
Net shipments:
Manufacturing, total	$	44,186		$	45,321		$	(1,135	)	(2.5	)
Sales to retail segment		(5,292	)		(4,635	)		(657	)	14.2

Manufacturing, net of eliminations		38,894			40,686			(1,792	)	(4.4	)
Retail		40,572			35,463			5,109		14.4

Consolidated net shipments	$	79,466		$	76,149		$	3,317		4.4

Gross profit:
Manufacturing	$	5,437		$	8,628		$	(3,191	)	(37.0	)
Retail		20,465			17,928			2,537		14.2

Consolidated gross profit	$	25,902		$	26,556		$	(654	)	(2.5	)

Gross margin:
Manufacturing		14.0	%		21.2	%
Retail		50.4	%		50.6	%
Consolidated gross margin		32.6	%		34.9	%
Selling and administrative expenses:
Manufacturing	$	5,963		$	6,079		$	(116	)	(1.9	)
Retail		20,275			17,634			2,641		15.0
Other		1,632			1,667			(35	)	(2.1	)

Consolidated selling and administrative expenses	$	27,870		$	25,380		$	2,490		9.8

Operating income (loss):
Manufacturing	$	(526	)	$	2,549		$	(3,075	)	(120.6	)
Retail		190			294			(104	)	(35.4	)
Other		(1,632	)		(1,667	)		35		(2.1	)

Consolidated operating income (loss)	$	(1,968	)	$	1,176		$	(3,144	)	(267.3	)

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Net shipments:

Net shipments increased 4.4% in the third quarter of 2005 from the comparable 2004 period. Storehouse’s total shipments increased from prior year levels, while Rowe’s shipments decreased.

Shipments from Rowe to Storehouse increased substantially compared to last year’s third quarter, consistent with the Storehouse shipments increase.

Manufacturing segment net shipments decreased in the third quarter of 2005 compared to 2004, as out-of-stock positions on certain fabrics impacted production and shipping levels, with units shipped down 2.2 percent compared to last year’s third quarter.

Retail segment net shipments increased in the third quarter of 2005 over 2004. The upholstery and bedroom categories were the largest dollar growth categories, while tables and textiles had the largest percentage growth. The remaining categories were a mixture of relatively small dollar increases. Overall, same store sales increased 1.8% for the quarter. The Company opened four new retail stores during the first three months of 2005, and one each during the second and third quarters, for a total of six year to date. Three stores relocated during the first half of 2005, and five more stores are currently slated to open during the fourth quarter of the year.

Gross profit:

Gross profit declined slightly in the third quarter of 2005 compared to 2004 due to the costs of production inefficiencies in the manufacturing segment, as well as some increases in certain costs. Gross margin declined from 34.9% in 2004 to 32.6% in 2005, due to the decline in gross profit in the manufacturing segment.

Manufacturing segment gross profit and gross margin declined substantially in 2005 from 2004 levels. Materials costs were $1.1 million over the prior year period with increases in most categories, in particular petroleum derived materials, plywood and hardwood, steel springs and bed frame parts. Direct labor costs increased approximately $0.8 million due to downtime caused by inefficient scheduling and the periodic shortage of certain strong-selling fabrics and to a lesser extent, internally manufactured frame parts. Overhead costs increased $0.3 million over last year, as a result of overtime costs and increases in customer service costs. Transportation costs increased approximately $0.6 million principally due to increased use and cost of third party carriers utilized to expedite deliveries to accommodate customer needs. Increased fuel costs within our fleet of trucks were largely passed through to customers through automatic fuel surcharges.

While significant price increases are being implemented to offset much, but not all, of the impact of material price increases, staff and resources have been devoted to correcting out-of-stock fabric issues, and changes are underway on the production floor to improve production efficiencies, it is likely that negative effects will continue into at least the fourth quarter of fiscal 2005 and probably longer.

Retail gross profit increased largely in proportion to increased shipments, while retail gross margin was down slightly from the prior year period, principally due to higher levels of clearance sales associated with relocating stores.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Selling and administrative expenses:

Selling and administrative expenses increased by 9.8% overall in 2005. Retail segment expenses accounted for all of the increase. As a percentage of retail net shipments, retail selling and administrative expenses increased 0.3% over 2004.

Retail segment selling and administrative expenses increased in virtually all categories, driven by costs at ten new stores opened since May 2004 (four in fiscal 2004, five in the first half of fiscal 2005, and one in the third quarter of fiscal 2005). Storehouse also added costs to support direct marketing (catalog and internet) in particular since the first quarter of fiscal 2004 and in mid 2004 added a cross-dock warehouse facility to support new store openings in New Jersey and Pennsylvania. Offsetting these increases, in part, has been favorable healthcare costs.

Manufacturing segment selling and administrative expenses decreased 1.9% in 2005 over 2004, primarily as a result of reduced spending on advertising, particularly point of sale materials, during the third quarter of 2005 ($110,000).

Operating earnings:

Operating earnings declined by $3.1 million to a loss of $2.0 million in 2005 as a result of manufacturing segment production inefficiencies and increased retail segment selling and administrative expenses primarily resulting from new stores and related costs, as discussed above.

Interest expense:

Interest expense increased by $141,000 from 2004 to 2005 as interest on increased borrowings in early 2005 under the revolver loan, as well as increased rates (both base rates and the spread over base rates), offset the savings from the swap agreement (associated with the original Elliston lease) that matured in August 2004.

Other income, net, increased $59,000 in 2005 from 2004, due to a gain of $153,000 recognized on an expected insurance recovery related to Hurricane Katrina in 2005, offset by the loss of rental income in 2004 from a short-term tenant that did not renew for 2005.

Earnings from continuing operations before taxes declined from earnings of $650,000 in 2004 to a loss of $(2,576,000) in 2005, reflecting the factors discussed above.

Critical Accounting Policies:

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain estimates and assumptions have been made that affect the amounts and disclosures reported in the consolidated financial statements and the related accompanying notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in valuing these estimates and may solicit

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

external advice. Estimates are based on current facts and circumstances, prior experience and other assumptions believed to be reasonable. Critical accounting policies that may affect the consolidated financial statements include self-insurance reserves, long-lived asset valuations and impairments, bad debt reserves, inventory reserves and goodwill.

Self-Insurance Reserves

The Company is self-insured for substantial portions of its health care and workers compensation insurance programs. Reserves are established for such costs based on, among other factors, reported claims to date, prior history, and actuarial projections of claims incurred but not reported and future medical cost increases likely to affect the total cost to settle claims. If actual results in any of these areas change from prior periods, adjustments to recorded reserves may be required.

Long-lived Asset Valuations and Impairments

The Company monitors the economic health of its facilities and operations and makes determinations, using cash flow analyses, of the fair value of its assets, both tangible and intangible. When cash flow analysis indicates that the fair value of an asset is less than its book value, and such shortfall is not believed to be temporary in nature, then an adjustment to reduce the asset to its fair value is made. As conditions change, additional adjustments of fair value may be required.

Bad Debt Reserves

The Company maintains reserves for receivables from retail furniture businesses that become unable to pay their balances due. Management monitors payment status and periodically performs credit evaluations of these customers in determining the appropriate level of reserves. Factors that affect these conditions can change rapidly, and adjustments to the required level of reserves may be required as such changes occur.

Inventory Reserves

The Company maintains its inventories at the lower of cost or market value. Cost is determined on a last-in, first-out (LIFO) basis for inventory held at retail facilities, and on a first-in, first-out (FIFO) basis for inventory held at its manufacturing facilities. When conditions warrant (usually highlighted by slow-moving product, declining vendor prices on incoming product or a change in merchandising), reserves are established to reduce the value of inventory to net realizable values. As conditions warrant, additional adjustments may be required.

Goodwill

In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company in 2003, goodwill and other intangible assets are to be evaluated for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. The Company conducts its required annual impairment test during the second quarter of each fiscal year. The impairment test uses a discounted cash flow and projected profitability model to estimate the fair value of the reporting unit. This model requires the use of long-term planning forecasts and assumptions

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

regarding specific economic conditions that are outside the control of the Company. Based upon the results of testing, there was no impairment of goodwill as of May 29, 2005.

Liquidity and Source of Capital:

Cash from Operations

Net cash provided by (used in) operating activities was $(13,898,000) and $6,588,000 in 2005 and 2004, respectively. Fluctuations in net cash provided by operating activities are primarily the result of changes in operating income and changes in working capital accounts. Substantial changes between 2005 and 2004 included an increase in accounts receivable in 2005 as shipments increased in 2005 (compared to lower levels of shipments in the fourth quarter of 2004) and as customer service issues related to the ERP implementation impacted the timely payments on accounts receivable invoices; an increase in inventories to support higher retail sales and new stores, improve in-stock fabric position in manufacturing and higher manufacturing work-in-process inventory; the receipt in early 2005 of a refund of 2004’s estimated tax payments in excess of taxes due, as well as the funds received on the litigation settlement in early 2005. Storehouse also received $2.8 million of rent incentives from landlords in 2005, compared to $1.4 million received during the prior year period. Cash flow from operations is highly dependent on order rates and the Company’s operating performance, and for the immediate future, reductions in inventory levels.

Cash from Investing Activities

Net cash provided by (used in) investing activities was $7,581,000 and $(4,008,000) in 2005 and 2004, respectively, primarily reflecting proceeds from the sales of investment real estate property in 2005. Capital expenditures in 2005 largely related to new stores at Storehouse and included $2.8 million funded by landlord incentives, while 2004 capital expenditures were a combination of investments in new stores, a new distribution center and the ERP system. At August 28, 2005, the Company’s capital expenditures for the fourth quarter were expected to be approximately $1.5 million, to be used in connection with new stores at Storehouse. These expenditures are expected to be funded primarily through the Company’s available borrowing capacity.

Cash from Financing Activities

Net cash provided by (used in) financing activities was $2,072,000 and $(4,049,000) in 2005 and 2004, respectively. In 2005, the Company drew upon its revolving bank loan to fund operating losses, capital expenditures, and inventory purchases, while the repayments of long-term debt in 2005 include both scheduled payments and the pay-off of the mortgage loans securing the investment properties with proceeds from the sales of the properties. In 2004, draws, net of repayments on the revolving loan, reflected more normal business activities, while the payments on long-term debt included a payment in conjunction with the extension of the lease for the Elliston facility in December 2003, in addition to scheduled debt payments.

As of August 28, 2005, the Company’s cash and cash equivalents were $1.3 million, compared to $5.6 million as of November 28, 2004. As explained above, this decrease was mainly attributable to negative net cash flows from operations, offset by net increases in cash from investment activities and cash from financing activities. As of October 14, 2005, the Company’s availability under its revolving bank loan was $1.2 million; however, because the Company is currently in default under the revolving loan (see below), the Company’s lenders are not obligated to make any additional advances to the Company under the revolving loan.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

As discussed elsewhere in this report (see Note 5 of Notes to Consolidated Financial Statements and “Overview”), the Company is currently in default of certain operating covenants under the agreement governing its term loan and revolving credit facility and the agreement governing the capital lease of the Company’s Elliston, Virginia manufacturing facility. The Company’s existing debt under these agreements is now subject to acceleration at the option of the lenders, and, accordingly, all $35.3 million of such debt as of August 28, 2005 has been reflected as currently due in the consolidated balance sheet as of that date. To date, the lenders have not exercised such right.

In light of the Company’s inability to negotiate modifications to the covenants in its existing bank agreements and to remain in compliance with those covenants, there can be no assurance that amounts currently available under its bank agreements will continue to be available on existing terms, or, should circumstances require additional borrowing, that such borrowing capacity would be available in the future. If the Company’s lenders exercise their rights to limit borrowing availability, decline to make excess borrowing capacity available should the Company run out of availability or accelerate the maturity of the debt, it is highly unlikely that the Company would be able to meets its obligations in the ordinary course of business. Under these circumstances, a number of material adverse effects would likely be experienced by the Company, including but not limited to vendors refusing to ship materials to the Company, the Requirement to make reductions in head count and to take other cost cutting initiatives, changes in vendors, loss of customers and cancellation of orders; and the Company might seek reorganization under Chapter 11 of the U.S. Bankruptcy Code.

The Company is pursuing alternative financing options, including raising additional equity capital, and may consider selling assets. The Company’s Board of Directors has appointed a special committee of the Board, comprised of Directors Rosen, Ptashek, Silver, and Woodlief, to lead this effort and provide recommendations to the full Board. As of October 17, 2005, the Company is negotiating to obtain a commitment letter from another lender to refinance its existing bank debt and give the Company a higher borrowing availability. There can be no assurance as to when or if the Company will be able to successfully negotiate acceptable terms with the new lender.

Forward-Looking Statements:

When used in this quarterly report and in filings with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions, as well as the use of future dates, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements. Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, customer

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

acceptance of existing and new products, or otherwise; the price at which an investment property is sold, cash and non-cash charges incurred in connection therewith, and the timing of any such sale; pending or future litigation; pricing pressures due to excess capacity; raw material cost increases; transportation cost increases; the inability of a major customer to meet its obligations; loss of significant customers in connection with a merger, acquisition, redisposition, bankruptcy or otherwise; actions of current or new competitors; increased advertising costs associated with promotional efforts; change of tax rates; change of interest rates; future business decisions and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company.

Additional risks include:

•

We are currently in default of certain operating covenants under the terms of out outstanding debt, which gives our lenders the right to accelerate the maturity of the debt.

We are currently in default of certain operating covenants under the agreement governing our term loan and revolving credit facility and the agreement governing the capital lease of our Elliston, Virginia manufacturing facility. Out existing debt under these agreements, which totaled $35.3 million as of August 28, 2005, is now subject to acceleration at the option of the lenders. If the lenders exercise this right, it is highly unlikely that we would be able to repay the debt from existing resources. Under these circumstances, we might seek reorganization under Chapter 11 of the U.S. Bankruptcy Code. As discussed under “liquidity and Source of Capital,” while we are pursuing alternative financing arrangements that would enable us to repay the debt, no assurance can be given as to when or whether we will be able to complete such an arrangement on terms acceptable to us.

•

Our available cash has decreased substantially, and we may be unable to obtain financing for our operations on acceptable terms.

As of August 28, 2005, our cash and cash equivalents totaled $1.3 million. Until we are able to again generate positive net cash flows from operations, we will depend primarily on bank borrowings to fund our operations. As of August 28, 2005 our remaining availability for additional borrowings under our revolving bank loan was $2.1 million and had declined to $1.2 million as of October 14, 2005. As noted under “Liquidity and Source of Capital,” as of October 17, 2005, the Company is negotiating to obtain a commitment letter from another lender to refinance its existing debt and give the Company a higher borrowing availability. There can be no assurance as to when or if we will be able to successfully negotiate acceptable terms with the new lender.

As part of our pursuit of financing alternatives, we may seek to raise additional equity capital. No assurance can be given that we will be successful in our efforts to do so. The raising of additional equity capital would be dilutive to the interests of existing shareholders, and the holders of any such additional equity securities could have rights, preferences and privileges that are superior to the holders of our common stock.

•

The furniture industry is highly competitive at both the manufacturing and the retail levels; loss of market share could adversely impact sales, earnings and cash flow.

Our manufacturing and retailing subsidiaries face significant competition from numerous competitors, many of which are larger and better capitalized. Our subsidiaries may be at a competitive disadvantage as a result. If our subsidiaries lose market share to competitors, our financial performance could be adversely affected.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

•

We have had difficulties, and continue to experience difficulties, with the implementation of our Enterprise Resource Planning (“ERP”) software and related manufacturing process changes.

Our manufacturing operations recently implemented a new ERP system that includes accounting, order processing, materials purchasing and inventory management, human resources and payroll management and certain other functions. This was a complex, multi-step implementation. Various parts of the system have not performed as planned, which has created problems in entering and processing customer orders, procuring and managing inventory, scheduling orders for production, shipping and invoicing finished product to customers. In addition, several changes in production processes were made concurrently with the system changes. Individually and in combination, these changes have resulted in significant downtime in the plant, inefficient production, delays in filling orders, and shortfalls in operating results.

Our production management personnel, assisted by experts provided by the software vendor, have been intensely focused on identifying the specific problems and solutions to them. While progress has been made, problems continue to persist and there can be no assurance as to when operations and profitability will improve significantly.

•

Our retail operations may not become profitable.

Our retail operations are currently unprofitable, and there can be no assurance that profitability will be achieved.

•

Our retail operations are opening stores at a higher rate than in recent years.

Storehouse opened six new stores in the first nine months of 2005 and anticipates opening five additional stores during the remainder of fiscal 2005. There are numerous risks inherent in new store development which could result in unprofitable locations. Risk exposure areas include site selection, contractual commitment to rent expense, and successful execution of store selling and operations activities. There can be no assurance that these new stores will achieve adequate levels of shipments or profitability.

•

The Company imports a substantial portion of its retail merchandise, and some of its raw materials, from foreign sources. Changes in exchange rates could impact the price the Company pays for these goods, resulting in potentially higher retail prices and/or lower gross profit on these goods.

During fiscal 2004, nearly 40% of the Company’s purchases of retail merchandise originated overseas, and the Company also purchased some raw materials, particularly wood components, fabric, and leather chairs for re-sale, from overseas sources. Most of these purchases were denominated in US dollars. As exchange rates between the U.S. dollar and certain other currencies have become unfavorable, the likelihood of price increases from our foreign vendors has increased. Such price increases, if they occur, could have one or more of the following impacts:

•

We could be forced to raise retail prices so high that we are unable to sell the products at current unit volumes;

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

•

If we are unable to raise retail prices commensurately with the cost increases, gross profit could be negatively impacted; or

•

We may be forced to find alternative sources of comparable product, which may be more expensive than the current products, of lower quality, or the vendors may be unable to meet our requirements for quantities, delivery schedules or other key terms.

Similar impacts could be experienced in our manufacturing segment.

•

Our bad debts experience may differ materially from our estimates.

Substantially all of the Company’s trade accounts receivable are from retail furniture businesses. Management monitors payment status and periodically performs credit evaluations of these customers. However, changes in creditworthiness can occur rapidly and unanticipated losses from trade accounts receivable could occur in excess of the outstanding allowance for losses. Therefore, there can be no assurance that total losses from uncollectible accounts will not exceed the allowance.

•

Our revenue could be adversely affected by low-cost imported merchandise.

In certain merchandise categories, there has been a rapid expansion of imported home furnishings at lower manufacturing costs, resulting in lower retail selling prices. This trend has reached the upholstery segment of the home furnishings market, resulting in our manufacturing operations facing low-cost foreign competition. This in turn could require us to reduce our selling prices or could diminish demand for our products.

•

Our revenue could be adversely affected by a disruption in our supply chain.

We are an importer of finished goods for our retail operations and components for our manufacturing operations. We also utilize a significant quantity of petroleum-based materials, such as poly bags and foam for seat cushions, much of which is produced in or transported through the Gulf Coast areas affected by recent hurricanes. In addition, if our liquidity situation further deteriorates to the point we are unable to meet our obligations in the ordinary course of business, suppliers may refuse to ship materials to us. Any such disruptions to our supply chain could result in late arrival or unavailability of components or finished goods for resale, causing manufacturing delays or negatively affecting retail sales due to increased out-of-stock merchandise, and/or higher costs for certain materials.

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk and Foreign Currency Exchange Rate Risk

Because the Company’s obligations under its term loan, revolving loan and capital lease obligation bear interest at variable rates, the Company is sensitive to changes in prevailing interest rates. Based upon the balances of the above loans as of August 28, 2005, an increase of 100 basis points in market interest rates would increase quarterly interest expense by approximately $70,000.

The Company currently manages its interest rate risk under the capital lease for its Elliston, Virginia manufacturing facility through an interest rate swap entered into with a third party in December 2003 for a notional principal amount of $9 million, declining by $50,000 per month, through November 2008. While 30 day LIBOR is below 3.65%, the Company pays the counterparty the difference in interest between 3.65% and actual LIBOR. If and when 30 day LIBOR exceeds 3.65%, then the counterparty will pay the Company the difference. At August 28, 2005, 30 day LIBOR was 3.67%.

The Company is exposed to market risk from changes in the value of foreign currencies because it imports a substantial portion of retail inventory, and some of its raw materials, from foreign sources. See “Forward-Looking Statements” above.

Item 4.

Controls and Procedures.

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(a)) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of August 28, 2005 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that as of August 28, 2005, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

There were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

At the end of fiscal 2007, Section 404 of the Sarbanes-Oxley Act will require the Company’s management to provide an assessment of the effectiveness of the Company’s internal control over financial reporting, and the Company’s independent registered public accounting firm will be required to audit management’s assessment. The Company is in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for its independent registered public accountants to provide its attestation report. The Company has not completed this process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

None

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information with respect to shares of common stock of the Company purchased by the Company during the three months ended August 28, 2005.

Purchases of Equity Securities


Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
5/30/05 through 7/3/05	481	$	3.85	—	—
7/4/05 through 7/31/05	89		3.80	—	—
8/1/05 through 8/28/05	450		3.60	—	—

Total	1,020	$	3.74	—	—

The shares shown above have been purchased by the Company in accordance with the terms of the Company’s ESOP/PAYSOP, which grants participants the right to sell their shares back to the company under certain conditions. Except for such purchases of its shares, the Company is prohibited by the terms of its bank lending agreements from purchasing its shares. As of August 28, 2005, there were 133,346 shares in the Company’s ESOP/PAYSOP.

Item 3.

Defaults Upon Senior Securities.

As disclosed and discussed in Note 5 of the consolidated financial statements as well as the “Overview” and “Liquidity and Source of Capital” sections of Management’s Discussion and Analysis, the Company was in default of certain operating covenants governing the bank lending agreements.

Item 4.

Submission of Matters to a Vote of Security Holders.

None

Item 5.

Other Information.

None

Item 6.

Exhibits.

The following exhibits are furnished as part of this report.


Exhibit		Description

31.1		Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002

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.


				THE ROWE COMPANIES Registrant

Date: October 17, 2005				/s/ Gene S. Morphis
				Gene S. Morphis
				Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification of the CEO under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the CFO under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the CEO under Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the CFO under Section 906 of the Sarbanes-Oxley Act of 2002

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ROWE COMPANIES 10-Q