EX-13 2 ex13.txt SELECTED PORTIONS OF THE ANNUAL REPORT ------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------------------------------------- The following discussion should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto. Certain information presented herein includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. However, there can be no assurance that the Company's actual results will not differ materially from its expectations. The matters referred to in forward-looking statements may be affected by risks and uncertainties affecting the Company's business. CONTINUING OPERATIONS During the last three years, the Company has made significant acquisitions as part of its long-term strategic plan to consolidate its industry and to create the single premier supplier to the commercial furniture market. In 1999, the Company acquired Shelby Williams Industries, Inc. ("Shelby Williams"), a leading manufacturer of contract seating primarily for the hospitality market. In 1998, the Company acquired Howe Furniture Corporation, which specializes in the design, engineering and marketing of tables for the contract office and hospitality markets. Operating Results as a Percentage of Sales The following table sets forth, for the periods presented, certain information relating to the operations of the Company, expressed as a percentage of net sales:
OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 31, 1998 ------------------------------------------------------------------------------------------------------------------------------ Net sales 100.0% 100.0% 100.0% ------------------------------------------------------------------------------------------------------------------------------ Cost of sales, including nonrecurring items 72.4 73.7 71.8 ------------------------------------------------------------------------------------------------------------------------------ Special and nonrecurring items -- 4.7 0.2 ------------------------------------------------------------------------------------------------------------------------------ Gross margin 27.6 21.6 28.0 ------------------------------------------------------------------------------------------------------------------------------ Selling, general and administrative expenses 17.0 17.7 20.6 ------------------------------------------------------------------------------------------------------------------------------ Operating profit 10.6 3.9 7.4 ------------------------------------------------------------------------------------------------------------------------------ Interest expense, net 5.5 3.2 0.4 ------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 5.1 0.7 7.0 ------------------------------------------------------------------------------------------------------------------------------ Income tax expense 2.2 0.4 2.6 ------------------------------------------------------------------------------------------------------------------------------ Net earnings 2.9 0.3 4.4 ============================================================================================================================== Supplemental Information -- Before Special and Nonrecurring Items ------------------------------------------------------------------------------------------------------------------------------ Gross margin 27.6% 27.9% 30.4% ------------------------------------------------------------------------------------------------------------------------------ Operating profit 10.6 10.2 9.8 ------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 5.1 6.9 9.5 ------------------------------------------------------------------------------------------------------------------------------ Net earnings 2.9 4.2 6.0 ==============================================================================================================================
NET SALES In 2000, net sales were $315.7 million, an increase of 41.9% over 1999 net sales of $222.5 million. The sales increase over the prior year is primarily the result of the Shelby Williams acquisition. Management believes that the addition of the Shelby Williams sales force and customer relationships will be excellent assets for the Company. Net sales in 1999 were $222.5 million, an increase of 55.1% over 1998 net sales of $143.4 million. The sales increase over the prior year is primarily the result of the Shelby Williams acquisition and increased sales to the national accounts and contract office markets. COSTS AND EXPENSES The Company's reported operating results for fiscal years 1999 and 1998 included special and nonrecurring items associated with various strategic initiatives the Company has undertaken. Those items make direct comparisons of the reported results difficult. During 1999, in conjunction with the acquisition of Shelby Williams, the Company recorded a pre-tax integration charge of $14 million, $8.7 million after taxes or $0.97 per share, to cover the anticipated costs of combining its existing business with the acquired business. The charge relates to the closing of certain duplicative 16 | 17 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- manufacturing facilities. Included in this charge is $3.5 million to write down the carrying value of inventory, which is included in Cost of Sales, while the remaining components are reported in Special and Nonrecurring Items in the accompanying Consolidated Statements of Earnings. During 1998, the Company recorded a pre-tax charge of $4.7 million, $2.9 million after-tax or $0.32 per share, related to management's decision to discontinue and dispose of the Company's hotel casegoods line of business. The charge entailed the write-down of assets, including goodwill, inventories, and equipment, associated with the product line located in the Tijuana, Mexico, facility. Of the total charge, Cost of Sales includes a $3.3 million charge to write down the carrying value of inventory. The remaining components of the charge have been reported in Special and Nonrecurring Items in the Consolidated Statements of Earnings. Also during 1998, the Company recorded a $1.3 million pre-tax gain, $0.8 million after-tax or $0.09 per share, on the sale of the Company's corporate headquarters building. The gain has been reported in Special and Nonrecurring Items in the Consolidated Statements of Earnings. During the fourth quarter of 1998, the Company recorded an additional pre-tax charge of $0.2 million, $0.1 million after-tax or $0.01 per share, related to the consolidation of the Company's manufacturing facilities that was announced in 1997. These charges are reported in Special and Nonrecurring Items in the Consolidated Statements of Earnings. During 2000, the Company's gross margin increased to $87.2 million, or 81.6% over 1999's gross margin of $48.0 million, primarily due to increased sales volume from the Shelby Williams acquisition. Gross margin as a percent of sales, excluding the special and nonrecurring items in 1999, decreased to 27.6% in 2000 from 27.9% in 1999. The decrease was primarily attributed to the addition of the Shelby Williams business, as Shelby Williams' historic gross margins were lower than the Company's historic gross margins. Combining the businesses also resulted in excess manufacturing capacity, and as a result, the Company decided to close its Lewisville, Arkansas, City of Industry, California, and the Tijuana, Mexico, facilities. These closings negatively impacted the gross margin percentage for the year, although, the Company expects significant future benefits from these closings. In 1999, the Company's gross margin increased to $48.0 million from $40.1 million in 1998, a 19.7% increase which was primarily due to increased sales volume. Gross margin as a percent of sales, excluding the special and nonrecurring items in both 1999 and 1998, decreased to 27.9% in 1999 from 30.4% in 1998. The decrease was primarily attributed to the Shelby Williams acquisition which maintained a lower gross margin percentage than the Company's historical business. Selling, general and administrative expenses were $53.8 million, $39.3 million, and $29.5 million in 2000, 1999, and 1998, respectively. The overall increase is principally related to the aforementioned acquisition, higher level of business activity and increased sales and marketing programs including salaries, commissions, travel and literature. As a percentage of net sales, the expense rate was 17.0% in 2000, 17.7% in 1999, and 20.6% in 1998. The decrease in the expense rate is primarily due to the elimination of duplicative selling and administrative expenses from combining the Falcon and Shelby Williams businesses, and a lower level of marketing and selling expenses required to support the combined businesses. INTEREST AND TAXES Net interest expense was $17.1 million, $7.3 million, and $0.6 million in 2000, 1999 and 1998, respectively. The increased interest expense in 2000 was due to a full year of outstanding borrowings as a result of the Shelby Williams acquisition as compared to a partial year of outstanding borrowings in 1999. Income tax expense was $7.0 million, $0.9 million, and $3.7 million in 2000, 1999, and 1998, respectively. The effective income tax rate was 43.4% in 2000, 59.9% in 1999, and 36.8% in 1998. The higher effective tax rate in 2000 and 1999 is due to non-deductible goodwill charges representing a greater percentage of pre-tax earnings. NET EARNINGS Net earnings increased to $9.2 million or $1.05 per share in 2000 from $0.6 million or $0.07 per share in 1999. The increase is due to the special and nonrecurring charge in 1999 related to the integration of the Shelby Williams business. Excluding special and nonrecurring items, net earnings were $9.2 million or $1.05 per share in 2000, compared to $9.3 million or $1.04 per share in 1999. ------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------------------------------------- Net earnings decreased to $0.6 million or $0.07 per share in 1999 from $6.4 million, or $0.68 per share in 1998. The decrease is due to the special and nonrecurring charge in 1999 related to the integration of the Shelby Williams business. Excluding special and nonrecurring items in 1999 and 1998, net earnings were $9.3 million, or $1.04 per share in 1999, compared to $8.6 million, or $0.92 per share, in 1998. Excluding special and nonrecurring items, net earnings increased 8% while earnings per share increased 13%. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at October 28, 2000, was $43.3 million and its ratio of current assets to current liabilities was 1.8 to 1. Cash provided by operating activities was $17.3 million in 2000 and $5.0 million in 1999. Cash used in investing activities in 2000 was $5.3 million, compared to $143.3 million in 1999. The decrease is due to the acquisition of Shelby Williams in 1999. The Company invested $5.3 million in 2000 and $6.2 million in 1999 in capital additions primarily to increase manufacturing capacities and to improve operating efficiencies, as well as normal recurring capital replacements. The Company's capital budget for 2001 is approximately $6.5 million, which will be used primarily to acquire new equipment. Cash used in financing activities was $11 million in 2000 for the repayment of debt and the payment of dividends. Cash provided by financing activities was $136.1 million in 1999 primarily related to the borrowings under credit facilities to finance the Shelby Williams acquisition. During 1999, the Company acquired 349,100 shares of its common stock at a total cost of $3 million. The Company is authorized to purchase up to 441,000 additional shares of its common stock under the stock repurchase plan approved by the Board of Directors. The Company expects that it will meet its ongoing working capital and capital requirements from a combination of existing cash, internally generated funds and available borrowings under its revolving credit facility. The Company's operating cash flows constitute its primary internal source of liquidity. Generally, inflation has not had a material effect on the Company in the past, and no such effect is expected in the near future. Historically, the Company has been able to increase prices to offset increases in the cost of manufacturing its products, and management presently believes that the Company will continue to be able to do so. OTHER DATA EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. EBITDA is commonly used to analyze companies on the basis of operating performance, leverage and liquidity. EBITDA is not intended to represent cash flow for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. EBITDA was $42.4 million for fiscal 2000, an 8.8% increase from $39.0 million, on a pro forma basis, for the full fiscal year of 1999. EBITDA margins increased to 13.4% of sales for the 2000 fiscal year from 12.0% on a pro forma basis in 1999. RISK MANAGEMENT The Company is exposed to market risk from changes in interest rates and foreign exchange rates. To modify the risk from interest rate fluctuations, the Company enters into interest rate swap transactions that have been authorized pursuant to the Company's policies and procedures. The Company does not use financial instruments for trading purposes. The interest rate swaps are used to modify the Company's exposure to interest rate movements and to reduce borrowing costs. The Company's net exposure to interest rate risk consists of floating-rate instruments based on LIBOR rates. Assuming October 28, 2000 variable rate debt levels, a one-point increase in interest rates would have increased interest expense by $0.5 million in fiscal year 2000. RECENTLY ISSUED ACCOUNTING STANDARDS See Notes to Consolidated Financial Statements for discussion of new accounting pronouncements. 18 | 19 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Earnings For the Years Ended October 28, 2000, October 30, 1999, and October 31, 1998 -----------------------------------------------------------------------------------------------------------------------------------
In thousands, except per-share data 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------ Net sales $315,732 $222,495 $143,426 Cost of sales, including nonrecurring items 228,554 163,992 103,067 Special and nonrecurring items -- 10,500 271 ------------------------------------------------------------------------------------------------------------------------------ Gross margin 87,178 48,003 40,088 Selling, general and administrative expenses 53,787 39,289 29,482 ------------------------------------------------------------------------------------------------------------------------------ Operating profit 33,391 8,714 10,606 Interest expense, net; including interest income of $380, $225, and $264, respectively 17,149 7,281 619 Minority interest in consolidated subsidiary (2) (24) (64) ------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 16,244 1,457 10,051 Income tax expense 7,048 873 3,701 ------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 9,196 $ 584 $ 6,350 ============================================================================================================================== Basic earnings per share $ 1.05 $ 0.07 $ 0.69 ============================================================================================================================== Diluted earnings per share $ 1.05 $ 0.07 $ 0.68 ============================================================================================================================== See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets October 28, 2000, and October 30, 1999 -----------------------------------------------------------------------------------------------------------------------------------
In thousands, except share data 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 3,929 $ 2,878 Accounts receivable, less allowances of $1,256 and $1,352, respectively 40,113 47,733 Inventories 49,867 49,078 Prepayments and other current assets 2,978 5,080 ------------------------------------------------------------------------------------------------------------------------------ Total current assets 96,887 104,769 ------------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment: Land 3,332 3,368 Buildings and improvements 26,124 25,284 Machinery and equipment 40,715 42,034 ------------------------------------------------------------------------------------------------------------------------------ 70,171 70,686 Less accumulated depreciation 20,274 21,845 ------------------------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 49,897 48,841 ------------------------------------------------------------------------------------------------------------------------------ Other assets, net of accumulated amortization: Goodwill 120,982 124,381 Other 11,259 14,215 ------------------------------------------------------------------------------------------------------------------------------ Total other assets 132,241 138,596 ------------------------------------------------------------------------------------------------------------------------------ Total Assets $279,025 $292,206 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,730 $ 20,890 Customer deposits 10,289 11,765 Accrued compensation and benefits 11,680 12,633 Accrued interest 4,786 4,440 Other accrued liabilities 2,613 5,799 Current maturities of long-term debt 8,468 2,443 ------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 53,566 57,970 ------------------------------------------------------------------------------------------------------------------------------ Long-term obligations: Long-term debt 145,940 162,063 Minority interest in consolidated subsidiary 810 786 Other 4,032 2,086 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 204,348 222,905 ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Common stock, $.02 par value: authorized 20,000,000 shares, issued 9,915,117 198 198 Additional paid-in capital 47,376 47,376 Treasury stock, at cost (1,193,343 and 1,265,151 shares, respectively) (14,481) (15,455) Cumulative translation adjustments (3,175) (221) Retained earnings 44,759 37,403 ------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 74,677 69,301 ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $279,025 $292,206 ============================================================================================================================== See accompanying notes to consolidated financial statements.
20 | 21 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Stockholders' Equity For the Years Ended October 28, 2000, October 30, 1999, and October 31, 1998 -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CUMULATIVE TOTAL COMMON PAID-IN TREASURY TRANSLATION RETAINED STOCKHOLDERS' In thousands STOCK CAPITAL STOCK ADJUSTMENTS EARNINGS EQUITY ------------------------------------------------------------------------------------------------------------------------------ BALANCE, NOVEMBER 1, 1997 $198 $47,376 $ (6,855) $ (727) $33,272 $73,264 Net earnings -- -- -- -- 6,350 6,350 Translation adjustments -- -- -- 708 -- 708 ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 7,058 Cash dividends -- -- -- -- (1,457) (1,457) Issuance of stock to Employee Stock Purchase Plan -- -- 31 -- -- 31 Exercise of employee incentive stock options -- -- 323 -- (217) 106 Treasury stock purchases -- -- (7,473) -- -- (7,473) Issuance of stock for acquisition -- -- 417 -- -- 417 ------------------------------------------------------------------------------------------------------------------------------ BALANCE, OCTOBER 31, 1998 $198 $47,376 $(13,557) $ (19) $37,948 $71,946 ============================================================================================================================== Net earnings -- -- -- -- 584 584 Translation adjustments -- -- -- (202) -- (202) ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 382 Cash dividends -- -- -- -- (710) (710) Issuance of stock to Employee Stock Purchase Plan -- -- 574 -- (226) 348 Exercise of employee incentive stock options -- -- 177 -- (77) 100 Treasury stock purchases -- -- (3,017) -- -- (3,017) Issuance of stock for acquisition -- -- 368 -- (116) 252 ------------------------------------------------------------------------------------------------------------------------------ BALANCE, OCTOBER 30, 1999 $198 $47,376 $(15,455) $ (221) $37,403 $69,301 ============================================================================================================================== Net earnings -- -- -- -- 9,196 9,196 Translation adjustments -- -- -- (2,954) -- (2,954) ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 6,242 Cash dividends -- -- -- -- (1,394) (1,394) Issuance of stock to Employee Stock Purchase Plan -- -- 692 -- (314) 378 Exercise of employee incentive stock options -- -- 192 -- (97) 95 Issuance of stock for acquisition -- -- 90 -- (35) 55 ------------------------------------------------------------------------------------------------------------------------------ BALANCE, OCTOBER 28, 2000 $198 $47,376 $(14,481) $(3,175) $44,759 $74,677 ============================================================================================================================== See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows For the Years Ended October 28, 2000, October 30, 1999, and October 31, 1998 -----------------------------------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings $ 9,196 $ 584 $ 6,350 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization 9,818 6,004 3,753 Deferred income tax provision 6,248 (5,852) 1,768 Minority interest in consolidated subsidiary (2) (24) (64) Special and nonrecurring items -- 14,000 3,681 Changes in assets and liabilities: Accounts receivable 7,184 (7,685) (173) Inventories (2,873) 1,224 (4,462) Prepayments and other current assets (894) (107) 593 Other assets (2,270) (1,915) (2,953) Accounts payable (4,848) 1,558 (1,267) Customer deposits (1,402) 928 (660) Accrued liabilities (3,798) (3,147) (6,116) Other liabilities 983 (612) (156) ------------------------------------------------------------------------------------------------------------------------------ Cash provided by operating activities 17,342 4,956 294 ============================================================================================================================== Cash flows from investing activities: Additions to property, plant and equipment (5,327) (6,245) (6,594) Cost of businesses acquired (including working capital at acquisition of $9,596 in 1999 and $564 in 1998) -- (137,101) (15,962) Net proceeds from sale of building -- -- 5,170 ------------------------------------------------------------------------------------------------------------------------------ Cash used in investing activities (5,327) (143,346) (17,386) ============================================================================================================================== Cash flows from financing activities: Repayment of long-term debt (10,098) (16,309) (5,223) Proceeds from long-term debt -- 162,000 20,000 Cash dividends (1,394) (710) (1,457) Common stock issuances 528 700 137 Treasury stock purchases -- (3,017) (7,473) Debt issuance costs -- (6,582) -- ------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used in) financing activities (10,964) 136,082 5,984 ============================================================================================================================== Increase (decrease) in cash and cash equivalents 1,051 (2,308) (11,108) Cash and cash equivalents - beginning of period 2,878 5,186 16,294 ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents - end of period $ 3,929 $ 2,878 $ 5,186 ============================================================================================================================== Supplemental cash flow information: Cash paid for interest $ 15,904 $ 2,824 $ 728 ============================================================================================================================== Cash paid for taxes $ 2,377 $ 6,834 $ 5,329 ============================================================================================================================== See accompanying notes to consolidated financial statements.
22 | 23 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- Note 1 - Summary of Significant Accounting Policies PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Falcon Products, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions are eliminated in consolidation. FISCAL YEAR The Company's fiscal year ends on the Saturday closest to October 31. Fiscal years 2000, 1999, and 1998 ended October 28, 2000, October 30, 1999, and October 31, 1998, respectively, and included 52 weeks. References to years relate to fiscal years rather than calendar years. NATURE OF BUSINESS The Company designs, manufactures and markets an extensive line of furniture and related products for the food service, office, hospitality, healthcare and retail markets, including table bases, table tops, metal and wood chairs, booths and interior decor systems. The Company manufactures most of its products to customer order from basic raw materials. The Company markets its products to a wide variety of customers, including wholesale distributors, buying groups, architecture and design firms, office furniture dealers and end-users, through a combination of its own direct factory sales force and independent manufacturer's representatives. The Company considers its operations a single industry segment. The Company operates factories in Mexico through wholly-owned subsidiaries which produce all of its table base casting requirements and also certain of its wood chair frames. Substantially all of the sales of these subsidiaries are to the parent company and are eliminated in consolidation. The Company has a manufacturing facility in the Czech Republic, Falcon Mimon a.s., which manufactures and sells chair frames and fully finished wood chairs throughout Europe and in North America. The Company operates Howe Europe A/S, located in Middelfart, Denmark, which markets, assembles and distributes tables and chairs to the European contract office market. In addition, the Falcon Products (Shenzen) Limited facility located in The Peoples' Republic of China manufactures and markets products primarily for the national accounts market within the Asia-Pacific region. Sales from foreign operations and export sales from domestic facilities were $25.0 million, $18.6 million and $14.0 million in 2000, 1999, and 1998, respectively. REVENUE RECOGNITION The Company manufactures products for specific customer orders. Revenues are recognized and billings are rendered as the product is shipped to the customer. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Substantially all of the Company's cash equivalents are denominated in U.S. dollars and therefore the effect of exchange rate changes on cash balances was not significant during any of the years presented. INVENTORIES Inventories include material, labor and factory overhead and are stated at the lower of cost or market. The cost of approximately 60% and 50% of the inventories at October 28, 2000, and October 30, 1999, respectively, have been determined using the Last-In, First-Out ("LIFO") method. The remaining inventories are valued using the First- In, First-Out ("FIFO") method. At October 28, 2000, the inventory valued using LIFO approximates FIFO. Inventories at October 28, 2000, and October 30, 1999, consist of the following:
In thousands 2000 1999 --------------------------------------------------------------------- Raw materials $32,932 $28,840 Work in process 9,094 11,570 Finished goods 7,841 8,668 --------------------------------------------------------------------- $49,867 $49,078 =====================================================================
PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment are recorded at cost. Improvements are capitalized, while repair and maintenance costs are charged to operations. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts; gains or losses are included in operations. Depreciation, including the amortization of assets recorded under capital leases, is computed by use of the straight-line method over estimated service lives. Principal service lives are: buildings and improvements - 5 to 40 years; machinery and equipment - 3 to 13 years. ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. The Company periodically assesses the carrying value of long-lived assets, including intangible assets, and recognizes impairment losses if it is determined the carrying values are not recoverable. OTHER ASSETS Other assets consist of the following at October 28, 2000, and October 30, 1999:
In thousands 2000 1999 ------------------------------------------------------------------------------------------ Goodwill, net of accumulated amortization of $7,326 and $3,872 $120,982 $124,381 Deferred financing fees, net of accumulated amortization of $1,149 and $308 5,559 6,318 Deferred catalog costs, net of accumulated amortization of $166 and $17 798 697 Deferred tax asset -- 2,593 Other, net of accumulated amortization of $1,596 and $977 4,902 4,607 ------------------------------------------------------------------------------------------ $132,241 $138,596 ==========================================================================================
Goodwill represents the excess of cost over fair value of net assets acquired at the date of acquisition. Goodwill is amortized on a straight-line basis over thirty to forty years. Deferred debt issue costs are amortized on a straight-line basis over the original life of the respective debt issue, approximately six to ten years. The cost of the design, production and distribution of sales catalogs and reprints thereof is being amortized on a straight-line basis over three to five years. PENSION PLAN The Company has five noncontributory, defined benefit pension plans covering certain hourly and substantially all domestic salaried personnel. The Company's policy is to fund pension benefits to the extent contributions are deductible for tax purposes and in compliance with federal laws and regulations. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's non-U.S. subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." The functional currency for Falcon Mimon a.s. and Howe Europe A/S has been determined to be the subsidiaries' local currency. As a result, the gain or loss resulting from the translation of its financial statements to U.S. dollars is included as a separate component of stockholders' equity. For the Company's Mexican subsidiaries, the functional currency has been determined to be the U.S. dollar. The gain or loss resulting from the translation of these financial statements is included in selling, general and administrative expenses. The net foreign currency translation and transaction gains (losses) included in earnings for 2000, 1999, and 1998, were ($46), $267, and ($737) thousand, respectively. INTEREST RATE HEDGE AGREEMENTS The Company manages interest rates on borrowings under its credit facility and subordinated notes by using interest rate swap agreements. The interest rate swap agreements are accounted for as a hedge of a debt obligation, and accordingly, the interest differential to be paid or received on the interest rate swaps are recognized as an adjustment to interest expense as the differential occurs. EARNINGS PER SHARE Earnings per share amounts have been calculated in accordance with SFAS No. 128 using the weighted average number of shares outstanding during each period, adjusted for the impact of common stock equivalents using the treasury stock method when the effect is dilutive. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those reported. COMPREHENSIVE INCOME Comprehensive income represents the change in stockholders' equity during the period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. 24 | 25 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity" provides standards for the recognition and measurement of derivative and hedging activities. It requires that derivatives be recorded on the Consolidated Balance Sheet at fair value and establishes criteria for hedges of changes in the fair value of assets, liabilities or firm commitments and certain other items. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income depending on whether it is an effective part of a hedged transaction. The standard will be effective for the Company beginning October 29, 2000. The adoption of SFAS No. 133 will not have a material effect on the consolidated financial statements. Emerging Issues Task Force ("EITF") Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs" requires that all amounts billed to customers in sale transactions related to shipping and handling represent revenues earned for the goods provided and should be classified as such. Upon adoption, comparative financial statements for the prior periods must comply with the classification guidelines of this issue. This conclusion becomes effective for the Company during fiscal year 2001. At this time, management does not believe that the adoption of EITF Issue No. 00-10 will have a material effect on the consolidated financial statements. Note 2 - Business Acquisitions In June 1999, the Company acquired all of the common stock of Shelby Williams Industries, Inc. and its subsidiaries ("Shelby Williams") for a cash price of $137.1 million. Shelby Williams is a leading manufacturer of contract seating for the commercial contract furniture market. The Company used the purchase method of accounting to record this acquisition. Accordingly, results of operations have been included in the financial statements from the date of acquisition. The purchase price was allocated to the assets and liabilities based on estimated fair values at the date of acquisition. This resulted in an excess of purchase price over assets acquired of $99.2 million, which is being amortized on a straight-line basis over 40 years. In March 1998, the Company acquired the stock of Howe Furniture Corporation and its subsidiaries ("Howe") for $16.6 million, and assumed $2.2 million of outstanding long-term debt of Howe. Howe specializes in the design, engineering and marketing of tables for the contract office and hospitality markets. The Company used the purchase method of accounting to record this acquisition. Accordingly, results of operations have been included in the financial statements from the date of acquisition. This resulted in an excess of the purchase price over assets acquired of $13.9 million, which is being amortized on a straight-line basis over 40 years. Following are the Company's unaudited pro forma results, excluding special and nonrecurring items, assuming the acquisitions occurred as of the beginning of each period presented:
In thousands, except per-share data 1999 1998 --------------------------------------------------------------------- Net sales $325,814 $307,939 Net earnings 7,356 5,943 Basic and diluted earnings per share 0.83 0.64 ---------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results had the combinations been in effect during the periods presented, or of future results. Note 3 - Special and Nonrecurring Items During 1999, in conjunction with the acquisition of Shelby Williams, the Company recorded a pre-tax integration charge of $14 million, $8.7 million after taxes or $0.97 per share, to cover the anticipated costs of combining its existing business with the acquired business. The charge relates to the closing of certain duplicative manufacturing facilities. Included in this charge is $3.5 million to write down the carrying value of inventory, which is included in Cost of Sales, while the remaining components are reported in Special and Nonrecurring Items in the accompanying Consolidated Statements of Earnings. This one-time charge includes costs associated with asset write-downs, asset dispositions and other related costs associated with closing the duplicative manufacturing facilities of $11.6 million, real estate exit costs of $1 million and severance costs related to the elimination of approximately 500 positions of $1.4 million. All items were paid or utilized by October 28, 2000. During 1998, the Company recorded a pre-tax charge of $4.7 million, $2.9 million after-tax or $0.32 per share, related to management's decision to discontinue and dispose of the Company's hotel casegoods line of business. The charge was substantially all utilized in 1998 and entailed the write-down of assets, including goodwill, inventories and equipment associated with the product line located in the Tijuana, Mexico, facility. Of the total charge, Cost of Sales includes a $3.3 million charge to ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- write down the carrying value of inventory. The remaining components of the charge have been reported in Special and Nonrecurring Items in the Consolidated Statements of Earnings and are related to impairment charges and reserves for losses on disposal of certain assets and exit costs for lease termination. In 1998, the Company also recorded a $1.3 million pre-tax gain, $0.8 million after-tax or $0.09 per share, on the sale of the Company's corporate headquarters building during 1998, which is included in Special and Nonrecurring Items in the accompanying Consolidated Statements of Earnings. The Company entered into a two-year lease agreement to lease back a portion of the premises, and accordingly, the portion of the total $2.5 million gain representing the present value of the operating lease payments, approximately $1.2 million, was deferred and is included in other liabilities on the accompanying Consolidated Balance Sheets. The deferred gain will be credited to income as a reduction to rent expenses over the term of the lease. During the fourth quarter of 1998, the Company recorded an additional pre-tax charge of $0.2 million, $0.1 million after-tax or $0.01 per share, related to the consolidation of the Company's manufacturing facilities that was announced in 1997. Note 4 - Rental Expense and Lease Commitments The Company leases certain manufacturing facilities, office and showroom space, and certain office and transportation equipment under noncancelable lease agreements having an initial term of more than one year and expiring at various dates through the year 2006. The future minimum rental commitments due under lease agreements are as follows at October 28, 2000:
CAPITAL OPERATING In thousands LEASES LEASES --------------------------------------------------------------------- 2001 $ 61 $ 3,036 2002 61 2,576 2003 61 2,472 2004 61 2,184 2005 -- 1,987 Later years -- 9,213 --------------------------------------------------------------------- Total minimum lease payments 244 $21,468 ======= Less-amount representing interest (22) --------------------------------------------------- Present value of minimum lease payments $222 ===================================================
Total operating lease and rental expense was approximately $2.8, $2.4, and $1.6 million in 2000, 1999, 1998, respectively. Note 5 - Long-Term Debt Long-term debt consists of the following at October 28, 2000 and October 30, 1999:
In thousands 2000 1999 ------------------------------------------------------------------------------------------ Term loan expiring April 30, 2005, interest at LIBOR + 2.25% $ 51,150 $ 60,000 11.375% Senior subordinated notes, due June 15, 2009 100,000 100,000 Revolving line of credit, interest at LIBOR + 2.25% -- -- Notes payable to a foreign bank, secured by certain assets of Falcon Mimon, due in varying monthly installments, interest ranging from LIBOR + 1.4% to LIBOR + 2.15% 1,683 2,393 Notes payable to a foreign bank, secured by certain assets of Howe Europe, due in varying quarterly installments, interest at 4.5% to 5.1% 1,353 1,841 Obligations under capital leases, due in annual installments through November 16, 2003, interest at 4.0% 222 272 ------------------------------------------------------------------------------------------ 154,408 164,506 Less current maturities 8,468 2,443 ------------------------------------------------------------------------------------------ $145,940 $162,063 ==========================================================================================
The Company's long-term debt matures (in thousands) as follows: $8,468 in 2001, $10,830 in 2002, $12,177 in 2003, $14,863 in 2004, $8,070 in 2005 and $100,000 thereafter. In June 1999, the Company entered into a new $120 million senior secured credit facility (the "Senior Secured Credit Facility") with a group of financial institutions which provides for a six-year term loan of $70 million (the "Term Loan") and a six-year revolving credit facility of up to $50 million (the "Revolving Credit Facility"). At October 28, 2000, the Company had outstanding indebtedness of $51.2 million under the Term Loan, and no amounts were outstanding under the Revolving Credit Facility. The loans outstanding under the Senior Secured Credit Facility bear interest at the Company's option, at (1) the London Interbank Offered Rate ("LIBOR") plus the applicable margin, or (2) the greater of the Prime Rate and the rate which is 1% in excess of the rates on overnight Federal Funds transactions as published by the Federal Reserve Bank of New York (the "Base Rate"), 26 | 27 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- plus the applicable margin. The applicable margin is determined based on total leverage ratio, as defined. For the Revolving Credit Facility and the Term Loan, the applicable margin will range from 1.75% to 2.50% for LIBOR borrowings and from 0.75% to 1.50% for Base Rate borrowings. Concurrently with entering into the Senior Secured Credit Facility, the Company issued $100 million of 11.375% Senior Subordinated Notes (the "Senior Subordinated Notes") due June 15, 2009, with interest payable semiannually commencing December 15, 1999. The proceeds from the issuance were used in conjunction with the Senior Secured Credit Facility to finance the Shelby Williams acquisition along with the fees and expenses associated with the acquisition. At any time prior to June 15, 2002, the Company may redeem up to 35% of the aggregate principal amount at a redemption price of 111.375% of the principal amount, with the net cash proceeds from public equity offerings. Under the terms of the Senior Secured Credit Facility and the indentures pursuant to which the Senior Subordinated Notes have been issued (the "Indenture"), the Company must comply with certain covenants including limitations relating to the payment of dividends and the maintenance of specific ratios. Based on borrowing rates currently available for debt instruments with similar terms and maturities, the fair market value of the Company's long-term debt as of October 28, 2000, and October 30, 1999, was approximately $145 million and $165 million, respectively. At October 28, 2000, the Company had letters of credit outstanding of approximately $1.8 million relating to insurance reserves and certain foreign purchases. To manage the relative mix of the Company's debt between fixed and variable rate instruments, the Company entered into two interest rate swap agreements to modify the interest rate characteristics without an exchange of the underlying principal amount. At October 28, 2000, the Company has an interest rate collar agreement with a notional amount of $35 million that provides a cap (8%) and a floor (5.25%) for LIBOR rates. The Company makes payments when interest rates fall below the floor level and receives payments when interest rates rise above the cap. At October 28, 2000, there were no payables or receivables under the interest rate collar agreement. The Company has interest rate swap agreements with a notional amount of $65 million that have the Company paying a swap rate of 11.26% and receiving a swap rate of 11.375% through June 2004. At October 28, 2000, the fair value of the interest rate swap agreements is ($1.5) million. Management believes that the seller of the interest rate swap agreement will be able to meet its obligation under the agreement. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparty is not anticipated nor would it have a material adverse effect on the results of operations or financial position of the Company. Note 6 - Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires income taxes to be accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying statutory tax rates in effect at the date of the balance sheet to differences between the book and tax basis of assets and liabilities. Adjustments to deferred income taxes resulting from statutory rate changes flow through the tax provision in the year of the change. The components of income tax expense are as follows:
In thousands 2000 1999 1998 --------------------------------------------------------------------------------- Current: Federal $ 648 $ 1,755 $1,551 State 41 255 207 Foreign 111 304 175 Deferred 6,248 (1,441) 1,768 --------------------------------------------------------------------------------- $7,048 $ 873 $3,701 =================================================================================
The following is a reconciliation between statutory federal income tax expense and actual income tax expense:
In thousands 2000 1999 1998 --------------------------------------------------------------------------------- Computed "expected" federal income tax expense $5,522 $ 494 $3,417 Increase (decrease) resulting from: State income taxes 767 58 393 Nondeductible goodwill amortization 1,059 532 164 Other, net (300) (211) (273) --------------------------------------------------------------------------------- $7,048 $ 873 $3,701 =================================================================================
------------------------------------------------------------------------------- Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- The significant components of deferred income tax assets and liabilities are as follows:
In thousands 2000 1999 ================================================================================= Deferred tax assets: Reserves and accruals $ 5,400 $ 7,377 Net operating loss carryforward 352 675 --------------------------------------------------------------------------------- 5,752 8,052 Deferred tax liabilities: Depreciation and other property basis differences (1,682) (1,225) Inventories (2,806) (265) Other (2,324) (1,374) --------------------------------------------------------------------------------- (6,812) (2,864) --------------------------------------------------------------------------------- Net deferred income tax (liability) asset $(1,060) $ 5,188 =================================================================================
Net current deferred income tax liabilities and net non-current deferred income tax liabilities are included in accrued liabilities and other long-term obligations, respectively, in the accompanying Consolidated Balance Sheets. The Company's net operating loss carryforward expires in 2013. Note 7 - Stock Option and Stock Purchase Plans The Company has an employee incentive stock option plan which allows the Company to grant key employees incentive and nonqualified stock options to purchase shares of the Company's common stock at not less than the market price on the date of grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period but not later than ten years from the date of grant. The Company also has a Non-Employee Director Stock Option Plan, approved by the stockholders, under which the Company annually grants an option to purchase 2,000 shares of common stock to each director who is neither an officer of the Company nor compensated under any employment or consulting arrangements. Under the plan, the option exercise price is the fair market value of the Company's common stock on the date of the grant and the options are exercisable, on a cumulative basis, at 20% per year commencing on the date of the grant. The Company accounts for the option plans using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized relating to the stock options. Stock option transactions under the plans for 2000, 1999, and 1998, are summarized below:
2000 1999 1998 ---------------------- ---------------------- ---------------------- AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER PRICE OF SHARES PRICE OF SHARES PRICE OF SHARES ------------------------------------------------------------------------------------------------------------------------------ Options outstanding at beginning of year $11.09 1,289,970 $11.66 870,848 $10.70 687,892 Options granted 9.22 24,000 10.52 567,000 14.07 242,550 Options canceled 11.38 110,700 12.45 135,839 13.55 37,791 Options exercised 6.68 14,717 8.03 12,039 4.88 21,803 ------------------------------------------------------------------------------------------------------------------------------ Options outstanding at end of year $11.08 1,188,553 $11.09 1,289,970 $11.66 870,848 ============================================================================================================================== Exercisable at end of year 734,033 530,340 447,663 ==============================================================================================================================
Stock options outstanding at October 28, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ------------------------------- NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE RANGE OF EXERCISE OF OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OF OPTIONS EXERCISE PRICE ------------------------------------------------------------------------------------------------------------------------------ $ 0.60 - $ 9.77 513,153 4.8 $ 9.07 413,953 $ 9.11 $10.00 - $13.13 396,450 7.0 11.41 176,330 11.20 $13.31 - $15.00 278,950 6.7 14.30 143,750 14.34 ------------------------------------------------------------------------------------------------------------------------------ 1,188,553 6.0 $11.08 734,033 $10.64 ==============================================================================================================================
28 | 29 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Pro forma net earnings and net earnings per common share in the following table were prepared as if the Company had accounted for its stock option plans under the fair market value method of SFAS No. 123, "Accounting for Stock-Based Compensation."
In thousands, except per-share data 2000 1999 1998 --------------------------------------------------------------------------------------- Net earnings - pro forma $8,629 $ 55 $6,127 Net earnings per share - pro forma $ 0.98 $0.01 $ 0.66 Weighted-average fair value of options granted $ 4.64 $3.07 $ 6.64 =======================================================================================
For the pro forma disclosures, the fair value of each option grant is estimated at the date of the grant using an option pricing model with the following assumptions:
In thousands 2000 1999 1998 --------------------------------------------------------------------------------------- Expected dividend yield 1% 1% 1% Expected stock price volatility 30% 30% 30% Risk-free interest rate 5.5% 5.2% 5.8% Expected life of option 5.8 years 6.2 years 10 years =======================================================================================
In 1998, the Company adopted an Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, employees may contribute up to 10% of their gross income to purchase stock of the Company at 85% of the lesser of the fair market value on the grant date or the exercise date. Note 8 - Earnings Per Share In accordance with SFAS No. 128, the following table reconciles net earnings and weighted average shares outstanding to the amounts used to calculate basic and diluted earnings per share for each of the years ended 2000, 1999, and 1998.
In thousands, except per-share data 2000 1999 1998 --------------------------------------------------------------------------------------- Net earnings $9,196 $ 584 $6,350 ======================================================================================= Average shares outstanding 8,741 8,825 9,156 Assumed exercise of options (treasury method) 49 53 126 --------------------------------------------------------------------------------------- Average shares outstanding adjusted for dilutive effects 8,790 8,878 9,282 ======================================================================================= Basic earnings per share $ 1.05 $ 0.07 $ 0.69 ======================================================================================= Diluted earnings per share $ 1.05 $ 0.07 $ 0.68 =======================================================================================
Basic earnings per share was computed by dividing earnings available to common stockholders by the weighted average shares of common stock outstanding during the year. Diluted earnings available to common stockholders was determined assuming the options issued and outstanding were exercised as of the first day of the respective year of the grant date. Options to purchase 852,610 shares at a weighted average exercise price of $12.02 per share, 748,550 shares at a weighted average exercise price of $12.61 per share and 386,850 shares at a weighted average exercise price of $14.23 were outstanding during 2000, 1999, and 1998, respectively, but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common stock. Note 9 - Pension Plans The Company has five noncontributory, defined benefit pension plans covering certain hourly and substantially all salaried domestic personnel. For the Company's plans, normal retirement age is 65, but provision is made for earlier retirement. Benefits are based on 1.5% of average annual compensation for each year of service. Full vesting occurs upon completion of five years of service. Assets of the Company's pension plans primarily consist of investments in publicly traded securities and in group annuity contracts with insurance companies.
In thousands 2000 1999 --------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $30,990 $ 6,621 Service cost 1,855 718 Interest cost 2,220 458 Actuarial (gain) loss (368) (642) Acquisition -- 24,518 Benefits paid (1,968) (683) --------------------------------------------------------------------------------------- Benefit obligation at end of year $32,729 $30,990 ======================================================================================= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $30,285 $ 5,856 Actual return on plan assets 1,994 392 Acquisition -- 23,312 Employer contributions 88 1,408 Benefits paid (1,968) (683) --------------------------------------------------------------------------------------- Fair value of plan assets at end of year $30,399 $30,285 ======================================================================================= RECONCILIATION OF FUNDED STATUS Funded status (underfunded)/overfunded $(2,330) $ (705) Unrecognized net actuarial (gain)/loss 216 361 Unrecognized transition (asset)/obligation (93) (8) Unrecognized prior service cost 469 441 --------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $(1,738) $ 89 ======================================================================================= COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 1,855 $ 718 Interest cost 2,220 458 Expected return on plan assets (2,634) (492) Amortization of plan assets -- 16 Amortization of prior service cost 73 72 Amortization of transition (asset)/obligation (33) (41) Recognized net actuarial loss/(gain) 10 (11) --------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,491 $ 720 =======================================================================================
------------------------------------------------------------------------------- Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- The following actuarial assumptions were used in determining the Company's net periodic pension cost and projected benefit obligation:
2000 1999 -------------------------------------------------------------------- Discount rate 7.75% 7.50% Rate of salary increase 5.00% 5.00% Expected long-term rate of return on plan assets 9.00% 9.00% ====================================================================
Note 10 - Business Segment Information The Company operates in one product business segment, the manufacturing and sale of commercial furniture. Additionally, the Company's operations are located worldwide and are analyzed on a consolidated basis. Note 11 - Transactions with Related Parties Certain of the Company's directors or their affiliates provide various consulting and other professional services to the Company or purchase some of the Company's products. During 2000, 1999, and 1998, the Company's transactions with those directors or their affiliates totaled approximately $456, $874, and $222 thousand, respectively. Note 12 - Contingencies The Company is subject to various lawsuits and claims with respect to such matters as patents, product liabilities, government regulations, and other actions arising in the normal course of business. In the opinion of management, the ultimate liabilities resulting from such lawsuits and claims will not have a material adverse effect on the Company's financial condition and results of operations. Note 13 - Quarterly Financial Information (Unaudited)
In thousands, except per-share data 2000 FIRST SECOND THIRD FOURTH --------------------------------------------------------------------------------------------------------- Net sales $75,073 $79,548 $78,104 $83,007 Gross margin 21,311 21,300 21,350 23,217 Net earnings 2,065 2,347 2,687 2,097 Diluted earnings per share $ 0.24 $ 0.27 $ 0.31 $ 0.24 ========================================================================================================= 1999 FIRST SECOND THIRD FOURTH --------------------------------------------------------------------------------------------------------- Net sales $34,595 $36,469 $59,884 $91,547 Special and nonrecurring items -- -- 10,500 -- Gross margin 9,902 10,672 2,817 24,612 Net earnings (loss) 1,864 1,970 (6,229) 2,979 Diluted earnings (loss) per share $ 0.21 $ 0.23 $ (0.71) $ 0.34 =========================================================================================================
30 | 31 FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- Report of Independent Public Accountants ------------------------------------------------------------------------------- TO FALCON PRODUCTS, INC.: We have audited the accompanying consolidated balance sheets of FALCON PRODUCTS, INC. (a Delaware corporation) and subsidiaries as of October 28, 2000, and October 30, 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three fiscal years in the period ended October 28, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Falcon Products, Inc. and subsidiaries as of October 28, 2000 and October 30, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended October 28, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP St. Louis, Missouri December 13, 2000 ----------------------------------------------------------------------------------------------------------------------------------- Selected Financial Data -----------------------------------------------------------------------------------------------------------------------------------
In thousands, except per-share data 2000 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------------------------------------- Operating Data: Net sales $315,732 $222,495 $143,426 $113,010 $100,702 $79,647 Cost of sales, including nonrecurring items 228,554 163,992 103,067 79,507 69,125 52,883 Special and nonrecurring items -- 10,500 271 3,700 -- -- --------------------------------------------------------------------------------------------------------------------------------- Gross margin 87,178 48,003 40,088 29,803 31,577 26,764 Selling, general and administrative expenses 53,787 39,289 29,482 22,044 20,469 16,992 --------------------------------------------------------------------------------------------------------------------------------- Operating profit 33,391 8,714 10,606 7,759 11,108 9,772 Interest expense (income), net 17,149 7,281 619 (139) (95) (141) Minority interest (2) (24) (64) (47) (89) 44 --------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes 16,244 1,457 10,051 7,945 11,292 9,869 Income tax expense 7,048 873 3,701 3,019 4,291 3,693 --------------------------------------------------------------------------------------------------------------------------------- Net earnings from continuing operations 9,196 584 6,350 4,926 7,001 6,176 Discontinued operations, net of tax -- -- -- 938 1,432 1,281 Gain on sale of discontinued operations, net of tax -- -- -- 6,770 -- -- --------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 9,196 $ 584 $ 6,350 $ 12,634 $ 8,433 $ 7,457 ================================================================================================================================= Earnings Per Share - Diluted:(1) Continuing operations $ 1.05 $ 0.07 $ 0.68 $ 0.50 $ 0.71 $ 0.64 Discontinued operations -- -- -- 0.09 0.15 0.13 Gain on sale of discontinued operations -- -- -- 0.69 -- -- --------------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ 1.05 $ 0.07 $ 0.68 $ 1.28 $ 0.86 $ 0.77 ================================================================================================================================= Cash dividends per share $ 0.16 $ 0.08 $ 0.16 $ 0.14 $ 0.10 $ 0.07 ================================================================================================================================= Financial Position: Working capital $ 43,321 $ 46,799 $ 35,756 $ 38,691 $ 34,531 $29,927 Property, plant and equipment, net 49,897 48,841 27,498 25,211 24,485 21,529 Capital expenditures 5,327 6,245 6,594 3,807 4,449 4,969 Total assets 279,025 292,206 111,974 99,357 84,388 74,884 Total debt 154,408 164,506 18,815 1,794 1,405 1,889 Stockholders' equity 74,677 69,301 71,946 73,264 68,476 58,307 ================================================================================================================================= (1)Per-share data reflects adjustments related to the December 1995, 10% stock dividend.
32 | FALCON PRODUCTS, INC. 2000 ANNUAL REPORT ------------------------------------------------------------------------------- Corporate Directory and Shareholder Information ------------------------------------------------------------------------------- BOARD OF DIRECTORS FRANKLIN A. JACOBS * Chairman of the Board and Chief Executive Officer, Falcon Products, Inc. RAYNOR E. BALDWIN + President, Woodsmiths, Inc. MELVIN F. BROWN + Chairman Emeritus, Deutsche Financial Services DONALD P. GALLOP * Chairman, Gallop, Johnson & Neuman, L.C. Attorneys At Law JAMES L. HOAGLAND Retired, Past President and Chief Executive Officer, Graybar Electric Company, Inc. S. LEE KLING * Chairman of the Board, Kling Rechter & Co., Inc. LEE M. LIBERMAN + Retired, Past Chairman of the Board, Laclede Gas Company DAVID L. MORLEY President and Chief Operating Officer, Falcon Products, Inc. JAMES SCHNEIDER Broker, International Monetary Market, Chicago Mercantile Exchange [FN] * Member Executive Committee + Member Audit Committee CORPORATE OFFICERS FRANKLIN A. JACOBS Chairman of the Board and Chief Executive Officer DAVID L. MORLEY President and Chief Operating Officer STEPHEN E. COHEN Vice President, Sales and Marketing ROBERT P. COULTER President and Chief Operating Officer, Shelby Williams Industries, Inc. JOHN K. CRONIN Vice President, Contract MICHAEL J. DRELLER Vice President, Finance and Chief Financial Officer LYNDA GARRISON Vice President, Support Services and Systems Development RICHARD HNATEK Senior Vice President, Quality GREGORY E. HOLROYD Vice President, Sales, Shelby Williams Industries, Inc. MICHAEL JACOBS Vice President, International MICHAEL J. KULA Vice President, Corporate Technology and Development CHARLES A. PINEAU Vice President, Human Resources JACKSON H. SPIDELL Vice President, Operations DANIEL L. STEINBERG Vice President, Information Technologies W. CRAIG WATTS President and Chief Executive Officer, Epic Furniture Group TRANSFER AGENT Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 800 368 5948 INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP 1010 Market Street St. Louis, Missouri 63101 CORPORATE COUNSEL Gallop, Johnson & Neuman, L.C. 101 South Hanley Road St. Louis, Missouri 63105 FACILITIES CORPORATE HEADQUARTERS: 9387 Dielman Industrial Drive St. Louis, Missouri 63132 www.falconproducts.com DOMESTIC MANUFACTURING FACILITIES: 22 Falcon Drive Belmont, Mississippi 38827 2075 Highway 43 Canton, Mississippi 39046 50 Amor Avenue Carlstadt, New Jersey 07072 86 Route 4 East Englewood, New Jersey 07631 150 Shelby Williams Drive Morristown, Tennessee 37813 810 West Highway 25/70 Newport, Tennessee 37821 603 Meacham Road Statesville, North Carolina 28677 FOREIGN FACILITIES: Falcon de Juarez, S.A. de C.V. APDO, Postal 2519 E. CD Juarez, Chih., Mexico U.S.A. - P.O. Box 12865 Falcon Mimon a.s. Hvezdovska 644 47124 Mimon Czech Republic Falcon Products (Shenzhen) Limited Pin Hu Cun, Pin Hu Zheng Shenzhen The People's Republic of China 518111 Howe Europe A/S Fabriksvej 15c Roejle 5500 Middelfart, Denmark Industrial Mueblera Shelby Williams, S.A. DE C.V. Manzana IV, Lote 1, Parque Industrial Calera DE V.R. 98500 Calera, Zacatecas, Mexico SHOWROOMS / SALES OFFICES: 11-111 and 11-94 Merchandise Mart Chicago, Illinois 60654 3525 Piedmont Road North East Suite 100 Atlanta, Georgia 30305 1444 Oak Lawn Avenue Suite 612 Dallas, Texas 75207 7026 Old Katy Road Suite 267 Houston, Texas 77024 8687 Melrose Avenue Los Angeles, California 90069 8211 West Brownard Boulevard Suite 120 Plantation, Florida 33324 150 East 58th Street Suite 300 New York, New York 10005 FORM 10-K A copy of the Annual Report to the Securities and Exchange Commission on Form 10-K may be obtained from the Company at no charge. Direct your written requests to: Corporate Secretary Falcon Products, Inc. 9387 Dielman Industrial Drive St. Louis, Missouri 63132 TRADING INFORMATION Falcon Products, Inc., common stock is traded on the New York Stock Exchange under the symbol FCP. ANNUAL MEETING The Annual Meeting of Shareholders will be held on Thursday, March 15, 2001, at 4:00 p.m. Central Standard Time at the St. Louis Club, 16th Floor, 7701 Forsyth Boulevard, Clayton, Missouri 63105