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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 2003
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 1-11577
FALCON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-0730877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9387 DIELMAN INDUSTRIAL DRIVE 63132
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
(314) 991-9200
(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 twelve months, and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of June 16, 2003, the registrant had 8,998,064 shares of common stock,
$.02 par value, outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
--------------------
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Earnings
-----------------------------------
(Unaudited)
Thirteen Twenty-Six
Weeks Ended Weeks Ended
--------------------------- --------------------------
May 3, May 4, May 3, May 4,
(In thousands, except per share data) 2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 58,710 $ 66,594 $ 123,844 $ 130,936
Cost of sales 44,834 50,484 95,180 99,917
----------- ----------- ----------- -----------
Gross margin 13,876 16,110 28,664 31,019
Selling, general and administrative expenses 10,590 11,657 21,409 23,187
Special and nonrecurring items - - - 639
----------- ----------- ----------- -----------
Operating profit 3,286 4,453 7,255 7,193
Interest expense, net 4,063 4,303 8,131 8,329
Minority interest in consolidated subsidiary (16) 8 49 16
----------- ----------- ----------- -----------
Earnings (loss) before income taxes (761) 142 (925) (1,152)
Income tax expense (benefit) (133) 74 (1) (341)
----------- ----------- ----------- -----------
Net earnings (loss) $ (628) $ 68 $ (924) $ (811)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per share $ (0.07) $ 0.01 $ (0.10) $ (0.09)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Balance Sheets
---------------------------
(Unaudited)
(In thousands, except share data)
May 3, November 2,
2003 2002
---------- -----------
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,180 $ 1,646
Accounts receivable, less allowances
of $613 and $707, respectively 30,215 32,942
Inventories 64,409 57,117
Prepayments and other current assets 7,590 9,041
---------- ----------
Total current assets 103,394 100,746
---------- ----------
Property, plant and equipment:
Land 2,873 2,726
Buildings and improvements 20,545 19,962
Machinery and equipment 51,366 49,569
---------- ----------
74,784 72,257
Less: accumulated depreciation 34,360 31,375
---------- ----------
Net property, plant and equipment 40,424 40,882
---------- ----------
Other assets, net of accumulated amortization:
Goodwill 117,474 117,474
Other 13,943 14,475
---------- ----------
Total other assets 131,417 131,949
---------- ----------
Total Assets $ 275,235 $ 273,577
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 25,578 $ 20,841
Customer deposits 7,263 9,211
Accrued liabilities 13,361 16,376
Current maturities of long-term debt 4,490 15,359
---------- ----------
Total current liabilities 50,692 61,787
Long-term obligations:
Long-term debt 148,547 135,226
Minority interest in consolidated subsidiary 785 736
Other 13,618 14,828
---------- ----------
Total liabilities 213,642 212,577
---------- ----------
Stockholders' equity:
Common stock, $.02 par value: authorized 20,000,000 shares;
issued 9,915,117 shares 198 198
Additional paid-in capital 47,376 47,376
Treasury stock, at cost (917,053 and 1,012,918 shares, respectively) (10,493) (11,949)
Accumulated other comprehensive loss (5,588) (6,775)
Retained earnings 30,100 32,150
---------- ----------
Total stockholders' equity 61,593 61,000
---------- ----------
Total Liabilities and Stockholders' Equity $ 275,235 $ 273,577
========== ==========
See accompanying notes to consolidated financial statements.
3
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Twenty-Six Weeks Ended
--------------------------------
(In thousands) May 3, May 4,
2003 2002
------------- ------------
Cash flows from operating activities:
Net loss $ (924) $ (811)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,622 4,384
Minority interest in consolidated subsidiary 49 16
Change in assets and liabilities:
Accounts receivable 3,412 4,451
Inventories (6,764) (9,638)
Prepayments and other current assets 1,451 (368)
Other assets (1,582) (1,376)
Accounts payable and customer deposits 2,640 (1,174)
Accrued liabilities (2,862) (3,448)
Other liabilities (1,314) 1,002
------------ ------------
Cash used in operating activities (1,272) (6,962)
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,288) (2,967)
------------ ------------
Cash used in investing activities (1,288) (2,967)
------------ ------------
Cash flows from financing activities:
Common stock issuances 320 379
Repayment of long-term debt (5,385) (4,090)
Proceeds from long-term debt 7,159 14,824
------------ ------------
Cash provided by financing activities 2,094 11,113
------------ ------------
Increase (decrease) in cash and cash equivalents (466) 1,184
Cash and cash equivalents-beginning of period 1,646 1,670
------------ ------------
Cash and cash equivalents-end of period $ 1,180 $ 2,854
============ ============
Supplemental cash flow information:
Cash paid for interest $ 7,525 $ 8,170
============ ============
Cash paid for (refund of) taxes, net $ (3,582) $ 273
============ ============
See accompanying notes to consolidated financial statements.
4
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
For the Thirteen and Twenty-Six Weeks Ended May 3, 2003
-------------------------------------------------------
Note 1 - Interim Results
The financial statements contained herein are unaudited. In the opinion
of management, these financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are necessary for a
fair presentation of the results of the interim periods presented. Reference
is made to the footnotes to the consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended November 2,
2002, filed with the Securities and Exchange Commission.
Note 2 - Segments
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosure about Segments of an Enterprise and Related
Information," a single segment has been identified based upon management
responsibility. The Company operates in one reportable segment, the
manufacture and sale of commercial furniture. The Company sells a wide
variety of commercial furniture products and does not record revenues by
specific product type within its general-purpose financial statements. Due
to the wide variety of products sold and other practical limitations it is
impracticable for the Company to report revenues from external customers for
each product or group of similar products.
Note 3 - Special and Nonrecurring Items
During the first quarter of 2002, the Company recorded a pre-tax charge
of $0.6 million, $0.4 million after-tax, for special and nonrecurring items.
This charge was a result of the Company executing its strategic initiative
to close its Statesville, North Carolina facility and transfer production
into the Company's other plants. The initiative was announced during the
third quarter of 2001.
A summary of 2003 activity related to the strategic initiative is as
follows:
In thousands
Liability - November 2, 2002 $ 250
Cash paid for real estate exit and other costs (195)
-----
Liability - May 3, 2003 $ 55
=====
Note 4 - Inventories
Inventories consisted of the following:
May 3, November 2,
In thousands 2003 2002
-------- -----------
Raw materials....................... $ 41,045 $ 37,759
Work in process..................... 16,131 10,641
Finished goods...................... 7,233 8,717
-------- -----------
$ 64,409 $ 57,117
======== ===========
5
Note 5 - Long-Term Debt
On June 3, 2003, the Company refinanced its existing senior credit
agreement with a new group of financial institutions. The borrowers under
the new credit facility, on a joint and several basis, are the Company,
Shelby Williams Industries, Inc. and Sellers & Josephson, Inc. and the
new credit facility is jointly and severally guaranteed by the following
domestic subsidiaries of the Company: Howe Furniture Corporation, Johnson
Industries, Inc., Falcon Holdings, Inc., The Falcon Companies International,
Inc., Madison Furniture Industries, Inc. and Epic Furniture Group, Inc.
The new credit facility of $75 million matures in June 2007. The new credit
facility consists of (i) a $33.8 million revolving credit facility, (ii)
a $6.2 million amortizing term loan A, and (iii) a $35 million non-amortizing
term loan B. The current maturities of long-term debt reflected on the
accompanying consolidated balance sheet have been adjusted to reflect
the terms of the new financing arrangement. The term loan A has
required quarterly principal payments of $0.223 million, commencing
on July 1, 2003.
The new credit facility is secured by substantially all of the
assets of the Company and its domestic subsidiaries, including a
pledge of all of the stock of the Company's domestic subsidiaries
and a pledge of 65% of the stock of the following foreign subsidiaries
of the Company: Howe a/s, Falcon Mimon a/s, Falcon de Juarez S.A. de
C.V. and Falcon Products China Limited.
The revolving credit facility bears interest at the Company's option at
(i) the London Interbank Offered Rate ("LIBOR") plus 2.75% or (ii) the Base
Rate (defined as the rate of interest announced or quoted by the agent bank
from time to time as its prime rate for commercial loans) plus 0.75%. The
term loan A bears interest at the Company's option at (i) LIBOR plus 3.00%
or (ii) the Base Rate plus 1.00%. The term loan B bears interest at 16.5%,
of which 12.0% is payable on a current basis as provided in the agreement
and the balance of the interest equal to 4.5% is accrued and added to the
outstanding principal balance each month.
Note 6 - Earnings Per Share
The following table reconciles net earnings (loss) and weighted average
shares outstanding to the amounts used to calculate basic and diluted
earnings per share:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
In thousands, May 3, May 4, May 3, May 4,
except per-share data 2003 2002 2003 2002
------ ------ ------ ------
Net earnings (loss)............................... $ (628) $ 68 $ (924) $ (811)
Weighted average shares outstanding............... 9,057 8,938 9,052 8,937
Assumed exercise of options....................... - 20 - -
------ ------ ------ ------
Weighted average diluted shares outstanding....... 9,057 8,958 9,052 8,937
====== ====== ====== ======
Basic earnings (loss) per share................... $(0.07) $ 0.01 $(0.10) $(0.09)
====== ====== ====== ======
Diluted earnings (loss) per share................. $(0.07) $ 0.01 $(0.10) $(0.09)
====== ====== ====== ======
Basic earnings (loss) per share were computed by dividing net earnings
(loss) by the weighted average shares of common stock outstanding during the
period. Diluted earnings (loss) per share were computed assuming the options
issued and outstanding were exercised. Outstanding options to purchase
shares were not included in the computation of diluted earnings (loss) per
share if the shares were antidilutive or if the exercise price was greater
than the average market price of the common stock.
6
Note 7 - Comprehensive Income (Loss)
Comprehensive income (loss) includes, in addition to net earnings
(loss), the change in stockholders' equity during the period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in stockholders' equity except those resulting from
investments by owners and distributions to owners.
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------- ------------------------
May 3, May 4, May 3, May 4,
2003 2002 2003 2003
------- ------ ------ ------
Net earnings (loss) $ (628) $ 68 $ (924) $ (811)
Translation adjustments 477 564 1,187 521
Cash flow hedge - 155 - 240
------- ------ ------ ------
Comprehensive income (loss) $ (151) $ 787 $ 263 $ (50)
======= ====== ====== ======
Note 8 - Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FIN 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. FIN 45 is to be
applied prospectively to guarantees issued or modified after December 31,
2002. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company generally offers one-year warranties on its products. The Company
estimates the amount of future warranty claims based on historical warranty
claim information as well as recent trends that might suggest that past cost
information may differ from future claims.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment to SFAS
No. 123. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS No. 148 is effective for fiscal years ended after
December 15, 2002. The Company plans to continue to account for stock-based
employee compensation under the intrinsic value based method and to provide
disclosure of the impact of the fair value based method on reported income.
7
Pro forma net earnings (loss) in the following table were prepared as
if the Company had accounted for its stock option plans under the fair
market value method.
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- -------------------------
May 3, May 4, May 3, May 4,
In thousands 2003 2002 2003 2002
------ ------ ------- -------
Net earnings (loss) $ (628) $ 68 $ (924) $ (811)
Fair value of stock-based employee
compensation, net of tax (156) (150) (311) (300)
------ ------ ------- -------
Net loss - pro forma $ (784) $ (82) $(1,235) $(1,111)
====== ====== ======= =======
Net loss per share - pro forma $(0.09) $(0.01) $ (0.14) $ (0.12)
====== ====== ======= =======
Note 9 - Derivative Instruments
The Company uses interest rate swap agreements to manage the relative
mix of the Company's debt between fixed and variable rate instruments. At
May 3, 2003, the Company had no interest rate swap agreements.
Note 10 - Guarantor Subsidiaries
The Company's senior subordinated notes are fully and unconditionally
(as well as jointly and severally) guaranteed on an unsecured, senior
subordinated basis by each subsidiary of the Company (the "Guarantor
Subsidiaries") other than Howe Europe a/s, Falcon Products (Shenzhen)
Limited, Falcon Mimon, a.s., Falcon De Juarez, S.A. de C.V. and Industrial
Mueblera Shelby Williams, S.A. de C.V. (the "Non-Guarantor Subsidiaries").
Each of the Guarantor Subsidiaries and Non-Guarantor Subsidiaries is wholly
owned by the Company, except for Falcon Mimon, a.s., and Epic Furniture
Group, which are owned 87.4% and 80%, respectively.
The following condensed consolidating financial statements of the
Company include the combined accounts of the Company and its Guarantor
Subsidiaries and the combined accounts of the Non-Guarantor Subsidiaries.
Given the size of the Non-Guarantor Subsidiaries, relative to the Company
and its Guarantor Subsidiaries on a consolidated basis, separate financial
statements of the respective Company and its Guarantor Subsidiaries are not
presented because management has determined that such information is not
material is assessing the Company and its Guarantor Subsidiaries.
8
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------------------------------------------------------------------------
Net sales $ - $ 56,007 $ 6,144 $ (3,441) $ 58,710
Cost of sales - 42,981 5,294 (3,441) 44,834
Selling, general and administrative expenses - 9,747 843 - 10,590
------------------------------------------------------------------------
Operating profit - 3,279 7 - 3,286
Equity in earnings (loss) of subsidiary (628) - - 628 -
Interest expense, net - 4,027 36 - 4,063
Minority interest in consolidated subsidiary - (16) - - (16)
------------------------------------------------------------------------
Earnings (loss) before income taxes (628) (732) (29) 628 (761)
Income tax expense (benefit) - (191) 58 - (133)
------------------------------------------------------------------------
Net earnings (loss) $ (628) $ (541) $ (87) $ 628 $ (628)
========================================================================
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 4, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------------------------------------------------------------------------
Net sales $ - $ 63,851 $ 6,513 $ (3,770) $ 66,594
Cost of sales - 48,273 5,981 (3,770) 50,484
Selling, general and administrative expenses - 10,858 799 - 11,657
------------------------------------------------------------------------
Operating profit (loss) - 4,720 (267) - 4,453
Equity in earnings of subsidiary 68 - - (68) -
Interest expense, net - 4,273 30 - 4,303
Minority interest in consolidated subsidiary - 8 - - 8
------------------------------------------------------------------------
Earnings (loss) before income taxes 68 439 (297) (68) 142
Income tax expense (benefit) - 206 (132) - 74
------------------------------------------------------------------------
Net earnings (loss) $ 68 $ 233 $ (165) $ (68) $ 68
========================================================================
9
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Twenty-Six Weeks Ended May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-----------------------------------------------------------------------
Net sales $ - $118,364 $ 12,633 $ (7,153) $ 123,844
Cost of sales - 91,225 11,108 (7,153) 95,180
Selling, general and administrative expenses - 19,947 1,462 - 21,409
-----------------------------------------------------------------------
Operating profit - 7,192 63 - 7,255
Equity in earnings (loss) of subsidiary (924) - - 924 -
Interest expense, net - 8,054 77 - 8,131
Minority interest in consolidated subsidiary - 49 - - 49
-----------------------------------------------------------------------
Earnings (loss) before income taxes (924) (911) (14) 924 (925)
Income tax expense (benefit) - (65) 64 - (1)
-----------------------------------------------------------------------
Net earnings (loss) $(924) $ (846) $ (78) $ 924 $ (924)
=======================================================================
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Twenty-Six Weeks Ended May 4, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-----------------------------------------------------------------------
Net sales $ - $125,312 $ 14,486 $ (8,862) $130,936
Cost of sales - 95,625 13,154 (8,862) 99,917
Selling, general and administrative expenses - 21,769 1,418 - 23,187
Special and nonrecurring items - 639 - - 639
-----------------------------------------------------------------------
Operating profit (loss) - 7,279 (86) - 7,193
Equity in earnings of subsidiary (811) - - 811 -
Interest expense, net - 8,270 59 - 8,329
Minority interest in consolidated subsidiary - 16 - - 16
-----------------------------------------------------------------------
Earnings (loss) before income taxes (811) (1,007) (145) 811 (1,152)
Income tax expense (benefit) - (348) 7 - (341)
-----------------------------------------------------------------------
Net earnings (loss) $(811) $ (659) $ (152) $ 811 $ (811)
=======================================================================
10
Falcon Products, Inc.
Consolidating Balance Sheet
As of May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 124 $ 1,056 $ - $ 1,180
Accounts receivable - 27,406 2,809 - 30,215
Inventories - 56,462 7,947 - 64,409
Other current assets - 6,308 1,282 - 7,590
-------------------------------------------------------------------------------
Total current assets - 90,300 13,094 - 103,394
Property, plant and equipment, net - 25,284 15,140 - 40,424
Investment in subsidiaries 61,593 - - (61,593) -
Goodwill and other assets - 131,364 53 - 131,417
-------------------------------------------------------------------------------
Total assets $61,593 $246,948 $ 28,287 $(61,593) $275,235
===============================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $ 45,757 $ 4,935 $ - $ 50,692
Long-term debt - 147,018 1,529 - 148,547
Other long-term liabilities - 14,129 274 - 14,403
Intercompany payable (receivable) - (10,134) 10,134 - -
-------------------------------------------------------------------------------
Total liabilities - 196,770 16,872 - 213,642
Total stockholders' equity 61,593 50,178 11,415 (61,593) 61,593
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $61,593 $246,948 $ 28,287 $(61,593) $275,235
===============================================================================
11
Falcon Products, Inc.
Consolidating Balance Sheet
As of November 2, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 378 $ 1,268 $ - $ 1,646
Accounts receivable - 29,695 3,247 - 32,942
Inventories - 49,276 7,841 - 57,117
Other current assets - 8,236 805 - 9,041
---------------------------------------------------------------------------------
Total current assets - 87,585 13,161 - 100,746
Property, plant and equipment, net - 26,338 14,544 - 40,882
Investment in subsidiaries 61,000 - - (61,000) -
Goodwill and other assets - 131,949 - - 131,949
---------------------------------------------------------------------------------
Total assets $ 61,000 $ 245,872 $ 27,705 $ (61,000) $ 273,577
=================================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $ 56,263 $ 5,524 $ - $ 61,787
Long-term debt - 133,834 1,392 - 135,226
Other long-term liabilities - 15,394 170 - 15,564
Intercompany payable (receivable) - (9,126) 9,126 - -
---------------------------------------------------------------------------------
Total liabilities - 196,365 16,212 - 212,577
Total stockholders' equity 61,000 49,507 11,493 (61,000) 61,000
---------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 61,000 $ 245,872 $ 27,705 $ (61,000) $ 273,577
=================================================================================
12
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-Six Weeks Ended May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Cash used in operating activities $ - $ (1,128) $ (144) $ - $(1,272)
---------------------------------------------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment, net - (1,083) (205) - (1,288)
Cash received from (contributed to) subsidiary (320) 320 - - -
---------------------------------------------------------------------------
Cash used in investing activities (320) (763) (205) - (1,288)
---------------------------------------------------------------------------
Cash flows from financing activities
Common stock issuances 320 - - - 320
Additions to long-term debt, net - 1,637 137 - 1,774
---------------------------------------------------------------------------
Cash provided by financing activities 320 1,637 137 - 2,094
---------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ (254) $ (212) $ - $ (466)
===========================================================================
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-Six Weeks Ended May 4, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Cash provided by (used in) operating activities $ - $ (9,353) $ 2,391 $ - $(6,962)
---------------------------------------------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment, net - (1,676) (1,291) - (2,967)
Cash received from (contributed to) subsidiary (379) 379 - - -
---------------------------------------------------------------------------
Cash used in investing activities (379) (1,297) (1,291) - (2,967)
---------------------------------------------------------------------------
Cash flows from financing activities
Common stock issuances 379 - - - 379
Additions to long-term debt, net - 10,764 (30) - 10,734
---------------------------------------------------------------------------
Cash provided by (used in) financing activities 379 10,764 (30) - 11,113
---------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ 114 $ 1,070 $ - $ 1,184
===========================================================================
13
Item 2. - Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Certain information presented herein includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. However, there can be no assurance that the Company's actual
results will not differ materially from its expectations. The matters
referred to in forward-looking statements may be affected by risks and
uncertainties affecting the Company's business.
RESULTS OF OPERATIONS
General
The following table sets forth, for the periods presented, certain
information relating to the operating results of the Company, expressed as a
percentage of net sales:
Thirteen Twenty-Six
Weeks Ended Weeks Ended
------------------------ ----------------------
May 3, May 4, May 3, May 4,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.4 75.8 76.9 76.3
-------- -------- -------- --------
Gross margin 23.6 24.2 23.1 23.7
Selling, general and administrative expenses 18.0 17.5 17.3 17.7
Special and nonrecurring items - - - 0.5
-------- -------- -------- --------
Operating profit 5.6 6.7 5.8 5.5
Interest expense, net 6.9 6.5 6.6 6.4
-------- -------- -------- --------
Earnings (loss) before income taxes (1.3) 0.2 (0.8) (0.9)
Income tax expense (benefit) (0.2) 0.1 - (0.3)
-------- -------- -------- --------
Net earnings (loss) (1.1)% 0.1% (0.8)% (0.6)%
======== ======== ======== ========
Thirteen weeks ended May 3, 2003, compared to the thirteen weeks ended May
4, 2002
The Company reported a net loss of $0.6 million in the second quarter
of 2003 compared to net earnings of $68 thousand in the same period of 2002.
Net earnings (loss) per share were $(0.07) and $0.01 in the second quarter
of 2003 and 2002, respectively. Weighted average shares outstanding were 9.1
million and 9.0 million shares in the second quarter of 2003 and 2002,
respectively.
Net sales for the second quarter of 2003 were $58.7 million, a decrease
of 11.8% from the second quarter of 2002 net sales of $66.6 million. Each of
the Company's markets experienced a decline in sales due to concerns over
the economy and the prospects of war, which significantly impacted orders
leading into the second quarter of 2003. In addition, sales in the food
service market decreased as a result of the successful completion of the
Boston Market remodeling program in the first quarter of 2003. The decrease
in the hospitality market was a reflection of the continuation of the soft
hospitality market, which has led to a decline in new construction and a
deferral of hotel refurbishments.
Cost of sales was $44.8 million in the second quarter of 2003, a
decrease of 11.2% from $50.5 million in the second quarter of 2002. Gross
margin decreased to $13.9 million for the second quarter of
14
2003, from $16.1 million in the same quarter of 2002. Gross margin as a
percentage of net sales decreased to 23.6% in 2003, from 24.2% in 2002.
Gross margin as a percentage of net sales was negatively impacted by the
decline in sales, which reduced fixed overhead absorption at the
manufacturing plants, and by product mix and pricing pressures, primarily in
the hospitality market. The Company partially offset these items through
cost reduction activities at the manufacturing plants.
Selling, general and administrative expenses were $10.6 million in the
second quarter of 2003, compared to $11.7 million in the second quarter of
2002. The lower selling, general and administrative expenses is a result of
significant cost reduction activities initiated by the Company during 2002
and continued into 2003 and lower variable selling costs due to lower sales.
Selling, general and administrative expenses as a percentage of net sales
were 18.0% for the second quarter of 2003, compared to 17.5% for the second
quarter of 2002.
Twenty-six weeks ended May 3, 2003, compared to the twenty-six weeks ended
May 4, 2002
The Company reported a net loss of $0.9 million and $0.8 million in the
first half of 2003 and 2002, respectively. Net loss per share was $ (0.10)
and $(0.09) in the first twenty-six weeks of 2003 and 2002, respectively.
Weighted average shares outstanding were 9.1 million and 8.9 million shares
in the first half of 2003 and 2002, respectively.
During the first quarter of 2002, the Company recorded a pre-tax charge
of $0.6 million, $0.4 million after-tax, for special and nonrecurring items.
This charge is a result of the Company executing its strategic initiative to
close its Statesville, North Carolina facility and transfer production into
the Company's other plants.
Net sales for the first half of 2003 were $123.8 million, a decrease of
5.4% from the first half of 2002 net sales of $130.9 million. The decrease
is a result of decreases in both the hospitality and food service markets
partially offset by an increase in the contract office market. All of the
Company's markets were impacted by concerns over the economy and the
prospects of war, which significantly impacted orders during the first
quarter of 2003. Sales in the food service market also decreased as a result
of the successful completion the Boston Market remodeling program in the
first quarter of 2003. The decrease in the hospitality market was a
reflection of the continuation of the soft hospitality market, which has led
to a decline in new construction and a deferral of hotel refurbishments.
Cost of sales was $95.2 million in the first half of 2003, a decrease
of 4.7% from $99.9 million in the first half of 2002. Gross margin decreased
to $28.7 million for the first half of 2003, from $31.0 million in the first
half of 2002. Gross margin as a percentage of net sales decreased to 23.1%
in 2003, compared to 23.7% in 2002. The decrease in gross margin as a
percentage of net sales is mainly the result of the decline in sales, which
reduced fixed overhead absorption at the manufacturing plants. Also, gross
margin was negatively impacted by product mix and pricing pressures,
primarily in the hospitality market, partially offset by the Company's cost
reduction activities at the manufacturing plants, including the closing of
the Statesville, NC facility, which was completed during February 2002.
Selling, general and administrative expenses were $21.4 million in the
first half of 2003, compared to $23.2 million in the first half of 2002. The
reduction of selling, general and administrative expenses was a result of
cost reduction activities and lower variable selling costs due to lower
sales. Selling,
15
general and administrative expenses as a percentage of net sales were 17.3%
for the first half of 2003, compared to 17.7% for the first half of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at May 3, 2003 was $52.7 million compared
with $39.0 million at November 2, 2002. The Company's ratio of current
assets to current liabilities was 2.0 to 1.0 at May 3, 2003 and 1.6 to 1.0
at November 2, 2002.
Cash used in operating activities was $1.3 million and $7.0 million in
the first half of 2003 and 2002, respectively. The cash used in the first
half of 2003 was mainly for the purchase of inventory and the payment of
interest partially offset by an income tax refund and the timing of payments
for accounts payable. Inventories were $64.4 million at May 3, 2003,
compared with $57.1 million at November 2, 2002, a 12.8% increase. The
increase in inventory is primarily a result of inventories being at their
lowest level at year-end due to the timing of the business cycle and
seasonal purchases of raw lumber and chair frames. During the first six
months of 2003 and 2002, the Company incurred $1.3 million and $3.0 million,
respectively, for capital expenditures. Cash provided by financing
activities was $2.1 million and $11.1 million in the first half of 2003 and
2002, respectively.
On June 3, 2003, the Company refinanced its existing senior credit
agreement with a new group of financial institutions. The borrowers under
the new credit facility, on a joint and several basis, are the Company,
Shelby Williams Industries, Inc. and Sellers & Josephson, Inc. and the
new credit facility is jointly and severally guaranteed by the following
domestic subsidiaries of the Company: Howe Furniture Corporation, Johnson
Industries, Inc., Falcon Holdings, Inc., The Falcon Companies International,
Inc., Madison Furniture Industries, Inc. and Epic Furniture Group, Inc.
The new credit facility of $75 million matures in June 2007. The new credit
facility consists of (i) a $33.8 million revolving credit facility, (ii) a
$6.2 million amortizing term loan A, and (iii) a $35 million non-amortizing
term loan B. The term loan A has required quarterly principal payments of
$0.223 million, commencing on July 1, 2003.
The new credit facility is secured by substantially all of the
assets of the Company and its domestic subsidiaries, including a
pledge of all of the stock of the Company's domestic subsidiaries
and a pledge of 65% of the stock of the following foreign subsidiaries
of the Company: Howe a/s, Falcon Mimon a/s, Falcon de Juarez S.A. de
C.V. and Falcon Products China Limited.
The revolving credit facility bears interest at the Company's option at
(i) the London Interbank Offered Rate ("LIBOR") plus 2.75% or (ii) the Base
Rate (defined as the rate of interest announced or quoted by the agent bank
from time to time as its prime rate for commercial loans) plus 0.75%. The
term loan A bears interest at the Company's option at (i) LIBOR plus 3.00%
or (ii) the Base Rate plus 1.00%. The term loan B bears interest at 16.5%,
of which 12.0% is payable on a current basis as provided in the agreement
and the balance of the interest equal to 4.5% is accrued and added to the
outstanding principal balance each month.
At May 3, 2003, the Company had $18.3 million outstanding under the old
revolving line of credit. In addition, approximately $4.8 million of the
total commitment under the old revolving line of credit was used to support
outstanding standby letters of credit.
The Company must comply with certain covenants under its credit
agreement, including limitations relating to the payment of dividends and
capital expenditures and the maintenance of specific financial ratios,
including minimum levels of EBITDA, as defined in the agreement.
EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. The Company presents EBITDA because EBITDA is
commonly used to analyze companies on the basis of operating performance,
leverage and liquidity. EBITDA is not intended to represent cash flow for
the
16
period, nor has it been presented as an alternative to operating income as
an indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. A reconciliation
of earnings (loss) before income taxes under generally accepted accounting
principles to EBITDA is as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- ---------------------------
May 3, May 4, May 3, May 4,
In thousands 2003 2002 2003 2002
--------- --------- --------- ---------
Earnings (loss) before income taxes $ (761) $ 142 $ (925) $(1,152)
Interest expense, net 4,063 4,303 8,131 8,329
Depreciation and amortization expense 2,031 2,033 4,037 3,908
--------- --------- --------- ---------
EBITDA $ 5,333 $ 6,478 $11,243 $11,085
Special and nonrecurring items - - - 639
--------- --------- --------- ---------
Adjusted EBITDA $ 5,333 $ 6,478 $11,243 $11,724
========= ========= ========= =========
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates
and foreign exchange rates. The Company's net exposure to interest rate risk
consists of floating-rate debt based on the Base Rate or LIBOR.
Item 4. - Controls and Procedures
-----------------------
The Company's chief executive officer and chief financial officer have
reviewed the Company's disclosure controls and procedures within 90 days
prior to the filing of this report. Based upon this review, each such
officer has concluded that the Company's disclosure controls and procedures
are effective in ensuring that material information related to the Company
is made known to them by others responsible for reporting such material
information within the Company.
There were no significant changes in the Company's internal controls or
in any other factors that could significantly affect such controls
subsequent to the date that the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
-----------------
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage against potential claims in an amount it
believes to be adequate. There is no material pending legal proceedings,
other than routine litigation incidental to the business, to which the
Company is a party or of which any of the Company's property is the subject.
17
Item 2. - Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. - Defaults Upon Senior Securities
-------------------------------
None.
Item 4. - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on
March 6, 2003, for the purposes of electing two Class A
directors for a term expiring in 2006.
The number of votes for and withheld for each nominee for
director are as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Melvin F. Brown 8,045,685 16,235
Steven C. Roberts 8,045,655 16,265
Item 5. - Other Information
-----------------
None.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
4 $75,000,000 Loan and Security Agreement dated June 3, 2003.
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
18
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.
FALCON PRODUCTS, INC.
Date: June 16, 2003 /s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chief Executive Officer
and Chairman of the Board
Date: June 16, 2003 /s/ Michael J. Dreller
----------------------
Michael J. Dreller
Vice President and
Chief Financial Officer
19
Chief Executive Officer Certification
I, Franklin A. Jacobs certify that:
1. I have reviewed this quarterly report on Form 10-Q of Falcon Products,
Inc. (the "Registrant").
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report.
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chairman of the Board, Chief Executive Officer
and Director
20
Chief Financial Officer Certification
I, Michael J. Dreller certify that:
1. I have reviewed this quarterly report on Form 10-Q of Falcon Products,
Inc. (the "Registrant").
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report.
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Michael J. Dreller
----------------------
Michael J. Dreller
Vice President, Finance and
Chief Financial Officer
21