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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 August 2, 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 September 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 Thirty-Nine
Weeks Ended Weeks Ended
----------------------------- ----------------------------
August 2, August 3, August 2, August 3,
(In thousands, except per share data) 2003 2002 2003 2002
---------- ----------- ---------- -----------
Net sales $ 62,306 $ 70,811 $ 186,150 $ 201,747
Cost of sales, including restructuring charge 49,319 54,260 144,499 154,177
---------- ----------- ---------- ----------
Gross margin 12,987 16,551 41,651 47,570
Selling, general and administrative expenses 11,193 11,277 32,602 34,464
Interest expense, net 4,607 4,532 12,738 12,861
Minority interest in consolidated subsidiary (55) (31) (6) (15)
Loss on early extinguishment of debt 1,564 - 1,564 -
Loss on curtailment of pension plan 1,833 - 1,833 -
Restructuring charge 1,980 - 1,980 639
---------- ----------- ---------- ----------
Earnings (loss) before income taxes (8,135) 773 (9,060) (379)
Income tax expense (benefit) (2,551) 439 (2,552) 98
---------- ----------- ---------- ----------
Net earnings (loss) $ (5,584) $ 334 $ (6,508) $ (477)
========== =========== ========== ==========
Basic and diluted earnings (loss) per share $ (0.62) $ 0.04 $ (0.72) $ (0.05)
========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
2
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands, except share data)
August 2, November 2,
Assets 2003 2002
- ------ (Unaudited)
-------------- -----------
Current assets:
Cash and cash equivalents $ 1,577 $ 1,646
Accounts receivable, less allowances
of $622 and $707, respectively 30,977 32,942
Inventories 64,437 57,117
Prepayments and other current assets 10,645 9,041
-------------- -----------
Total current assets 107,636 100,746
-------------- -----------
Property, plant and equipment:
Land 2,837 2,726
Buildings and improvements 19,765 19,962
Machinery and equipment 51,007 49,569
-------------- -----------
73,609 72,257
Less: accumulated depreciation 35,194 31,375
-------------- -----------
Net property, plant and equipment 38,415 40,882
--------------- ------------
Other assets, net of accumulated amortization:
Goodwill 117,474 117,474
Other 12,084 14,475
-------------- -----------
Total other assets 129,558 131,949
-------------- -----------
Total Assets $ 275,609 $ 273,577
============== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 20,349 $ 20,841
Customer deposits 5,390 9,211
Accrued liabilities 11,460 16,376
Current maturities of long-term debt 4,112 15,359
-------------- -----------
Total current liabilities 41,311 61,787
Long-term obligations:
Long-term debt 165,108 135,226
Minority interest in consolidated subsidiary 730 736
Other 12,612 14,828
-------------- -----------
Total liabilities 219,761 212,577
-------------- -----------
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 (5,751) (6,775)
Retained earnings 24,518 32,150
-------------- -----------
Total stockholders' equity 55,848 61,000
-------------- -----------
Total Liabilities and Stockholders' Equity $ 275,609 $ 273,577
============== ===========
See accompanying notes to consolidated financial statements.
3
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Thirty-Nine Weeks Ended
-------------------------
(In thousands) August 2, August 3,
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (6,508) $ (477)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 7,024 6,566
Minority interest in consolidated subsidiary (6) (15)
Loss on early extinguishment of debt 1,564 -
Loss on curtailment of pension plan 1,833 -
Restructuring charge, non-cash 4,265 -
Change in assets and liabilities:
Accounts receivable 2,433 3,151
Inventories (9,181) (11,638)
Prepayments and other current assets (1,604) (1,425)
Other assets (1,941) (1,554)
Accounts payable and customer deposits (4,432) 5,011
Accrued liabilities (6,124) (6,290)
Other liabilities (2,216) 755
----------- -----------
Cash used in operating activities (14,893) (5,916)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,675) (3,638)
----------- -----------
Cash used in investing activities (1,675) (3,638)
----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (54,218) (6,782)
Proceeds from long-term debt 72,430 17,160
Deferred debt issuance costs (2,033) -
Common stock issuances 320 379
----------- -----------
Cash provided by financing activities 16,499 10,757
----------- -----------
Increase (decrease) in cash and cash equivalents (69) 1,203
Cash and cash equivalents-beginning of period 1,646 1,670
----------- -----------
Cash and cash equivalents-end of period $ 1,577 $ 2,873
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 14,850 $ 15,484
=========== ===========
Cash paid for (refund of) taxes, net $ (3,441) $ 439
=========== ===========
See accompanying notes to consolidated financial statements.
4
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
For the Thirteen and Thirty-Nine Weeks Ended August 2, 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 - Restructuring Charges
During the third quarter of 2003, the Company recorded a non-cash
pre-tax charge of $4.3 million or $3.0 million after-tax, to write-down the
assets of the Company's Zacatecas, Mexico manufacturing facility to its
anticipated net realizable value in connection with the Company's decision
to dispose of the facility. The total charge of $4.3 million included a
write-down of inventory of $2.3 million, which is included in the
Consolidated Statements of Earnings as a component of cost of sales,
including restructuring charge.
During the first quarter of 2002, the Company recorded a pre-tax charge
of $0.6 million or $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 (223)
-----
Liability - August 2, 2003 $ 27
=====
5
Note 4 - Pension Plans
During the third quarter of 2003, the Company notified its employees,
who are participants in the Falcon Products, Inc. Retirement Plan (the
"Plan") that no pension benefits will be earned for service on or after
August 1, 2003. As a result of this action, the Company recorded a $1.8
million pension curtailment loss to record previously unrecognized prior
service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits."
Note 5 - Inventories
Inventories consisted of the following:
August 2, November 2,
In thousands 2003 2002
--------- -----------
Raw materials....................... $ 39,991 $ 37,759
Work in process..................... 17,103 10,641
Finished goods...................... 7,343 8,717
--------- -----------
$ 64,437 $ 57,117
========= ===========
Note 6 - 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 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 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.
In connection with the refinancing, the Company recorded a loss on
early extinguishment of debt to write-off deferred debt issuance costs of
$1.6 million.
6
Note 7 - 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 Thirty-Nine Weeks Ended
------------------------------------ ------------------------------------
In thousands, August 2, August 3, August 2, August 3,
except per-share data 2003 2002 2003 2002
---------------- ---------------- ----------------- ---------------
Net earnings (loss)............................... $ (5,584) $ 334 $ (6,508) $ (477)
Weighted average shares outstanding............... 9,062 8,946 9,056 8,941
Assumed exercise of options....................... - - - -
---------------- ---------------- ----------------- ---------------
Weighted average diluted shares outstanding....... 9,062 8,946 9,056 8,941
================ ================ ================= ===============
Basic earnings (loss) per share................... $ (0.62) $ 0.04 $ (0.72) $ (0.05)
================ ================ ================= ===============
Diluted earnings (loss) per share................. $ (0.62) $ 0.04 $ (0.72) $ (0.05)
================ ================ ================= ===============
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.
Note 8 - 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.
In thousands Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ---------------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
------------ ------------ ------------ -----------
Net earnings (loss) $ (5,584) $ 334 $ (6,508) $ (477)
Translation adjustments (163) 810 1,024 1,331
Cash flow hedge - 305 - 545
------------ ------------ ------------ -----------
Comprehensive income (loss) $ (5,747) $ 1,449 $ (5,484) $ 1,399
============ ============ ============ ===========
Note 9 - 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
7
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.
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 Thirty-Nine Weeks Ended
------------------------------ -------------------------------
August 2, August 3, August 2, August 3,
In thousands 2003 2002 2003 2002
------------- ------------- ------------- --------------
Net earnings (loss) $(5,584) $ 334 $(6,508) $ (477)
Fair value of stock-based employee
compensation, net of tax (139) (149) (470) (448)
------------- ------------- ------------- --------------
Net earnings (loss) - pro forma $(5,723) $ 185 $(6,978) $ (925)
============= ============= ============= ==============
Net earnings (loss) per share -
Pro forma $ (0.63) $ (0.02) $ (0.77) $ (0.10)
============= ============= ============= ==============
Note 10 - 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
August 2, 2003, the Company had no interest rate swap agreements.
Note 11 - 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.
8
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 in assessing the Company and its Guarantor Subsidiaries.
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Net sales $ - $ 60,055 $ 5,883 $ (3,632) $ 62,306
Cost of sales, including restructuring charge - 48,131 4,820 (3,632) 49,319
---------------------------------------------------------------------------
Gross margin - 11,924 1,063 - 12,987
Selling, general and administrative expenses - 10,294 899 - 11,193
Interest expense, net - 4,566 41 - 4,607
Minority interest in consolidated subsidiary - (55) - - (55)
Loss on early extinguishment of debt - 1,564 - - 1,564
Loss on curtailment of pension plan - 1,833 - - 1,833
Restructuring charge - 1,980 - - 1,980
Equity in earnings (loss) of subsidiary (5,584) - - 5,584 -
---------------------------------------------------------------------------
Earnings (loss) before income taxes (5,584) (8,258) 123 5,584 (8,135)
Income tax expense (benefit) - (2,664) 113 - (2,551)
---------------------------------------------------------------------------
Net earnings (loss) $ (5,584) $ (5,594) $ 10 $ 5,584 $ (5,584)
===========================================================================
9
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended August 3, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-----------------------------------------------------------------------
Net sales $ - $ 67,946 $ 6,896 $ (4,031) $ 70,811
Cost of sales - 51,640 6,651 (4,031) 54,260
-----------------------------------------------------------------------
Gross Margin - 16,306 245 - 16,551
Selling, general and administrative expenses - 10,370 907 - 11,277
Equity in earnings of subsidiary 334 - - (334) -
Interest expense, net - 4,493 39 - 4,532
Minority interest in consolidated subsidiary - (31) - - (31)
-----------------------------------------------------------------------
Earnings (loss) before income taxes 334 1,474 (701) (334) 773
Income tax expense (benefit) - 627 (188) - 439
-----------------------------------------------------------------------
Net earnings (loss) $ 334 $ 847 $ (513) $ (334) $ 334
=======================================================================
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirty-Nine Weeks Ended August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------
Net sales $ - $ 178,419 $ 18,516 $ (10,785) $ 186,150
Cost of sales, including restructuring charge - 139,356 15,928 (10,785) 144,499
--------------------------------------------------------------------------
Gross margin - 39,063 2,588 - 41,651
Selling, general and administrative expenses - 30,241 2,361 - 32,602
Interest expense, net - 12,620 118 - 12,738
Minority interest in consolidated subsidiary - (6) - - (6)
Loss on early extinguishment of debt - 1,564 - - 1,564
Loss on curtailment of pension plan - 1,833 - - 1,833
Restructuring charge - 1,980 - - 1,980
Equity in earnings (loss) of subsidiary (6,508) - - 6,508 -
--------------------------------------------------------------------------
Earnings (loss) before income taxes (6,508) (9,169) 109 6,508 (9,060)
Income tax expense (benefit) - (2,729) 177 - (2,552)
--------------------------------------------------------------------------
Net earnings (loss) $(6,508) $ (6,440) $ (68) $ 6,508 $ (6,508)
==========================================================================
10
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirty-Nine Weeks Ended August 3, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------------------------------------------------------------------------
Net sales $ - $ 193,258 $ 21,382 $ (12,893) $ 201,747
Cost of sales - 147,265 19,805 (12,893) 154,177
-------------------------------------------------------------------------
Gross Margin - 45,993 1,577 - 47,570
Selling, general and administrative expenses - 32,139 2,325 - 34,464
Restructuring charge - 639 - - 639
Equity in earnings of subsidiary (477) - - 477 -
Interest expense, net - 12,763 98 - 12,861
Minority interest in consolidated subsidiary - (15) - - (15)
-------------------------------------------------------------------------
Earnings (loss) before income taxes (477) 467 (846) 477 (379)
Income tax expense (benefit) - 279 (181) - 98
-------------------------------------------------------------------------
Net earnings (loss) $ (477) $ 188 $ (665) $ 477 $ (477)
=========================================================================
Falcon Products, Inc.
Consolidating Balance Sheet
As of August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 554 $ 1,023 $ - $ 1,577
Accounts receivable - 28,829 2,148 - 30,977
Inventories - 58,749 5,688 - 64,437
Prepayments and other current assets - 9,443 1,202 - 10,645
--------------------------------------------------------------------------------
Total current assets - 97,575 10,061 - 107,636
Property, plant and equipment, net - 26,727 11,688 - 38,415
Investment in subsidiaries 58,834 - - (58,834) -
Goodwill and other assets - 129,457 101 - 129,558
--------------------------------------------------------------------------------
Total assets $ 58,834 $ 253,759 $ 21,850 $ (58,834) $ 275,609
================================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $ 36,076 $ 5,235 $ - $ 41,311
Long-term debt - 163,599 1,509 - 165,108
Other long-term liabilities - 13,067 275 - 13,342
Intercompany payable (receivable) - (3,406) 3,406 - -
-------------------------------------------------------------------------------
Total liabilities - 209,336 10,425 - 219,761
Total stockholders' equity 58,834 44,423 11,425 (58,834) 55,848
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 58,834 $ 253,759 $ 21,850 $ (58,834) $ 275,609
================================================================================
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
Prepayments and 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 Thirty-Nine Weeks Ended August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------------------------------------------------------------------------
Cash used in operating activities $ - $ (14,818) $ (75) $ - $ (14,893)
-------------------------------------------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment,
net - (1,388) (287) - (1,675)
Cash received from (contributed to)
subsidiary (320) 320 - - -
-------------------------------------------------------------------------
Cash used in investing activities (320) (1,068) (287) - (1,675)
-------------------------------------------------------------------------
Cash flows from financing activities
Common stock issuances 320 - - - 320
Deferred debt issuance costs - (2,033) - - (2,033)
Additions to long-term debt, net - 18,095 117 - 18,212
-------------------------------------------------------------------------
Cash provided by financing activities 320 16,062 117 - 16,499
-------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ 176 $ (245) $ - $ (69)
=========================================================================
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended August 3, 2002
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------------------------------------------------------------------------
Cash provided by (used in) operating activities $ - $ (8,452) $ 2,536 $ - $ (5,916)
-------------------------------------------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment,
net - (1,434) (2,204) - (3,638)
Cash received from (contributed to)
subsidiary (379) 379 - - -
-------------------------------------------------------------------------
Cash used in investing activities (379) (1,055) (2,204) - (3,638)
-------------------------------------------------------------------------
Cash flows from financing activities
Common stock issuances 379 - - - 379
Additions to long-term debt, net - 9,585 793 - 10,378
-------------------------------------------------------------------------
Cash provided by financing activities 379 9,585 793 - 10,757
-------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ 78 $ 1,125 $ - $ 1,203
=========================================================================
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 Thirty-Nine
Weeks Ended Weeks Ended
------------------------ ------------------------
Aug. 2, Aug. 3, Aug. 2, Aug. 3,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including restructuring charge 79.2 76.6 77.6 76.4
---------- ---------- ---------- ----------
Gross margin 20.8 23.4 22.4 23.6
Selling, general and administrative expenses 18.0 15.9 17.5 17.1
Interest expense, net 7.4 6.4 6.8 6.4
Minority interest in consolidated subsidiaries (0.1) - - -
Loss on early extinguishment on debt 2.5 - 0.9 -
Loss on curtailment of pension plan 2.9 - 1.0 -
Restructuring charge 3.2 - 1.1 0.3
---------- ---------- ---------- ----------
Earnings (loss) before income taxes (13.1) 1.1 (4.9) (0.2)
Income tax expense (benefit) (4.1) 0.6 (1.4) -
---------- ---------- ---------- ----------
Net earnings (loss) (9.0)% 0.5% (3.5)% (0.2)%
========== ========== ========== ==========
Thirteen weeks ended August 2, 2003, compared to the thirteen weeks ended
August 3, 2002
The Company reported a net loss of $5.6 million in the third quarter of
2003 compared to net earnings of $0.3 million in the same period of 2002.
Net earnings (loss) per diluted share were $(0.62) and $0.04 in the third
quarter of 2003 and 2002, respectively. The results for the third quarter of
2003 include charges for the write-down of assets at the Zacatecas, Mexico
facility of $4.3 million, the write-off of deferred debt issuance costs of
$1.6 million and the curtailment of a pension plan of $1.8 million. Weighted
average shares outstanding were 9.1 million and 8.9 million shares in the
third quarter of 2003 and 2002, respectively.
14
During the third quarter of 2003, the Company recorded a non-cash
pre-tax charge of $4.3 million or $3.0 million after-tax, to write-down the
assets of the Company's Zacatecas, Mexico manufacturing facility to its
anticipated net realizable value in connection with the Company's decision
to dispose of the facility. The total charge of $4.3 million included a
write-down of inventory of $2.3 million, which is included in the
Consolidated Statements of Earnings as a component of cost of sales,
including restructuring charge. The Company currently has a signed letter of
intent to sell the assets and transfer the operations of this facility to a
third party. The Company expects the sale to be completed by the end of
December 2003, although there are no assurances that the sale will be
completed. If the current proposed sale is completed, the Company does not
expect to incur any significant future cash costs associated with the
disposal of this facility. However, if the Company does not successfully
sell the facility, it may incur future cash costs associated with the
closure of the facility.
Net sales for the third quarter of 2003 were $62.3 million, a decrease
of 12.0% from the third quarter of 2002 net sales of $70.8 million. The
Company's sales declined in the hospitality and contract office markets due
to soft market conditions. 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. Excluding the impact from
Boston Market, the Company's sales to the food service market showed solid
growth. 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, including restructuring charge, was $49.3 million in the
third quarter of 2003, a decrease of 9.1% from $54.3 million in the third
quarter of 2002. Gross margin decreased to $13.0 million for the third
quarter of 2003, from $16.6 million in the same quarter of 2002. The
decrease in gross margin is a result of the restructuring charge of $2.3
million and a decline in sales. Gross margin as a percentage of net sales
decreased to 20.8% in 2003, from 23.4% in 2002. Gross margin as a percentage
of net sales was negatively impacted by 3.7% related to the restructuring
charge record in the third quarter of 2003. The Company's cost reduction
measures and other factors improved gross margin as a percentage of net
sales by 1.1%.
Selling, general and administrative expenses were $11.2 million in the
third quarter of 2003, compared to $11.3 million in the third quarter of
2002. The lower selling, general and administrative expenses is due to the
lower level of sales. Selling, general and administrative expenses as a
percentage of net sales were 18.0% for the third quarter of 2003, compared
to 15.9% for the third quarter of 2002. The higher expense rate is a result
of the decline in sales and the resulting impact from fixed expense items.
In connection with the refinancing of its senior credit facility, the
Company recorded a loss on early extinguishment of debt to write-off
deferred debt issuance costs of $1.6 million.
During the third quarter of 2003, the Company notified its employees,
who are participants in the Falcon Products, Inc. Retirement Plan (the
"Plan") that no pension benefits will be earned for service on or after
August 1, 2003. As a result of this action, the Company recorded a $1.8
million pension curtailment loss to record previously unrecognized prior
service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits."
15
The Company recorded an income tax benefit of $2.6 million in the third
quarter of 2003, compared with a $0.4 million income tax expense in the
third quarter of 2002. The effective tax rate differs from the statutory tax
rate due to non-deductible permanent tax items and state, local and foreign
taxes.
Thirty-nine weeks ended August 2, 2003, compared to the thirty-nine weeks
ended August 3, 2002
The Company reported a net loss of $6.5 million and $0.5 million in the
first nine months of 2003 and 2002, respectively. Net loss per diluted share
was $(0.72) and $(0.05) in the first thirty-nine weeks of 2003 and 2002,
respectively. The results for the first nine months of 2003 include charges
for the write-down of assets at the Zacatecas, Mexico facility of $4.3
million, the write-off of deferred debt issuance costs of $1.6 million and
the curtailment of a pension plan of $1.8 million. Weighted average shares
outstanding were 9.1 million and 8.9 million shares in the nine months 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.
During the third quarter of 2003, the Company recorded a non-cash
pre-tax charge of $4.3 million or $3.0 million after-tax, to write-down the
assets of the Company's Zacatecas, Mexico manufacturing facility to its
anticipated net realizable value in connection with the Company's decision
to dispose of the facility. The total charge of $4.3 million included a
write-down of inventory of $2.3 million, which is included in the
Consolidated Statements of Earnings as a component of cost of sales,
including restructuring charge. The Company currently has a signed letter of
intent to sell the assets and transfer the operations of this facility to a
third party. The Company expects the sale to be completed by the end of
December 2003, although there are no assurances that the sale will be
completed. If the current proposed sale is completed, the Company does not
expect to incur any significant future cash costs associated with the
disposal of this facility. However, if the Company does not successfully
sell the facility, it may incur future cash costs associated with the
closure of the facility.
Net sales for the nine months of 2003 were $186.2 million, a decrease
of 7.7% from the nine months of 2002 net sales of $201.7 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 the soft United States economy.
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. Excluding the impact from Boston Market, the Company's sales to the
food service market increased during the period. 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.
16
Cost of sales, including restructuring charge, was $144.5 million in
the first nine months of 2003, a decrease of 6.3% from $154.2 million in the
first nine months of 2002. Gross margin decreased to $41.7 million for the
first nine months of 2003, from $47.6 million in the first nine months of
2002. The decrease in gross margin is due to the decline in sales, the
restructuring charge of $2.3 million recorded in the third quarter of 2003,
and pricing pressures, primarily in the hospitality market. Gross margin as
a percentage of net sales was 22.4% and 23.6% in the first nine months of
2003 and 2002, respectively. Gross margin as a percentage of net sales was
negatively impacted by 1.2% related to the restructuring charge recorded in
the first nine months of 2003. The Company's cost reduction activities
offset any decline in gross margin as a percentage of net sales due to the
lower sales volume and other factors.
Selling, general and administrative expenses were $32.6 million in the
first nine months of 2003, compared to $34.5 million in the first nine
months 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, general and administrative
expenses as a percentage of net sales were 17.5% for the first nine months
of 2003, compared to 17.1% for the first nine months of 2002.
In connection with the refinancing of its senior credit facility, the
Company recorded a loss on early extinguishment of debt to write-off
deferred debt issuance costs of $1.6 million.
During the third quarter of 2003, the Company notified its employees,
who are participants in the Falcon Products, Inc. Retirement Plan (the
"Plan") that no pension benefits will be earned for service on or after
August 1, 2003. As a result of this action, the Company recorded a $1.8
million pension curtailment loss to record previously unrecognized prior
service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits."
The Company recorded an income tax benefit of $2.6 million in the first
nine months of 2003, compared with a $0.1 million income tax expense in the
first nine months of 2002. The effective tax rate differs from the statutory
tax rate due to non-deductible permanent tax items and state, local and
foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at August 2, 2003 was $66.3 million
compared with $39.0 million at November 2, 2002. The Company's ratio of
current assets to current liabilities was 2.6 to 1.0 at August 2, 2003 and
1.6 to 1.0 at November 2, 2002.
Cash used in operating activities was $14.9 million and $5.9 million in
the first nine months of 2003 and 2002, respectively. The cash used in the
first nine months of 2003 was mainly for the purchase of inventory, the
payment of interest, and the timing of accounts payable, partially offset by
an income tax refund. Inventories were $64.4 million at August 2, 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 nine
months of 2003 and 2002, the Company incurred $1.7 million and $3.6 million,
respectively, for capital expenditures. Cash provided by financing
activities was $16.5 million and $10.8 million in the first nine months of
2003 and 2002, respectively.
17
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 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 August 2, 2003, the Company had $23.2 million outstanding under the
revolving line of credit. In addition, approximately $4.7 million of the
total commitment under the 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 Adjusted EBITDA, as defined in the agreement.
As of August 2, 2003, the Company was in compliance with its debt
covenants under its credit agreements. Based on the Company's anticipated
improvement in its operating results, the Company expects to remain in
compliance with its credit agreements absent any material trend adversely
affecting the U.S. economy. However, the Company's expectations of future
operating results and continued compliance with the Company's credit
agreements cannot be assured.
18
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 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 Thirty-Nine Weeks Ended
---------------------------- -----------------------------
August 2, August 3, August 2, August 3,
In thousands 2003 2002 2003 2002
------------ ------------ ------------- ------------
Earnings (loss) before income taxes $ (8,135) $ 773 $ (9,060) $ (379)
Interest expense, net 4,607 4,532 12,738 12,861
Depreciation and amortization expense 2,147 1,942 6,184 5,850
------------ ------------ ------------- -------------
EBITDA $ (1,381) $ 7,247 $ 9,862 $ 18,332
Restructuring charge 4,265 - 4,265 639
Loss on early extinguishment of debt 1,564 - 1,564 -
Loss on curtailment of pension plan 1,833 - 1,833 -
------------ ------------ ------------- -------------
Adjusted EBITDA $ 6,281 $ 7,247 $ 17,524 $ 18,971
============ ============ ============= =============
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 instruments based on LIBOR.
Item 4. - Controls and Procedures
-----------------------
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of
the chief executive officer and chief financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")).
Based on this evaluation, the chief executive officer and chief financial
officer concluded that the Company's disclosure controls and procedures were
effective as of the end of the period covered by this report. There was no
change in the Company's internal controls over financial reporting during
the Company's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
19
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.
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
---------------------------------------------------
None.
Item 5. - Other Information
-----------------
None.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
September 4, 2003 - Press release issued by Falcon Products,
Inc. on September 3, 2003
20
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: September 16, 2003 /s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chief Executive Officer
and Chairman of the Board
Date: September 16, 2003 /s/ Michael J. Dreller
----------------------
Michael J. Dreller
Vice President and
Chief Financial Officer
21