SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): June 15, 1999
FALCON PRODUCTS, INC.
---------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-11577 43-0730877
- --------------------- ------------ ---------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
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)
Not applicable.
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 28, 1999, the Registrant filed a current report on Form 8-K and
reported under Item 2, among other things, that (i) on June 15, 1999, SY
Acquisition, Inc., a wholly-owned subsidiary of the Registrant (the
"Purchaser"), completed its cash tender offer for all of the outstanding shares
of the common stock of Shelby Williams Industries, Inc. ("Shelby Williams"); and
(ii) on June 18, 1999, the Purchaser merged with and into Shelby Williams.
Pursuant to Item 7(a)(4), the Registrant did not include the requisite financial
statements with that report on Form 8-K. Item 7 herein supplements the earlier
filing by providing the required financial statements and the pro forma
financial information.
ITEM 7. FINANCIAL STATEMENTS
(a)(1) Financial Statements of Registrant
The following financial statements of Falcon Products, Inc. are listed
below and made a part hereof:
Report of Independent Public Accountants
Consolidated Statements of Earnings for the years ended October 31,
1998, November 1, 1997 and November 2, 1996
Consolidated Balance Sheets, as of October 31, 1998 and November 1,
1997
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, November 1, 1997 and November 2, 1996
Consolidated Statements of Cash Flows for the years ended October 31,
1998, November 1, 1997 and November 2, 1996
Notes to Consolidated Financial Statements
Consolidated Statements of Earnings for the thirteen and twenty-six
weeks ended May 1, 1999 and May 2, 1998 (Unaudited)
Consolidated Balance Sheets, as of May 1, 1999 (Unaudited) and October
31, 1998
Consolidated Statements of Stockholders' Equity for the twenty-six
weeks ended May 1, 1999 and May 2, 1998 (Unaudited)
Consolidated Statements of Cash Flows for the twenty-six weeks ended
May 1, 1999 and May 2, 1998 (Unaudited)
Notes to Unaudited Consolidated Financial Statements-- twenty-six weeks
ended May 1, 1999
(a)(2) Financial Statements of Business Acquired
The following financial statements of Shelby Williams Industries, Inc.
are listed below and made a part hereof:
Report of Independent Auditors
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Consolidated Statements of Income for the three months ended March 31,
1999 and 1998 (Unaudited)
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998
Consolidated Statements of Cash Flows for the three months ended March
31, 1999 and 1998 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
(b) Pro Forma Financial Information
The following pro forma financial information for Falcon Products, Inc.
are listed below and made a part hereof:
Unaudited Pro Forma Combined Balance Sheet as of May 1, 1999
Notes to Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statement of Operations for the last
twelve months ended May 1, 1999
Unaudited Pro Forma Combined Statement of Operations for the Twenty-Six
Weeks ended May 1, 1999
Unaudited Pro Forma Combined Statements of Operations for fiscal year
ended October 31, 1998
Notes to Unaudited Pro Forma Combined Statements of Operations
(c) Exhibits
The following Exhibits are filed with this Report:
Exhibit No. Document
----------- --------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
<PAGE>
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 31, 1998
and November 1, 1997, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended October 31, 1998. 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 generally accepted auditing
standards. 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 31, 1998 and November 1, 1997, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
December 15, 1998
<PAGE>
<TABLE>
<CAPTION>
FALCON PRODUCTS, INC.
Consolidated Statements of Earnings
For the Years Ended October 31, 1998, November 1, 1997, and November 2,
1996
(In thousands, except per share data) 1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net sales..................................................... $143,426 $113,010 $100,702
Cost of sales, including nonrecurring items................... 103,067 79,507 69,125
Special and nonrecurring items................................ 271 3,700 --
----------- -------- -------
Gross margin.................................................. 40,088 29,803 31,577
Selling, general and administrative expenses.................. 29,482 22,044 20,469
----------- ---------- ----------
Operating profit.............................................. 10,606 7,759 11,108
Interest income (expense), net; including interest
income of $264, $228 and $263, respectively............... (619) 139 95
Minority interest in consolidated subsidiary.................. 64 47 89
--------- -------- --------
Earnings from continuing operations before income taxes....... 10,051 7,945 11,292
Income tax expense............................................ 3,701 3,019 4,291
--------- -------- --------
Net earnings from continuing operations....................... 6,350 4,926 7,001
Discontinued operations, net of tax........................... -- 938 1,432
Gain on sale of discontinued operations, net of tax........... -- 6,770 --
--------- -------- -------
Net earnings.................................................. $ 6,350 $ 12,634 $ 8,433
========- ======== ========
Earnings per share - Basic:
Continuing operations.................................... $ .69 $ .51 $ .73
Discontinued operations.................................. -- .10 .15
Gain on sale of discontinued operations.................. -- .70 --
--------- -------- -------
Net earnings per share................................... $ .69 $ 1.31 $ .88
========= ======== ========
Earnings per share - Diluted:
Continuing operations.................................... $ .68 $ .50 $ .71
Discontinued operations.................................. -- .09 .15
Gain on sale of discontinued operations.................. -- .69 --
--------- -------- -------
Net earnings per share................................... $ .68 $ 1.28 $ .86
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FALCON PRODUCTS, INC.
Consolidated Balance Sheets
October 31, 1998, and November 1, 1997
(In thousands, except per share data) 1998 1997
--------- ------
Assets
Current assets:
Cash and cash equivalents.......................... $ 5,186 $ 16,294
Accounts receivable, less allowances of $672
and $337, respectively........................... 22,683 18,625
Inventories, net................................... 24,877 22,687
Prepayments and other current assets............... 3,081 3,732
---------- --------
Total current assets.......................... 55,827 61,338
---------- --------
Property, plant and equipment:
Land 2,116 2,731
Buildings and improvements......................... 11,395 12,347
Machinery and equipment............................ 32,154 26,360
--------- --------
45,665 41,438
Less accumulated depreciation...................... 18,167 16,227
---------- --------
Net property, plant and equipment............. 27,498 25,211
--------- --------
Other assets, net of accumulated amortization:
Goodwill........................................... 23,243 9,454
Other 5,406 3,354
---------- --------
Total other assets...................................... 28,649 12,808
---------- --------
Total Assets....................................... $ 111,974 $ 99,357
========== =========
Liabilities and Stockholders' Equity Current
liabilities:
Accounts payable................................... $ 11,695 $ 10,458
Accrued liabilities................................ 6,769 10,716
Current maturities of long-term debt............... 1,607 1,473
---------- --------
Total current liabilities..................... 20,071 22,647
Long-term obligations:
Long-term debt..................................... 17,208 321
Pension liability.................................. -- 96
Deferred income taxes.............................. 876 2,155
Minority interest in consolidated subsidiary....... 810 874
Other 1,063 --
---------- --------
Total liabilities............................. 40,028 26,093
---------- --------
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 (992,777 and 477,512
shares, respectively)............................ (13,557) (6,855)
Cumulative translation adjustments................. (19) (727)
Retained earnings.................................. 37,948 33,272
--------- --------
Total stockholders' equity.................... 71,946 73,264
---------- --------
Total Liabilities and Stockholders' Equity.............. $ 111,974 $ 99,357
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FALCON PRODUCTS, INC.
Consolidated Statements of Stockholders'
Equity For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
Additional Cumulative Total
Common Paid-in Treasury Translation Retained Stockholders'
(In thousands) Stock Capital Stock Adjustments Earnings Equity
------ ---------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 28, 1995.................. $ 191 $ 42,761 $ (135) $ 182 $15,308 $ 58,307
Net earnings.......................... -- -- -- -- 8,433 8,433
Cash dividends........................ -- -- -- -- (958) (958)
Issuance of stock to Employee
Stock Purchase Plan................ -- 195 533 -- -- 728
Exercise of employee incentive
stock options...................... 2 355 864 -- (553) 668
Compensation expense under non-
qualified stock options............ -- 7 -- -- -- 7
Tax benefit of stock options.......... -- 647 -- -- -- 647
Translation adjustments............... -- -- -- 92 -- 92
Cancellation of restricted stock...... -- (19) -- -- 19 --
Amortization of restricted stock...... -- -- -- -- 24 24
Treasury stock purchases.............. -- -- (2,791) -- -- (2,791)
Issuance of stock for acquisition..... 5 3,314 -- -- -- 3,319
-------- ---------- --------- ---------- -------- -----------
Balance, November 2, 1996.................. 198 47,260 (1,529) 274 22,273 68,476
Net earnings.......................... -- -- -- -- 12,634 12,634
Cash dividends........................ -- -- -- -- (1,348) (1,348)
Issuance of stock to Employee
Stock Purchase Plan................ -- 8 893 -- -- 901
Exercise of employee incentive
stock options...................... -- -- 624 -- (314) 310
Tax benefit of stock options.......... -- 103 -- -- -- 103
Translation adjustments............... -- -- -- (1,001) -- (1,001)
Amortization of restricted stock...... -- -- -- -- 27 27
Treasury stock purchases.............. -- -- (7,202) -- -- (7,202)
Issuance of stock for acquisition..... -- 5 359 -- -- 364
-------- --------- --------- ---------- ------- ---------
Balance, November 1, 1997.................. 198 47,376 (6,855) (727) 33,272 73,264
Net earnings.......................... -- -- -- -- 6,350 6,350
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
Translation adjustments............... -- -- -- 708 -- 708
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
======= ========= ========= ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FALCON PRODUCTS, INC.
Consolidated Statements of Cash Flows
For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
(In thousands) 1998 1997 1996
----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,350 $ 12,634 $ 8,433
Adjustments to reconcile net earnings to cash
provided by operating activities:
Gain on sale of discontinued operations............... -- (6,770) --
Earnings from discontinued operations................. -- (938) (1,432)
Depreciation and amortization......................... 3,753 4,230 3,816
Special and nonrecurring items, net................... 3,521 -- --
Translation adjustments during year................... 708 (1,001) 92
Tax benefit of stock option exercises................. -- 103 647
Compensation expense under stock and option plans..... -- 27 31
Deferred income tax provision......................... 1,768 (978) 819
Minority interest in consolidated subsidiary.......... (64) (47) (89)
Change in assets and liabilities:
Accounts receivable, net......................... (595) (3,346) 1,472
Inventories...................................... (4,695) (3,055) (3,941)
Prepayments and other current assets............. 587 (438) (464)
Other assets, net................................ (2,490) (944) (1,443)
Accounts payable................................. (1,845) 3,264 (172)
Accrued liabilities.............................. (6,215) 763 (1,203)
Other liabilities................................ (156) -- --
--------- -------- -------
Cash provided by continuing operations........... 627 3,504 6,566
Cash provided by (used in) discontinued
operations..................................... -- (99) 867
--------- -------- -------
Cash provided by operating activities............ 627 3,405 7,433
--------- -------- -------
Cash flows from investing activities:
Additions to property, plant and equipment, net....... (6,594) (3,807) (4,449)
Proceeds from sale of discontinued operations......... -- 17,711 --
Net proceeds from sale of building.................... 5,170 -- --
Cost of businesses acquired (including working
capital at acquisition of
$564 in 1998 and $165 in 1996)..................... (15,962) -- (1,189)
--------- -------- --------
Cash provided by (used in) investing activities.. (17,386) 13,904 (5,638)
--------- -------- --------
Cash flows from financing activities:
Common stock issuances................................ 137 1,575 1,396
Treasury stock purchases.............................. (7,473) (7,202) (2,791)
Cash dividends........................................ (1,457) (1,348) (958)
Additions to (repayment of) long-term debt, net....... 14,777 389 (634)
Change in pension liability........................... (333) (143) (64)
--------- -------- --------
Cash provided by (used in) financing activities.. 5,651 (6,729) (3,051)
--------- -------- --------
Increase (decrease) in cash and cash equivalents........... (11,108) 10,580 (1,256)
Cash and cash equivalents - beginning of period............ 16,294 5,714 6,970
--------- -------- -------
Cash and cash equivalents - end of period.................. $ 5,186 $16,294 $ 5,714
========= ======== =======
Supplemental cash flow information:
Cash paid for interest................................ $ 728 $ 91 $ 121
========= ======== =======
Cash paid for taxes................................... $ 5,329 $ 4,841 $ 3,809
========= ======== =======
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal years 1998 and 1997 ended October 31, 1998 and November 1, 1997,
respectively, and included 52 weeks. Fiscal year 1996 ended on November 2, 1996,
and included 53 weeks. References to years relate to fiscal years rather than
calendar years.
Nature of Business
The principal products manufactured and sold by the Company are
pedestal table bases, table tops, metal and wood chairs, booths, millwork and
casegoods. The Company's sales are primarily to the food service, contract
furniture, hospitality, government and healthcare markets. 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 wood
chair frames and casegood products for the hospitality industry. 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. In
addition, the Company operates Howe Europe a/s, in Middelfart, Denmark, which
markets, assembles and distributes tables and chairs to the European
contract/office market. Sales from foreign operations and export sales from
domestic facilities were $13.6 million, $9.3 million and $10.9 million in 1998,
1997 and 1996, respectively.
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 are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventories at October 31, 1998,
and November 1, 1997, consist of the following:
(In thousands) 1998 1997
------- -------
Raw materials............... $18,174 $17,579
Work in process............. 5,288 4,320
Finished goods, net......... 1,415 788
-------- --------
$ 24,877 $ 22,687
========= =========
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
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.
Certain of the Company's assets were acquired through long-term lease
obligations financed principally by Industrial Development Revenue Bonds. These
leases represent installment purchases. Accordingly, the assets are recorded at
cost and the related obligations are included in long-term obligations as
mortgages payable.
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 has assessed the recoverability of
long-lived assets, including intangible assets, and has determined that no
impairment loss need be recognized for applicable assets of continuing
operations.
Other Assets
Other assets consist of the following at October 31, 1998, and November
1, 1997:
(In thousands) 1998 1997
--------- -------
Goodwill, net of accumulated amortization
of $2,285 and $1,481.............................. $23,243 $ 9,454
Deferred catalog costs, net of accumulated
amortization of $965 and $318..................... 2,241 1,226
Other, net of accumulated amortization
of $1,127 and $544............................... 3,165 2,128
--------- --------
$ 28,649 $ 12,808
========== =========
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 three years. The cost of the design, production and distribution
of sales catalogs and reprints thereof is being amortized on a straight-line
basis over two to five years.
Pension Plan
The Company has a noncontributory defined benefit pension plan 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.
The Company also has a noncontributory defined benefit pension plan
which covered certain employees of Howe Furniture Corporation. Benefits under
this plan were curtailed January 1, 1993.
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Stock Dividends
On November 21, 1995, the Board of Directors of the Company declared a
10% stock dividend. The record date of this transaction was December 13, 1995,
with a distribution date of January 2, 1996. All information contained in the
accompanying Consolidated Financial Statements and these Notes to Consolidated
Financial Statements relating to the Company's common stock, including shares
outstanding, stock option plans and per share data, has been restated to give
effect to the stock dividend discussed above.
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. 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, inventory, prepayments and
property are translated at historical exchange rates while other assets and
liabilities are translated at current exchange rates. Revenues and expenses are
translated at average exchange rates during the year. The resulting translation
adjustment is included in selling, general and administrative expenses.
The net foreign currency translation and transaction losses included in
earnings for 1998, 1997 and 1996, were $737, $304 and $235 thousand,
respectively.
Interest Rate Hedge Agreement
The Company manages fluctuations in interest rates on borrowings under
its revolving credit facility by using an interest rate swap agreement. The
interest rate swap agreement is accounted for as a hedge of a debt obligation,
and accordingly, the net settlement amount is recorded as an adjustment to
interest expense in the period incurred.
The Company's interest rate swap agreement requires the Company to pay
a fixed rate and receive a floating rate thereby creating fixed rate debt. The
Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing risk.
The interest rate swap agreement has been designed for hedging purposes and is
not held or issued for speculative purposes.
Earnings Per Share
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." All
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. All per share data has been retroactively restated in
accordance with SFAS No. 128.
Note 2 - Business Acquisitions
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. The excess of the purchase
price over amounts assigned to net tangible assets ($13.9 million) was recorded
as goodwill.
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
In October 1996, the Company acquired certain assets and assumed
certain liabilities of The Chair Source for 241,400 newly issued shares of
common stock valued at approximately $3.3 million, plus 75,000 shares of common
stock to be issued through October 1999, subject to certain contingencies. The
Chair Source manufactures wood and upholstered seating and distributes them
primarily to the hospitality, lodging and food service markets. The company used
the purchase method of accounting to account for this acquisition and recorded
goodwill of approximately $2.9 million relating to this acquisition.
In February 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of a manufacturing facility located in Tijuana,
Mexico. This facility specializes in manufacturing upscale wood and upholstered
seating for the lodging and hospitality markets. The total purchase price for
this facility was approximately $500 thousand and was funded by the Company with
its available cash reserves. The company used the purchase method of accounting
to account for this acquisition and recorded goodwill of approximately $421
thousand relating to this acquisition.
Note 3 - Special and Nonrecurring Items
During 1998, the Company recorded a pre-tax charge of $4.7 million,
$2.9 million after-tax, related to management's decision to discontinue and
dispose of the Company's hotel casegoods line of business. The charge entails
the writedown 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 Statement 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, on the sale of the Company's corporate headquarters building
during 1998, which is included in special and non-recurring items, in the
accompanying Consolidated Statement 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 Sheet as
of October 31, 1998. 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, related to the
consolidation of the Company's manufacturing facilities that was announced in
1997.
During 1997, the Company recorded a pre-tax charge of $3.7 million,
$2.3 million after-tax, for special and nonrecurring items. The charges are a
result of the consolidation of the Company's manufacturing operations at its
Anaheim, California and Belding, Michigan facilities into its City of Industry,
California facility and the elimination of several duplicative and nonperforming
wood seating product lines. These pre-tax charges are recorded as a separate
line in the Consolidated Statements of Earnings and included $3.0 million for
costs associated with asset write-downs and dispositions and $0.7 million for
exit costs of leased facilities and employee severance and termination costs.
Note 4 - Discontinued Operations
On September 8, 1997, the Company completed the sale of its William
Hodges division (the Hodges Division) to Leggett & Platt, Incorporated for
approximately $17.7 million. The Hodges Division manufactures wire shelving and
kitchen equipment. The sale resulted in a gain of approximately $6.8 million,
net of applicable income taxes of $3.8 million.
The results of the Hodges Division for 1997 through the date of the
sale (approximately 10.5 months) and for fiscal year 1996 are classified as
discontinued operations in the accompanying consolidated financial statements.
Earnings from the discontinued Hodges Division were $938 thousand in 1997 and
$1,432 thousand in 1996, net of applicable income taxes of $575 thousand and
$877 thousand, respectively. Net revenues from the Hodges Division in 1997
through the date of the sale were $7.8 million. Hodges Division revenues in
fiscal year 1996 were $10.3 million.
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 5 - Rental Expense and Lease Commitments
The Company leases certain manufacturing facilities and certain office
and transportation equipment under non-cancelable 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 31, 1998:
Capital Operating
(In thousands) Leases Leases
------- ---------
1999........................................... $ 61 $ 2,129
2000........................................... 61 1,411
2001........................................... 61 1,373
2002........................................... 61 849
2003........................................... 61 670
Later years.................................... 61 1,777
-------- -------
Total minimum lease payments................... 366 $ 8,209
=======
Less-amount representing interest.............. (45)
-------
Present value of minimum lease payments........ $ 321
=======
Total operating lease and rental expense was approximately $1,622,
$1,463 and $953 thousand in 1998, 1997 and 1996, respectively.
Note 6 - Long Term Debt
Long-term debt consists of the following at October 31, 1998, and
November 1, 1997:
(In thousands) 1998 1997
-------- ------
Revolving line of credit expiring April 22, 2000,
interest at prime minus 2.0%.......................... $16,935 $ --
Notes payable to a foreign bank, secured by certain
assets of Falcon Mimon, due in varying monthly
installments through 1999, interest at LIBOR + 2.5%... 1,559 1,301
Obligations under capital leases, due in annual
installments through November 16, 2003,
interest at 4.0%...................................... 321 368
Other................................................... -- 125
------- -------
18,815 1,794
Less current maturities................................. 1,607 1,473
------- -------
$17,208 $ 321
======= =======
At October 31, 1998, the Company had letters of credit outstanding of
approximately $409 thousand relating to insurance reserves and certain foreign
purchases.
In connection with the acquisition of Howe, the Company entered into an
unsecured $20.0 million revolving line of credit expiring April 22, 2000. The
rate of interest on borrowings under this agreement is, at the Company's option,
the Prime Rate, Federal Funds Rate or LIBOR adjusted for a spread based upon the
Company's leverage ratio. The variable interest rate was 6.4% at October 31,
1998.
Under the loan agreements, the Company must comply with certain
covenants including, but not limited to, the maintenance of specific ratios and
net worth. The Company has complied with the terms of the loan agreements.
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
The minimum annual maturities of long-term debt, including capital
lease obligations, are: $1,607, $16,985, $52, $54 and $57 thousand in 1999
through 2003, respectively, and $60 thousand thereafter.
The Company has entered into an interest rate swap agreement with a
notional amount of $12.0 million. The notional amount of the interest rate swap
does not represent amounts exchanged by the parties and thus, is not a measure
of the Company's exposure through its use of the interest rate swap agreement.
The amounts exchanged are determined by reference to the notional amount and
other terms of the contract.
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. Non-performance 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 7 - Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS No. 109), 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) 1998 1997 1996
------- -------- ------
Current:
Federal.................. $ 1,551 $ 3,587 $ 3,107
State.................... 207 410 365
Foreign.................. 175 -- --
Deferred...................... 1,768 (978) 819
------- -------- -------
$ 3,701 $ 3,019 $ 4,291
======= =======- =======
The following is a reconciliation between statutory federal income tax
expense and actual income tax expense:
(In thousands) 1998 1997 1996
-------- -------- ------
Computed "expected" federal income tax
expense............................... $ 3,417 $ 2,701 $ 3,852
Increase (decrease) resulting from:
State income taxes.................. 393 378 452
Other, net.......................... (109) (60) (13)
------- ------- -------
$ 3,701 $ 3,019 $ 4,291
======= =======- =======
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
The significant components of deferred income tax assets and
liabilities are as follows:
(In thousands) 1998 1997
------- ------
Deferred tax assets:
Inventories................................... $ 434 $ 648
Reserves and accruals......................... 949 1,505
Net operating loss carryforward............... 822 --
-------- -------
2,205 2,153
-------- -------
Deferred tax liabilities:
Depreciation and other property
basis differences........................... (1,153) (1,558)
Other......................................... (158) (597)
-------- -------
(1,311) (2,155)
------- -------
Net deferred income tax asset (liability).......... $ 894 $ (2)
======= =======
Net current deferred income tax assets are included in prepayments and
other current assets in the accompanying Consolidated Balance Sheets. The
Company's net operating loss carryforward of $2.2 million expires in 2013. The
Company's income tax returns have been examined by the Internal Revenue Service
for fiscal years through 1994.
Note 8 - 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 up to 1,100,000 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 1,650 shares of common stock to each director who is neither an
officer of the Company nor compensated under any employment or consulting
arrangements ("Non-Employee Director"). 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 Non-Employee Director Stock Option Plan was amended in December
1998 to increase the number of shares underlying the options granted from 1,650
to 2,000.
The Company accounts for the option plans using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation expense
has been recognized relating to the stock options.
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."
1998 1997 1996
-------- -------- ------
Net earnings - pro forma................. $ 6,127 $12,446 $ 8,425
======= ======= =======
Net earnings per share - pro forma....... $ .66 $ 1.26 $ .86
======= ======= =======
Weighted-average fair value of options
granted................................ $ 6.64 $ 7.39 $ 6.54
======= ======= =======
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
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:
1998 1997 1996
-------- -------- --------
Expected dividend yield........... 1% .7% .6%
Expected stock price volatility... 30% 30% 30%
Risk-free interest rate........... 5.8% 6.4% 5.8%
Expected life of option........... 10 years 10 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.
During 1997, the Company had a Stock Purchase Plan under which eligible
employees could elect to invest up to 10% of salary earned during each pay
period and the Company contributed an amount equal to 40% of each participant's
contributions. This plan was terminated at the end of fiscal 1997.
<TABLE>
<CAPTION>
Stock option transactions under the plans for 1998, 1997, and 1996 are
summarized below:
1998 1997 1996
-------------------- ------------------- ---------------------
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year............................ $ 10.70 687,892 $ 9.35 575,925 $ 7.58 766,450
Options granted....................... 14.07 242,550 14.49 168,900 13.04 68,150
Options canceled...................... 13.55 37,791 13.16 12,754 10.00 64,348
Options exercised..................... 4.88 21,803 7.01 44,179 3.44 194,327
------- ------- ------- ------- ------- -------
Options outstanding at end of year.... $ 11.66 870,848 $ 10.70 687,892 $ 9.35 575,925
======= ======= ======= ======= ======= =======
Exercisable at end of year............ 447,663 311,847 245,346
======= ======= =======
Stock options outstanding at October 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise of Options Life Exercise Price of Options Exercise Price
----------------- ---------- ----------- -------------- ----------- --------------
$ 0.50 - $ 10.00 355,488 4.6 $ 9.07 314,733 $ 8.99
$ 10.00 - $ 13.00 132,510 6.5 $ 11.16 63,620 $ 10.96
$ 13.00 - $ 15.00 382,850 8.7 $ 14.23 69,310 $ 14.37
----------- -------- ------------ ----------- ------------
870,848 6.7 $ 11.66 447,663 $ 10.10
=========== ======== ============ =========== ============
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 9 - Earnings Per Share
As discussed in Note 1 herein, the Company adopted SFAS No. 128 in
1998. In accordance with SFAS No. 128, the following tables reconcile net
earnings from continuing operations and weighted average shares outstanding to
the amounts used to calculate basic and diluted earnings per share for each of
the years ended 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Per
Net Share
(In thousands, except per share data) Earnings Shares Amount
<S> <C> <C> <C>
For the year ended October 31, 1998
Net Earnings from Continuing Operations.............. $ 6,350 -- $ --
======= ======= =======
Basic Earnings Per Share
Earnings available to common stockholders.......... $ 6,350 9,156 $ 0.69
Assumed exercise of options (treasury method)...... -- 126 --
------- ------- -------
Diluted Earnings Per Share
Earnings available to common stockholders.......... $ 6,350 9,282 $ 0.68
======= ======= =======
For the year ended November 1, 1997
Net Earnings from Continuing Operations.............. $ 4,926 -- $ --
======= ======= =======
Basic Earnings Per Share
Earnings available to common stockholders.......... $ 4,926 9,665 $ 0.51
Assumed exercise of options (treasury method)...... -- 211 --
------- ------- -------
Diluted Earnings Per Share
Earnings available to common stockholders.......... $ 4,926 9,876 $ 0.50
======= ======= =======
For the year ended November 2, 1996
Net Earnings from Continuing Operations.............. $ 7,001 -- $ --
======= ======= =======
Basic Earnings Per Share
Earnings available to common stockholders.......... $ 7,001 9,591 $ 0.73
Assumed exercise of options (treasury method)...... -- 202 --
------- ------- -------
Diluted Earnings Per Share
Earnings available to common stockholders..... $ 7,001 9,793 $ 0.71
======= ======= =======
</TABLE>
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 386,850
shares at a weighted average exercise price of $14.23 per share, 155,400 shares
at a weighted average exercise price of $14.51 per share and 5,000 shares at a
weighted average exercise price of $14.50 were outstanding during 1998, 1997 and
1996, 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. As a result of adoption of SFAS No. 128, the Company
restated reported earnings per share for 1997 and 1996. This accounting change
had no impact of previously reported per share data.
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 10 - Pension Plans
The Company has two noncontributory defined benefit pension plans
covering certain hourly and substantially all salaried domestic personnel. In
connection with the Howe acquisition, the Company acquired the curtailed pension
plan of Howe, whose assets exceed the accumulated benefits. For the Company's
non-curtailed plan, 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 plan consist entirely of an investment in a group annuity
contract with an insurance company.
The following actuarial assumptions were used in determining the
Company's net periodic pension cost and projected benefit obligation:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Discount rate....................................... 7.25% 7.25% 7.25%
Rate of salary increase............................. 5.00% 5.00% 5.50%
Expected long-term rate of return on plan assets.... 9.00% 9.00% 9.00%
Net periodic pension cost of the plan, is as follows:
(In thousands) 1998 1997 1996
-------- ------- ------
Service cost - benefits earned during the period. $ 619 $ 473 $ 421
Interest cost on projected benefit obligation..... 369 279 257
Return on plan assets............................. 704 (641) (389)
Net total of other components..................... (1,108) 345 137
------- ------- -------
Net periodic pension cost......................... $ 584 $ 456 $ 426
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The funded status of the defined benefit pension plans is as follows:
(In thousands) 1998 1998 1997
---------- ---------- -------
Plan Whose Plan Whose
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
---------- -----------
<S> <C> <C> <C>
Vested benefit obligation...................................... $ (1,059) $ (4,359) $ (3,643)
Non-vested benefits............................................ -- (380) (631)
---------- --------- ---------
Accumulated benefit obligation................................. (1,059) (4,739) (4,274)
Effect of projected future compensation levels................. (114) (611) (467)
--------- --------- ---------
Projected benefit obligation................................... (1,173) (5,350) (4,741)
Plan assets at fair value...................................... 1,438 4,447 4,018
---------- ---------- ----------
Plan assets greater (less) than projected benefit obligation... 265 (903) (723)
Unrecognized net loss due to past experience different from
assumptions................................................. 89 676 130
Unrecognized prior service cost................................ -- 513 586
Unrecognized net asset......................................... -- (49) (89)
---------- ---------- ----------
Prepaid (accrued) pension cost................................. $ 354 $ 237 $ (96)
========== ========== ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
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 receive commissions
as sales representatives. During 1998, 1997 and 1996, the Company incurred
expenses of approximately $222, $99 and $220 thousand, respectively, for such
services.
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 - Domestic and Foreign Subsidiaries
Following is condensed consolidating financial statements of Falcon
Products, Inc. and its domestic subsidiaries (Domestic) and Falcon Products,
Inc.'s foreign subsidiaries (Foreign):
<TABLE>
<CAPTION>
Consolidating Statement of Earnings
For the Year Ended October 31, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Net sales...................................... $ 135,742 $ 20,665 $ (12,981) $ 143,426
Cost of sales, including nonrecurring items.... 97,801 18,247 (12,981) 103,067
Special and nonrecurring items................. 271 -- -- 271
---------- ---------- ---------- ----------
Gross margin.............................. 37,670 2,418 -- 40,088
Selling, general and administrative expenses... 27,225 2,257 -- 29,482
---------- ---------- ---------- ----------
Operating profit.......................... 10,445 161 -- 10,606
Minority interest in consolidated subsidiary... 64 -- -- 64
Interest income (expense)...................... (546) (73) -- (619)
---------- ---------- ---------- ----------
Earnings before income taxes.............. 9,963 88 -- 10,051
Income tax expense............................. 3,668 33 -- 3,701
---------- ---------- ---------- ----------
Net earnings.............................. $ 6,295 $ 55 $ -- $ 6,350
========== ========== ========== ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Balance Sheet
October 31, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents............................. $ 3,666 $ 1,520 $ -- $ 5,186
Accounts receivable................................... 20,472 2,211 -- 22,683
Inventories, net...................................... 20,922 3,955 -- 24,877
Other assets 2,760 321 -- 3,081
---------- ---------- ---------- ----------
Total current assets........................ 47,820 8,007 -- 55,827
Property plant and equipment, net..................... 18,362 9,136 -- 27,498
Investment in subsidiaries............................ 7,150 -- (7,150) --
Goodwill and other assets............................. 28,649 -- -- 28,649
---------- ---------- ---------- ----------
Total assets................................ $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== ========== =========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 16,143 $ 3,928 $ -- $ 20,071
Long-term debt........................................ 17,208 -- -- 17,208
Other long-term liabilities........................... 2,749 -- -- 2,749
Intercompany payable (receivable)..................... (6,065) 6,065 -- --
------------ ---------- ---------- ----------
Total liabilities........................... 30,035 9,993 -- 40,028
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 6,446 (6,446) 198
Additional paid-in capital....................... 47,376 925 (925) 47,376
Treasury stock................................... (13,557) -- -- (13,557)
Cumulative translation adjustment................ (19) -- -- (19)
Retained earnings................................ 37,948 (221) 221 37,948
---------- ----------- ---------- ----------
Total stockholders' equity.................. 71,946 7,150 (7,150) 71,946
---------- ---------- ----------- ----------
Total liabilities and stockholders' equity. $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== =========== ============ ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Statement of Cash Flows
For the Year Ended October 31, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -----
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities...... $ (452) $ 1,079 $ -- $ 627
---------- ---------- ---------- ----------
Cash flows from investing activities
Acquisition, net of cash............................ (16,457) 495 -- (15,962)
Additions to property, plant and equipment, net..... (845) (579) -- (1,424)
---------- ---------- ---------- ----------
Net cash used in investing activities.......... (17,302) (84) -- (17,386)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Common stock issuance............................... 137 -- -- 137
Treasury stock purchases............................ (7,473) -- -- (7,473)
Cash dividends...................................... (1,457) -- -- (1,457)
Additions to (repayment of) long-term debt, net..... 14,777 -- -- 14,777
Change in pension liability......................... (333) -- -- (333)
----------- ---------- ---------- ----------
Net cash provided by financing activities...... 5,651 -- -- 5,651
---------- ---------- ---------- ----------
Net change in cash and cash equivalents........ $ (12,103) $ 995 $ -- $ (11,108)
========== ========== ========== ===========
Consolidating Statement of Earnings
For the Year Ended November 1, 1997
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -----
Net sales........................................... $ 109,105 $ 13,917 $ (10,012) $ 113,010
Cost of sales, including nonrecurring items......... 76,003 13,516 (10,012) 79,507
Special and nonrecurring items................. 3,700 -- -- 3,700
---------- ----------- ---------- ----------
Gross margin................................... 29,402 401 -- 29,803
Selling, general and administrative expenses........ 21,797 247 -- 22,044
---------- ---------- ---------- ----------
Operating profit............................... 7,605 154 -- 7,759
Minority interest in consolidated subsidiary........ 47 -- -- 47
Interest income (expense)........................... (154) -- 139
---------- ---------- ---------- ----------
Earnings before income taxes................... 7,945 -- -- 7,945
Income tax expense.................................. 3,019 -- -- 3,019
---------- ---------- ---------- ----------
Net earnings from continuing operations........ $ 4,926 $ -- $ -- $ 4,926
========== ========== ========== ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Balance Sheet
November 1, 1997
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -----
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents............................. $ 15,769 $ 525 $ -- $ 16,294
Accounts receivable................................... 17,986 639 -- 18,625
Inventories, net...................................... 18,638 4,049 -- 22,687
Other assets ......................................... 3,241 491 -- 3,732
---------- ---------- ---------- ----------
Total current assets........................ 55,634 5,704 -- 61,338
Property plant and equipment, net..................... 16,780 8,431 -- 25,211
Investment in subsidiaries............................ 5,527 -- (5,527) --
Goodwill and other assets............................. 12,808 -- -- 12,808
---------- ---------- ---------- ----------
Total assets................................ $ 90,749 $ 14,135 $ (5,527) $ 99,357
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 20,465 $ 2,182 $ -- $ 22,647
Long-term debt........................................ 321 -- -- 321
Other long-term liabilities........................... 3,125 -- -- 3,125
Intercompany payable (receivable)..................... (6,426) 6,426 -- --
---------- ---------- ---------- ----------
Total liabilities........................... 17,485 8,608 -- 26,093
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 5,726 (5,726) 198
Additional paid-in capital....................... 47,376 77 (77) 47,376
Treasury stock................................... (6,855) -- -- (6,855)
Cumulative translation adjustment................ (727) -- -- (727)
Retained earnings................................ 33,272 (276) 276 33,272
---------- ---------- ---------- ----------
Total stockholders' equity.................. 73,264 5,527 (5,527) 73,264
---------- ---------- ----------- ----------
Total liabilities and stockholders' equity.. $ 90,749 $ 14,135 $ (5,527) $ 99,357
========== ========== ========== ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Statement of Cash Flows
For the Year Ended November 1, 1997
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities............. $ 4,991 $ (1,586) $ -- $ 3,405
---------- ----------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of discontinued operations.............. 17,711 -- -- 17,711
Additions to property, plant and equipment, net............ (3,807) -- -- (3,807)
---------- ---------- ---------- ----------
Net cash provided by investing activities............. 13,904 -- -- 13,904
---------- ---------- ---------- ----------
Cash flows from financing activities:
Common stock issuance...................................... (114) 1,689 -- 1,575
Treasury stock purchases................................... (7,202) -- -- (7,202)
Cash dividends............................................. (1,348) -- -- (1,348)
Additions to (repayment of) long-term debt, net............ 389 -- -- 389
Change in pension liability................................ (143) -- -- (143)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities... (8,418) 1,689 -- (6,729)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents............... $ 10,477 $ 103 $ -- $ 10,580
=========== ========== ========== ==========
Consolidating Statement of Earnings
For the Year Ended November 2, 1996
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 96,838 $ 11,446 $ (7,582) $ 100,702
Cost of sales.......................................... 65,904 10,803 (7,582) 69,125
---------- ---------- ---------- ----------
Gross margin...................................... 30,934 643 -- 31,577
Selling, general and administrative expenses........... 19,757 712 -- 20,469
---------- ---------- ---------- ----------
Operating profit.................................. 11,177 (69) -- 11,108
Minority interest in consolidated subsidiary........... 89 -- -- 89
Interest income (expense).............................. 288 (193) -- 95
---------- ---------- ---------- ----------
Earnings before income taxes...................... 11,554 (262) -- 11,292
Income tax expense..................................... 4,391 (100) -- 4,291
---------- ---------- ---------- ----------
Net earnings from continuing operations........... $ 7,163 $ (162) $ -- $ 7,001
========== ========== ========== ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Statement of Cash Flows
For the Year Ended November 2, 1996
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Net cash provided by operating activities....................... $ 4,148 $ 3,285 $ -- $ 7,433
---------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition, net of cash................................... (1,189) -- -- (1,189)
Additions to property, plant and equipment, net............ (851) (3,598) -- (4,449)
---------- ---------- ---------- ----------
Net cash used in investing activities................. (2,040) (3,598) -- (5,638)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Common stock issuance...................................... 1,389 7 -- 1,396
Treasury stock purchases................................... (2,791) -- -- (2,791)
Cash dividends............................................. (958) -- -- (958)
Additions to (repayment of) long-term debt, net............ (634) -- -- (634)
Change in pension liability................................ (64) -- -- (64)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities... (3,058) 7 -- (3,051)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents............... $ (950) $ (306) $ -- $ (1,256)
========== =========== ========== ==========
</TABLE>
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Note 14 - Quarterly Financial Information (Unaudited)
(In thousands, except for share data) First Second Third Fourth
-------- -------- ------- -------
<S> <C> <C> <C> <C>
1998
Net sales........................................ $28,060 $33,651 $41,297 $40,418
Special and nonrecurring items................... -- -- 111 160
Gross margin..................................... 8,134 9,525 9,113 13,316
Net earnings..................................... 1,782 1,838 216 2,514
Earnings per share - Diluted:
Net earnings per share...................... $ .19 $ .20 $ .02 $ .28
First Second Third Fourth
------- ------- ------- -------
1997
Net sales........................................ $26,733 $26,850 $28,570 $30,857
Special and nonrecurring items................... -- -- -- 3,700
Gross margin..................................... 7,658 7,844 8,371 5,930
Net earnings from continuing operations.......... 1,688 1,580 1,653 5
Net earnings from discontinued operations........ 179 362 397 --
Gain on sale of discontinued operations.......... -- -- -- 6,770
Net earnings..................................... 1,867 1,942 2,050 6,775
Earnings per share - Diluted:
Continuing operations....................... $ .17 $ .16 $ .17 $ --
Discontinued operations..................... .02 .04 .04 --
Gain on sale of discontinued operations..... -- -- -- .69
Net earnings per share...................... .19 .20 .21 .69
First Second Third Fourth
------- ------- ------- -------
1996
Net sales........................................ $23,239 $23,266 $25,228 $28,969
Gross margin..................................... 6,855 7,604 7,619 9,499
Net earnings from continuing operations.......... 1,459 1,730 1,699 2,113
Net earnings from discontinued operations........ 164 397 346 525
Net earnings..................................... 1,623 2,127 2,045 2,638
Earnings per share - Diluted:
Continuing operations....................... $ .15 $ .18 $ .17 $ .22
Discontinued operations..................... .02 .04 .04 .05
Net earnings per share...................... .17 .22 .21 .27
</TABLE>
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks
Thirteen Weeks Ended Ended
May 1, May 2, May 1, May 2,
(In thousands, except per share data) 1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net sales....................................... $36,469 $33,651 $71,064 $61,711
Cost of sales................................... 25,797 24,126 50,490 44,052
------ ------- ------- -------
Gross margin............................... 10,672 9,525 20,574 17,659
Selling, general and administrative expenses.... 7,220 6,465 13,833 11,813
------- ------- ------- -------
Operating profit........................... 3,452 3,060 6,741 5,846
Interest (expense) income, net.................. (307) (90) (596) 7
Minority interest in consolidated subsidiary.... 8 19 14 34
------- ------- ------- -------
Earnings before income taxes............... 3,153 2,989 6,159 5,887
Income tax expense.............................. 1,183 1,151 2,325 2,267
------- ------- ------- -------
Net earnings............................... $ 1,970 $ 1,838 $ 3,834 $ 3,620
======= ======= ======= =======
Basic and diluted earnings per share:........... $ .23 $ .20 $ .43 $ .38
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
May 1, October 31,
(In thousands, except share data) 1999 1998
--------- -------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................ $ 1,162 $ 5,186
Accounts receivable, less allowances of
$421 and $672, respectively.................... 20,567 22,683
Inventories...................................... 27,761 24,877
Prepayments and other current assets............. 3,421 3,081
-------- --------
Total current assets........................ 52,911 55,827
-------- --------
Property, plant and equipment:
Land 2,116 2,116
Buildings and improvements....................... 11,451 11,395
Machinery and equipment.......................... 34,190 32,154
-------- --------
47,757 45,665
Less accumulated depreciation.................... (19,403) (18,167)
-------- --------
Total property, plant and equipment......... 28,354 27,498
-------- --------
Other assets, net of accumulated amortization:
Goodwill......................................... 24,749 23,243
Other ......................................... 5,717 5,406
-------- --------
Total other assets.......................... 30,466 28,649
-------- --------
Total Assets $111,731 $111,974
======== ========
Liabilities and Stockholders' Equity Current
liabilities:
Accounts Payable................................. $ 10,528 $ 11,695
Accrued liabilities.............................. 5,018 6,769
Current maturities of long-term debt............. 2,079 1,607
-------- --------
Total current liabilities................... 17,625 20,071
Long-term obligations:
Long-term debt................................... 19,249 17,208
Deferred income taxes............................ 876 876
Minority interest in consolidated subsidiary..... 796 810
Other ......................................... 759 1,063
-------- --------
Total liabilities........................... 39,305 40,028
-------- --------
Stockholders' equity:
Common stock, $.02 par value: authorized
20,000,000 shares;
9,915,117 shares issued....................... 198 198
Additional paid-in capital....................... 47,376 47,376
Treasury stock, at cost (942,540 and 992,777
shares, respectively).......................... (15,685) (13,557)
Cumulative translation adjustment................ (196) (19)
Retained earnings................................ 40,733 37,948
-------- --------
Total stockholders' equity.................. 72,426 71,946
-------- --------
Total Liabilities and Stockholders' Equity............ $111,731 $111,974
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Twenty-Six Weeks Ended May 1, 1999, and May 2, 1998
(Unaudited)
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-in Treasury Translation Retained Stockholders'
(In thousands) Stock Capital Stock Adjustments Earnings Equity
----------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997............. $ 198 $ 47,376 $ (6,855) $ (727) $ 33,272 $ 73,264
Net earnings..................... -- -- -- -- 3,620 3,620
Exercise of stock options........ -- -- 219 -- (139) 80
Issuance of stock to Employee
Stock Purchase Plan........... -- -- 30 -- -- 30
Translation adjustments.......... -- -- -- (176) -- (176)
Cash dividends................... -- -- -- -- (734) (734)
Treasury stock purchases......... -- -- (5,900) -- -- (5,900)
Issuance of stock for business
acquisition................... -- -- 243 -- -- 243
---------- --------- ---------- ---------- --------- ----------
Balance, May 2, 1998.................. $ 198 $ 47,376 $ (12,263) $ (903) $ 36,019 $ 70,427
========== ========= ========== ========== ========= ==========
Balance, October 31, 1998............. $ 198 $ 47,376 $ (13,557) $ (19) $ 37,948 $ 71,946
Net earnings..................... -- -- -- -- 3,834 3,834
Exercise of stock options........ -- -- 139 -- (67) 72
Issuance of stock to Employee
Stock Purchase Plan........... -- -- 574 -- (226) 348
Translation adjustments.......... -- -- -- (177) -- (177)
Cash dividends................... -- -- -- -- (710) (710)
Treasury stock purchases......... -- -- (3,025) -- -- (3,025)
Issuance of stock for business
acquisition................... -- -- 184 -- (46) 138
---------- --------- ---------- ---------- ---------- ----------
Balance, May 1, 1999.................. $ 198 $ 47,376 $ (15,685) $ (196) $ 40,733 $ 72,426
========== ========= ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Twenty-Six Weeks Ended
----------------------
May 1, May 2,
(In thousands) 1999 1998
-------- ------
Cash flows from operating activities:
Net earnings $ 3,834 $ 3,620
Adjustments to reconcile net earnings to net
cash provided by (used in)
operating activities:
Depreciation and amortization................... 1,721 1,823
Translation adjustments......................... (177) (176)
Minority interest in consolidated subsidiary.... (14) (34)
Change in assets and liabilities:
Accounts receivable, net................... 2,116 2,166
Inventories................................ (2,884) (1,429)
Prepayments and other current assets....... (340) (1,127)
Other assets, net.......................... (221) (221)
Accounts payable........................... (1,167) (1,082)
Accrued liabilities........................ (1,751) (6,510)
Other liabilities.......................... (304) --
-------- -------
Net cash used in operating activities........... (1,857) (2,970)
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment, net...... (1,503) (3,931)
Acquisition, net of cash............................. -- (15,962)
------- -------
Net cash used in investing activities........... (1,503) (19,893)
------- --------
Cash flows from financing activities:
Additions to (repayment of) long-term debt, net...... 2,513 15,150
Common stock issuances............................... 558 110
Cash dividends....................................... (710) (734)
Treasury stock purchases............................. (3,025) (5,900)
-------- --------
Net cash provided by (used in)
financing activities.......................... (664) 8,626
-------- -------
Net decrease in cash and cash equivalents................. (4,024) (14,237)
Cash and cash equivalents-beginning of period............. 5,186 16,294
------- -------
Cash and cash equivalents-end of period................... $ 1,162 $ 2,057
======= =======
Supplemental Cash Flow Information:
Cash paid for interest............................... $ 578 $ 277
======= =======
Cash paid for income taxes........................... $ 2,745 $ 9,770
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Twenty-six Weeks Ended May 1, 1999
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 fair presentation
of the results of the interim periods presented. Reference is made to the
footnotes to the consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended October 31, 1998, filed with the
Securities and Exchange Commission.
Note 2 - Business Acquisition
The Company's results for the thirteen and twenty-six weeks ended May
1, 1999 include Howe Furniture Corporation and its subsidiaries ("Howe"). Howe
was acquired during March 1998, and therefore Howe's results of operation are
not included in the reported results for a portion of the thirteen and
twenty-six weeks ended May 2, 1998.
Note 3 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards, "Reporting Comprehensive Income"
(SFAS) No. 130, which is the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources; it includes all changes in equity during the period except those
resulting from investments by owners and distribution to owners. Comprehensive
income is the total of all components of comprehensive income and other
comprehensive income, including net income. Other comprehensive income refers to
revenues, expenses, gains and losses that under GAAP are excluded from net
income. Effective November 1, 1998, the Company adopted SFAS No. 130. For the
Company, the only element of other comprehensive income is cumulative
translation adjustments, arising from the translation of certain balance sheet
accounts from local currency to functional currency. Comprehensive income was
$2.1 million and $1.9 million for the thirteen weeks ended May 1, 1999 and May
2, 1998, respectively and $3.7 million and $3.4 million for the twenty-six weeks
ended May 1, 1999 and May 2, 1998, respectively.
Note 4 - Subsequent Event
On May 5, 1999, the Company entered into a merger agreement to acquire
all of the outstanding shares of Shelby Williams Industries, Inc. ("Shelby
Williams") for $16.50 per share in cash. The aggregate purchase price, including
transaction costs, for the outstanding Shelby Williams common stock and the cost
of redemption of outstanding Shelby Williams stock options is expected to be
approximately $149.3 million. The acquisition will be funded by senior secured
credit facilities comprised of a $70 million term loan and a $50 million
revolving credit facility in addition to an offering of $100 million of senior
subordinated notes (at the closing, it is expected that the outstanding current
revolver amount of $19.2 million will be paid off and that the term loan and the
notes will be drawn in full and the revolving credit facility will be undrawn.)
The Company's domestic subsidiaries will guarantee the notes on a senior
subordinated basis.
The following condensed consolidating financial statements of the
Company include the combined accounts of the Company and its domestic
subsidiaries and the combined accounts of the foreign subsidiaries. Given the
size of the foreign subsidiaries, relative to the Company and its domestic
subsidiaries on a consolidated basis, separate financial statements of the
respective Company and its domestic subsidiaries are not presented because
management has determined that such information is not material in assessing the
Company and its domestic subsidiaries.
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 1, 1999
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
<S> <C> <C> <C> <C>
Net sales....................................... $ 35,161 $ 4,472 $ (3,164) $ 36,469
Cost of sales................................... 24,940 4,021 (3,164) 25,797
---------- ---------- ---------- ----------
Gross margin............................... 10,221 451 -- 10,672
Selling, general and administrative expenses.... 7,179 41 -- 7,220
---------- ---------- ---------- ----------
Operating profit........................... 3,042 410 -- 3,452
Minority interest in consolidated subsidiary.... 8 -- -- 8
Interest income (expense)....................... (282) (25) -- (307)
---------- ---------- ---------- ----------
Earnings before income taxes............... 2,768 385 -- 3,153
Income tax expense.............................. 1,095 88 -- 1,183
---------- ---------- ---------- ----------
Net earnings............................... $ 1,673 $ 297 $ -- $ 1,970
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 2, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Net sales....................................... $ 31,525 $ 5,145 $ (3,019) $ 33,651
Cost of sales................................... 22,432 4,713 (3,019) 24,126
---------- ---------- ---------- ----------
Gross margin............................... 9,093 432 -- 9,525
Selling, general and administrative............. 6,022 443 -- 6,465
---------- ---------- ---------- ----------
Operating profit........................... 3,071 (11) -- 3,060
Minority interest in consolidated subsidiary.... 19 -- -- 19
Interest income (expense)....................... (75) (15) -- (90)
---------- ---------- ---------- ----------
Earnings before income taxes............... 3,015 (26) -- 2,989
Income tax expense.............................. 1,161 (10) -- 1,151
---------- ---------- ---------- ----------
Net earnings............................... $ 1,854 $ (16) $ -- $ 1,838
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Twenty-six Weeks Ended May 1, 1999
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Net sales....................................... $ 67,786 $ 9,606 $ (6,328) $ 71,064
Cost of sales................................... 48,440 8,378 (6,328) 50,490
---------- ---------- ---------- ----------
Gross margin............................... 19,346 1,228 -- 20,574
Selling, general and administrative............. 13,306 527 -- 13,833
---------- ---------- ---------- ----------
Operating profit........................... 6,040 701 -- 6,741
Minority interest in consolidated subsidiary.... 14 -- -- 14
Interest income (expense)....................... (566) (30) -- (596)
---------- ---------- ---------- ----------
Earnings before income taxes............... 5,488 671 -- 6,159
Income tax expense.............................. 2,168 157 -- 2,325
---------- ---------- ---------- ----------
Net earnings............................... $ 3,320 $ 514 $ -- $ 3,834
========== ========== ========== ==========
<PAGE>
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Twenty-six Weeks Ended May 2, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Net sales...................................... $ 58,201 $ 8,957 $ (5,447) $ 61,711
Cost of sales.................................. 40,970 8,529 (5,447) 44,052
---------- ---------- ---------- ----------
Gross margin.............................. 17,231 428 -- 17,659
Selling, general and administrative............ 11,304 509 -- 11,813
---------- ---------- ---------- ----------
Operating profit.......................... 5,927 (81) -- 5,846
Minority interest in consolidated subsidiary... 34 -- -- 34
Interest income (expense)...................... 45 (38) -- 7
---------- ---------- ---------- ----------
Earnings before income taxes.............. 6,006 (119) -- 5,887
Income tax expense............................. 2,312 (45) -- 2,267
---------- ---------- ---------- ----------
Net earnings.............................. $ 3,694 $ (74) $ -- $ 3,620
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Balance Sheet
May 1, 1999
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Assets
Cash and cash equivalents............................. $ (31) $ 1,193 $ -- $ 1,162
Accounts receivable................................... 18,185 2,382 -- 20,567
Inventories ......................................... 22,902 4,859 -- 27,761
Other assets ......................................... 2,891 530 -- 3,421
---------- ---------- ---------- ----------
Total current assets........................ 43,947 8,964 -- 52,911
Property, plant and equipment, net.................... 19,329 9,025 -- 28,354
Investment in subsidiaries............................ 7,664 -- (7,664) --
Intangibles and other assets.......................... 30,466 -- -- 30,466
---------- ---------- ---------- ----------
Total assets................................ $ 101,406 $ 17,989 $ (7,664) $ 111,731
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 13,056 $ 4,569 $ -- $ 17,625
Long-term debt........................................ 19,249 -- -- 19,249
Other long-term liabilities........................... 2,431 -- -- 2,431
Intercompany payable (receivable)..................... (5,756) 5,756 -- --
---------- ---------- ---------- ----------
Total liabilities........................... 28,980 10,325 -- 39,305
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 6,446 (6,446) 198
Additional paid-in capital....................... 47,376 925 (925) 47,376
Treasury stock................................... (15,685) -- -- (15,685)
Cumulative translation adjustment................ (196) -- -- (196)
Retained earnings................................ 40,733 293 (293) 40,733
Total stockholders' equity.................. 72,426 7,664 (7,664) 72,426
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity. $ 101,406 $ 17,989 $ (7,664) $ 111,731
========== ========== ========== ==========
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements--(Continued)
Consolidating Balance Sheet
October 31, 1998
Total Total
Domestic Foreign Eliminations Total
--------- -------- ------------ --------
Assets
Cash and cash equivalents............................. $ 3,666 $ 1,520 $ -- $ 5,186
Accounts receivable................................... 20,472 2,211 -- 22,683
Inventories, net...................................... 20,922 3,955 -- 24,877
Other assets 2,760 321 -- 3,081
--------- --------- ---------- ----------
Total current assets........................ 47,820 8,007 -- 55,827
Property plant and equipment, net..................... 18,362 9,136 -- 27,498
Investment in subsidiaries............................ 7,150 -- (7,150) --
Goodwill and other assets............................. 28,649 -- -- 28,649
---------- ---------- ---------- ----------
Total assets................................ $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 16,143 $ 3,928 $ -- $ 20,071
Long-term debt........................................ 17,208 -- -- 17,208
Other long-term liabilities........................... 2,749 -- -- 2,749
Intercompany payable (receivable)..................... (6,065) 6,065 -- --
---------- ---------- ---------- ----------
Total liabilities........................... 30,035 9,993 -- 40,028
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 6,446 (6,446) 198
Additional paid-in capital....................... 47,376 925 (925) 47,376
Treasury stock................................... (13,557) -- -- (13,557)
Cumulative translation adjustment................ (19) -- -- (19)
Retained earnings................................ 37,948 (221) 221 37,948
---------- ---------- ---------- ----------
Total stockholders' equity.................. 71,946 7,150 (7,150) 71,946
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity.. $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended May 1, 1999
Total Total
Domestic Foreign Eliminations Total
--------- -------- ------------ --------
Net cash from operating activities..................... $ (1,444) $ (413) $ -- $ (1,857)
---------- ---------- ---------- ----------
Cash flows used in investing activities
Capital expenditures, net.......................... (1,589) 86 -- (1,503)
---------- ---------- ---------- ---------
Net cash used in investing activities.................. (1,589) 86 -- (1,503)
---------- ---------- ---------- ---------
Cash flows used in financing activities
Common stock issuance............................. 558 -- -- 558
Treasury stock purchases.......................... (3,025) -- -- (3,025)
Cash dividends.................................... (710) -- -- (710)
Additions to (repayment of) long-term debt, net... 2,513 -- -- 2,513
---------- ---------- ---------- ----------
Net cash used in financing activities.................. (664) -- -- (664)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents................ $ (3,697) $ (327) $ -- $ (4,024)
========== ========== ========== ==========
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements--(Continued)
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended May 2, 1998
Total Total
Domestic Foreign Eliminations Total
--------- --------- ------------ --------
Net cash from operating activities..................... $ (1,411) $ (1,559) $ -- $ (2,970)
---------- ---------- ---------- ----------
Cash flows used in investing activities
Acquisition, net of cash.......................... (15,962) -- -- (15,962)
Capital expenditures, net......................... (4,548) 617 -- (3,931)
---------- ---------- ---------- ----------
Net cash used in investing activities.................. (20,510) 617 -- (19,893)
---------- ---------- ---------- ----------
Cash flows used in financing activities
Common stock issuance............................. 110 -- -- 110
Treasury stock purchases.......................... (5,900) -- -- (5,900)
Cash dividends.................................... (734) -- -- (734)
Additions to (repayment of) long-term debt, net... 15,150 -- -- 15,150
---------- ---------- ---------- ----------
Net cash used in financing activities.................. 8,626 -- -- 8,626
---------- ---------- ---------- ----------
Net change in cash and cash equivalents................ $ (13,295) $ (942) $ -- $ (14,237)
========== ========== ========== ==========
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Shelby Williams Industries, Inc.
We have audited the accompanying consolidated balance sheets of Shelby
Williams Industries, Inc., as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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 consolidated financial position of Shelby
Williams Industries, Inc., as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
January 29, 1999
Atlanta, Georgia
<PAGE>
<TABLE>
<CAPTION>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Income
Years Ended December 31,
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Net sales................................ $ 165,937,000 $ 157,779,000 $ 149,481,000
Cost of goods sold....................... 126,388,000 120,849,000 114,998,000
Selling, general and administrative
expenses............................... 22,994,000 22,268,000 22,100,000
------------- ------------- -------------
16,555,000 14,662,000 12,383,000
Other deductions (income):
Interest expense......................... 391,000 622,000 969,000
Interest income.......................... (539,000) (614,000) (18,000)
Miscellaneous income..................... (102,000) (89,000) (44,000)
------------- ------------- -------------
(250,000) (81,000) 907,000
------------- ------------- -------------
Income from continuing operations
before income taxes.................... 16,805,000 14,743,000 11,476,000
Income taxes:
Current.................................. 7,626,000 4,926,000 3,247,000
Deferred................................. (1,435,000) 140,000 473,000
------------- ------------- -------------
6,191,000 5,066,000 3,720,000
------------- ------------- -------------
Income from continuing operations........ 10,614,000 9,677,000 7,756,000
Discontinued operations:
Income (loss) from discontinued
operations, net of taxes............... (48,000) 915,000 661,000
Loss on disposal of discontinued
operations, net of taxes............... (7,081,000) -- --
------------- ------------- -------------
Net income............................... $ 3,485,000 $ 10,592,000 $ 8,417,000
============= ============= =============
Income per share:
Continuing operations.................... $ 1.17 $ 1.05 $ 0.88
Income (loss) from discontinued
operations, net of taxes............... (0.01) 0.10 0.08
Loss on disposal of discontinued
operations, net of taxes............... (0.78) -- --
------------- ------------- -------------
Net income............................... $ 0.38 $ 1.15 $ 0.96
============= ============= =============
Income per share-assuming dilution:
Continuing operations.................... $ 1.17 $ 1.05 $ 0.88
Income (loss) from discontinued
operations, net of taxes............... (0.01) 0.10 0.07
Loss on disposal of discontinued
operations, net of taxes............... (0.78) -- --
------------- ------------- -------------
Net income............................... $ 0.38 $ 1.15 $ 0.95
============= ============= =============
Weighted average number of common
shares outstanding..................... 9,078,000 9,198,000 8,805,000
============= ============= =============
Weighted average number of common
shares outstanding-assuming dilution... 9,108,000 9,250,000 8,838,000
============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Balance Sheets
December 31,
1998 1997
------------- ------------
Assets
Current assets:
Cash and cash equivalents...................... $ 6,355,000 $ 11,124,000
Accounts receivable, less allowance for
doubtful accounts of $375,000 in 1998
and $325,000 in 1997........................ 28,025,000 26,165,000
Inventories:
Raw materials............................. 11,818,000 8,147,000
Work in process........................... 5,492,000 4,978,000
Finished goods............................ 5,234,000 4,643,000
------------ ------------
22,544,000 17,768,000
Prepaid expenses............................... 5,187,000 5,015,000
Net assets of discontinued operations.......... -- 8,857,000
------------ ------------
Total current assets........................... 62,111,000 68,929,000
Net assets of discontinued operations.......... -- 2,335,000
Excess of cost over net assets of acquired
companies................................... 151,000 160,000
Property, plant and equipment, at cost:
Land and land improvements................ 2,560,000 2,392,000
Buildings and leasehold improvements...... 20,974,000 20,176,000
Machinery and equipment................... 26,746,000 22,720,000
Construction in progress.................. -- 1,690,000
------------ ------------
50,280,000 46,978,000
Less accumulated depreciation and
amortization........................... 24,295,000 22,367,000
------------ ------------
25,985,000 24,611,000
Other assets................................... 1,386,000 1,203,000
------------ ------------
$ 89,633,000 $ 97,238,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................... $ 7,063,000 $ 4,730,000
Customer deposits on orders in process......... 5,717,000 4,225,000
Accrued liabilities............................ 6,278,000 5,629,000
Income taxes................................... 889,000 1,851,000
Current portion of long-term debt.............. 3,000,000 4,000,000
------------ ------------
Total current liabilities...................... 22,947,000 20,435,000
Long-term debt................................. -- 3,000,000
Deferred income taxes.......................... 1,991,000 2,031,000
Commitments (see notes)
Stockholders' equity:
Common stock, $.05 par value; authorized
30,000,000 shares; issued
11,876,000 shares (1997-11,848,000).... 593,000 592,000
Capital in excess of par value............ 10,128,000 9,837,000
Retained earnings......................... 77,012,000 76,820,000
------------ ------------
87,733,000 87,249,000
Less common stock held in treasury;
3,025,000 shares at cost
(1997-2,500,000)....................... 23,038,000 15,477,000
------------ ------------
Total stockholders' equity..................... 64,695,000 71,772,000
------------ ------------
$ 89,633,000 $ 97,238,000
============ ============
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31,
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 3,485,000 $ 10,592,000 $ 8,417,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 2,478,000 2,298,000 2,457,000
Provision for losses on accounts receivable.................. 207,000 110,000 136,000
Change in net assets of discontinued operations.............. 9,692,000 (468,000) (314,000)
Changes in assets and liabilities net of effects
from sale of facility:
Accounts receivable........................................ (2,067,000) (2,953,000) (540,000)
Inventories................................................ (4,776,000) 2,380,000 (640,000)
Prepaid expenses........................................... (172,000) (2,051,000) (267,000)
Accounts payable and accrued liabilities................... 4,474,000 (818,000) (2,706,000)
Income taxes payable....................................... (962,000) 147,000 921,000
Increase (decrease) in deferred taxes........................... (40,000) (106,000) 34,000
Pension liability adjustment.................................... -- 789,000 119,000
Other ........................................................ (183,000) 168,000 452,000
------------ ------------ ------------
Net cash provided by operating activities............................ 12,136,000 10,088,000 8,069,000
Cash flows from investing activities:
Proceeds from sale of business and facility..................... 1,500,000 -- 2,000,000
Proceeds from disposal of property, plant and equipment......... 76,000 133,000 5,000
Capital expenditures............................................ (3,919,000) (3,557,000) (1,189,000)
------------ ------------ ------------
Net cash provided (used) by investing activities .................... (2,343,000) (3,424,000) 816,000
Cash flows from financing activities:
Sale of treasury stock at public offering....................... -- 7,953,000 --
Repayment of short-term borrowings.............................. -- -- (5,900,000)
Principal payments of long-term debt............................ (4,000,000) (1,000,000) (32,000)
Sale of common stock under stock option plan.................... 292,000 296,000 290,000
Purchase of common stock for the treasury....................... (7,561,000) (884,000) (1,937,000)
Dividends declared and paid..................................... (3,293,000) (2,944,000) (2,643,000)
------------ ------------ ------------
Net cash provided (used) by financing activities..................... (14,562,000) 3,421,000 (10,222,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............ (4,769,000) 10,085,000 (1,337,000)
Cash and cash equivalents at beginning of year.................. 11,124,000 1,039,000 2,376,000
------------ ------------ ------------
Cash and cash equivalents at end of year............................. $ 6,355,000 $ 11,124,000 $ 1,039,000
============ ============ ============
Supplemental cash flow information:
Cash paid during the year for:
Interest..................................................... $ 447,000 $ 632,000 $ 969,000
Income taxes................................................. 4,557,000 6,104,000 3,277,000
------------ ------------ ------------
$ 5,004,000 $ 6,736,000 $ 4,246,000
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------------------------
Common Stock Accumulated
------------ Capital in other
Shares excess of Retained comprehensive Treasury
Issued Amount par value earnings income stock, at cost Total
------ ------ ---------- -------- ------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 ...................... 11,779,000 $ 589,000 $ 7,855,000 $ 63,398,000 $ (908,000) $(19,210,000) $ 51,724,000
Net income.................... -- -- -- 8,417,000 -- -- 8,417,000
Other comprehensive
income:
Pension liability
adjustment............ -- -- -- -- 198,000 -- 198,000
Tax expense.............. -- -- -- -- (79,000) -- (79,000)
------------ ----------- ------------
Comprehensive income.......... -- -- -- 8,417,000 119,000 -- 8,536,000
Sale of common stock under
stock option plan.......... 35,000 2,000 288,000 -- -- -- 290,000
Common stock purchased for
treasury (168,000
shares).................... -- -- -- -- -- (1,937,000) (1,937,000)
Cash dividends - $.30 per
share...................... -- -- -- (2,643,000) -- -- (2,643,000)
------------ ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
1996 ...................... 11,814,000 591,000 8,143,000 69,172,000 (789,000) (21,147,000) 55,970,000
Net income.................... -- -- -- 10,592,000 -- -- 10,592,000
Other comprehensive
income:
Pension liability
adjustment............ -- -- -- -- 1,315,000 -- 1,315,000
Tax expense.............. -- -- -- -- (526,000) -- (526,000)
------------- ----------- - ------------
Comprehensive income.......... -- -- -- 10,592,000 789,000 -- 11,381,000
Sale of treasury stock at
public offering (619,000
shares).................... -- -- 1,399,000 -- -- 6,554,000 7,953,000
Sale of common stock under
stock option plan.......... 34,000 1,000 295,000 -- -- -- 296,000
Common stock purchased for
treasury (72,000 shares)... -- -- -- -- -- (884,000) (884,000)
Cash dividends - $.32 per
share...................... -- -- -- (2,944,000) -- -- (2,944,000)
------------ ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
1997 ...................... 11,848,000 592,000 9,837,000 76,820,000 0 (15,477,000) 71,772,000
Net income and
comprehensive income....... -- -- -- 3,485,000 -- -- 3,485,000
Sale of common stock under
stock option plan.......... 28,000 1,000 291,000 -- -- -- 292,000
Common stock purchased for
treasury (525,000
shares).................... -- -- -- -- -- (7,561,000) (7,561,000)
Cash dividends - $.36 per
share...................... -- -- -- (3,293,000) -- -- (3,293,000)
------------ ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
1998 ...................... 11,876,000 $ 593,000 $10,128,000 $ 77,012,000 $ 0 $(23,038,000) $ 64,695,000
============ =========== =========== ============= =========== ============ ============
</TABLE>
See accompanying notes.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Description of Business
Shelby Williams designs, manufactures and distributes products for the
contract furniture market. The Company has a significant position in the
hospitality and food service markets through its "Shelby Williams" seating line,
"King Arthur" line of function room furniture and "Sterno" accessories. It
serves the health care, university, and other institutional markets through its
"Thonet" division with health care and university furniture, including chairs,
tables, and other institutional products. The Company also processes and
distributes vinyl wallcoverings for residential, hotel and office use under the
name "Sellers & Josephson."
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
items and transactions are denominated in U.S. dollars and have been eliminated
in consolidation.
Revenue Recognition
Sales are recognized when the products are shipped.
Income Taxes
Income tax expense includes Federal and state income taxes currently
payable and deferred taxes arising from temporary differences between the tax
bases of assets or liabilities and their reported amounts in the financial
statements.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments, with original
maturities of three months or less, that are readily convertible to known
amounts of cash.
Inventories
Inventories are carried at the lower of cost or market, determined by
the last-in, first-out (LIFO) method. The current replacement cost of
inventories exceeded carrying value by approximately $10,828,000 at December 31,
1998 and $9,997,000 at December 31, 1997.
As a result of the difference between the method of allocating the cost
of acquisitions in 1976, 1987 and 1988 for financial reporting purposes, and the
method used for income tax purposes, the Company's tax basis in the inventories
is approximately $20,204,000 at December 31, 1998 and $22,278,000 at December
31, 1997. Related 1998 disposition cost of $616,000 was not a deduction for tax.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment is
provided using the straight-line method over the estimated useful lives of the
respective assets.
Post-employment Benefits
The Company provides certain post-employment benefits. Payments of
these benefits in the past have been infrequent and are not estimable, thus the
Company records these benefits on an event basis.
Other Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. As a result of significant deductibles in its insurance
coverage for liability and worker's compensation claims, the Company provides
amounts which management believes are sufficient to cover the associated
liabilities.
Commitments
Leases
The Company leases certain manufacturing facilities under operating
leases which expire over the next seven years. The Company also leases showroom
space under operating leases expiring over the next five years.
Future minimum rental payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1998 are:
Year ending
December 31,
-------------
1999.......................................................... $ 1,058,000
2000.......................................................... 968,000
2001.......................................................... 573,000
2002.......................................................... 532,000
2003.......................................................... 469,000
Subsequent to 2003............................................ 62,000
------------
Total minimum lease payments.................................. $ 3,662,000
============
Total rental expense for all operating leases aggregated $1,899,000 in
1998, $1,955,000 in 1997, and $1,912,000 in 1996.
Short-Term Borrowings
The Company has unsecured lines of credit amounting to $20,000,000 at
interest rates of prime or less. At December 31, 1998, all of these lines were
unused.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Long-Term Debt
Long-term debt at December 31, 1998, and 1997 consisted of the
following:
1998 1997
----------------------------
7.8% senior notes due in quarterly
installments through July 1999............ $ 3,000,000 $ 7,000,000
Less amounts due within one year............ 3,000,000 4,000,000
------------ ------------
$ -- $ 3,000,000
============ ============
The terms of the senior note agreement contain certain restrictions. At
December 31, 1998, the Company was in compliance with all such restrictions. The
final $863,000 of a capitalized lease obligation was discharged by assignment
with sale of the related facility in August 1996.
Common Stock Information (unaudited)
The following table sets forth the high and low sales prices of the
Company's common stock as reported by the New York Stock Exchange.
Sales
Prices High Low
------ ---- -----
1998 1st Quarter................................ 17 1/8 14 5/8
2nd Quarter................................ 16 1/8 14 5/8
3rd Quarter................................ 15 3/4 11
4th Quarter................................ 13 1/8 11
1997 1st Quarter................................ 17 11 7/8
2nd Quarter................................ 14 3/8 11 3/8
3rd Quarter................................ 19 7/8 13 3/4
4th Quarter................................ 20 5/8 14 3/4
At December 31, 1998, there were approximately 3,000 holders of record
of the Company's common stock, including individual participants in security
position listings.
The Company declared and paid cash dividends on its common stock during
the last two fiscal years as follows:
Cash Dividend
per
Common Share
-----------------
Period 1998 1997
------ -----------------
1st Quarter....................................... $ 0.09 $ 0.08
2nd Quarter....................................... 0.09 0.08
3rd Quarter....................................... 0.09 0.08
4th Quarter....................................... 0.09 0.08
------ ------
$ 0.36 $ 0.32
====== ======
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Quarterly Results (unaudited)
Summarized quarterly results for the two years ended December 31, 1998
follows (dollars in thousands, except for per share amounts):
1998 1997
---------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 44,237 $ 42,387 $ 40,829 $ 38,484 $ 41,966 $ 39,608 $ 39,749 $ 36,456
Gross profit................ 10,962 10,095 9,937 8,555 10,256 9,435 9,182 8,057
Income from continuing
operations............... 3,120 2,727 2,689 2,078 2,862 2,532 2,450 1,833
Net income (loss)........... 3,120 2,727 (4,476) 2,114 2,985 2,734 2,707 2,166
Income (loss) per share
(basic and diluted):
Continuing operations.... 0.35 0.30 0.29 0.22 0.31 0.27 0.26 0.21
Net income (loss)........ 0.35 0.30 (0.49) 0.23 0.32 0.29 0.29 0.25
</TABLE>
Stock Option Plans
Under the Company's incentive stock option plan and directors' stock
option plan, options are granted to key employees and directors to purchase the
Company's common stock at not less than fair market value at date of grant. At
December 31, 1998 and 1997, there were 276,000 and 308,000 shares, respectively,
reserved for issuance under the plans. Of options granted, 20,000 in 1997 and
16,000 in 1996 have five year terms and vest and become fully exercisable at the
end of six months service. The remaining options granted in 1997 and 1996 and
all of the options granted in 1998 have five year terms and vest and become
exercisable in 1/3 increments after 15 months, 30 months, and 45 months,
respectively, of continued employment.
The intrinsic value method is used in accounting for stock-based awards
under the Company's stock option plans. Because the exercise price of the
Company's stock options at least equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
A summary of the Company's stock option activity, and related
information for years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year................... 217 $ 12.17 147 $ 9.97 119 $ 8.30
Granted........................................... 43 16.69 107 13.96 63 12.25
Exercised......................................... (28) 10.37 (34) 8.61 (35) 8.38
Forfeited......................................... (4) 14.00 (3) 8.38 -- --
----- ------- ----- ------- ----- ------
Outstanding - end of year......................... 228 $ 13.21 217 $ 12.17 147 $ 9.97
===== ======= ===== ======= ===== ======
Exercisable at end of year........................ 111 $ 11.62 88 $ 10.89 79 $ 9.14
===== ======= ===== ======= ===== ======
Weighted-average fair value of options granted
during the year................................ $ 5.17 $ 4.05 $ 3.68
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged
from $7.94 to $8.73 for 33,000 options and $12.12 to $18.15 for 195,000 options,
with weighted-average exercise prices of $8.03 and $14.10, respectively. The
weighted-average remaining contractual life of those options is 1 year and 3
years, respectively, or 2.7 years as a whole. Exercise prices for options
exercisable at December 31, 1998 ranged from $7.94 to $8.73 for 33,000 shares
and $12.12 to $15.25 for 78,000 shares, with weighted-average exercise prices of
$8.03 and $13.15, respectively.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of
6.5%, 6.2% and 5.3%; dividend yields of 2.7%, 2.6% and 2.2%; volatility factors
of the expected market price of the Company's common stock of .32, .31 and .35;
and a weighted-average expected life of the option of five years.
The effect of applying the fair value method to the Company's
stock-based awards results in net income and earnings per share that are not
materially different from amounts reported. The assumed dilutive effect of stock
options, which were the only dilutive securities outstanding in 1998, 1997 and
1996, was 30,000, 52,000 and 33,000 shares, respectively.
Restructuring Charge
Due to increases in lumber prices and increased competition primarily
from imported products, the Company made changes in its product and
manufacturing strategies during December 1994, designed to make the Company more
competitive in the industry. The plan was to exit certain portions of the
Company's enterprise by selling an upholstery business with a related
manufacturing facility and discontinuing a part of the product lines in the
health care, university and office markets, resulting in closure of another
plant. The Company anticipated completing the restructuring by December 31,
1995; however, the sale of the upholstery business was not completed until
August 1996.
At December 31, 1995, accrued liabilities included $439,000 related to
the plan. These costs were paid and charged against the liability in 1996,
completing the plan. In 1996, revenues and net operating income for the
upholstery business that was sold amounted to $5,858,000 and $182,000,
respectively.
Discontinued Operations
On July 14, 1998, the Company's Board of Directors approved
management's plan to discontinue the Company's distribution operations of
textile and floor covering products manufactured by outside suppliers. Of the
two businesses comprising these operations, one was sold and one was liquidated.
The plan was completed in December, 1998. During the second quarter 1998, the
Company recorded a loss on the disposition of these operations of $9,698,000, or
$7,081,000 after taxes, including a provision for losses prior to disposal,
which is summarized below:
Reduction of inventory value.......................... $ 4,706,000
Reduction of property to net realizable value......... 2,198,000
Reduction of accounts receivable and prepaids value... 629,000
Other liabilities..................................... 1,445,000
Losses through disposition............................ 720,000
------------
Total................................................. 9,698,000
Income tax benefit.................................... 2,617,000
------------
$ 7,081,000
============
The operating results of the discontinued operations are summarized as
follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Net sales..........................$ 6,981,000 $ 21,849,000 $ 22,950,000
Income (loss) before income taxes.. (77,000) 1,474,000 1,052,000
Income taxes (benefit)............. (29,000) 559,000 391,000
Net income (loss).................. (48,000) 915,000 661,000
Net income (loss) per share........ (0.01) 0.10 0.08
Net income (loss) per
share-assuming dilution.......... (0.01) 0.10 0.07
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
The net assets of the discontinued operations follows:
As of
December 31, 1997
-----------------
Current assets......................................... $ 9,947,000
Current liabilities.................................... 1,090,000
------------
Net assets of discontinued operations, current......... $ 8,857,000
============
Property, net.......................................... $ 2,235,000
------------
Net assets of discontinued operations, non-current..... $ 2,235,000
============
The consolidated financial statements of the Company have been restated
to reflect the results of operations and net assets of these operations as a
discontinued operation in accordance with generally accepted accounting
principles. The losses recorded on the disposition of these operations were not
materially different from those incurred on the actual amounts realized in the
sale and liquidation process.
Retirement Plans
The Company has several defined pension plans covering essentially all
of its employees in the United States. These plans held 66,000 shares of the
Company's common stock at December 31, 1998 and December 31, 1997.
Weighted-average assumptions used in the accounting were as follows:
As of
December 31,
---------------
1998 1997
---- ----
Discounts rates............................... 7.0% 8.3%
Rates of compensation increase................ 3.5% 3.5%
Expected return on plan assets................ 8.5% 8.5%
<TABLE>
<CAPTION>
Components of net periodic benefit cost are as follows:
Year ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Benefit cost:
Service cost.................................................... $ 1,062,000 $ 964,000 $ 966,000
Interest cost................................................... 1,496,000 1,354,000 1,151,000
Expected return on plan assets.................................. (1,654,000) (1,350,000) (1,143,000)
Amortization:
Transition asset........................................... (25,000) (25,000) (25,000)
Net actuarial loss......................................... -- 38,000 102,000
------------ ------------ ------------
Net benefit cost................................................ $ 879,000 $ 981,000 $ 1,051,000
============ ============ ============
</TABLE>
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Changes in plan assets and benefit obligation, indicating the end of
year funded status and prepaid pension, included in prepaid expenses of the
accompanying consolidated balance sheets, were as follows:
Year ended December 31,
---------------------------------
1998 1997
---------------------------------
Fair value of plan assets:
Beginning of year....................... $ 19,485,000 $ 15,142,000
Actual return on plan assets............ 2,318,000 3,169,000
Employer contribution................... 1,462,000 1,858,000
Benefits paid........................... (809,000) (684,000)
------------- -------------
End of year............................. 22,456,000 19,485,000
------------- -------------
Benefit obligation:
Beginning of year....................... 18,484,000 15,983,000
Service cost............................ 1,062,000 964,000
Interest cost........................... 1,496,000 1,354,000
Actuarial loss.......................... 3,859,000 867,000
Benefits paid........................... (809,000) (684,000)
------------- -------------
End of year............................. 24,092,000 18,484,000
------------- -------------
Funded status........................... (1,636,000) 1,001,000
Unrecognized net asset.................. (137,000) (163,000)
Unrecognized net loss................... 4,184,000 989,000
Unrecognized prior service cost......... 60,000 61,000
------------- -------------
Prepaid pension at end of year.......... $ 2,471,000 $ 1,888,000
============= =============
The Company has an employee stock ownership plan covering essentially
all salaried employees. The contributions were $83,000 for 1998, $69,000 for
1997, and $63,000 for 1996. The plan held 52,000 shares of the Company's common
stock at December 31, 1998 and 44,000 shares at December 31, 1997.
Retirement plan expense was $962,000, $1,050,000, and $1,114,000 for
1998, 1997, and 1996 respectively.
Operating Segments
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Applying the criteria from this statement,
the Company has three segments. The hotel and food service furniture segment
manufactures and distributes chairs, tables, and guest, banquet and function
room furnishings, along with specialty items for banquet use, for the
hospitality market. The healthcare and university furniture segment produces and
markets seating products used for healthcare, university and other institutional
facilities. The wall coverings segment processes and distributes vinyl wall
coverings for the hospitality and other markets.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Cash and cash equivalents are
considered corporate assets and interest expense and interest income are
unallocated. Intersegment sales are not significant. The Company evaluates
performance based on income before income taxes.
The Company's segments are strategic business units that offer
different products or serve different markets. They are managed separately
because each requires different technology and marketing strategies, which are
coordinated to the extent practical.
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Segment information follows:
December 31, Hotel and Healthcare
and year food service and university
then ended furniture furniture Wall coverings Total
---------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales: 1998 $126,726,000 $23,478,000 $15,733,000 $165,937,000
1997 117,707,000 24,868,000 15,204,000 157,779,000
1996 113,436,000 22,135,000 13,910,000 149,481,000
Depreciation and amortization: 1998 1,564,000 431,000 483,000 2,478,000
1997 1,396,000 417,000 485,000 2,298,000
1996 1,501,000 419,000 537,000 2,457,000
Segment profit: 1998 13,990,000 1,022,000 1,645,000 16,657,000
1997 11,991,000 1,178,000 1,582,000 14,751,000
1996 10,626,000 504,000 1,297,000 12,427,000
Capital expenditures: 1998 2,390,000 684,000 845,000 3,919,000
1997 2,737,000 465,000 355,000 3,557,000
1996 751,000 115,000 323,000 1,189,000
Segment assets: 1998 59,685,000 15,797,000 7,796,000 83,278,000
1997 52,387,000 15,346,000 7,189,000 74,922,000
</TABLE>
Reconciliation of segment profits to consolidated income from
continuing operations before income taxes, follows:
Year ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Total profit for segments...... $ 16,657,000 $ 14,751,000 $ 12,427,000
Unallocated:
Interest expense.......... (391,000) (622,000) (969,000)
Interest income........... 539,000 614,000 18,000
------------ ------------ ------------
Income from continuing
operations before
income taxes................ $ 16,805,000 $ 14,743,000 $ 11,476,000
============ ============ ============
Reconciliation of segment assets to consolidated assets, follows:
As of December 31,
-----------------------------
1998 1997
-----------------------------
Total assets for segments.................. $ 83,278,000 $ 74,922,000
Net assets of discontinued operations...... -- 11,192,000
Cash and cash equivalents.................. 6,355,000 11,124,000
------------ ------------
Consolidated assets........................ $ 89,633,000 $ 97,238,000
============ ============
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Geographic information for net sales follows:
Year ended December 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Net sales:
United States......... $ 151,727,000 $ 140,834,000 $ 135,025,000
Foreign (exports)..... 14,210,000 16,945,000 14,456,000
------------- ------------- -------------
Total ................... $ 165,937,000 $ 157,779,000 $ 149,481,000
============= ============= =============
Geographic information for long-lived assets follows:
As of December 31,
----------------------------
1998 1997
----------------------------
Long-lived assets:
United States......................... $ 23,070,000 $ 21,527,000
Mexico................................ 3,066,000 3,244,000
------------ ------------
Total.................................... $ 26,136,000 $ 24,771,000
============ ============
Income Taxes
Deferred income tax liabilities (assets) for differences in tax bases
and amounts in the financial statements were as follows:
As of December 31,
----------------------------
1998 1997
----------------------------
Current:
Allocated costs of acquisition inventories... $ 796,000 $ 1,005,000
Prepaid pension.............................. 850,000 763,000
Other - net.................................. (1,641,000) (368,000)
------------ ------------
Total included in current income taxes.......... 5,000 1,400,000
Noncurrent:
Property, plant and equipment................ 1,991,000 2,031,000
------------ ------------
Net deferred tax liabilities.................... $ 1,996,000 $ 3,431,000
============ ============
The components of income tax expense are as follows:
Year ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Current:
Federal..................... $ 6,806,000 $ 4,414,000 $ 2,790,000
State....................... 820,000 512,000 457,000
------------ ------------ ------------
7,626,000 4,926,000 3,247,000
Deferred:
Federal..................... (1,435,000) 140,000 473,000
------------ ------------ ------------
$ 6,191,000 $ 5,066,000 $ 3,720,000
============ ============ ============
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Income tax expense differs from amounts computed by applying the
Federal statutory tax rate to income before income taxes as follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Statutory rate................. $ 5,714,000 $ 5,013,000 $ 3,902,000
State income taxes, net of
Federal tax benefit......... 541,000 337,000 302,000
Other.......................... (64,000) (284,000) (484,000)
------------ ------------ ------------
$ 6,191,000 $ 5,066,000 $ 3,720,000
============ ============ ============
Effective rate................. 36.8% 34.4% 32.4%
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Income
Three Months Ended
March 31,
--------------------
(Amounts in thousands, except per share data) 1999 1998
--------------------
(Unaudited)
Net sales............................................ $43,128 $38,484
Cost of goods sold................................... 34,081 29,929
------- -------
Gross profit......................................... 9,047 8,555
Selling, general and administrative expenses......... 5,548 5,302
------- -------
3,499 3,253
Other deductions (income):
Interest expense..................................... 46 125
Interest and dividend income......................... (107) (188)
Miscellaneous expense................................ 22 18
------- -------
(39) (45)
------- -------
Income from continuing operations before
income taxes...................................... 3,538 3,298
Income taxes:
Current.............................................. 1,256 1,202
Deferred............................................. 18 18
------- -------
1,274 1,220
------- -------
Income from continuing operations.................... 2,264 2,078
Income from discontinued operations,
net of taxes...................................... -- 36
------- -------
Net income........................................... $ 2,264 $ 2,114
======= =======
Income per share (basic and diluted):
Continuing operations................................ $ 0.26 $ 0.22
Income from discontinued operations,
net of taxes...................................... -- 0.01
------- -------
Net income........................................... $ 0.26 $ 0.23
======= =======
Weighted average number of common shares
outstanding....................................... 8,786 9,296
======= =======
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Balance Sheets
March 31, December 31,
(Amounts in thousands, except per share data) 1999 1998
-------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents............................. $ 6,282 $ 6,355
Accounts receivable, less allowance for doubtful
accounts of $337 at March 31, 1999
and $375 at December 31, 1998...................... 27,237 28,025
Inventories:
Raw materials.................................... 11,772 11,818
Work in process.................................. 5,072 5,492
Finished goods................................... 6,463 5,234
--------- ---------
23,307 22,544
Prepaid expense....................................... 4,591 5,187
--------- ---------
Total current assets.................................. 61,417 62,111
Excess of cost over net assets of acquired company.... 149 151
Property, plant and equipment at cost:
Land and land improvements....................... 2,560 2,560
Buildings and leasehold improvements............. 20,980 20,974
Machinery and equipment.......................... 27,239 26,746
Construction in progress......................... 43 --
--------- ---------
50,822 50,280
Less accumulated depreciation and amortization... 24,896 24,295
--------- ---------
25,926 25,985
Other assets.......................................... 1,153 1,386
--------- ---------
$ 88,645 $ 89,633
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................................... $ 5,415 $ 7,063
Customer deposits on orders in process................ 6,033 5,717
Accrued liabilities................................... 6,189 6,278
Income taxes.......................................... 1,975 889
Current portion of long-term debt..................... 2,000 3,000
--------- ---------
Total current liabilities............................. 21,612 22,947
Deferred income taxes................................. 2,009 1,991
Stockholder's equity:
Common stock, $.05 par value; authorized
30,000 shares; issued 11,877 shares
(1998--11,876 shares)......................... 594 593
Capital in excess of par value................... 10,135 10,128
Retained earnings................................ 78,479 77,012
--------- ---------
89,208 87,733
Less common stock held in treasury; 3,115
shares at cost (1998--3,025).................. 24,184 23,038
--------- ---------
Total stockholders' equity....................... 65,024 64,695
--------- ---------
$ 88,645 $ 89,633
========= =========
<PAGE>
<TABLE>
<CAPTION>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
---------------------
(Amounts in thousands) 1999 1998
---------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 2,264 $ 2,114
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 681 611
Provision for losses on accounts receivable.................................... 2 31
Change in assets and liabilities of discontinued operations.................... -- 124
Change in assets and liabilities:
Accounts receivable....................................................... 786 838
Inventories............................................................... (763) (505)
Prepaid expenses.......................................................... 596 275
Accounts payable and accrued liabilities.................................. (1,421) 775
Income taxes payable...................................................... 1,086 689
Increase in deferred taxes................................................ 18 18
Other..................................................................... 233 (65)
-------- --------
Net cash provided by operating activities................................................ 3,482 4,905
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment............................. 3 7
Capital expenditures................................................................ (623) (1,608)
-------- --------
Net cash used by investing activities.................................................... (620) (1,601)
Cash flows from financing activities:
Principal payments of long-term debt................................................ (1,000) (1,000)
Sale of common stock under stock option plan........................................ 8 76
Purchase of common stock for the treasury........................................... (1,146) (79)
Dividends declared and paid......................................................... (797) (843)
-------- --------
Net cash used by financing activities.................................................... (2,935) (1,846)
-------- --------
Net increase (decrease) in cash..................................................... (73) 1,458
Cash and cash equivalents at beginning of period.................................... 6,355 11,124
-------- --------
Cash and cash equivalents at end of period............................................... $ 6,282 $ 12,582
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest....................................................................... $ 58 $ 141
Income taxes................................................................... 170 535
-------- --------
$ 228 $ 676
======== ========
</TABLE>
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Unaudited Consolidated Financial Statements
Discontinued Operations
On July 14, 1998, the Company's Board of Directors approved
management's plan to discontinue the Company's distribution operations of
textile and floor covering products manufactured by outside suppliers. Of the
two businesses comprising these operation, one was sold and one was liquidated.
The plan was completed in December, 1998. During the second quarter 1998, the
Company recorded a loss on the disposition of these operations of $9,698,000, or
$7,081,000 after taxes, including a provision for losses prior to disposal,
which is summarized below:
Reduction of inventory value ................................ $ 4,706,000
Reduction of property to net realizable value ............... 2,198,000
Reduction of accounts to net receivable and prepaids value .. 629,000
Other liabilities ........................................... 1,445,000
Losses through disposition................................... 720,000
------------
Total ............................................. 9,698,000
Income tax benefit .......................................... 2,617,000
------------
$ 7,081,000
============
The operating results of the discontinued operations for the three
months ended March 31, 1998, are summarized as follows:
Net sales................................................... $ 3,534,000
Income before income taxes.................................. 58,000
Income taxes................................................ 22,000
Net income.................................................. 36,000
Net income per share (basic and diluted).................... 0.01
The consolidated financial statements of the Company have been restated
to reflect the results of operations and net assets of these operations as a
discontinued operation in accordance with generally accepted accounting
principles. The losses recorded on the disposition of these operations were not
materially different from those incurred on the actual amounts realized in the
sale and liquidation process.
Interim Results
The attached unaudited statements include all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for the
interim periods presented. Except as indicated above, all such adjustments are
of a normal recurring nature.
Operating Segments
Operating Segment information follows (amounts in thousands):
Three Months Ended
March 31,
----------------------
1999 1998
----------------------
Segment revenue:
Hotel and food service furniture.............. $ 34,417 $ 28,193
Healthcare and university furniture........... 3,926 6,005
Wall coverings................................ 4,785 4,286
--------- ---------
Net sales.......................................... $ 43,128 $ 38,484
========= =========
Segments profit (loss):
Hotel and food service furniture.............. $ 3,138 $ 2,577
Healthcare and university furniture........... (271) 177
Wall coverings................................ 610 481
--------- ---------
3,477 3,235
Interest income, net............................... 61 63
--------- ---------
Income from continuing operations before
income taxes.................................... $ 3,538 $ 3,298
========= =========
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
On June 18, 1999, Falcon Products, Inc. (the "Company") completed its
acquisition (the "Acquisition") of all of the outstanding capital stock of
Shelby Williams Industries, Inc. ("Shelby Williams"). In order to finance the
Acquisition, the Company consummated a series of transactions including (i) the
issuance of $100,000,000 aggregate principal amount of 11-3/8% Senior
Subordinated Notes due 2009, Series A; (ii) a credit agreement with DLJ Capital
Funding, Inc. and certain lenders providing for an aggregate of up to
$70,000,000 under an amortizing term loan facility and up to $50,000,000 under a
revolving credit facility (the "Senior Credit Facilities"); and (iii) the
refinancing of certain existing indebtedness of the Company and Shelby Williams
(collectively, the "Transactions").
The following unaudited pro forma combined financial data presents the
pro forma combined balance sheet of the Company as of May 1, 1999 as if the
Transactions had occurred on May 1, 1999, and presents the pro forma combined
statements of operations data of the Company for the periods presented as if the
Transactions had occurred on November 2, 1997. The unaudited pro forma combined
financial data is based on the historical consolidated financial statements of
the Company and the adjusted historical consolidated financial statements of
Shelby Williams, and on the assumptions and adjustments described in the notes
to such unaudited pro forma combined financial data, including assumptions
relating to the allocation of the consideration paid for Shelby Williams to the
assets and liabilities of Shelby Williams based on preliminary estimates of
their respective fair values. The actual allocation of such consideration may
differ from that reflected in the unaudited pro forma combined financial data.
Amounts allocated will be based upon the estimated fair values at the time of
the Acquisition of Shelby Williams which could vary significantly from the
amounts assumed. In addition, the interest rates on the borrowings under the
Senior Secured Credit Facilities, and the estimated transaction fees and
expenses, are assumed solely for the purpose of presenting the unaudited pro
forma combined financial data set forth below. The actual interest rates on the
borrowings under the Senior Credit Facilities and actual transaction fees and
expenses may differ from assumptions set forth below.
The consolidated statements of operations of Shelby Williams for the
year ended October 31, 1998 and the twenty-six weeks ended May 1, 1999 reflect
adjustments to the fiscal year ended December 31, 1998 and the fiscal quarter
ended March 31, 1999 historical financial data of Shelby Williams to conform
such financial data to the fiscal year end and most recent fiscal quarter of
Falcon. As a result, the consolidated statement of operations of Shelby Williams
for the year ended October 31, 1998 was derived by adding the monthly activity
for November and December 1997 to, and subtracting the monthly activity for
November and December 1998 from, the audited consolidated statement of
operations of Shelby Williams for the fiscal year ended December 31, 1998.
Likewise, the consolidated statement of operations of Shelby Williams for the
twenty-six weeks ended May 1, 1999 was derived by adding the monthly activity
for November 1998, December 1998 and April 1999 to the unaudited consolidated
statement of operations of Shelby Williams for the fiscal quarter ended March
31, 1999. The consolidated statement of operations for the latest twelve months
ended May 1, 1999 and the consolidated balance sheet of Shelby Williams as of
May 1, 1999 were derived from unaudited monthly financial statements. Such
monthly statements do not reflect all adjustments which are customarily made at
the end of each fiscal quarter. We believe that the effect of such adjustments,
if made, would not be material.
In connection with the Acquisition of Shelby Williams, we have
identified estimated annual cost savings on a pro forma basis of approximately
$0.4 million related to duplicate public company costs, which cost savings are
reflected in the unaudited pro forma financial data as adjustments to selling,
general and administrative expenses. Management expects that the Company will
begin to realize a portion of the benefit of the cost savings described above in
the fiscal quarter after the closing of the Acquisition. Management also
believes that the Company will be able to realize additional cost savings as a
result of the Acquisition which have not been included in the pro forma combined
financial data. A significant portion of the benefit of such cost savings is not
expected to be realized until the end of fiscal year 2003. Such additional cost
savings do not qualify as pro forma adjustments under Regulation S-X promulgated
under the Securities Act.
We completed the Transactions in the third fiscal quarter of 1999. We
do not expect to record any material charges in connection with the refinancing
of existing indebtedness.
The unaudited pro forma combined financial data do not purport to
represent what our financial position and results of operations would have been
if the Transactions had actually been completed as of the dates indicated and
are not intended to project our financial position or results of operations for
any future period.
The unaudited pro forma combined financial data should be read in
conjunction with the respective historical consolidated financial statements of
the Company and Shelby Williams and the related notes thereto which are included
herein.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of May 1, 1999
Historical Historical Pro forma Pro forma
Falcon Shelby Williams adjustments combined
---------- --------------- ----------- ----------
(In thousands)
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 1,162 $ 8,793 $ (6,049)(1) $ 3,906
Accounts receivable.................... 20,567 24,839 -- 45,406
Inventories............................ 27,761 23,445 10,738(9) 61,944
Prepayments and other current assets... 3,421 4,421 -- 7,842
---------- ---------- ---------- ----------
Total current assets............... 52,911 61,498 4,689 119,098
Property, plant and equipment, net......... 28,354 25,918 -- 54,272
Goodwill, net.............................. 24,749 148 84,095(2) 108,992
Deferred financing fees.................... -- -- 6,500(4) 6,500
Other intangible assets, net............... 5,717 1,154 -- 6,871
---------- ---------- ---------- ----------
Total assets....................... $ 111,731 $ 88,718 $ 95,284 $ 295,733
========== ========== ==========- ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................... $ 8,561 $ 7,331 $ -- $ 15,892
Customer deposits on orders in process. 1,967 7,037 -- 9,004
Accrued liabilities.................... 5,018 6,572 10,000(5) 21,887
297(3)
Current maturities of long-term debt... 2,079 1,000 (1,000)(6) 2,079
---------- ---------- ---------- ----------
Total current liabilities.......... 17,625 21,940 9,297 48,862
Deferred income taxes...................... 876 2,014 -- 2,890
Minority interest in consolidated subsidiary 796 -- -- 796
Long-term debt............................. 19,249 -- 170,000(7) 170,000
(19,249)(6)
Other...................................... 759 -- -- 759
---------- ---------- ---------- ----------
Total liabilities.................. 39,305 23,954 160,048 223,307
---------- ---------- ---------- ----------
Stockholders' Equity:
Common stock........................... 198 593 (593)(8) 198
Additional paid-in-capital............. 47,376 10,135 (10,135)(8) 47,376
Treasury stock, at cost................ (15,685) (24,184) 24,184(8) (15,685)
Cumulative translation adjustments..... (196) -- -- (196)
Retained earnings...................... 40,733 78,220 (78,220)(8) 40,733
---------- ---------- ---------- ----------
Total stockholders' equity......... 72,426 64,764 (64,764) 72,426
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity........................... $ 111,731 $ 88,718 $ 95,284 $ 295,733
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(In thousands)
The unaudited pro forma combined balance sheet as of May 1, 1999 has
been prepared as if the Transactions had occurred as of May 1, 1999. The
following adjustments were recorded:
(1) The following table sets forth the estimated sources and uses of
funds in connection with the Transactions:
Sources of funds:
Initial borrowings under the Senior Secured
Credit Facilities:
Revolving Credit Facility................... $ --
Term Loan................................... 70,000
Original Notes................................. 100,000
Cash on hand................................... 6,049
---------
Total sources of funds.................... $ 176,049
=========
Uses of funds:
Purchase price................................. $ 149,300
Refinancing of existing debt................... 20,249
Debt issuance costs............................ 6,500
---------
Total uses of funds....................... $ 176,049
=========
(2) The following table sets forth the purchase price for the
Acquisition of Shelby Williams and the preliminary allocation as of May 1, 1999:
Acquisition costs of Shelby Williams:
Purchase price of 100% of outstanding
common stock.................................... $ 144,563
Purchase price to acquire outstanding options*.... 737
Plus: Transaction costs........................... 4,000
---------
Total purchase price......................... $ 149,300
=========
Preliminary Allocation:
Cash and cash equivalents......................... $ 8,793
Accounts receivable, net.......................... 24,839
Inventories....................................... 34,183
Prepaid and other current assets.................. 4,421
Property, plant and equipment..................... 25,918
Other assets...................................... 1,302
Accounts payable and other current liabilities.... (32,237)
Other long-term liabilities....................... (2,014)
----------
Subtotal (fair value of net assets acquired)...... 65,205
Goodwill (excess of purchase price over fair
value of net assets acquired)................... 84,095
---------
Total purchase price......................... $ 149,300
=========
- -------------------------
*All outstanding options were purchased by Shelby Williams directly
from the optionees at a price equal to the excess, if any, of the per share
purchase price offered in the Stock Tender Offer over the exercise price of the
option in question, multiplied by the number of shares covered by the option.
We are currently in the process of allocating the purchase price among
the tangible and intangible assets to be acquired and the liabilities to be
assumed. The final purchase price and its allocation will be based on
independent appraisals, discounted cash flows, quoted market prices and
estimates by management which are expected to be completed within one year
following the Acquisition. Upon completion of the purchase price allocation
process, to the extent the purchase price exceeds the fair value of the net
identifiable tangible and intangible assets acquired, such excess will be
allocated to goodwill and amortized over approximately forty years.
<PAGE>
(3) Represents the addition of deferred taxes, at an effective tax rate
of 38.0%, at Shelby Williams due to the adjustment of assets and liabilities to
equal fair value.
(4) Represents the portion of estimated transaction fees and expenses
attributable to the Senior Secured Credit Facilities, the Original Notes and the
New Notes which will be recorded as deferred financing costs and amortized over
the life of the debt to be issued.
(5) Represents the accrual of additional costs and expenses associated
with the Acquisition of Shelby Williams, primarily related to facility
rationalization and other integration costs.
(6) Represents the repayment of revolving credit borrowings and other
debt under the existing credit facilities.
(7) Represents the issuance of the Original Notes and the long-term
portion of the term loan under the Senior Secured Credit Facilities.
(8) Represents the elimination of the historical stockholders' equity
of Shelby Williams as required by purchase accounting.
(9) Represents the inventory write-up at Shelby Williams relating to
inventory costing. Shelby Williams' inventory is stated at last-in, first-out
(LIFO) cost. This adjustment costs inventory at first-in, first-out (FIFO),
which approximates fair market value.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Last twelve months ended May 1, 1999
Historical Historical Pro forma Pro forma
Falcon Shelby Williams (1) adjustments combined
---------- ------------------- ----------- ---------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net sales....................................... $ 152,814 $ 171,788 $ (1,048)(8) $ 323,554
Cost of sales................................... 106,297 131,762 (1,048)(8) 237,011
---------- ---------- ---------- ----------
Gross margin.................................... 46,517 40,026 -- 86,543
Selling, general and administrative expenses.... 35,031 23,248 2,102(2) 60,004
(377)(7)
---------- ---------- ---------- ----------
Operating profit................................ 11,486 16,778 (1,725) 26,539
Interest income (expense)....................... (1,208) 155 (15,572)(3) (17,442)
(817)(4)
Minority interest in consolidated subsidiary.... 45 -- -- 45
---------- ---------- ---------- ----------
Earnings before income taxes.................... 10,323 16,933 (18,114) 9,142
Income tax expense.............................. 3,758 6,211 (6,084)(5) 3,885
---------- ---------- ---------- ----------
Earnings from continuing operations............. $ 6,565 $ 10,722 $ (12,030) $ 5,257
========== ========== ========== ==========
Earnings Per Share Data:
Earnings per share--Basic........................ $ 0.73 $ 0.58
========= ==========
Earnings per share--Diluted...................... $ 0.72 $ 0.58
========= ==========
Weighted average shares outstanding--Basic....... 9,032 9,032
========= ==========
Weighted average shares outstanding--Diluted..... 9,144 9,144
========= ==========
Other Data:
EBITDA(6)....................................... $ 19,008 $ 19,343 $ 377 $ 38,728
Depreciation and amortization................... 4,001 2,565 2,102 8,668
Capital expenditures............................ 4,166 2,991 -- 7,157
Selected Ratios:
Ratio of EBITDA to interest expense............. 2.2x
Ratio of senior debt to EBITDA.................. 1.8x
Ratio of total debt to EBITDA................... 4.4x
Ratio of earnings to fixed charges(9)........... 1.5x
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Twenty-six weeks ended May 1, 1999
Historical Historical Pro forma Pro forma
Falcon Shelby Williams(1) adjustments combined
---------- ------------------ ----------- ---------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net sales....................................... $ 71,064 $ 86,447 $ (498)(8) $ 157,013
Cost of sales................................... 50,490 66,873 (498)(8) 116,865
---------- ---------- ---------- ----------
Gross margin.................................... 20,574 19,574 -- 40,148
Selling, general and administrative expenses.... 13,833 11,576 1,051(2) 26,271
(189)(7)
---------- ---------- ---------- ----------
Operating profit................................ 6,741 7,998 (862) 13,877
Interest income (expense)....................... (596) 101 (7,818)(3) (8,721)
(408)(4)
Minority interest in consolidated subsidiary.... 14 -- -- 14
---------- ---------- ---------- ----------
Earnings before income taxes.................... 6,159 8,099 (9,088) 5,170
Income tax expense.............................. 2,325 2,949 (3,054)(5) 2,220
---------- ---------- ---------- ----------
Earnings from continuing operations............. $ 3,834 $ 5,150 $ (6,034) $ 2,950
========== ========== ========== ==========
Earnings Per Share Data:
Earnings per share--Basic........................ $ 0.43 $ 0.33
========= ==========
Earnings per share--Diluted...................... $ 0.43 $ 0.33
========= ==========
Weighted average shares outstanding--Basic....... 8,951 8,951
========= ==========
Weighted average shares outstanding--Diluted..... 9,000 9,000
========= ==========
Other Data:
EBITDA(6)....................................... $ 8,462 $ 9,327 $ 189 $ 17,978
Depreciation and amortization................... 1,721 1,329 1,051 4,101
Capital expenditures............................ 1,503 1,494 -- 2,997
Selected Ratios:
Ratio of EBITDA to interest expense............. 2.1x
Ratio of earnings to fixed charges(9)........... 1.6x
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Fiscal year ended October 31, 1998
Historical Historical Pro forma Pro forma
Falcon Shelby Williams(1) adjustments combined
---------- ------------------ ----------- ---------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net sales....................................... $ 143,426 $ 164,513 $ (1,016)(8) $ 306,923
Cost of sales................................... 103,338 125,490 (1,016)(8) 227,812
---------- ---------- ---------- ----------
Gross margin.................................... 40,088 39,023 -- 79,111
Selling, general and administrative expenses.... 29,482 22,672 2,102(2) 53,879
(377)(7)
Operating profit................................ 10,606 16,351 (1,725) 25,232
Interest income (expense)....................... (619) 195 (16,201)(3) (17,442)
(817)(4)
Minority interest in consolidated subsidiary.... 64 -- -- 64
---------- ---------- ---------- ----------
Earnings before income taxes.................... 10,051 16,546 (18,743) 7,854
Income tax expense.............................. 3,701 6,129 (6,324)(5) 3,506
---------- ---------- ---------- ----------
Earnings from continuing operations............. $ 6,350 $ 10,417 $ (12,419) $ 4,348
========== ========== ========== ==========
Earnings Per Share Data:
Earnings per share--Basic........................ $ 0.69 $ 0.48
========= ==========
Earnings per share--Diluted...................... $ 0.68 $ 0.47
========= ==========
Weighted average shares outstanding--Basic....... 9,156 9,156
========= ==========
Weighted average shares outstanding--Diluted..... 9,282 9,282
========= ==========
Other Data:
EBITDA(6)....................................... $ 17,880 $ 18,715 $ 377 $ 36,972
Depreciation and amortization................... 3,753 2,364 2,102 8,219
Capital expenditures............................ 6,594 3,972 -- 10,566
Selected Ratios:
Ratio of EBITDA to interest expense............. 2.1x
Ratio of senior debt to EBITDA.................. 1.9x
Ratio of total debt to EBITDA................... 4.6x
Ratio of earnings to fixed charges(9)........... 1.4x
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(In thousands)
The unaudited pro forma combined statements of operations have been
prepared as if the Transactions had occurred on November 2, 1997. The following
adjustments were recorded:
(1) Represents results of continuing operations.
(2) Represents the amortization of goodwill associated with the
Acquisition of Shelby Williams over forty years ($2,102 for the
latest twelve months ended May 1, 1999, $1,051 for the twenty-six
weeks ended May 1, 1999 and $2,102 for the fiscal year ended
October 31, 1998).
(3) Represents interest expense based on pro forma debt of $170,000,
comprised of $100,000 of New Notes and $70,000 of senior debt at a
blended interest rate of 9.8%. The effect of a 0.125% increase in
interest rates would result in an increase in interest expense of
$213 for the latest twelve months ended May 1, 1999, $106 for the
twenty-six weeks ended May 1, 1999 and $213 for the fiscal year
ended October 31, 1998.
(4) Represents the amortization of debt issuance costs associated with
the Transactions ($817 for the latest twelve months ended May 1,
1999, $408 for the twenty-six weeks ended May 1, 1999 and $817 for
the fiscal year ended October 31, 1998) over a period of six years
to the extent such deferred costs and fees relate to the Senior
Secured Credit Facilities and over ten years to the extent such
deferred costs and fees relate to the New Notes.
(5) Represents the tax effect of the adjustments at an effective tax
rate of approximately 38% (excluding goodwill amortization).
(6) EBITDA for any period is calculated as the sum of net income plus
the following to the extent deducted in calculating net income: (a)
interest expense, (b) income tax expense, (c) depreciation expense,
(d) amortization expense and (e) special one-time charges. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of such special one-time
charges. We consider EBITDA to be a widely accepted financial
indicator of a company's ability to service debt, fund capital
expenditures and expand its business; however, EBITDA is not
calculated in the same way by all companies and is neither a
measurement required, nor represents cash flow from operations as
defined, by generally accepted accounting principles. EBITDA should
not be considered by an investor as an alternative to net income,
as an indicator of operating performance or as an alternative to
cash flow as a measure of liquidity. The calculation of EBITDA for
purposes of the financial information presented herein is
calculated differently than for purposes of the covenants under the
Indenture and the Senior Secured Credit Facilities. See "Prospectus
Summary--The Transactions--The Acquisition," "Description of the
Senior Secured Credit Facilities" and "Description of New Notes."
(7) Represents the annualized costs savings associated with combining
two public companies by eliminating duplicate costs (estimated to
be approximately $377 for the latest twelve months ended May 1,
1999, $188 for the twenty-six weeks ended May 1, 1999 and $377 for
the fiscal year ended October 31, 1998).
(8) Represents the elimination of intercompany sales between Falcon and
Shelby Williams and the related cost of sales.
(9) For purposes of computing the ratio of earnings to fixed charges,
earnings include net earnings plus fixed charges. Fixed charges
consist of interest expense, a portion of rental expense (deemed by
management to be representative of the interest factor of rental
payments) and amortization of debt issuance costs.
<PAGE>
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 hereunto duly authorized.
Dated: July 20, 1999
FALCON PRODUCTS, INC.
By: /s/ Michael J. Dreller
-----------------------------------
Michael J. Dreller,
Vice President - Finance
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
------- --------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K/A into the Company's previously filed
Registration Statements File Nos. 33-46998, 33-58159 and 333-60735.
/s/ Arthur Andersen LLP
St. Louis, Missouri
July 16, 1999
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-58159) pertaining to the Amended and Restated 1991 Stock Option Plan
of Falcon Products, Inc., the Registration Statement (Form S-8, No. 33-46998)
pertaining to the Non-Employee Director Plan and the Registration Statement
(Form S-8, No. 333-60735) pertaining to the Employee Stock Purchase Plan and
Non-Employee Directors' Deferred Compensation Plan of Falcon Products, Inc. of
our report dated January 29, 1999, with respect to the consolidated financial
statements of Shelby Williams Industries, Inc. included in the Current Report on
Form 8-K of Falcon Products, Inc. for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Atlanta, Georgia
July 14, 1999
