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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 July 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
As of September 14, 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 Thirty-Nine
Weeks Ended Weeks Ended
--------------------- ---------------------
July 31, August 2, July 31, August 2,
(In thousands, except per share data) 2004 2003 2004 2003
-------- --------- -------- ---------
Net sales $ 58,351 $62,306 $163,375 $186,150
Cost of sales, including restructuring charge 48,684 49,319 133,113 144,499
-------- ------- -------- --------
Gross margin 9,667 12,987 30,262 41,651
Selling, general and administrative expenses 11,194 11,193 32,519 32,602
Interest expense, net 6,251 4,607 16,985 12,738
Minority interest in consolidated subsidiary 20 (55) (16) (6)
Loss on early extinguishment of debt 9,454 1,564 13,401 1,564
Loss on curtailment of pension plan - 1,833 - 1,833
Restructuring charge 1,908 1,980 2,648 1,980
-------- ------- -------- ---------
Loss before income taxes (19,160) (8,135) (35,275) (9,060)
Income tax expense (benefit) 351 (2,551) 773 (2,552)
-------- ------- -------- --------
Net loss $(19,511) $(5,584) $(36,048) $ (6,508)
======== ======= ======== ========
Basic and diluted loss per share $ (1.98) $ (0.62) $ (3.81) $ (0.72)
======== ======= ======== ========
See accompanying notes to consolidated financial statements.
2
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands, except share data) (Unaudited)
July 31, November 1,
2004 2003
-------- -----------
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,564 $ 1,356
Accounts receivable, less allowances
of $830 and $861, respectively 29,793 31,877
Inventories 66,072 62,525
Prepayments and other current assets 6,819 5,344
-------- --------
Total current assets 104,248 101,102
-------- --------
Property, plant and equipment:
Land 2,908 2,872
Buildings and improvements 19,143 19,175
Machinery and equipment 51,508 51,235
-------- --------
73,559 73,282
Less: accumulated depreciation (40,557) (36,703)
-------- --------
Net property, plant and equipment 33,002 36,579
-------- --------
Other assets, net of accumulated amortization:
Goodwill 117,474 117,474
Other 9,318 11,385
-------- --------
Total other assets 126,792 128,859
-------- --------
Total Assets $264,042 $266,540
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 24,483 $ 27,612
Customer deposits 6,353 5,249
Accrued liabilities 12,334 16,842
Current maturities of long-term debt 90,835 3,900
-------- --------
Total current liabilities 134,005 53,603
Long-term obligations:
Long-term debt 105,838 161,485
Minority interest in consolidated subsidiary 806 822
Other 11,378 12,046
-------- --------
Total liabilities 252,027 227,956
-------- --------
Stockholders' equity:
Common stock, $.02 par value: authorized 20,000,000 shares;
issued 9,915,117 shares 198 198
Additional paid-in capital 53,892 47,376
Treasury stock, at cost (123,140 and 917,053 shares, respectively) (1,059) (10,493)
Accumulated other comprehensive loss (6,472) (7,004)
Retained earnings (deficit) (34,544) 8,507
-------- --------
Total stockholders' equity 12,015 38,584
-------- --------
Total Liabilities and Stockholders' Equity $264,042 $266,540
======== ========
See accompanying notes to consolidated financial statements.
3
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Thirty-Nine Weeks Ended
--------------------------
(In thousands) July 31, August 2,
2004 2003
-------- ---------
Cash flows from operating activities:
Net loss $(36,048) $ (6,508)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 6,933 7,024
Minority interest in consolidated subsidiary (16) (6)
Loss on early extinguishments of debt 13,401 1,564
Loss on curtailment of pension plan - 1,833
Restructuring charge, non-cash 4,306 4,265
Change in assets and liabilities:
Accounts receivable 1,922 2,433
Inventories (6,345) (9,181)
Prepayments and other current assets (1,625) (1,604)
Other assets (820) (1,941)
Accounts payable (2,887) (611)
Customer deposits 1,104 (3,821)
Accrued liabilities (4,583) (6,124)
Other liabilities (807) (2,216)
-------- ---------
Cash used in operating activities (25,465) (14,893)
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,159) (1,675)
-------- ---------
Cash used in investing activities (1,159) (1,675)
-------- ---------
Cash flows from financing activities:
Common stock issuances 2,431 320
Repayment of long-term debt (43,019) (54,218)
Proceeds from long-term debt 74,146 72,430
Deferred debt issuance costs (6,726) (2,033)
-------- ---------
Cash provided by financing activities 26,832 16,499
-------- ---------
Increase/(Decrease) in cash and cash equivalents 208 (69)
Cash and cash equivalents-beginning of period 1,356 1,646
-------- ---------
Cash and cash equivalents-end of period $ 1,564 $ 1,577
======== =========
Supplemental cash flow information:
Cash paid for interest $ 15,525 $ 14,850
======== =========
Cash paid for (refund of) taxes, net $ 424 $ (3,441)
======== =========
See accompanying notes to consolidated financial statements.
4
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
For the Thirteen and Thirty-Nine Weeks Ended July 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 third quarter of 2004 due to
the decline in volume, increased interest costs, the loss on early
extinguishments of debt, and the restructuring charges. As a result of the
loss, the Company was not in compliance with its financial covenants under
its credit agreement as of July 31, 2004. (see Note 6).
As a result of the Company's covenant defaults, the Company is
evaluating its existing capital structure and considering alternatives to
strengthen its balance sheet, including refinancing its Senior Credit
Facility or obtaining waivers or amendments to its Senior Credit Facility.
Based upon discussions with several potential lending institutions, the
Company believes it will be able to refinance its Senior Credit Facility on
terms and with financial covenants that will give the Company the ability to
complete its planned operational improvements and position itself to return
to profitability. If the Company is unable to arrange such financing or
obtain additional waivers from or satisfactory agreements with its lenders,
the Company's cash flow from operations would not be adequate to meet its
debt service requirements if the indebtedness is accelerated.
While the Company's declining sales trend has continued, the Company
has remained focused on managing costs and improving operating performance.
There was progress in the third quarter of this year toward our cost
reduction targets. In addition, the Company announced that it would close
the Belmont, Mississippi facility and move production to other facilities,
which will lower costs in future periods.
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 Charge
During the third quarter of 2004, the Company recorded a non-cash
charge of $4.3 million to write-down the assets of the Belmont, Mississippi
manufacturing facility to its anticipated net realizable value in connection
with the Company's decision to dispose of the facility. The non-cash charge
of $4.3 million included a write-down of inventory of $3.0 million, which is
included in the Consolidated Statements of Operations as a component of cost
of sales, including restructuring charge. In connection with the closing,
the Company incurred $0.1 million of cash costs. The Company expects to
expense future cash costs of approximately $1.0 million to $1.5 million
associated with the closing the Belmont, Mississippi facility. The costs
will include termination benefits, real estate holding costs and other
closedown costs. As of July 31, 2004, 155 people were employed at the
Belmont, Mississippi facility. The Company expects the closing to be
completed by the end of October 2004.
During the third quarter and thirty-nine weeks of 2004, the Company
recorded a restructuring charge of $0.5 million and $1.2 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. The Company expects to expense future
cash costs of approximately $0.2 million to $0.4 million associated with
closing its Canton, Mississippi facility.
During the third quarter of 2003, the Company recorded a non-cash
pre-tax charge of $4.3 million or $3.0 million after-tax, to write-down the
assets of the Company's Zacatecas, Mexico manufacturing facility to its
anticipated net realizable value in connection with the Company's decision
to dispose of the facility. The total charge of $4.3 million included a
write-down of inventory of $2.3 million, which is included in the
Consolidated Statements of Earnings as a component of cost of sales,
including restructuring charge.
A summary of 2004 activity is as follows:
In thousands
Liability - November 1, 2003 $ 500
Charges:
Asset write-downs 4,306
Employee severance 312
Real estate exit and other costs 1,030
Payments made:
Asset write-downs (4,306)
Employee severance (312)
Real estate exit and other costs (1,198)
-------
Liability - July 31, 2004 $ 332
=======
6
Note 5 - Inventories
Inventories consisted of the following:
July 31, November 1,
In thousands 2004 2003
------- -----------
Raw materials....................... $41,370 $40,896
Work in process..................... 19,266 15,728
Finished goods...................... 5,436 5,901
------- -------
$66,072 $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. As discussed more
fully below, the Company was not in compliance with the financial covenants
in its credit agreement at each of its quarters ended January 31, 2004, May
1, 2004 and July 31, 2004. After each of the first two quarters of 2004, the
Company obtained from its lenders waivers of the non-compliance that eased
the covenants for the remaining quarters of 2004. In connection with the
waivers for non-compliance with covenants at May 1, 2004, the credit
agreement was amended on June 15, 2004, to among other things, increase Term
Loan B to $60 million from $50 million, increase interest payable on Term
Loan B and extend the period within which a premium would be due upon
prepayment of Term Loan B. The Senior Credit Facility, as amended on June
15, 2004, provides for a $99.3 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 $60 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 18.0%, of which 7.0% is
payable on a current basis as provided in the agreement and the balance of
the interest equal to 11.0% accrues and is added to the outstanding
principal balance each month.
At July 31, 2004, the Company had $20.4 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.
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. At July 31,
2004, the Company was not in compliance with amended covenants.
As a result of the Company's covenant defaults, the Company is
evaluating its existing capital structure and considering alternatives to
strengthen its balance sheet, including refinancing its Senior Credit
Facility or obtaining waivers or amendments to its Senior Credit Facility.
Based upon discussions with several potential lending institutions, the
Company believes it will be able to refinance its Senior
7
Credit Facility on terms and with financial covenants that will give the
Company the ability to complete its planned operational improvements and
position itself to return to profitability. If the Company is unable to
arrange such financing or obtain additional waivers from or satisfactory
agreements with its lenders, the Company's cash flow from operations would
not be adequate to meet its debt service requirements if the indebtedness is
accelerated.
In exchange for the June 15, 2004 waiver and the eased third and fourth
quarter covenants, the interest on the term B loan was increased from 16% to
18% of which 7% is payable on a current basis and 11% is accrued and added
to the outstanding principal balance each month. Further, the 10% 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.
In connection with the June 15, 2004 waiver, which was a substantial
modification to the credit agreement, the Company recorded a loss on early
extinguishment of debt of $9.5 million. The loss included the write-off of
deferred debt issuance costs of $3.0 million and the expense of the fair
value of the warrants of $6.5 million. In connection with the January 15,
2004 refinancing, the Company recorded a loss on early extinguishment of
debt to write-off deferred debt issuance costs of $3.9 million.
Due to the noncompliance with financial covenants at July 31, 2004 and
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 is able to refinance its Senior Credit Facility or reach
satisfactory agreement with its senior lenders and to achieve 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.
8
On June 15, 2004, 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 Thirty-Nine Weeks Ended
------------------------ -----------------------
In thousands, July 31, Aug. 2, July 31, Aug. 2,
except per-share data 2004 2003 2004 2003
--------- ------- -------- -------
Net loss...................................... $(19,511) $(5,584) $(36,048) $(6,508)
Weighted average shares outstanding .......... 9,831 9,062 9,450 9,056
Assumed exercise of options .................. - - - -
-------- ------- -------- -------
Weighted average diluted shares outstanding 9,831 9,062 9,450 9,056
======== ======= ======== =======
Basic loss per share.......................... $ (1.98) $ (0.62) $ (3.81) $ (0.72)
======== ======= ======== =======
Diluted loss per share........................ $ (1.98) $ (0.62) $ (3.81) $ (0.72)
======== ======= ======== =======
Basic loss per share was computed by dividing net loss by the weighted
average shares of common stock outstanding during the period. Diluted
earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share for 2004 does not
reflect the effects of 2.3 million shares related to outstanding stock
options, 1.8 million shares related to the outstanding warrants and 0.6
million shares related to the convertible debentures, because those shares
or potential shares were antidilutive. Diluted earnings per share for 2003
does not reflect the effects of 2.1 million shares related to outstanding
stock options, because those shares or potential 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 Thirty-Nine Weeks Ended
------------------------ -----------------------
July 31, Aug. 2, July 31, Aug. 2,
2004 2003 2004 2003
--------- ------- -------- -------
Net loss $(19,511) $(5,584) $(36,048) $(6,508)
Translation adjustments 216 (163) 532 1,024
-------- ------- -------- -------
Comprehensive loss $(19,295) $(5,747) $(35,516) $(5,484)
======== ======= ======== =======
9
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 Thirty-Nine Weeks Ended
------------------------ -----------------------
July 31, Aug. 2, July 31, Aug. 2,
In thousands 2004 2003 2004 2003
--------- ------- -------- -------
Net loss $(19,511) $(5,584) $(36,048) $(6,508)
Fair value of stock-based employee
compensation (225) (139) (632) (470)
-------- ------- -------- -------
Net loss - pro forma $(19,736) $(5,723) $(36,680) $(6,978)
======== ======= ======== =======
Net loss per share - pro forma $ (2.01) $ (0.63) $ (3.88) $ (0.77)
======== ======= ======== =======
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 amount of
contributions paid, and expected to be paid, do not differ significantly
from amounts previously disclosed. The following table presents the
Company's net periodic benefit cost for pension benefits.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ -----------------------
July 31, Aug. 2, July 31, Aug. 2,
In thousands 2004 2003 2004 2003
--------- ------- -------- -------
Service cost $ 143 $ 377 $ 327 $ 1,345
Interest cost 841 624 1,931 2,221
Expected return on plan assets (812) (504) (1,864) (1,796)
Amortization of prior service cost 6 53 15 189
Recognized net actuarial loss 174 171 398 608
----- ----- ------- -------
Net periodic benefit cost $ 352 $ 721 $ 807 $ 2,567
===== ===== ======= =======
10
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 July 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Net sales $ - $ 55,023 $6,758 $(3,430) $ 58,351
Cost of sales - 46,310 5,804 (3,430) 48,684
Selling, general and administrative expenses - 10,132 1,062 - 11,194
Equity in earnings (loss) of subsidiary (9,764) - - 9,764 -
Interest expense, net - 6,213 38 - 6,251
Minority interest in consolidated subsidiary - 20 - - 20
Loss on early extinguishments of debt - 9,454 - - 9,454
Restructuring charge - 1,908 - - 1,908
------- -------- ------ ------- --------
Earnings (loss) before income taxes (9,764) (19,014) (146) 9,764 (19,160)
Income tax expense - 264 87 - 351
------- -------- ------ ------- --------
Net earnings (loss) $(9,764) $(19,278) $ (233) $ 9,764 $(19,511)
======= ======== ====== ======= ========
11
Falcon Products, Inc.
Consolidating Statement of Operations
For the Thirteen Weeks Ended August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Net sales $ - $60,055 $5,883 $(3,632) $62,306
Cost of sales - 48,131 4,820 (3,632) 49,319
Selling, general and administrative expenses - 10,294 899 - 11,193
Equity in earnings (loss) of subsidiary (5,584) - - 5,584 -
Interest expense, net - 4,566 41 - 4,607
Minority interest in consolidated subsidiary - (55) - - (55)
Loss on early extinguishment of debt - 1,564 - - 1,564
Loss on curtailment of pension plan - 1,833 - - 1,833
Restructuring charge - 1,980 - - 1,980
------- ------- ------ ------- -------
Earnings (loss) before income taxes (5,584) (8,258) 123 5,584 (8,135)
Income tax expense (benefit) - (2,664) 113 - (2,551)
------- ------- ------ ------- -------
Net earnings (loss) $(5,584) $(5,594) $ 10 $ 5,584 $(5,584)
======= ======= ====== ======= =======
Falcon Products, Inc.
Consolidating Statement of Operations
For the Thirty-Nine Weeks Ended July 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Net sales $ - $153,047 $18,437 $(8,109) $163,375
Cost of sales - 125,321 15,901 (8,109) 133,113
Selling, general and administrative expenses - 29,344 3,175 - 32,519
Equity in earnings (loss) of subsidiary (26,301) - - 26,301 -
Interest expense, net - 16,859 126 - 16,985
Minority interest in consolidated subsidiary - (16) - - (16)
Loss on early extinguishments of debt - 13,401 - - 13,401
Restructuring charge - 2,648 - - 2,648
-------- -------- ------- ------- --------
Earnings (loss) before income taxes (26,301) (34,510) (765) 26,301 (35,275)
Income tax expense - 295 478 - 773
-------- -------- ------- ------- --------
Net earnings (loss) $(26,301) $(34,805) $(1,243) $26,301 $(36,048)
======== ======== ======= ======= ========
12
Falcon Products, Inc.
Consolidating Statement of Operations
For the Thirty-Nine Weeks Ended August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Net sales $ - $178,419 $18,516 $(10,785) $186,150
Cost of sales - 139,356 15,928 (10,785) 144,499
Selling, general and administrative expenses - 30,241 2,361 - 32,602
Equity in earnings (loss) of subsidiary (6,508) - - 6,508 -
Interest expense, net - 12,620 118 - 12,738
Minority interest in consolidated subsidiary - (6) - - (6)
Loss on early extinguishment of debt - 1,564 - - 1,564
Loss on curtailment of pension plan - 1,833 - - 1,833
Restructuring charge - 1,980 - - 1,980
------- -------- ------- -------- --------
Earnings (loss) before income taxes (6,508) (9,169) 109 6,508 (9,060)
Income tax expense (benefit) - (2,729) 177 - (2,552)
------- -------- ------- -------- --------
Net earnings (loss) $(6,508) $ (6,440) $ (68) $ 6,508 $ (6,508)
======= ======== ======= ======== ========
Falcon Products, Inc.
Consolidating Balance Sheet
As of July 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Assets
Cash and cash equivalents $ - $ 400 $ 1,164 $ - $ 1,564
Accounts receivable - 26,599 3,194 - 29,793
Inventories - 60,085 5,987 - 66,072
Other current assets - 5,283 1,536 - 6,819
------- -------- ------- -------- --------
Total current assets - 92,367 11,881 - 104,248
Property, plant and equipment, net - 21,167 11,835 - 33,002
Investment in subsidiaries 15,248 - - (15,248) -
Goodwill and other assets - 126,736 56 - 126,792
------- -------- ------- -------- --------
Total assets $15,248 $240,270 $23,772 $(15,248) $264,042
======= ======== ======= ======== ========
Liabilities and Stockholders' Equity
Current liabilities $ - $122,446 $11,559 $ - $134,005
Long-term debt - 104,150 1,688 - 105,838
Other long-term liabilities - 11,761 423 - 12,184
------- -------- ------- -------- --------
Total liabilities - 238,357 13,670 - 252,027
Total stockholders' equity $15,248 1,913 10,102 (15,248) 12,015
------- -------- ------- -------- --------
Total liabilities and stockholders' equity $15,248 $240,270 $23,772 $(15,248) $264,042
======= ======== ======= ======== ========
13
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 Thirty-Nine Weeks Ended July 31, 2004
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Cash provided by (used in) operating activities $ - $(26,141) $ 676 $ - $(25,465)
------- -------- ------- ------ --------
Cash flows from investing activities
Additions to property, plant and
equipment, net - (705) (454) - (1,159)
Cash received from (contributed to)
subsidiary (2,431) 2,431 - - -
------- -------- ------- ------ --------
Cash used in investing activities (2,431) 1,726 (454) - (1,159)
------- -------- ------- ------ --------
Cash flows from financing activities
Additions (repayments) of long-term
debt, net - 31,216 (89) - 31,127
Deferred debt issuance costs - (6,726) - - (6,726)
Common stock issuances 2,431 - - - 2,431
------- -------- ------- ------ --------
Cash provided by financing activities 2,431 24,490 (89) - 26,832
------- -------- ------- ------ --------
Net change in cash and cash equivalents $ - $ 75 $ 133 $ - $ 208
======= ======== ======= ====== ========
14
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended August 2, 2003
In thousands Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
------- --------- ------------- ------------ --------
Cash used in operating activities $ - $(14,818) $ (75) $ - $(14,893)
------- -------- ------ ------ --------
Cash flows from investing activities
Additions to property, plant and
equipment, net - (1,388) (287) - (1,675)
Cash received from (contributed to)
subsidiary (320) 320 - - -
------- -------- ------ ------ --------
Cash used in investing activities (320) (1,068) (287) - (1,675)
------- -------- ------ ------ --------
Cash flows from financing activities
Common stock issuances 320 - - - 320
Deferred debt issuance costs - (2,033) - - (2,033)
Additions to long-term debt, net - 18,095 117 - 18,212
------- -------- ------ ------ --------
Cash provided by financing activities 320 16,062 117 - 16,499
------- -------- ------ ------ --------
Net change in cash and cash equivalents $ - $ 176 $ (245) $ - $ (69)
======= ======== ====== ====== ========
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 Ability of the Company to refinance its Senior debt facility or
obtain waivers of non-compliance with financial covenants on
terms reasonable to the Company, it at all,
o Ability of the Company to service its debt obligations and satisfy
the covenants in its loan agreement,
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 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.
15
RESULTS OF OPERATIONS
General
The following table sets forth, for the periods presented, certain
information relating to the operating results of the Company, expressed as a
percentage of net sales:
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
--------------------- ---------------------
July 31, Aug. 2, July 31, Aug. 2,
2004 2003 2004 2003
-------- ------- -------- -------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 83.4 79.2 81.5 77.6
-------- ------- ------- -------
Gross margin 16.6 20.8 18.5 22.4
Selling, general and administrative expenses 19.2 18.0 19.9 17.5
Interest expense, net 10.7 7.4 10.4 6.8
Minority interest in consolidated subsidiaries - (0.1) - -
Loss on early extinguishments of debt 16.2 2.5 8.2 0.9
Loss on curtailment of pension plan - 2.9 - 1.0
Restructuring charge 3.3 3.2 1.6 1.1
-------- ------- ------- -------
Earnings (loss) before income taxes (32.8) (13.1) (21.6) (4.9)
Income tax expense (benefit) 0.6 (4.1) 0.5 (1.4)
-------- ------- ------- -------
Net earnings (loss) (33.4)% (9.0)% (22.1)% (3.5)%
======== ======= ======= =======
Thirteen weeks ended July 31, 2004, compared to the thirteen weeks ended
August 2, 2003
The Company reported a net loss of $19.2 million, or $1.98 per diluted
share and $5.6 million, or $0.62 per diluted share in the third quarter of
2004 and 2003, respectively. Weighted average shares outstanding were 9.8
million and 9.1 million shares in the third quarter of 2004 and 2003,
respectively.
During the third quarter of 2004, the Company recorded a non-cash
charge of $4.3 million to write-down the assets of the Belmont, Mississippi
manufacturing facility to its anticipated net realizable value in connection
with the Company's decision to dispose of the facility. The non-cash charge
of $4.3 million included a write-down of inventory of $3.0 million, which is
included in the Consolidated Statements of Operations as a component of cost
of sales, including restructuring charge. In connection with the closing,
the Company incurred $0.1 million of cash costs.
During the third quarter of 2004, the Company recorded a restructuring
charge of $0.5 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.
During the third quarter of 2004, the Company recorded a loss on the
early extinguishment of debt of $9.5 million. The loss included the
write-off of deferred debt issuance costs of $3.0 million and the expense of
the fair value of the warrants of $6.5 million.
16
During the third quarter of 2003, the Company recorded a non-cash
pre-tax charge of $4.3 million or $3.0 million after-tax, to write-down the
assets of the Company's Zacatecas, Mexico manufacturing facility to its
anticipated net realizable value in connection with the Company's decision
to dispose of the facility. The total charge of $4.3 million included a
write-down of inventory of $2.3 million, which is included in the
Consolidated Statements of Earnings as a component of cost of sales,
including restructuring charge.
Net sales for the third quarter of 2004 were $58.4 million, a decrease
of 6.3% from the third quarter of 2003 net sales of $62.3 million. The
decrease is a result of a decline in the hospitality and contract office
markets. Sales within the food service market experienced sales growth in
the third quarter of 2004 as compared to the third 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 $48.7 million in the third quarter of 2004, a
decrease of 1.3% from $49.3 million in the third quarter of 2003. Gross
margin decreased to $9.7 million for the third quarter of 2004, from $13.0
million in the same quarter of 2003. Cost of sales included charges of $3.0
million and $2.3 million in the third quarter of 2004 and 2003,
respectively, to write-down inventory associated with plant closings. Gross
margin as a percentage of net sales decreased to 16.6% in 2004, from 20.8%
in 2003. Gross margin as a percentage of net sales was negatively impacted
by the write-down of inventory and 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.
Selling, general and administrative expenses were $11.2 million in the
third quarter of 2004 and 2003. Selling, general and administrative expenses
as a percentage of net sales were 19.2% for the third quarter of 2004,
compared to 18.0% for the third quarter of 2003.
In the third quarter of 2004, the Company recorded income tax expense
of $0.4 million on a loss before income taxes of $19.2 million due to
recording a deferred tax asset valuation allowance of $7.1 million,
non-deductible permanent tax items and state, local and foreign taxes.
Thirty-nine weeks ended July 31, 2004, compared to the thirty-nine weeks
ended August 2, 2003
The Company reported a net loss of $36.0 million and $6.5 million in
the first nine months of 2004 and 2003, respectively. Net loss per share was
$ (3.81) and $(0.72) in the first thirty-nine weeks of 2004 and 2003,
respectively. Weighted average shares outstanding were 9.5 million and 9.1
million shares in the first half of 2004 and 2003, respectively.
During the third quarter of 2004, the Company recorded a non-cash
charge of $4.3 million to write-down the assets of the Belmont, Mississippi
manufacturing facility to its anticipated net realizable value in connection
with the Company's decision to dispose of the facility. The non-cash charge
of $4.3 million included a write-down of inventory of $3.0 million, which is
included in the Consolidated Statements of Operations as a component of cost
of sales, including restructuring charge. In connection with the closing,
the Company incurred $0.1 million of cash costs.
17
During the first thirty-nine weeks of 2004, the Company recorded a
restructuring charge of $1.2 million as a 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.
During the third quarter of 2003, the Company recorded a non-cash
pre-tax charge of $4.3 million or $3.0 million after-tax, to write-down the
assets of the Company's Zacatecas, Mexico manufacturing facility to its
anticipated net realizable value in connection with the Company's decision
to dispose of the facility. The total charge of $4.3 million included a
write-down of inventory of $2.3 million, which is included in the
Consolidated Statements of Earnings as a component of cost of sales,
including restructuring charge.
In connection with the June 15, 2004 waiver, which was a substantial
modification to the credit agreement, the Company recorded a loss on early
extinguishment of debt of $9.5 million. The loss included the write-off of
deferred debt issuance costs of $3.0 million and the expense of the fair
value of the warrants of $6.5 million. In connection with the January 15,
2004 refinancing, the Company recorded a loss on early extinguishment of
debt to write-off deferred debt issuance costs of $3.9 million.
Net sales for the first nine months of 2004 were $163.4 million, a
decrease of 12.2% from the first nine months of 2003 net sales of $186.2
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 nine
months 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 $133.1 million in the first nine months of 2004, a
decrease of 7.9% from $144.5 million in the first nine months of 2003. Cost
of sales included charges of $3.0 million and $2.3 million in the first nine
months of 2004 and 2003, respectively, to write-down inventory associated
with plant closings. Gross margin decreased to $30.3 million for the first
nine months of 2003 from $41.7 million in the first nine months of 2003.
Gross margin as a percentage of net sales decreased to 18.5% in 2004,
compared to 22.4% in 2003. The decrease in gross margin as a percentage of
net sales is mainly the result of decreased sales volume and the write-down
of inventory. 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 $32.5 million in the
first nine months of 2004, compared to $32.6 million in the first nine
months 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 19.9% for the first nine months of 2004, compared to 17.5% for the
first nine months of 2003.
In the first nine months of 2004, the Company recorded income tax
expense of $0.8 million on a loss before income taxes of $35.3 million due
to recording a deferred tax asset valuation allowance of $13.0 million,
non-deductible permanent tax items and state, local and foreign taxes.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital was a negative $29.8 million as of
July 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 July 31,
2004 from 1.9 to 1.0 at November 1, 2003.
Cash used in operating activities was $25.5 million and $14.9 million
in the first nine months of 2004 and 2003, respectively. The cash used in
operations during the first nine months of 2004 was mainly used to support
the operating loss and to pay interest, along with an increase in inventory.
During the first nine months of 2004 and 2003, the Company incurred $1.2
million and $1.7 million, respectively, for capital expenditures. Cash
provided by financing activities was $26.8 million and $16.5 million in the
first nine months of 2004 and 2003, respectively.
On January 15, 2004, the Company amended and restated its existing
credit agreement with a group of financial institutions. As discussed more
fully below, the Company was not in compliance with the financial covenants
in its credit agreement at each of its quarters ended January 31, 2004, May
1, 2004 and July 31, 2004. After each of the first two quarters of 2004, the
Company obtained from its lenders waivers of the non-compliance that eased
the covenants for the remaining quarters of 2004. In connection with the
waivers for non-compliance with covenants at May 1, 2004, the credit
agreement was amended on June 15, 2004, to among other things, increase Term
Loan B to $60 million from $50 million, increase interest payable on Term
Loan B and extend the period within which a premium would be due upon
prepayment of Term Loan B. The Senior Credit Facility, as amended on June
15, 2004, provides for a $99.3 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 $60 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 18.0%, of which 7.0% is
payable on a current basis as provided in the agreement and the balance of
the interest equal to 11.0% accrues and is added to the outstanding
principal balance each month.
At July 31, 2004, the Company had $20.4 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.
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. At July 31,
2004, the Company was not in compliance with amended covenants.
As a result of the Company's covenant defaults, the Company is
evaluating its existing capital structure and considering alternatives to
strengthen its balance sheet, including refinancing its Senior Credit
Facility or obtaining waivers or amendments to its Senior Credit Facility.
Based upon discussions
19
with several potential lending institutions, the Company believes it will be
able to refinance its Senior Credit Facility on terms and with financial
covenants that will give the Company the ability to complete its planned
operational improvements and position itself to return to profitability. If
the Company is unable to arrange such financing or obtain additional waivers
from or satisfactory agreements with its lenders, the Company's cash flow
from operations would not be adequate to meet its debt service requirements
if the indebtedness is accelerated.
In exchange for the June 15, 2004 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.
In connection with the June 15, 2004 waiver, which was a substantial
modification to the credit agreement, the Company recorded a loss on early
extinguishment of debt of $9.5 million. The loss included the write-off of
deferred debt issuance costs of $3.0 million and the expense of the fair
value of the warrants of $6.5 million. In connection with the January 15,
2004 refinancing, the Company recorded a loss on early extinguishment of
debt to write-off deferred debt issuance costs of $3.9 million.
Due to the noncompliance with financial covenants at July 31, 2004 and
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 is able to refinance its Senior Credit Facility or reach
satisfactory agreement with its senior lenders and to achieve 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.
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.
20
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.
As discussed in the Company's Annual Report on Form 10-K, certain
deficiencies in internal controls exist 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.
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 third 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.
21
Item 3. - Defaults Upon Senior Securities
-------------------------------
The following events of default have occurred and are
continuing under the Senior Credit Facility: the failure of
the Company to satisfy certain financial covenants for the
quarter ended July 31, 2004, including the fixed charge ratio,
the minimum EBITDA requirement and the maximum secured debt to
EBITDA ratio.
Item 4. - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K:
On June 15, 2004, a Form 8-K was filed under Items 7 and
12 announcing the Company's financial results for the
second fiscal quarter ended May 1, 2004.
On July 6, 2004, a Form 8-K was filed under Item 5
announcing the New York Exchange accepts the Company's
plan to comply with the listing requirements.
On July 6, 2004, a Form 8-K was filed under Items 4 and 7
announcing a change in the Company's certifying accountant.
On August 11, 2005, a Form 8-K was filed under Items 5 and
7 announcing the appointment of Gene Fleetwood as Vice
President and Chief Financial Officer and the resignation
of Phillip J. Pacey as Vice President and Chief Financial
Officer.
22
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON PRODUCTS, INC.
Date: September 14, 2004 /s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chief Executive Officer
and Chairman of the Board
Date: September 14, 2004 /s/ Gene Fleetwood
------------------
Gene Fleetwood
Vice President and
Chief Financial Officer
23