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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 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 June 15, 2004, the registrant had 9,791,977 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 Twenty-Six
Weeks Ended Weeks Ended
-------------------------------- -------------------------------
May 1, May 3, May 1, May 3,
(In thousands, except per share data) 2004 2003 2004 2003
------------- -------------- ------------- --------------
Net sales $ 55,133 $ 58,710 $ 105,024 $ 123,844
Cost of sales 42,235 44,834 84,429 95,180
------------- -------------- ------------- --------------
Gross margin 12,898 13,876 20,595 28,664
Selling, general and administrative expenses 10,787 10,590 21,325 21,409
Interest expense, net 5,626 4,063 10,734 8,131
Minority interest in consolidated subsidiary 19 (16) (37) 49
Loss on early extinguishment of debt - - 3,947 -
Restructuring charge 546 - 740 -
------------- -------------- ------------- --------------
Loss before income taxes (4,080) (761) (16,114) (925)
Income tax expense (benefit) 226 (133) 422 (1)
------------- -------------- ------------- --------------
Net loss $ (4,306) $ (628) $ (16,536) $ (924)
============= ============== ============= ==============
Basic and diluted loss per share $ (0.46) $ (0.07) $ (1.78) $ (0.10)
============= ============== ============= ==============
See accompanying notes to consolidated financial statements.
2
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands, except share data) (Unaudited)
May 1, November 1,
Assets 2004 2003
- ------ ---------- -----------
Current assets:
Cash and cash equivalents $ 1,046 $ 1,356
Accounts receivable, less allowances
of $829 and $861, respectively 26,718 31,877
Inventories 63,794 62,525
Prepayments and other current assets 6,218 5,344
---------- -----------
Total current assets 97,776 101,102
---------- -----------
Property, plant and equipment:
Land 2,888 2,872
Buildings and improvements 19,313 19,175
Machinery and equipment 51,953 51,235
---------- -----------
74,154 73,282
Less: accumulated depreciation 39,067 36,703
---------- -----------
Net property, plant and equipment 35,087 36,579
---------- -----------
Other assets, net of accumulated amortization:
Goodwill 117,474 117,474
Other 12,032 11,385
---------- -----------
Total other assets 129,506 128,859
---------- -----------
Total Assets $ 262,369 $ 266,540
========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 26,539 $ 27,612
Customer deposits 5,653 5,249
Accrued liabilities 14,521 16,842
Current maturities of long-term debt 72,470 3,900
---------- -----------
Total current liabilities 119,183 53,603
Long-term obligations:
Long-term debt 105,874 161,485
Minority interest in consolidated subsidiary 785 822
Other 11,729 12,046
---------- -----------
Total liabilities 237,571 227,956
---------- -----------
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 (123,140 and 917,053 shares, respectively) (1,059) (10,493)
Accumulated other comprehensive loss (6,688) (7,004)
Retained earnings (deficit) (15,029) 8,507
---------- -----------
Total stockholders' equity 24,798 38,584
---------- -----------
Total Liabilities and Stockholders' Equity $ 262,369 $ 266,540
========== ===========
See accompanying notes to consolidated financial statements.
3
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Twenty-Six Weeks Ended
---------------------------------
(In thousands) May 1, May 3,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net loss $ (16,536) $ (924)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,511 4,622
Minority interest in consolidated subsidiary (37) 49
Loss on early extinguishments of debt 3,947 -
Change in assets and liabilities:
Accounts receivable 4,891 3,412
Inventories (1,174) (6,764)
Prepayments and other current assets (874) 1,451
Other assets (336) (1,582)
Accounts payable and customer deposits (372) 2,640
Accrued liabilities (2,377) (2,862)
Other liabilities (454) (1,314)
--------------- ---------------
Cash used in operating activities (8,811) (1,272)
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (879) (1,288)
--------------- ---------------
Cash used in investing activities (879) (1,288)
--------------- ---------------
Cash flows from financing activities:
Common stock issuances 2,431 320
Repayment of long-term debt (42,796) (5,385)
Proceeds from long-term debt 55,659 7,159
Deferred debt issuance costs (5,914) -
--------------- ---------------
Cash provided by financing activities 9,380 2,094
--------------- ---------------
Decrease in cash and cash equivalents (310) (466)
Cash and cash equivalents-beginning of period 1,356 1,646
--------------- ---------------
Cash and cash equivalents-end of period $ 1,046 $ 1,180
=============== ===============
Supplemental cash flow information:
Cash paid for interest $ 8,363 $ 7,525
=============== ===============
Cash paid for (refund of) taxes, net $ 276 $ (3,582)
=============== ===============
See accompanying notes to consolidated financial statements.
4
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
For the Thirteen and Twenty-Six Weeks Ended May 1, 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 second quarter of 2004 due to
the decline in volume and increased interest costs. As a result of the loss,
the Company was not in compliance with its financial covenants under its
credit agreement as of May 1, 2004. (see Note 6).
There was significant progress in the second quarter of this year
toward our cost reduction targets. The company successfully closed the
Canton, Mississippi facility and moved production to other facilities. In
the second quarter, the Company's gross margin increased due to the savings
from this initiative as well as actions taken during the quarter to reduce
the cost of quality. The Company also made headcount reductions to its
selling, general and administrative departments.
While the Company's declining sales trend has continued, the Company
has remained focused on managing costs and improving operating performance.
The second quarter results substantiate the progress the Company is making
toward its goals.
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.
Note 4 - Restructuring Charge
During the second quarter and first half of 2004, the Company recorded
a restructuring charge of $0.5 million and $0.7 million, respectively. 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.
5
A summary of 2004 activity is as follows:
In thousands
Liability - November 1, 2003 $ 500
Charges - Employee severance, real estate exit
costs and other costs 740
Payments made:
Employee severance (231)
Real estate exit and other costs (637)
-----
Liability - May 1, 2004 $ 372
=====
The Company expects to expense future cash costs of approximately $0.7
million to $0.9 million associated with closing its Canton, Mississippi
facility.
Note 5 - Inventories
Inventories consisted of the following:
May 1, November 1,
In thousands 2004 2003
-------- -----------
Raw materials....................... $ 39,789 $ 40,896
Work in process..................... 17,324 15,728
Finished goods...................... 6,681 5,901
-------- ----------
$ 63,794 $ 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%. Prior to the amendment, the term loan B bore
interest at 16.0%, of which 6.0% was payable on a current basis as provided
in the agreement and the balance of the interest equal to 10.0% was accrued
and added to the outstanding principal balance each month.
At May 1, 2004, the Company had $13.2 million outstanding under this
revolving line of credit. In addition, approximately $5.2 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.
6
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. At January 31, 2004, the Company was not in compliance
with its debt covenants and obtained a waiver and revised its debt
covenants. At May 1, 2004, the Company was not in compliance with the
amended covenants. The Company obtained a waiver for its non-compliance that
eased its covenants for the third and fourth quarters of 2004.
Specifically, the fixed charge coverage ratio was reduced from 0.60 and
1.05 to 1.0 for the third and fourth quarters respectively, to 0.35 and 0.65
to 1.0. The minimum EBITDA requirement was reduced from $17 million to $12
million in the third quarter and from $25 million to $19 million in the
fourth quarter. The maximum secured debt to EBITDA ratio was increased from
4.2 and 3.0 to 7.4 and 4.7 for the third and fourth quarters, respectively.
A working capital covenant was added.
In exchange for the waiver and the eased third and fourth quarter
covenants, the Company is obligated to pay interest on its term B loan of
18% of which 7.0% is payable on a current basis and 11.0% is accrued and
added to the outstanding principal balance each month. Further, the
prepayment penalty was extended to four years from the amended three years
and ten year warrants to purchase 1,841,715 shares of the common stock of
the Company at an exercise price of $0.02 per share were issued to the term
B lender. The term loan B was increased to $60 million from $50 million and
a commitment fee of $0.75 million was paid on the additional $10 million. In
addition, the Company agreed to raise $2.5 million in new equity or junior
securities by September 30, 2004.
Due to the uncertainty surrounding future debt covenant compliance and
the ability to raise new equity, the Company has classified the credit
agreement debt in current maturities of long-term debt in its consolidated
balance sheet. If the Company achieves significant improvement in operating
results as a result of the cost savings initiatives it has implemented and
is able to raise new equity, 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.
Note 7 - Stockholders' Equity
On April 6, 2004, the Company completed a $2.1 million private
placement of 700,000 shares of its common stock at a sales price of $3.00
per share, the closing price of the common stock on the New York Stock
Exchange on April 5, 2004. Directors and officers of the Company purchased
approximately 366,667 shares of the common stock sold in the private
placement.
7
Subsequent to the end of the second quarter, in connection with the
waiver of covenant non-compliance and the amendment to the loan agreement
increasing the term loan and easing covenants for the third and fourth
quarters described above, the Company issued warrants to its term B lender
to purchase 1,841,715 shares of its common stock at an exercise price of
$0.02 per share. The warrants are for a term of 10 years and include
anti-dilution provisions including provisions related to future issuances of
common stock at below market value. In connection with the issuance of the
warrants, the Company granted certain registration rights to the holder.
Note 8 - 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 Twenty-Six Weeks Ended
--------------------------- ---------------------------
In thousands, May 1, May 3, May 1, May 3,
except per-share data 2004 2003 2004 2003
-------- ------- -------- -------
Net loss........................................... $ (4,306) $ (628) $(16,536) $ (924)
Weighted average shares outstanding.......... 9,370 9,057 9,266 9,052
Assumed exercise of options.................... - - - -
-------- ------- -------- -------
Weighted average diluted shares outstanding 9,370 9,057 9,266 9,052
======== ======= ======== =======
Basic loss per share................................ $ (0.46) $ (0.07) $ (1.78) $ (0.10)
======== ======= ======== =======
Diluted loss per share............................. $ (0.46) $ (0.07) $ (1.78) $ (0.10)
======== ======= ======== =======
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 and the convertible debentures were not included
in the computation of diluted loss per share because the shares were
antidilutive.
Note 9 - 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 Twenty-Six Weeks Ended
------------------------- --------------------------
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
-------- ------- -------- -------
Net loss $ (4,036) $ (628) $(16,536) $ (924)
Translation adjustments (152) 477 316 1,187
-------- ------- -------- -------
Comprehensive income (loss) $ (4,188) $ (151) $(16,220) $ 263
======== ======= ======== =======
8
Note 10 - 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.
Pro forma net loss in the following table was prepared as if the
Company had accounted for its stock option plans under the fair market value
method.
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------ --------------------------
May 1, May 3, May 1, May 3,
In thousands 2004 2003 2004 2003
-------- ------- -------- --------
Net loss $ (4,306) $ (628) $(16,536) $ (924)
Fair value of stock-based employee compensation (189) (156) (393) (311)
-------- ------- -------- --------
Net loss - pro forma $ (4,495) $ (784) $(16,929) $ (1,235)
======== ======= ======== ========
Net loss per share - pro forma $ (0.48) $ (0.09) $ (1.83) $ (0.14)
======== ======= ======== ========
In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits
(SFAS No. 132R)," which retains the disclosure requirements in SFAS No. 132
and contains additional requirements. These additional requirements include
disclosures about a plan sponsor's investment strategies, detailed
information of plan assets, expected future cash flow requirements, and
interim disclosures related to periodic benefit cost. The following table
presents the Company's net periodic benefit cost for pension benefits.
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- -------------------------
May 1, May 3, May 1, May 3,
In thousands 2004 2003 2004 2003
------ ------ ------- -------
Service cost $ 113 $ 504 $ 185 $ 968
Interest cost 666 833 1,089 1,598
Expected return on plan assets (643) (673) (1,052) (1,292)
Amortization of prior service cost 5 71 8 136
Recognized net actuarial loss 137 228 225 437
------ ------ ------- -------
Net periodic benefit cost $ 278 $ 963 $ 455 $ 1,847
====== ====== ====== =======
The total amount of contributions paid, and expected to be paid, do not
differ significantly from amounts previously disclosed.
9
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.
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 Operations
For the Thirteen Weeks Ended May 1, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ --------
Net sales $ - $ 51,971 $ 5,536 $ (2,374) $ 55,133
Cost of sales - 39,591 5,018 (2,374) 42,235
Selling, general and administrative expenses - 9,776 1,011 - 10,787
Equity in earnings (loss) of subsidiary (4,306) - - 4,306 -
Interest expense, net - 5,593 33 - 5,626
Minority interest in consolidated subsidiary - 19 - - 19
Restructuring charge - 546 - - 546
-------- --------- ------- -------- --------
Earnings (loss) before income taxes (4,306) (3,554) (526) 4,306 (4,080)
Income tax expense - 31 195 - 226
-------- --------- ------- -------- --------
Net earnings (loss) $ (4,306) $ (3,585) $ (721) $ 4,306 $ (4,306)
======== ========= ======= ======== ========
10
Falcon Products, Inc.
Consolidating Statement of Operations
For the Thirteen Weeks Ended May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ --------
Net sales $ - $ 56,007 $ 6,144 $ (3,441) $ 58,710
Cost of sales - 42,981 5,294 (3,441) 44,834
Selling, general and administrative expenses - 9,747 843 - 10,590
Equity in earnings (loss) of subsidiary (628) - - 628 -
Interest expense, net - 4,027 36 - 4,063
Minority interest in consolidated subsidiary - (16) - - (16)
-------- -------- ------- -------- --------
Earnings (loss) before income taxes (628) (732) (29) 628 (761)
Income tax expense (benefit) - (191) 58 - (133)
-------- -------- ------- -------- --------
Net earnings (loss) $ (628) $ (541) $ (87) $ 628 $ (628)
======== ======== ======= ======== ========
Falcon Products, Inc.
Consolidating Statement of Operations
For the Twenty-Six Weeks Ended May 1, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ ---------
Net sales $ - $ 98,024 $ 11,679 $ (4,679) $ 105,024
Cost of sales - 79,011 10,097 (4,679) 84,429
Selling, general and administrative expenses - 19,213 2,112 - 21,325
Equity in earnings (loss) of subsidiary (16,536) - - 16,536 -
Interest expense, net - 10,646 88 - 10,734
Minority interest in consolidated subsidiary - (37) - - (37)
Loss on early extinguishments of debt - 3,947 - - 3,947
Restructuring charge - 740 - - 740
-------- --------- -------- --------- ---------
Earnings (loss) before income taxes (16,536) (15,496) (618) 16,536 (16,114)
Income tax expense - 31 391 - 422
-------- --------- -------- --------- ---------
Net earnings (loss) $(16,536) $ (15,527) $ (1,009) $ 16,536 $ (16,536)
======== ========= ======== ========= =========
11
Falcon Products, Inc.
Consolidating Statement of Operations
For the Twenty-Six Weeks Ended May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ ---------
Net sales $ - $118,364 $ 12,633 $ (7,153) $ 123,844
Cost of sales - 91,225 11,108 (7,153) 95,180
Selling, general and administrative expenses - 19,947 1,462 - 21,409
Equity in earnings (loss) of subsidiary (924) - - 924 -
Interest expense, net - 8,054 77 - 8,131
Minority interest in consolidated subsidiary - 49 - - 49
-------- -------- -------- ---------- ---------
Earnings (loss) before income taxes (924) (911) (14) 924 (925)
Income tax expense (benefit) - (65) 64 - (1)
-------- -------- -------- ---------- ---------
Net earnings (loss) $ (924) $ (846) $ (78) $ 924 $ (924)
======== ======== ======== ========== =========
Falcon Products, Inc.
Consolidating Balance Sheet
As of May 1, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ ---------
Assets
Cash and cash equivalents $ - $ 239 $ 807 $ - $ 1,046
Accounts receivable - 22,559 4,159 - 26,718
Inventories - 57,869 5,925 - 63,794
Other current assets - 4,873 1,345 - 6,218
-------- --------- ------------- ------------ ---------
Total current assets - 85,540 12,236 - 97,776
Property, plant and equipment, net - 23,167 11,920 - 35,087
Investment in subsidiaries 24,798 - - (24,798) -
Goodwill and other assets - 129,451 55 - 129,506
-------- --------- ------------- ------------ ---------
Total assets $ 24,798 $ 238,158 $ 24,211 $ (24,798) $ 262,369
======== ========= ============= ============ =========
Liabilities and Stockholders' Equity
Current liabilities $ - $ 107,454 $ 11,729 $ - $ 119,183
Long-term debt - 104,149 1,725 - 105,874
Other long-term liabilities - 12,093 421 - 12,514
-------- --------- ------------- ------------ ---------
Total liabilities - 223,696 13,875 - 237,571
Total stockholders' equity 24,798 14,462 10,336 (24,798) 24,798
-------- --------- ------------- ------------ ---------
Total liabilities and stockholders' equity $ 24,798 $ 238,158 $ 24,211 $ (24,798) $ 262,369
======== ========= ============= ============ =========
12
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
======== ========= ============= ============ =========
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-Six Weeks Ended May 1, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ ---------
Cash provided by (used in) operating activities $ - $ (9,051) $ 240 $ - $ (8,811)
-------- --------- ------------- ------------ ----------
Cash flows from investing activities
Additions to property, plant and
equipment, net - (467) (412) - (879)
Cash received from (contributed to)
subsidiary (2,431) 2,431 - - -
-------- --------- ------------- ------------ ----------
Cash used in investing activities (2,431) 1,964 (412) - (879)
-------- --------- ------------- ------------ ----------
Cash flows from financing activities
Additions (repayments) of long-term
debt, net - 12,915 (52) - 12,863
Deferred debt issuance costs - (5,914) - - (5,914)
Common stock issuances 2,431 - - - 2,431
-------- --------- ------------- ------------ ----------
Cash provided by financing activities 2,431 7,001 (52) - 9,380
-------- --------- ------------- ------------ ----------
Net change in cash and cash equivalents $ - $ (86) $ (224) $ - $ (310)
======== ========= ============= ============ ==========
13
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-Six Weeks Ended May 3, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
-------- --------- ------------- ------------ ---------
Cash used in operating activities $ - $ (1,128) $ (144) $ - $ (1,272)
-------- -------- ------------- ------------ ---------
Cash flows from investing activities
Additions to property, plant and
equipment, net - (1,083) (205) - (1,288)
Cash received from (contributed to)
subsidiary (320) 320 - - -
-------- -------- ------------- ------------ ---------
Cash used in investing activities (320) (763) (205) - (1,288)
-------- -------- ------------- ------------ ---------
Cash flows from financing activities
Common stock issuances 320 - - - 320
Additions to long-term debt, net - 1,637 137 - 1,774
-------- -------- ------------- ------------ ---------
Cash provided by financing activities 320 1,637 137 - 2,094
-------- -------- ------------- ------------ ---------
Net change in cash and cash equivalents $ - $ (254) $ (212) $ - $ (466)
======== ======== ============= ============ =========
Item 2. - Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Forward Looking Statements
Certain information presented herein includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 and involve risks and uncertainties that are dependent upon a
number of factors such as:
o Loss of key customers or suppliers within specific industries,
o Availability or cost of raw materials,
o Increased competitive pricing pressures reflecting industry
conditions,
o General demand for products,
o General economic conditions,
o Economic conditions in the markets served by the Company,
o Ability of the Company to service its debt obligations and satisfy
the covenants in its loan agreement,
o and other factors,
all of which are difficult to predict and most of which are beyond the
Company's control. Actual results could differ materially from those
expressed in the forward-looking statements. Please review the Company's
10-K and most recent 10-Q reports filed with the Securities and Exchange
Commission.
14
RESULTS OF OPERATIONS
General
The following table sets forth, for the periods presented, certain
information relating to the operating results of the Company, expressed as a
percentage of net sales:
Thirteen Twenty-Six
Weeks Ended Weeks Ended
---------------------- ---------------------
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.6 76.4 80.4 76.9
----- ----- ----- -----
Gross margin 23.4 23.6 19.6 23.1
Selling, general and administrative expenses 19.6 18.0 20.3 17.3
Interest expense, net 10.2 6.9 10.2 6.6
Loss on early extinguishments of debt - - 3.7 -
Restructuring charge 1.0 - 0.7 -
----- ----- ----- -----
Earnings (loss) before income taxes (7.4) (1.3) (15.3) (0.8)
Income tax expense (benefit) 0.4 (0.2) 0.4 -
----- ----- ----- -----
Net earnings (loss) (7.8)% (1.1)% (15.7)% (0.8)%
===== ===== ===== =====
Thirteen weeks ended May 1, 2004, compared to the thirteen weeks ended May
3, 2003
The Company reported a net loss of $4.3 million, or $0.46 per diluted
share and $0.6 million, or $0.07 per diluted share in the second quarter of
2004 and 2003, respectively. Weighted average shares outstanding were 9.4
million and 9.1 million shares in the second quarter of 2004 and 2003,
respectively.
During the second quarter of 2004, the Company recorded a pre-tax
charge of $0.5 million related to the closing of the Canton, Mississippi
facility.
Net sales for the second quarter of 2004 were $55.1 million, a decrease
of 6.1% from the second quarter of 2003 net sales of $58.7 million. The
decrease is a result of a decline in the hospitality market. Sales within
the food service and contract office markets experienced sales growth in the
second quarter of 2004 as compared to the second quarter of 2003. 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
hotel 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 in the second quarter of 2004, a
decrease of 5.8% from $44.8 million in the second quarter of 2003. Gross
margin decreased to $12.9 million for the second quarter of 2004, from $13.9
million in the same quarter of 2003. Gross margin as a percentage of net
sales decreased to 23.4% in 2004, from 23.6% in 2003. Gross margin as a
percentage of net sales was negatively impacted by the decline in sales,
which reduced fixed overhead absorption at the manufacturing plants. The
Company partially offset these items through cost reduction activities at
the manufacturing plants.
15
Selling, general and administrative expenses were $10.8 million in the
second quarter of 2004, compared to $10.6 million in the second quarter of
2003. The increase in selling, general and administrative expenses is a
result of increased spending on marketing for shows and sales promotions and
increased spending on professional services, partially offset by headcount
reductions. Selling, general and administrative expenses as a percentage of
net sales were 19.6% for the second quarter of 2004, compared to 18.0% for
the second quarter of 2003.
In the second quarter of 2004, the Company recorded income tax expense
of $0.2 million on a loss before income taxes of $4.1 million due to
recording a deferred tax asset valuation allowance of $1.6 million,
non-deductible permanent tax items and state, local and foreign taxes.
Twenty-six weeks ended May 1, 2004, compared to the twenty-six weeks ended
May 3, 2003
The Company reported a net loss of $16.5 million and $0.9 million in
the first half of 2004 and 2003, respectively. Net loss per share was $
(1.78) and $(0.10) in the first twenty-six weeks of 2004 and 2003,
respectively. Weighted average shares outstanding were 9.3 million and 9.1
million shares in the first half of 2004 and 2003, respectively.
During the first six months of 2004, the Company recorded charges of
$4.7 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 ($0.7 million).
Net sales for the first half of 2004 were $105.0 million, a decrease of
15.2% from the first half of 2003 net sales of $123.8 million. The decrease
is a result of decreases in both the hospitality and food service markets.
Sales in the food service market decreased as a result of the successful
completion 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 half 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 hotel
refurbishments. However, leading indicators, such as revenue per available
room and occupancy percentages, are showing signs of improvement.
Cost of sales was $84.4 million in the first half of 2004, a decrease
of 11.3% from $95.2 million in the first half of 2003. Gross margin
decreased to $20.6 million for the first half of 2003 from $28.7 million in
the first half of 2003. Gross margin as a percentage of net sales decreased
to 19.6% in 2004, compared to 23.1% in 2003. The decrease in 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
in the 1st quarter of 2004 during the transition of manufacturing from the
Canton, Mississippi facility to the other facilities, negatively impacted
gross margin.
Selling, general and administrative expenses were $21.3 million in the
first half of 2004, compared to $21.4 million in the first half of 2003. The
reduction of selling, general and administrative expenses was a result of
lower variable selling costs due to lower sales. Selling, general and
administrative expenses as a percentage of net sales were 20.3% for the
first half of 2004, compared to 17.3% for the first half of 2003.
16
In the first half of 2004, the Company recorded income tax expense of
$0.4 million on a loss before income taxes of $16.1 million due to recording
a deferred tax asset valuation allowance of $6.1 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 $21.4 million as of
May 1, 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 May 1, 2004
from 1.9 to 1.0 at November 1, 2003.
Cash used in operating activities was $8.8 million and $1.3 million in
the first half of 2004 and 2003, respectively. The cash used in operations
during the first half of 2004 was mainly used to support the operating loss
and to pay interest. During the first six months of 2004 and 2003, the
Company incurred $0.9 million and $1.3 million, respectively, for capital
expenditures. Cash provided by financing activities was $9.4 million and
$2.1 million in the first half of 2004 and 2003, respectively.
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%. Prior to the amendment, the term loan B bore
interest at 16.0%, of which 6.0% was payable on a current basis as provided
in the agreement and the balance of the interest equal to 10.0% was accrued
and added to the outstanding principal balance each month.
At May 1, 2004, the Company had $13.2 million outstanding under this
revolving line of credit. In addition, approximately $5.2 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. At January 31, 2004, the Company was not in compliance
with its debt covenants and obtained a waiver and revised its debt
covenants. At May 1, 2004, the Company was not in compliance with the
amended covenants. The Company obtained a waiver for its non-compliance that
eased its covenants for the third and fourth quarters of 2004.
Specifically, the fixed charge coverage ratio was reduced from 0.60 and
1.05 to 1.0 for the third and fourth quarters respectively, to 0.35 and 0.65
to 1.0. The minimum EBITDA requirement was reduced from $17 million to $12
million in the third quarter and from $25 million to $19 million in the
fourth quarter. The maximum secured debt to EBITDA ratio was increased from
4.2 and 3.0 to 7.4 and 4.7 for the third and fourth quarters, respectively.
A working capital covenant was added.
17
In exchange for the waiver and the eased third and fourth quarter
covenants, the Company is obligated to pay interest on its term B loan of
18% of which 7.0% is payable on a current basis and 11.0% is accrued and
added to the outstanding principal balance each month. Further, the
prepayment penalty was extended to four years from the amended three years
and ten year warrants to purchase 1,841,715 shares of the common stock of
the Company at an exercise price of $0.02 per share were issued to the term
B lender. The term loan B was increased to $60 million from $50 million and
a commitment fee of $0.75 million was paid on the additional $10 million. In
addition, the Company agreed to raise $2.5 million in new equity or junior
securities by September 30, 2004.
Due to the uncertainty surrounding future debt covenant compliance and
the ability to raise new equity, the Company has classified the credit
agreement debt in current maturities of long-term debt in its consolidated
balance sheet. If the Company achieves significant improvement in operating
results as a result of the cost savings initiatives it has implemented and
is able to raise new equity, the future classification of debt under its
credit agreement could be reclassified from current to long-term in future
periods.
On June 15, 2004, the Company made the $5.7 million interest payment to
the holders of its senior subordinated notes.
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 quarterly
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 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 Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective.
18
As discussed in the Company's Annual Report on Form 10-K, 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 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 now performs a physical inventory of finished goods and work in
process on a quarterly basis, improved the cycle counting procedures,
increased 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 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.
In addition to deficiencies in inventory accounting, certain
deficiencies in internal controls existed prior to and during this
evaluation related to recording sales in the appropriate period at one of
the Company's plant locations. These deficiencies related to properly
identifying the shipment date of product at the plant location, and
recording the appropriate shipment date and time in the Company's
information systems. In order to correct the deficiency, management,
including the Chief Executive Officer and Chief Financial Officer, undertook
a process to identify those product shipments outside of the quarterly
period using information systems records and common carrier documents, to
appropriately state the financial statements related to the quarter ended
May 1, 2004 prior to results being finalized and disseminated. The Company
will implement further corrective action by increasing financial oversight
over operations personnel and revising information technology department
procedures to ensure product shipments are properly dated and recorded in
the appropriate accounting period. The Company's audit committee retained
outside counsel to complete an independent investigation of the matter.
Management, including the Chief Executive Officer and 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 sales cut-off. Further, management and the audit committee
believe that the sales cut-off error was isolated to the quarter ended May
1, 2004 and the financial statements for the quarter ended May 1, 2004 were
properly stated for the sales cut-off error before results were announced.
(b) Changes in Internal Control Over Financial Reporting.
----------------------------------------------------
The Company's management, including the Company's Chairman and Chief
Executive Officer and its 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 second 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.
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 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
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on April
5, 2004, for the purposes of electing two Class B directors
for a term expiring in 2007, for considering and voting upon a
proposal to adopt the Falcon Products, Inc. 2004 Employee
Stock Purchase Plan, and for considering and voting upon a
proposal to adopt the Falcon Products, Inc. 2004 Stock Option
Plan.
The number of votes for and withheld for each nominee for
director and the number of votes for, against and abstained
for the proposals to adopt the Falcon Products, Inc. 2004
Employee Stock Purchase Plan and the Falcon Products, Inc.2004
Stock Option Plan are as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
David L. Morley 7,235,768 16,235
Martin Blaylock 7,198,624 16,265
Votes
-----
Votes For Votes Against Abstained
--------- ------------- ---------
Approval of Falcon Products, Inc. 2004
Employee Stock Purchase Plan 4,169,396 1,029,433 951,556
Approval of Falcon Products, Inc. 2004
Stock Option Plan 4,707,881 1,437,116 5,387
20
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
4.1 Stock Purchase Warrant for 1,841,715 Shares
4.2 Registration Rights Agreement between Registrant
and OCM Principal Opportunities Fund II, L.P.
10.1 Waiver and Amendment No. 3 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 March 11, 2004, a Form 8-K was filed under Items 7 and
12 announcing the Company's financial results for the
first fiscal quarter ended January 31, 2004.
On March 17, 2004, a Form 8-K was filed under Item 9
disclosing the breakdown of tax fees paid to Ernst & Young
LLP, the Company's independent public accountants for
fiscal 2003.
On April 5, 2005, a Form 8-K was filed under Items 5 and 7
announcing the appointment of Phillip J. Pacey as Vice
President and Chief Financial Officer and the resignation
of David L. Morley as President and Chief Operating
Officer.
On April 6, 2005, a Form 8-K was filed under Items 5 and 7
announcing the completion of a $2.1 million private
placement of 700,000 shares of its common stock at a price
of $3.00 per share.
On May 6, 2004, a Form 8-K was filed under Items 5 and 12
announcing the Company filed a plan to comply with the
listing requirements of the New York Stock Exchange.
21
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON PRODUCTS, INC.
Date: June 15, 2004 /s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chief Executive Officer
and Chairman of the Board
Date: June 15, 2004 /s/ Phillip J. Pacey
--------------------
Phillip J. Pacey
Vice President and
Chief Financial Officer
22