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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 January 31, 2004
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
ST. LOUIS, MISSOURI 63132
(Address of principal executive offices) (Zip Code)
(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 March 12, 2004, the registrant had 9,091,957 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 Operations
-------------------------------------
(Unaudited)
Thirteen Weeks Ended
----------------------------------
January 31, February 1,
(In thousands, except per share data) 2004 2003
---------------- ----------------
Net sales $ 49,891 $ 65,134
Cost of sales 42,194 50,346
------------- --------------
Gross margin 7,697 14,788
Selling, general and administrative expenses 10,538 10,819
Interest expense, net 5,108 4,068
Minority interest in consolidated subsidiaries (56) 65
Loss on early extinguishment of debt 3,947 -
Restructuring charge 194 -
------------- --------------
Loss before income taxes (12,034) (164)
Income tax expense 196 132
------------- --------------
Net loss $ (12,230) $ (296)
============= ==============
Basic and diluted loss per share $ (1.33) $ (0.03)
============= ==============
See accompanying notes to consolidated financial statements.
2
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands, except share data)
January 31, November 1,
Assets 2004 2003
- ------ (Unaudited)
-------------- ----------------
Current assets:
Cash and cash equivalents $ 1,232 $ 1,356
Accounts receivable, less allowances
of $735 and $861, respectively 24,685 31,877
Inventories 62,836 62,525
Prepayments and other current assets 5,863 5,344
-------------- -------------
Total current assets 94,616 101,102
-------------- -------------
Property, plant and equipment:
Land 2,905 2,872
Buildings and improvements 19,448 19,175
Machinery and equipment 51,895 51,235
-------------- -------------
74,248 73,282
Less: accumulated depreciation 37,878 36,703
-------------- -------------
Net property, plant and equipment 36,370 36,579
Other assets, net of accumulated amortization:
Goodwill 117,474 117,474
Other 12,539 11,385
-------------- -------------
Total other assets 130,013 128,859
-------------- -------------
Total Assets $ 260,999 $ 266,540
============== =============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 25,844 $ 27,612
Customer deposits 5,705 5,249
Accrued liabilities 11,815 16,842
Current maturities of long-term debt 72,275 3,900
-------------- -------------
Total current liabilities 115,639 53,603
Long-term obligations:
Long-term debt 106,003 161,485
Minority interest in consolidated subsidiaries 766 822
Other 11,457 12,046
-------------- -------------
Total liabilities 233,865 227,956
-------------- -------------
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 (825,625 and 917,053 shares, respectively) (9,097) (10,493)
Accumulated other comprehensive loss (6,536) (7,004)
Retained earnings (deficit) (4,807) 8,507
-------------- -------------
Total stockholders' equity 27,134 38,584
-------------- -------------
Total Liabilities and Stockholders' Equity $ 260,999 $ 266,540
============== =============
See accompanying notes to consolidated financial statements.
3
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Thirteen Weeks Ended
---------------------------------
(In thousands) January 31, February 1,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net loss $ (12,230) $ (296)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,178 2,298
Minority interest in consolidated subsidiaries (56) 65
Loss on early extinguishment of debt 3,947 -
Change in assets and liabilities:
Accounts receivable 8,277 1,396
Inventories (123) (2,797)
Prepayments and other current assets (518) 2,314
Other assets (1,389) (287)
Accounts payable and customer deposits (1,381) (1,860)
Accrued liabilities (5,066) (3,978)
Other liabilities (742) (618)
--------------- ---------------
Cash used in operating activities (7,103) (3,763)
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (658) (723)
--------------- ---------------
Cash used in investing activities (658) (723)
--------------- ---------------
Cash flows from financing activities:
Repayment of long-term debt (36,566) (2,693)
Proceeds from long-term debt 49,255 6,393
Deferred debt issuance costs (5,363)
Common stock issuances 311 320
--------------- ---------------
Cash provided by financing activities 7,637 4,020
---------------- ----------------
Decrease in cash and cash equivalents (124) (466)
Cash and cash equivalents-beginning of period 1,356 1,646
--------------- ---------------
Cash and cash equivalents-end of period $ 1,232 $ 1,180
=============== ===============
Supplemental cash flow information:
Cash paid for interest $ 7,411 $ 6,612
=============== ===============
Cash paid for (refund of) taxes, net $ (9) $ (3,740)
=============== ===============
See accompanying notes to consolidated financial statements.
4
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
For the Thirteen Weeks Ended January 31, 2004
---------------------------------------------
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 notes to the consolidated financial statements contained in
the Company's Annual Report on Form 10-K for the year ended November 1,
2003, filed with the Securities and Exchange Commission.
Note 2 - Management Plan
The Company experienced a net loss in the first quarter of 2004 due to
the decline in volume, unfavorable product mix and pricing pressures, the
write-off of deferred debt issuance costs and production inefficiencies as a
result of the closure of our Canton facility and transfer of the Canton
production into other facilities. As a result of the loss, the Company was
not in compliance with its financial covenants under its credit agreement as
of January 31, 2004. (see Note 6)
There was significant progress in the first quarter of this year toward
our cost reduction targets. The company successfully closed the Canton,
Mississippi facility and moved production to other facilities. This was
accomplished on time and below budget. Savings from this initiative will be
greater than originally forecasted because the Company did not hire as many
additional people in its Morristown facility as was originally anticipated.
Further, wood inventory was positioned in Eastern Europe to be able to
utilize green pre-cuts for a substantial part of production, which will
drive our wood frame costs down. Our outsourced wood frame supply from
Europe expanded in the quarter and will show meaningful savings in the
second quarter. Our sourcing strategies are taking hold and we have already
contracted for meaningful reductions in materials, even with the expected
increase in steel costs. These actions will have an immediate impact. In
addition, the company will continue to realize savings as a result of the
Company's actions to cease pension benefits for service on or after August
1, 2003 for participants in the Falcon Products, Inc. Retirement Plan.
While the first quarter was difficult from a sales perspective there
was a tremendous amount accomplished. The performance in the quarter is
wholly explained by volume and transition of production. The gross margin
decline is fully explained by volume variances and shut down inefficiencies.
Plant performance is on track with expectations.
Note 3 - 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.
5
Note 4 - Restructuring Charges
During the first quarter of 2004, the Company recorded a restructuring
charge of $0.2 million. This charge was the result of the Company closing
its Canton, Mississippi facility. The transfer of production to the other
facilities was completed at the end of January 2004.
A summary of 2004 activity is as follows:
Thirteen Weeks Ended
In thousands January 31, 2004
----------------
Liability - November 1, 2003 $ 500
Charges - Employee severance, real estate exit
costs and other costs 194
Payments made:
Employee severance (71)
Real estate exit and other costs (229)
-----
Liability - January 31, 2004 $ 394
=====
The Company expects to expense future cash costs of approximately $1.3
million to $1.6 million associated with closing its Canton, Mississippi
facility.
Note 5 - Inventories
Inventories consisted of the following:
January 31, November 1,
In thousands 2004 2003
--------------- -----------------
Raw materials....................... $ 40,488 $ 40,896
Work in process..................... 16,451 15,728
Finished goods...................... 5,897 5,901
--------------- -----------------
$ 62,836 $ 62,525
=============== =================
Note 6 - Long-Term Debt
On January 15, 2004, the Company amended and restated its existing
credit agreement with a group of financial institutions. The amended and
restated agreement provides for an $89.3 million total credit facility,
consisting of (i) a $33.8 million revolving credit facility, (ii) a $5.6
million amortizing term loan A and (iii) a $50 million non-amortizing term
loan B. The term loan A requires quarterly principal payments of $0.2
million commencing on April 1, 2004. The revolving credit facility bears
interest at the Company's option at (i) the London Interbank Offered Rate
("LIBOR") plus 3.00% or (ii) the Base Rate (as defined) plus 1.00%. The term
loan A bears interest at the Company's option at (i) LIBOR plus 3.25% or
(ii) the Base Rate plus 1.25%. The term loan B bears interest at 15.0%, of
which 6.0% is payable on a current basis as provided in the agreement and
the balance of the interest equal to 9.0% is accrued and added to the
outstanding principal balance each month.
At January 31, 2004, the Company had $13.5 million outstanding under
this revolving line of credit. In addition, approximately $5.0 million of
the total commitment under the revolving line of credit is currently used to
support outstanding standby letters of credit.
6
In connection with the refinancing, the Company recorded a loss on
early extinguishment of debt to write-off deferred debt issuance costs of
$3.9 million.
The Company must comply with certain covenants, under its credit
agreement, including limitations relating to the payment of dividends, the
maintenance of specific ratios and minimum levels of EBITDA, as defined in
the credit agreement. When finalizing the first quarter results, the Company
determined it was not in compliance with the January 15, 2004 amended
covenants. The Company obtained a waiver for its non-compliance which eased
its covenants for the second and third quarters of 2004.
Specifically, the fixed charge coverage ratio was reduced from .60 and
..70 to 1.0 for the second and third quarters respectively, to .50 and .60 to
1.0. The minimum EBITDA requirement was reduced from $15 million to $14
million in the second quarter and from $19 million to $17 million in the
third quarter. The maximum secured debt to EBITDA ratio was increased from
4.25 and 4.00 to 5.10 and 4.20 for the second and third quarters,
respectively. For the fourth quarter of 2004 all covenant requirements
remained as per the original agreement.
In addition to the above, the Domestic EBITDA requirement was
eliminated. No other financial covenants were changed. In exchange for the
waiver and the eased second and third quarter covenants, the Company is
obligated to pay interest of 16% versus 15% until which time the Company can
demonstrate a last twelve months EBITDA of more than $20 million in which
case the interest rate will adjust back to 15%. Further, the prepayment
penalty was extended to three years from the original two years.
Due to the uncertainty surrounding future debt covenant compliance, the
Company has classified the credit agreement debt in current maturities of
long-term debt in the consolidated balance sheet. If the Company achieves
significant improvement in operating results as a result of the cost savings
initiatives it has implemented, the future classification of debt under its
credit agreement could be reclassified from current to long-term in future
periods.
On December 15, 2003, the Company sold $4.15 million of 12% junior
subordinated convertible debentures (the "Debentures") due 2010. The
Debentures were sold mainly to directors and other related parties of the
Company. Interest is payable semiannually on June 15 and December 15,
commencing June 15, 2004. The holder of the Debentures is entitled, at his
or her option, at any time preceding maturity to convert the principal
amount of the Debentures into the Company's common stock at a conversion
price of $6.44 per share. The Company may redeem the Debentures at any time
prior to December 15, 2008 at 106% of the outstanding principal, provided,
however, that as of the business day prior to the giving notice of such
redemption, the closing price of the Company's stock has been at least $9.30
per share for at least 20 consecutive trading days immediately preceding the
date that the redemption notice is given.
7
Note 7 - Earnings Per Share
The following table reconciles net loss and weighted average shares
outstanding to the amounts used to calculate basic and diluted loss per
share:
Thirteen Weeks Ended
-----------------------------------
In thousands, January 31, February 1,
except per-share data 2004 2003
--------------- ---------------
Net loss $ (12,230) $ (296)
=============== ===============
Weighted average shares outstanding 9,164 9,048
Assumed exercise of options - -
--------------- ---------------
Weighted average diluted shares outstanding $ 9,164 $ 9,048
=============== ===============
Basic loss per share $ (1.33) $ (0.03)
=============== ===============
Diluted loss per share $ (1.33) $ (0.03)
=============== ===============
Basic loss per share was computed by dividing net loss by the weighted
average shares of common stock outstanding during the period. Outstanding
options to purchase shares were not included in the computation of diluted
loss per share because the shares were antidilutive.
Note 8- Comprehensive Income (Loss)
Comprehensive income (loss) includes, in addition to net 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
equity except those resulting from investments by owners and distributions
to owners.
Thirteen Weeks Ended
-----------------------------
January 31, February 1,
In thousands 2004 2003
------------ -------------
Net loss $(12,230) $ (296)
Translation adjustments 468 710
------------ -------------
Comprehensive income (loss) $(11,762) $ 414
============ =============
Note 9 - Recently Issued Accounting Standards
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.
8
Pro forma net 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
-------------------------------
January 31, February 1,
In thousands 2004 2003
------------- -------------
Net loss $(12,230) $ (296)
Fair value of stock-based employee compensation (211) (245)
------------- -------------
Net loss - pro forma $(12,441) $ (541)
============= =============
Net loss per share - pro forma $ (1.36) $ (0.06)
============= =============
In November 2002, the FASB issued FASB Interpretation No. 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 offers
one-year warranties on its products. The Company estimates the amount of
future warranty claims based on historical warranty information as well as
recent trends that might suggest that past cost information may differ from
future claims.
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 in assessing the Company and its Guarantor Subsidiaries.
9
Falcon Products, Inc.
Consolidating Statement of Operations
For the Thirteen Weeks Ended January 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------
Net sales $ - $ 46,053 $ 6,143 $ (2,305) $ 49,891
Cost of sales - 39,420 5,079 (2,305) 42,194
Selling, general and administrative expenses - 9,437 1,101 - 10,538
Equity in earnings (loss) of subsidiary (12,230) - - 12,230 -
Interest expense, net - 5,053 55 - 5,108
Minority interest in consolidated subsidiaries - (56) - - (56)
Loss on early extinguishment of debt - 3,947 - - 3,947
Restructuring charge - 194 - - 194
--------------------------------------------------------------------------
Net earnings (loss) before income taxes (12,230) (11,942) (92) 12,230 (12,034)
Income tax expense - - 196 - 196
--------------------------------------------------------------------------
Net income (loss) $(12,230) $(11,942) $ (288) $ 12,230 $(12,230)
==========================================================================
Falcon Products, Inc.
Consolidating Statement of Operations
For the Thirteen Weeks Ended February 1, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------------------------------------------------------------------------
Net sales $ - $ 62,357 $ 6,489 $ (3,712) $65,134
Cost of sales - 48,244 5,814 (3,712) 50,346
Selling, general and administrative expenses - 10,200 619 - 10,819
Equity in earnings (loss) of subsidiaries (296) - - 296 -
Interest expense, net - 4,027 41 - 4,068
Minority interest in consolidated subsidiaries - 65 - - 65
-------------------------------------------------------------------------
Net earnings (loss) before income taxes (296) (179) 15 296 (164)
Income tax expense - 126 6 - 132
-------------------------------------------------------------------------
Net income (loss) $ (296) $ (305) $ 9 $ 296 $ (296)
=========================================================================
10
Falcon Products, Inc.
Consolidating Balance Sheet
As of January 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 187 $ 1,045 $ - $ 1,232
Accounts receivable - 19,920 4,765 - 24,685
Inventories - 57,009 5,827 - 62,836
Other assets - 4,500 1,363 - 5,863
-------------------------------------------------------------------------------
Total current assets - 81,616 13,000 - 94,616
Property, plant and equipment, net - 23,982 12,388 - 36,370
Investment in subsidiaries 27,134 - - (27,134) -
Intangibles and other assets - 129,958 55 - 130,013
-------------------------------------------------------------------------------
Total assets $27,134 $235,556 $ 25,443 $(27,134) $ 260,999
===============================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $103,544 $ 12,095 $ - $ 115,639
Long-term debt - 104,149 1,854 - 106,003
Other long-term liabilities - 11,786 437 - 12,223
-------------------------------------------------------------------------------
Total liabilities - 219,479 14,386 - 233,865
Stockholders' equity 27,134 16,077 11,057 (27,134) 27,134
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $27,134 $235,556 $ 25,443 $(27,134) $ 260,999
===============================================================================
11
Falcon Products, Inc.
Consolidating Balance Sheet
As of November 1, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
----------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 325 $ 1,031 $ - $ 1,356
Accounts receivable - 28,944 2,933 - 31,877
Inventories - 56,802 5,723 - 62,525
Other current assets - 4,277 1,067 - 5,344
----------------------------------------------------------------------------------
Total current assets - 90,348 10,754 - 101,102
Property, plant and equipment, net - 24,593 11,986 - 36,579
Investment in subsidiaries 38,584 - - (38,584) -
Intangibles and other assets - 128,804 55 - 128,859
----------------------------------------------------------------------------------
Total assets $ 38,584 $ 243,745 $ 22,795 $ (38,584) $ 266,540
==================================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $ 44,212 $ 9,391 $ - $ 53,603
Long-term debt - 159,708 1,777 - 161,485
Other long-term liabilities - 12,586 282 - 12,868
----------------------------------------------------------------------------------
Total liabilities - 216,506 11,450 - 227,956
Total stockholders' equity 38,584 27,239 11,345 (38,584) 38,584
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 38,584 $ 243,745 $ 22,795 $ (38,584) $ 266,540
==================================================================================
12
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended January 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ - $ (7,349) $ 246 $ - $ (7,103)
Net cash used in investing activities (311) (38) (309) (658)
Cash flows from financing activities
Common stock issuances 311 - - - 311
Deferred debt issuance costs (5,363) - (5,363)
Additions to long-term debt, net - 12,612 77 - 12,689
--------------------------------------------------------------------------
Cash provided by financing activities 311 7,249 77 - 7,637
--------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ (138) $ 14 $ - $ (124)
==========================================================================
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended January 31, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------
Net cash used in operating activities $ - $ (3,580) $ (183) $ - $ (3,763)
Net cash used in investing activities (320) (254) (149) (723)
Cash flows from financing activities
Common stock issuances 320 - - - 320
Additions to long-term debt, net - 3,603 97 - 3,700
--------------------------------------------------------------------------
Cash provided by financing activities 320 3,603 97 - 4,020
--------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ (231) $ (235) $ - $ (466)
==========================================================================
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
Management Plan
The Company experienced a net loss in the first quarter of 2004 due to
the decline in volume, unfavorable product mix and pricing pressures, the
write-off of deferred debt issuance costs and production inefficiencies as a
result of the closure of our Canton facility and transfer of the Canton
production into other facilities. As a result of the loss, the Company was
not in compliance with its financial covenants under its credit agreement as
of January 31, 2004. The Company obtained a waiver from the banks without a
fee for its non-compliance and amended its covenants in the second and third
quarter of 2004. Due to the uncertainty surrounding future debt covenant
compliance, the Company has classified the credit agreement debt in current
maturities of long-term debt in the consolidated balance sheet. If the
Company achieves significant improvement in operating results as a result of
the cost savings initiatives it has implemented, the future classification
of debt under its credit agreement could be reclassified from current to
long-term in future periods.
There was significant progress in the first quarter of this year toward
our cost reduction targets. The company successfully closed the Canton,
Mississippi facility and moved production to other facilities. This was
accomplished on time and below budget. Savings from this initiative will be
greater than originally forecasted because the Company did not hire as many
additional people in its Morristown facility as was originally anticipated.
Further, wood inventory was positioned in Eastern Europe to be able to
utilize green pre-cuts for a substantial part of production, which will
drive our wood frame costs down. Our outsourced wood frame supply from
Europe expanded in the quarter and will show meaningful savings in the
second quarter. Our sourcing strategies are taking hold and we have already
contracted for meaningful reductions in materials, even with the expected
increase in steel costs. These actions will have an immediate impact. In
addition, the company will continue to realize savings as a result of the
Company's actions to cease pension benefits for service on or after August
1, 2003 for participants in the Falcon Products, Inc. Retirement Plan.
While the first quarter was difficult from a sales perspective there
was a tremendous amount accomplished. The performance in the quarter is
wholly explained by volume and transition of production. The gross margin
decline is fully explained by volume variances and shut down inefficiencies.
Plant performance is on track with expectations.
14
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 Weeks Ended
-------------------------------
January 31, February 1,
2004 2003
-------------- --------------
Net sales 100.0% 100.0%
Cost of sales 84.6 77.3
-------------- --------------
Gross margin 15.4 22.7
Selling, general and administrative expenses 21.1 16.6
Interest expense, net 10.2 6.2
Minority interest in consolidated subsidiary (0.1) 0.1
Loss on early extinguishment of debt 7.9 -
Restructuring charge 0.4 -
-------------- --------------
Loss before income taxes (24.1) (0.2)
Income tax expense 0.4 0.2
-------------- --------------
Net loss (24.5)% (0.4)%
============== ==============
Thirteen weeks ended January 31, 2004 compared to the thirteen weeks ended
February 1, 2003
The Company reported a net loss of $12.2 million, or $1.33 per diluted
share and $0.3 million, or $0.03 per diluted share in the first quarter of
2004 and 2003, respectively. Weighted average shares outstanding were 9.2
million and 9.0 million shares in the first quarter of 2004 and 2003,
respectively.
During the first quarter of 2004, the Company recorded charges of $4.1
million. These charges were the result of the Company amending and restating
its senior credit facility ($3.9 million) and closing its Canton,
Mississippi facility ($0.2 million).
Net sales for the first quarter of 2004 were $49.9 million, a decrease
of 23.3% from the 2003 first quarter net sales of $65.1 million. The
decrease is a result of a decline in both the food service and hospitality
markets. Sales in the food service market declined 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 first quarter of 2004.
The decrease in the hospitality market reflects the continued weak market
conditions, which has led to a decline in new construction and a deferral of
refurbishments. However, leading indicators, such as, revenue per available
room and occupancy percentages, are showing signs of improvement.
Cost of sales was $42.2 million for the first quarter of 2004, a
decrease of 16.1% from $50.3 million in the first quarter of 2003. Gross
margin decreased to $7.7 million for the first quarter of 2004, from $14.8
million in the same quarter of 2003. Gross margin as a percentage of net
sales decreased to 15.4% in 2004, compared to 22.7% in 2003. The decrease in
gross margin and gross margin as a percentage of net sales is mainly the
result of decreased sales volume. Additionally, pricing and product mix
pressure, limited primarily to the hospitality market, as well as
inefficiencies and additional costs incurred during the transition of
manufacturing from Canton to other facilities, also negatively impacted
gross margin.
Selling, general and administrative expenses were $10.5 million in the
first quarter of 2004, compared to $10.8 million in the first quarter of
2003. Selling, general and administrative expenses as a
15
percentage of net sales were 21.1% for the first quarter of 2004, compared
to 16.6% for the first quarter of 2003. The increase in the S,G&A expense
ratio is a reflection of the decrease in sales.
In the first quarter of 2004, the Company recorded income tax expense
of $0.2 million on a loss before income taxes of $12.0 million due to
recording a deferred tax asset valuation allowance of $4.5 million,
non-deductible permanent tax items and state, local and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital was a negative $21.0 million as of
January 31, 2004, compared with $47.5 million at November 1, 2003, due to
the classification change of the bank credit agreement. The Company's ratio
of current assets to current liabilities decreased to 0.8 to 1.0 at January
31, 2004 from 1.9 to 1.0 at November 1, 2003.
Cash used in operating activities was $7.1 million and $3.8 million in
the first quarter of 2004 and 2003, respectively. The cash used in the first
quarter of 2004 was mainly for the payment of interest and accounts payable.
During the first three months of 2004 and 2003, the Company incurred $0.7
million for capital expenditures. Cash provided by financing activities was
$7.6 million and $4.0 million in the first quarter of 2004 and 2003,
respectively, relating to the refinancing of the senior credit facility in
the first quarter of 2004 and net borrowings under the Company's revolving
line of credit in 2003.
On January 15, 2004, the Company amended and restated its existing
credit agreement with a group of financial institutions. The amended and
restated agreement provides for an $89.3 million total credit facility,
consisting of (i) a $33.8 million revolving credit facility, (ii) a $5.6
million amortizing term loan A and (iii) a $50 million non-amortizing term
loan B. The term loan A requires quarterly principal payments of $0.2
million commencing on April 1, 2004. The revolving credit facility bears
interest at the Company's option at (i) the London Interbank Offered Rate
("LIBOR") plus 3.00% or (ii) the Base Rate (as defined) plus 1.00%. The term
loan A bears interest at the Company's option at (i) LIBOR plus 3.25% or
(ii) the Base Rate plus 1.25%. The term loan B bears interest at 15.0%, of
which 6.0% is payable on a current basis as provided in the agreement and
the balance of the interest equal to 9.0% is accrued and added to the
outstanding principal balance each month.
At January 31, 2004, the Company had $13.5 million outstanding under
this revolving line of credit. In addition, approximately $5.0 million of
the total commitment under the revolving line of credit is currently used to
support outstanding standby letters of credit.
In connection with the refinancing, the Company recorded a loss on
early extinguishment of debt to write-off deferred debt issuance costs of
$3.9 million.
The Company must comply with certain covenants, under its credit
agreement, including limitations relating to the payment of dividends, the
maintenance of specific ratios and minimum levels of EBITDA, as defined in
the credit agreement. When finalizing the first quarter results, the Company
determined it was not in compliance with the January 15, 2004 amended
covenants. The Company obtained a waiver for its non-compliance which eased
its covenants for the second and third quarters of 2004.
Specifically, the fixed charge coverage ratio was reduced from .60 and
..70 to 1.0 for the second and third quarters respectively, to .50 and .60 to
1.0. The minimum EBITDA requirement was reduced from $15 million to $14
million in the second quarter and from $19 million to $17 million in the
third quarter. The maximum secured debt to EBITDA ratio was increased from
4.25 and 4.00 to 5.10 and 4.20 for the
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second and third quarters, respectively. For the fourth quarter of 2004 all
covenant requirements remained as per the original agreement.
In addition to the above, the Domestic EBITDA requirement was
eliminated. No other financial covenants were changed. In exchange for the
waiver and the eased second and third quarter covenants, the Company is
obligated to pay interest of 16% versus 15% until which time the Company can
demonstrate a last twelve months EBITDA of more than $20 million in which
case the interest rate will adjust back to 15%. Further, the prepayment
penalty was extended to three years from the original two years.
Due to the uncertainty surrounding future debt covenant compliance, the
Company has classified the credit agreement debt in current maturities of
long-term debt in the consolidated balance sheet. If the Company achieves
significant improvement in operating results as a result of the cost savings
initiatives it has implemented, the future classification of debt under its
credit agreement could be reclassified from current to long-term in future
periods.
On December 15, 2003, the Company sold $4.15 million of 12% junior
subordinated convertible debentures (the "Debentures") due 2010. The
Debentures were sold mainly to directors and other related parties of the
Company. Interest is payable semiannually on June 15 and December 15,
commencing June 15, 2004. The holder of the Debentures is entitled, at his
or her option, at any time preceding maturity to convert the principal
amount of the Debentures into the Company's common stock at a conversion
price of $6.44 per share. The Company may redeem the Debentures at any time
prior to December 15, 2008 at 106% of the outstanding principal, provided,
however, that as of the business day prior to the giving notice of such
redemption, the closing price of the Company's stock has been at least $9.30
per share for at least 20 consecutive trading days immediately preceding the
date that the redemption notice is given.
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
-----------------------
(a) Evaluation of Disclosure Controls and Procedures.
------------------------------------------------
An evaluation as of the end of the period covered by this annual report
was carried out under the supervision and with the participation of the
Company's management, including the Company's Chairman and Chief Executive
Officer and its President and Chief Operating Officer (acting Chief
Financial Officer), of the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934). Based
upon that evaluation, the Company's Chairman and Chief Executive Officer and
its President and Chief Operating Officer (acting Chief Financial Officer)
concluded that the Company's disclosure controls and procedures were
effective.
Prior to and during this evaluation, certain deficiencies in internal
controls existed related to accounting for inventory. These deficiencies
include inconsistent application of accounting policies and related controls
among the plants, insufficient review of inventory accounts by the plants
and limited
17
information system resources in valuing inventory, all of which relate
primarily to the decentralized nature of the accounting for inventory. In
order to improve inventory controls, the Company will perform a physical
inventory of finished goods and work in process on a quarterly basis,
improve the cycle counting procedures, increase corporate oversight of the
controls and procedures over inventory and has hired experienced inventory
personnel. Management, including the Chairman and Chief Executive Officer
and the President and Chief Operating Officer (acting Chief Financial
Officer), believe the results of the corrective actions initiated by the
Company will be effective in addressing the deficiencies in internal
controls over inventory.
(b) Changes in Internal Control Over Financial Reporting.
----------------------------------------------------
The Company's management, including the Company's Chairman and Chief
Executive Officer and its President and Chief Operating Officer (acting
Chief Financial Officer), has evaluated any changes in the Company's
internal control over financial reporting that occurred during the quarterly
period covered by this report and has concluded that there was no change
during the Company's first quarter of its 2004 fiscal year that has
materially affected or is reasonably likely to materially affect the
Company's internal control over financial reporting, including corrective
actions with regards to the deficiencies noted above.
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 are 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.
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Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.1 Waiver and Amendment No. 1 to Amended and Restated Loan
and Security Agreement
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:
On February 11, 2004, a Form 8-K was filed under Items 7 and
12 announcing the Company's financial results for the fourth
fiscal quarter ended November 1, 2003.
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: March 15, 2004 /s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chief Executive Officer
and Chairman of the Board
Date: March 15, 2004 /s/ David L. Morley
-------------------
David L. Morley
President and Chief Operating Office
(acting Chief Financial Officer)
19