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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-11577
________________________
FALCON PRODUCTS, INC.
DELAWARE 43-0730877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9387 DIELMAN INDUSTRIAL DRIVE, ST. LOUIS, MISSOURI 63132
Registrant's telephone number, including area code: (314) 991-9200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.02 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
________________________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days:
Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K: [X]
As of January 20, 1999, the Registrant had outstanding 9,027,607
shares of Common Stock. The aggregate market value of the shares of
Common Stock held by nonaffiliates of the Registrant as of January 20,
1999, was $73.5 million based upon the closing stock price as reported
on the New York Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended October 31, 1998, are incorporated by reference into
Parts II and IV of this Report.
Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held March 10, 1999, are incorporated by
reference into Part III of this Report.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
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<S> <C>
PART I
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ITEM 1. Business. . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. Properties. . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . 9
ITEM 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . 10
ITEM 4A. Executive Officers of the Registrant. . . . . . . . 10
PART II
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ITEM 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . 11
ITEM 6. Selected Financial Data . . . . . . . . . . . . . . 11
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 12
ITEM 8. Financial Statements and Supplementary Data . . . . 12
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . 12
PART III
- --------
ITEM 10. Directors and Executive Officers of the Registrant. 12
ITEM 11. Executive and Director Compensation . . . . . . . . 12
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . 12
ITEM 13. Certain Relationships and Related Transactions. . . 12
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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</TABLE>
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FALCON PRODUCTS, INC.
FORM 10-K
When used herein, the term "Company" refers to the Registrant, Falcon
Products, Inc., and its subsidiaries.
This Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws which, while reflective
of management's beliefs or expectations, involve certain risks and
uncertainties, many of which are beyond the control of the Company.
Accordingly, the Company's actual results and the timing of certain events
could differ materially from those discussed herein.
PART I
ITEM 1. BUSINESS.
GENERAL
The Company designs, manufactures and markets an extensive line of
furniture and related products for the food service, office, hospitality,
healthcare and retail markets, including table bases, table tops, metal
and wood chairs, booths, casegoods and interior decor systems. The
Company manufactures most of its products to customer order from basic raw
materials. The Company markets its products to a wide variety of
customers, including wholesale distributors, buying groups, architecture
and design firms, office furniture dealers and end-users, through a
combination of its own direct factory sales force and independent
manufacturer's representatives.
PRODUCTS
Furniture Products. The Company's principal products consist of
table bases, table tops, wood and metal chairs, booths, and casegoods.
The Company's table bases are produced in a variety of sizes, styles and
finishes and are utilized by restaurants, hotels, offices, cafeterias,
hospitals, airports, universities, country clubs and other commercial
locations where food is served. More than 35 styles of table bases are
finished to order in one of the Company's standard catalog powder coat
paint finishes or designer plated finishes and also may be painted to
match a customer's custom finish requirements. Table bases either may be
combined with table tops produced by the Company to create complete tables
for sale to customers or may be used by a customer in connection with
other table tops. The Company also has a number of original equipment
manufacturer customers who purchase its table bases for use with their own
table tops.
Table tops are manufactured by the Company in a number of standard
sizes and shapes and in a variety of finishes, including wood veneers,
fiberglass, high-pressure laminate patterns and solid wood. Edge
treatments for the table tops are available in vinyl, laminate, wood or
metal. Wood edge, veneer and butcher block tops are stained with one of
the Company's standard color finishes and sealed and sprayed with a
durable catalyzed top coat. The Company also has the capability of
manufacturing custom table tops in a wide variety of customer-specified
sizes, shapes and finishes. Table tops are typically sold with a base
produced by the Company but may also be sold separately.
The Company produces wood chairs in many styles from a variety of
wood types and in many standard upholstery fabric and vinyl coverings.
These chairs are manufactured by the Company or are assembled from
machined parts purchased in Europe. For upholstered products, the customer
may select one of the Company's standard catalog vinyls or contract-
quality fabrics or may specify or supply its choice of materials. Wood
chairs are finished with one of the Company's standard colors or the
customer may specify or supply its choice of finish material. A durable
seal coat and top coat finish are also applied to all wood chairs.
3
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The Company's metal stacking chairs are available in a wide variety
of styles and are used primarily in multi-use room situations where it is
necessary to store the chairs for certain functions, such as in training
and banquet facilities. Metal chairs may be upholstered in one of the
Company's standard catalog vinyls or fabrics or in customer-furnished or
customer-specified materials and may be plated or powder coat painted in a
standard catalog finish or in a customer-designated custom finish.
Booths manufactured by the Company are available in standard catalog
styles or customer-specified styles, some of which are suitable for
outdoor applications. Booths can be manufactured in wood, metal or
fiberglass and may be upholstered in one of the Company's standard catalog
vinyls or fabrics or in customer-designated or supplied coverings.
Exposed wood is color matched to customer specifications and top coated
with the same durable catalyzed finish used on the Company's table tops
and other wood products.
The combination of the Company's broad line of furniture products and
its vertical manufacturing capabilities enable it to offer a complete
commercial interior decor package to its customers with significant design
flexibility and short lead times. The Company integrates certain of its
products into complete interior decor systems, which include all
furniture, booths, walls, wood trim and casegood components. These turnkey
decor packages include casegood components such as counters, bars, divider
walls, planter units, salad bars and stands produced in a variety of high-
pressure laminates which are manufactured by the Company, delivered to the
customer site and installed by employees or Company-trained
subcontractors. These packages are suitable for either new food service
installations or remodeling existing facilities.
MARKETING AND DISTRIBUTION
Domestic Sales of Furniture Products. The Company sells its
furniture products throughout the United States to a wide variety of
customers, including restaurant supply dealers, architectural design
firms, office furniture dealers, mass merchandisers, OEM's and chain
restaurants. These products are marketed through a combination of direct
factory sales representatives employed by the Company and independent
manufacturer's representatives organizations. Most sales representatives
are assigned to geographical territories. The efforts of these factory
and independent sales representatives are directed by the Company's Vice
President-Sales and Marketing, the Company's other vice presidents who
focus on individual markets, and the Company's regional sales managers.
Each factory and independent sales representative is assigned a
territory in which to promote and sell the Company's products and assist
in resolution of any complaints with regard to his or her sales. The
Company determines the prices at which its products will be sold. The
Company's independent sales representatives are commissioned and do not
carry competing lines.
The Company's marketing programs assist its representatives in
various ways. The Company (i) conducts extensive training programs to
better educate its sales representatives with respect to the design,
manufacture, variety and decor applications of the Company's products;
(ii) provides restaurant supply and office furniture dealers, mass
merchandisers, architectural designers, OEM's and other customers with
catalog materials, samples and brochures; (iii) maintains a customer
service department that ensures that the Company promptly responds to the
needs and orders of its customers; (iv) exhibits its products at national
and regional furniture shows and at three showrooms in the Merchandise
Mart in Chicago; (v) maintains regular contact with key customers; and
(vi) conducts ongoing surveys to determine customer satisfaction.
Flight. The Company's office and other furniture products are also
marketed through the Company's "Flight" network of over 400 independent
office furniture dealers. Flight dealers distribute the Company's
furniture products to a wide variety of commercial users and office
furniture retailers and provide the Company with access to incremental
sales opportunities. The Flight network is designed to both distribute
the Company's office furniture products and cross-sell its food service
furniture products. The Company utilizes its direct factory sales force
and independent sales representatives, under the supervision of the
Company's Vice President - Contract, to call upon existing and prospective
Flight dealers.
4
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International Sales. The Company's products are marketed
throughout Europe through an exclusive distribution agreement with a
European distributor. The Company's Falcon Mimon, a.s., subsidiary
located in Mimon, Czech Republic ("Falcon Mimon") also markets wood
chair frames directly. The Company's Howe Europe a/s, subsidiary
located in Middelfart, Denmark ("Howe Europe") markets, assembles and
distributes tables and chairs to the European contract office market for
training, conferencing, meeting and executive dining applications. The
Company holds the European distribution rights to the award-winning
40/4(TM) chair through an exclusive licensing agreement with David
Rowland, the chair's designer. The manufacturing capabilities of Falcon
Mimon, Howe Europe and the distribution network allow the Company to
take advantage of opportunities in Europe.
Distribution of the Company's products in Asia and the Pacific Rim
is achieved through exclusive distribution arrangements in Japan, Hong
Kong, and South Korea. The Company plans to augment existing
distribution agreements during 1999 with additional distribution
arrangements in other countries in the Pacific Rim. The Company's
Falcon Products (Shenzhen) Limited, subsidiary located in Shenzhen, The
Peoples Republic of China ("Falcon China") markets table tops and
millwork to support National Accounts throughout the Asia Pacific
region. The Company's international sales efforts are supported by
dedicated customer service personnel. During 1998, 1997 and 1996,
foreign operations and export sales were $13.5, $9.3 million, and $10.9
million, respectively. Of these amounts, $8.7 million, $3.9 million and
$3.8 million of sales in 1998, 1997 and 1996, respectively, were made
directly from the Company's Falcon Mimon, Howe Europe, and Falcon China
locations.
National Accounts. The Company's National Accounts program
targets the major restaurant chains. The Company maintains a separate
National Accounts sales force consisting of both employee sales
representatives and independent sales representatives that are directed
by the Company's Vice President-Food Service and regional sales
managers. The Company believes that its vertically integrated
manufacturing capabilities allow it to better serve these customers than
most of its competitors and that its design, installation and service
capabilities are particularly suited for many of these customers. The
National Accounts sales force develops original design concepts,
including seating layouts and product specifications for each customer
based on the customer's requirements. The Company's National Accounts
sales force is supported by its own customer service team, quotation and
design staff and product engineers, located at the Company's Newport,
Tennessee and City of Industry, California manufacturing facilities.
PRODUCT DESIGN AND DEVELOPMENT
The Company's design and engineering group works with sales and
marketing personnel in support of the Company's complete decor systems
for its National Accounts program. The Company's engineering staff
utilizes the Company's computer aided design system to provide layout
and configuration advice to customers who are integrating the Company's
furniture products into their facilities and to design casegoods and
other components. The design and engineering group also assists the
Company's product design engineers in the development of new products.
The Company's Product Development team, which is comprised of
sales, marketing, purchasing, engineering and financial personnel,
strives to produce customer satisfaction and competitively priced
products by constantly improving the Company's product lines. The
Product Development team has a formalized charter and a plan that not
only will account for new product introductions, but has identified
market trends and includes product development to accommodate those
trends. The Company has four full-time product design engineers who
report to the Product Development team and are responsible for the
design of new products. On occasion, product designs are also purchased
from outside sources to supplement the Company's internal design
capabilities.
5
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MANUFACTURING
The Company's manufacturing facility in Newport, Tennessee,
produces table bases, table tops, millwork, casegoods and booths. Table
bases are produced from iron castings and from wood. Cast iron table
bases are sent to the Newport facility in truck load quantities from the
Company's gray iron foundry in Juarez, Mexico, and are finished to meet
customer requirements. Table tops, which may be combined with the
Company's table bases to produce a complete table, are produced from
solid wood or particle board core with a laminate or wood veneer
surface, receive various edge treatments and finishes, and are sealed
and sprayed with a durable top coat. Millwork and casegoods, which are
produced primarily to support the National Accounts program, are
manufactured at the Newport facility from lumber that is purchased in
truck load quantities, dry-kilned and rough-planed. The product is then
cut and assembled to engineering specifications and finished with a
durable catalyzed finish. Booths are produced from rough lumber that is
cut and prepared in a millroom at the facility, covered or color-matched
to customer specifications and top coated with the same durable
catalyzed finish used on the Company's table tops and other wood
products.
The Company's facility in Lewisville, Arkansas, produces wood
chairs. Approximately 10% of the facility's wood chairs are produced
entirely in house, with the balance assembled from machined parts
imported from Falcon Mimon or other European suppliers. The Company
purchases these parts in container loads and then assembles and finishes
the chairs to customer order. To provide consistency and speed to the
finishing process, a conveyorized paint line is utilized with spray
booths and drying ovens positioned to allow proper flash off and curing
times between finishing steps.
The Company's facility in Belmont, Mississippi, produces metal
chairs and fiberglass seating that are marketed to the restaurant,
banquet, retail distribution, office, and healthcare markets. Most
chairs are manufactured totally in-house through a process of metal
bending, fabrication, robotic welding and upholstering. All metal
chairs are then finished to customer requirements through plating or
powder coat painting.
The Company's facility in City of Industry, California, produces
fiberglass booths, table tops, millwork and casegoods, metal chairs,
wood chairs and fully upholstered seating; finishes raw table bases
received from the Company's Juarez facility; and upholsters finished
wood chair frames received from the Company's Tijuana facility. In
addition to manufacturing these additional products, this facility also
serves as a central distribution center for products manufactured at
other Falcon locations destined for the western United States.
The Company's facility in Tijuana, Mexico, manufactures casegoods
and wood chairs that are primarily suited for the lodging and
hospitality markets. Most of the chair frames manufactured and finished
in this factory are shipped to the City of Industry plant for
upholstering or consolidation with other Falcon products before the
products are shipped to customers. During 1998, the Company announced
that it will discontinue the manufacturer of casegoods products for the
lodging and hospitality markets.
The Company's facility in Juarez, Mexico, produces iron castings
which are finished into table bases at other Falcon facilities. Molds
for the table bases are produced by packing sand around an aluminum
match plate. Many of the raw materials used at the facility are readily
available in the Juarez area. The bases are finished and painted with a
powder coat paint in Juarez prior to shipment or if the bases are to be
chrome plated, they are polished in Juarez prior to shipment to other
Falcon factories. A small portion of this facility's production is
shipped, generally in truck-load quantities, directly to the Company's
customers. The Company's foundry utilizes an emission-free electric
furnace and has a melting capacity of 110,000 pounds per day.
The Company's facility in Mimon, Czech Republic, produces wood
chairs and wood chair parts for export and sale within the Czech
Republic. Approximately 50% of this facility's production is for chair
parts shipped to the Company's facility in Lewisville, Arkansas, for
assembly and final finishing. This facility also exports finished
chairs and chair parts to customers in Europe, the Pacific Rim and North
America. This facility has wood drying, machining and bending
capabilities to produce chair frames from raw lumber and finishing and
upholstery capabilities to complete fully finished chairs to customer
specifications.
The Company's facility in Shenzhen, The Peoples Republic of China,
produces table tops and millwork. This facility also outsources other
related items to support sales to National Accounts customers throughout
the Asia Pacific region.
The Company's facility in Middelfart, Denmark, markets, assembles,
and distributes tables and chairs to the European contract office market
for training conferencing, meeting and executive dining applications.
The Company holds the European distribution rights to the award-winning
40/4(TM) chair through an exclusive licensing agreement with the chair's
designer.
6
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The Company's Howe and Johnson subsidiaries outsource
approximately 30% of the manufacturing of their table tops. The
remaining products are manufactured at the Newport facility. These
tables are marketed as training, meeting, conferencing, seminar, dining,
banquet and general work tables to the contract office, institutional
and hospitality markets.
RAW MATERIALS
The Company manufactures most of its products to customer order
from basic raw materials. The Company utilizes a variety of raw
materials in the manufacture of its products, including rough lumber,
laminates, particle board, metal tubing, steel wire, scrap iron and
various plastic components, all of which the Company believes are in
abundant supply and available from a variety of sources. The Company
has no long-term supply contracts with any of its suppliers and it has
experienced no significant problems in obtaining raw materials for its
operations.
Certain products sold by the Company, including unfinished wood
chair frames and frame components and tubular steel stacking chair
components, are purchased by the Company from other sources. The
Company has not experienced difficulty in obtaining sources to produce
these products and believes that alternative arrangements could be made
to obtain these products should the need arise.
BACKLOG
As of October 31, 1998, the Company's backlog of orders for its
products believed to be firm was approximately $23.5 million, as
compared to $21.2 million at November 1, 1997. Due to the Company's
short delivery time, backlog of orders is typically not considered a
significant measure of future sales.
COMPETITION
The food service, office furniture and hospitality segments of the
furniture industry are fragmented and highly competitive with respect to
each of the products sold by the Company. The Company believes its
competitive strengths are its vertically integrated manufacturing, its
emphasis on customer service and support, its reputation for quality and
responsiveness to its customers, the one-stop shopping advantage made
possible by the wide variety of products offered by the Company and its
ability to design, manufacture and install turnkey interior decor
systems. The Company competes for sales of each of its products with
numerous domestic and foreign manufacturers, many of which have
financial and other resources greater than the Company.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,371
persons in its four domestic manufacturing facilities and support
locations, 429 in its manufacturing facilities in Mexico, 12 in China,
20 in Denmark, and 378 in its manufacturing facility in Mimon, Czech
Republic. Approximately 52 persons were employed in sales, 303 persons
in administration and 1,855 in manufacturing.
TRADEMARKS AND PATENTS
The Company has registered the "FALCON", "CHARLOTTE", "FLIGHT",
"GENESIS", "HOWE", "JOHNSON", "M.A.T.S.", "DIFFRIENT", "MIOS", "STORM",
"TUTOR", and "TEMPEST", trademarks, in addition to numerous other
trademarks, with the United States Patent and Trademark Office.
Management believes that the Company's trademark position is adequately
protected in all markets in which the Company does business. The
Company has received mechanical patents on certain of its furniture
mechanisms and components. The Company believes that while its patents
and trademarks have value, it is not dependent upon patents, trademarks,
servicemarks or copyrights.
7
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GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
The Company's operations must meet extensive federal, state, and
local regulatory standards in the areas of safety, health and
environmental pollution controls. Historically, these standards have
not had any material adverse effect on the Company's sales or
operations. Management believes that its plants are in compliance in
all material respects with all applicable federal, state, and local laws
and regulations concerned with safety, health and environmental
protection.
ACQUISITIONS
In March 1998, the Company acquired the stock of Howe Furniture
Corporation and its subsidiaries ("Howe") for $16.6 million in cash and
assumed $2.2 million in outstanding long-term obligations. 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.
In October 1996, the Company acquired certain assets and assumed
certain liabilities of The Chair Source for 266,400 newly issued shares
of common stock valued at approximately $3.3 million, plus 50,000 shares
of common stock to be issued through October 1999, subject to certain
contingencies. The Chair Source manufactured wood and upholstered
seating in Anaheim, California and distributes them primarily to the
hospitality, lodging and food service markets.
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 and casegoods primarily 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.
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ITEM 2. PROPERTIES.
The following table provides information with respect to each of the
Company's manufacturing facilities:
<TABLE>
<CAPTION>
BUILDING AREA
LOCATION (SQUARE FEET) PRODUCTS LEASE/OWNERSHIP TERMS
--------- ------------- -------- ---------------------
<S> <C> <C> <C>
Newport, Tennessee 370,000 Table bases, table tops, Leases expiring in December
millwork, casegoods, and 2001, with two five-year
booths renewals.
Belmont, Mississippi 227,000 Metal chairs and fiberglass Own 176,000 square feet in four
seating contiguous buildings; Lease
51,000 square feet expiring in
November 2003.
Lewisville, Arkansas 159,000 Wood chairs Leases expiring in August
2000, with three five-year
renewal options.
City of Industry, 177,000 Table bases, table tops, Lease expiring in April 2006,
California millwork, casegoods, metal with three five-year renewal
chairs, and fully upholstered options.
seating
Irwindale, California 34,000 Fiberglass booths Leases expiring in October 1999.
Mimon, Czech Republic 700,000 Wood chairs Owned
Juarez, Mexico 51,000 Iron castings for table bases Owned
Tijuana, Mexico 90,000 Wood chairs, fully upholstered Leases expiring in December 1999,
seating and casegoods with three one-year renewal
options.
Shenzhen, The Peoples 15,000 Table tops and millwork Lease expiring July 31, 1999,
Republic of China with an annual renewal option.
Middelfart, Denmark 25,000 Tables and chairs Lease expiring in March 1999.
</TABLE>
Management of the Company believes that its manufacturing and warehousing
facilities are in good condition and are adequate for the purposes for
which they are currently used. The capacity of the Company's current
facilities is considered to be adequate to meet current needs and
anticipated increases in sales volume for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage against potential claims in an amount which
it believes to be adequate. There are no material pending legal
proceedings, other than routine litigation incidental to the business, to
which the Company is a party or of which any of the Company's property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the last
quarter of the Company's fiscal year ended October 31, 1998.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT<F*>.
The Executive Officers of the Company are:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<C> <S> <C>
Franklin A. Jacobs Chairman of the Board since 1971; President from 1957 to May 66
1981 and again from January 1984 to December 1995.
Darryl C. Rosser President and Chief Operating Officer since December 1995; 47
Executive Vice President-Operations since May 1995;
Senior Vice President-Operations since December 1993; and
Vice President-Operations since January 1988.
Michael J. Dreller Vice President-Finance and Chief Financial Officer, 36
Secretary and Treasurer since January 1996; prior to joining
the Company, Vice President and Chief Financial Officer of
JDI Group, Inc., a distributor of residential furniture.
Stephen E. Cohen Vice President - Sales and Marketing since August 1998; 30
Vice President - Sales since November 1996;
Vice President - Sales Western Region since October 1995;
Vice President - Sales Midwestern Region since March 1995
Jackson H. Spidell Vice President-Operations since November 1998; prior to joining 43
the Company, Director of West Michigan Manufacturing
Operations - Herman Miller, Inc., a manufacturer of office furniture
Richard Hnatek Senior Vice President - International Sales/New Chain Development 54
since August 1998; Senior Vice President - Sales since December
1993; Vice President - Sales since November 1986.
Michael J. Kula Vice President - Corporate Technology & Development since 49
November 1998; Vice President - Operations since July 1996; prior
to joining the Company, Senior Vice President - Operations of the
Gunlocke Company, a subsidiary of HON Industries, Inc., a manufacturer
of office furniture.
<FN>
Each officer is elected annually by the Board of Directors.
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<F*> This information is included in PART I as a separate item in
accordance with General Instruction G of Form 10-K under the
Securities Exchange Act of 1934.
</TABLE>
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) Principal Market
The Company's common stock, par value $.02 per share, is
listed on the New York Stock Exchange under the symbol FCP.
(b) Stock Price and Dividend Information
The following table sets forth the high and low closing
sales prices per share for the Company's common stock and dividends
paid per share for the periods indicated.
<TABLE>
<CAPTION>
MARKET PRICE
----------------------- DIVIDENDS
HIGH LOW PER SHARE
-------- ------- -----------
<S> <C> <C> <C>
Year ended October 31, 1998:
First Quarter $15.56 $13.56 $.040
Second Quarter 13.68 12.88 .040
Third Quarter 13.50 12.12 .040
Fourth Quarter 13.13 10.00 .040
Year ended November 1, 1997:
First Quarter $16.00 $14.00 $.035
Second Quarter 15.88 13.63 .035
Third Quarter 14.38 12.88 .035
Fourth Quarter 15.94 13.31 .035
</TABLE>
Although the payment of future dividends is in the discretion
of the Board of Directors, the Company expects to pay a regular
quarterly dividend for the foreseeable future. During the first
quarter of 1997, the Company increased its cash dividend to $.035 per
share from $.025 per share. The Company again increased its dividend
in the first quarter of 1998, raising it to $.04 per share.
(c) Approximate Number of Holders of Common Stock
The approximate number of holders of record of the
Company's common stock as of January 20, 1999, was 776.
(d) Recent Sales of Unregistered Securities
In fiscal years 1996, 1997 and 1998, the Company issued 291,400
shares of common stock, and incurred a contingent obligation to issue
an additional 25,000 shares of common stock over the next year
(the 291,400 issued shares and the additional 25,000 are hereafter
referred to as the "Acquisition Shares") in connection with its
acquisition of the assets of The Chair Source from The T.L. Spriggs
Corporation. The Company believes that the value of the acquired
assets is commensurate with the total value of the Acquisition
Shares, which were valued at approximately $4.35 million as of the
acquisition date, October 28, 1996. The Acquisition Shares were
exempt from registration under Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data contained in the Registrant's
Annual Report for the fiscal year ended on October 31, 1998 (the
"1998 Annual Report") is incorporated herein by reference and
contained herein as Exhibit 13.
11
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the 1998 Annual Report is incorporated herein by
reference and contained herein as Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements together with the notes
thereto and the report of independent auditors (as set forth in Part
IV, Item 14 (a) (1)) in the 1998 Annual Report are incorporated
herein by reference. The financial data contained under the caption
"Quarterly Financial Information" in the 1998 Annual Report is also
incorporated herein by reference and contained herein as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the caption "INFORMATION ABOUT THE
NOMINEES" in the Registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held March 10, 1999 (the "Proxy
Statement"), is incorporated herein by reference.
Information regarding executive officers of the Company is
contained in Part I, Item 4A hereof under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION.
The information contained under the captions "EXECUTIVE
COMPENSATION", "COMPENSATION OF DIRECTORS", "INFORMATION AS TO STOCK
OPTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"
in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information contained under the captions "VOTING SECURITIES,
PRINCIPAL HOLDERS THEREOF AND CUMULATIVE VOTING RIGHTS" and "SECURITY
OWNERSHIP OF MANAGEMENT" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the caption "TRANSACTIONS WITH
ISSUER AND OTHERS" in the Proxy Statement is incorporated herein by
reference.
12
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following Consolidated Financial Statements of the
Company included in the 1998 Annual Report are incorporated by reference
in Part II, Item 8:
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE REFERENCE
--------------
<S> <C>
Consolidated Statements of Earnings for the years ended October 31, 1998,
November 1, 1997, and November 2, 1996 16
Consolidated Balance Sheets as of October 31, 1998, and November 1, 1997, and
November 2, 1996 17
Consolidated Statements of Stockholders' Equity for the years ended October 31,
1998, November 1, 1997, and November 2, 1996 18
Consolidated Statements of Cash Flows for the years ended October 31, 1998,
November 1, 1997, and November 2, 1996 19
Notes to Consolidated Financial Statements 20
Report of Independent Public Accountants 27
</TABLE>
(a) 2. Financial Statement Schedules
The following financial statement schedule is included in Item 14
on page 15:
Schedule II-Valuation and Qualifying Accounts for the years ended
October 31, 1998, November 1, 1997, and November 2, 1996
(a) 3. Exhibits:
See Exhibit Index on pages 17 through 19 of this Report.
(b) Reports on Form 8-K:
None.
13
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
TO FALCON PRODUCTS, INC.:
We have audited in accordance with generally accepted auditing
standards, the financial statements included in Falcon Products, Inc.
1998 Annual Report to Stockholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated December 15, 1998.
Our audit was made for the purpose of forming an opinion on those
financial statements taken as a whole. Schedule II included in this
Form 10-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
December 15, 1998
14
<PAGE>
<PAGE>
<TABLE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1998, NOVEMBER 1, 1997, AND NOVEMBER 2, 1996
<CAPTION>
ADDITIONS
BALANCE CHARGED ACQUISITIONS
AT TO COSTS FROM DEDUCTIONS BALANCE
BEGINNING AND ACQUIRED FROM AT END OF
(In thousands) OF PERIOD EXPENSES COMPANIES RESERVES PERIOD
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
and anticipated returns:
Year ended October 31, 1998 $ 337 $ 824 $317 $ 806<FA> $ 672
====== =========== ==== ========== ======
Year ended November 1, 1997 $ 392 $ 710 $ -- $ 765<FA> $ 337
====== =========== ==== ========== ======
Year ended November 2, 1996 $ 327 $ 1,062 $ -- $1,011<FA> $ 392
====== =========== ==== ========== ======
<FN>
- ---------------
<FA> Accounts charged off less recoveries and returns.
<CAPTION>
ADDITIONS
BALANCE CHARGED ACQUISITIONS
AT TO COSTS FROM DEDUCTIONS BALANCE
BEGINNING AND ACQUIRED FROM AT END OF
(In thousands) OF PERIOD EXPENSES COMPANIES RESERVES PERIOD
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997 Consolidation Reserve:
Year ended October 31, 1998 $2,091 $ (440)<FB> $ -- $ 1,651 $ --
====== =========== ==== ========== ======
Year ended November 1, 1997 $ -- $3,700 $ -- $ 1,609 $2,091
====== =========== ==== ========== ======
Year ended November 2, 1996 $ -- $ -- $ -- $ -- $ --
====== =========== ==== ========== ======
<FN>
- ---------------
<FB> Adjustment of estimate
<CAPTION>
ADDITIONS
BALANCE CHARGED ACQUISITIONS
AT TO COSTS FROM DEDUCTIONS BALANCE
BEGINNING AND ACQUIRED FROM AT END OF
(In thousands) OF PERIOD EXPENSES COMPANIES RESERVES PERIOD
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1998 Special and Nonrecurring
Item Reserve:
Year ended October 31, 1998 $ -- $ 4,650 $ -- $ 4,240 $ 410
====== =========== ==== ========== ======
Year ended November 1, 1997 $ -- $ -- $ -- $ -- $ --
====== =========== ==== ========== ======
Year ended November 2, 1996 $ -- $ -- $ -- $ -- $ --
====== =========== ==== ========== ======
- ---------------
</TABLE>
15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
FALCON PRODUCTS, INC.
Date: January 29, 1999 By /s/ Franklin A. Jacobs
--------------------------------
Franklin A. Jacobs,
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Falcon Products, Inc.,
hereby severally and individually constitute and appoint Franklin A. Jacobs
and Michael J. Dreller, and each of them, the true and lawful attorneys and
agents of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to
this Annual Report on Form 10-K and all instruments necessary or advisable
in connection therewith and to file the same with the Securities and
Exchange Commission, each of said attorneys and agents to have the power to
act with or without the others and to have full power and authority to do
and perform in the name and on behalf of each of the undersigned every act
whatsoever necessary or advisable to be done in the premises as fully and
to all intents and purposes as any of the undersigned might or could do in
person, and we hereby ratify and confirm our signatures as they may be signed
by our said attorneys and agents to each of them to any and all such
amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated:
Date: January 29, 1999 /s/ Franklin A. Jacobs
----------------------------------
Franklin A. Jacobs,
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: January 29, 1999 /s/ Michael J. Dreller
----------------------------------
Michael J. Dreller,
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial Officer)
Date: January 29, 1999 /s/ Raynor E. Baldwin
----------------------------------
Raynor E. Baldwin, Director
Date: January 29, 1999 /s/ Melvin F. Brown
----------------------------------
Melvin F. Brown, Director
Date: January 29, 1999 /s/ Donald P. Gallop
----------------------------------
Donald P. Gallop, Director
Date: January 29, 1999 /s/ James L. Hoagland
----------------------------------
James L. Hoagland, Director
Date: January 29, 1999 /s/ S. Lee Kling
----------------------------------
S. Lee Kling, Director
Date: January 29, 1999 /s/ Lee M. Liberman
----------------------------------
Lee M. Liberman, Director
Date: January 29, 1999 /s/ Darryl C. Rosser
----------------------------------
Darryl C. Rosser, Director
Date: January 29, 1999 /s/ James Schneider
----------------------------------
James Schneider, Director
16
<PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended April 27, 1996 (the "April 27, 1996 10-Q").
3.2 Restated Bylaws, filed as Exhibit 3.2 to the April 27, 1996 10-Q.
3.3 Amendment to Restated Bylaws, effective January 16, 1997, filed as Exhibit 3.3
to the Company's Annual Report on Form 10-K for the year ended November 2, 1996.
4.1 Form of Stock Certificate for Common Stock, incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Reg. No. 33-61706.
10.1 Lease Agreement dated February 1, 1980, between Lafayette County,
Arkansas and the Company, incorporated herein by reference to Exhibit 10(e)
to the Company's Annual Report on Form 10-K for the year ended
October 31, 1980 (the "1980 10-K").
10.5 Assignment and Assumption Agreement dated January 30, 1980, and the lease
thereunder, incorporated herein by reference to Exhibit 10(g) to 1980 10-K.
10.6 Lease Agreement dated as of June 1, 1988, among Burley Builders, Inc. and
Tennessee Tobacco Sales, Incorporated, as lessors, and the Company, as lessee,
incorporated herein by reference to Exhibit 10(m) to the Company's Annual
Report on Form 10-K for the year ended October 29, 1988.
10.7 First Amendment to Lease Agreement dated as of November 21, 1991, among
Burley Builders, Inc. and Tennessee Tobacco Sales, Incorporated, as lessors,
and the Company, as lessee, incorporated herein by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K for the year ended November 2,
1991 (the "1991 10-K").
10.8<Fa> Falcon Products, Inc. 1981 Employee Incentive Stock Option Plan ("ISOP"),
incorporated herein by reference to Exhibit 4(h) to the Company's Registration
Statement on Form S-8, Reg. No. 33-15698.
10.9<Fa> Form of Stock Option Agreement dated June 9, 1986, regarding options issued
to Directors, incorporated herein by reference to Exhibit 10(i) to the Company's
Annual Report on Form 10-K for the year ended November 1, 1986 (the "1986 10-K").
<FN>
___________
<Fa> Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
17
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.10<Fa> Stock Option Agreement dated June 9, 1986, regarding options issued to
Franklin A. Jacobs, incorporated herein by reference to Exhibit 10(i) to the
1986 10-K.
10.11<Fa> First Amendment to the ISOP, adopted June 16, 1987, incorporated herein
by reference to Exhibit 10(1) to the Company's Annual Report on Form 10-K
for the year ended October 31, 1987.
10.12<Fa> Falcon Products, Inc. Amended and Restated 1991 Stock Option Plan, incorporated
herein by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8, Reg. No. 33-46997.
10.13<Fa> Falcon Products, Inc. Amended and Restated Stock Purchase Plan, incorporated
herein by reference to Exhibit 10.15 to 1991 10-K.
10.14<Fa> Minutes of Meeting of Board of Directors of the Company dated March 14, 1991
(the "Non-Employee Director Plan"), incorporated herein by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8, Reg. No. 33-46998.
10.15 Debt Agreement dated August 3, 1992 (the "Debt Agreement"), between the
Company and Boatmen's Bank ("Boatmen's") entered into with respect to a
$10,000,000 revolving line of credit from Boatmen's to the Company, incorporated
herein by reference to Exhibit 10.15 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1992 (the "1992 10-K").
10.17<Fa> Minutes of Meeting of Board of Directors of the Company dated September 15,
1992, amending the Non-Employee Director Plan, incorporated herein by reference
to Exhibit 10.17 to the 1992 10-K.
10.18<Fa> Amendment to the Falcon Products, Inc. Amended and Restated 1991 Stock Option
Plan incorporated herein by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended October 30, 1993 (the "1993 10-K").
10.19<Fa> Consulting Agreement dated August 1, 1993, by and between the Company and AJR
Enterprises, Inc., incorporated herein by reference to Exhibit 10.19 to the 1993
10-K.
10.20 Amendment to the Debt Agreement dated as of September 24, 1993, incorporated
herein by reference to Exhibit 10.20 to the 1993 10-K.
10.21 Second Amendment to the Debt Agreement dated as of August 30, 1994, incorporated
herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended October 29, 1994 (the "1994 10-K").
<FN>
_____________
<Fa> Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
18
<PAGE>
<PAGE>
<CAPTION>
EXHBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.22 Third Amendment to the Debt Agreement dated as of September 8, 1994, incorporated
herein by reference to Exhibit 10.22 to the 1994 10-K.
10.23<Fa> Amendment No. 2 to the Falcon Products, Inc. Amended and Restated 1991 Stock
Option Plan, incorporated herein by reference to Exhibit 10.23 to the 1994 10-K.
10.24 Agreement of Purchase and Sale of Assets dated September 26, 1995, by and
between Falcon Products, Inc. and DPD Manufacturing, Inc., incorporated herein by
reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year
ended October 28, 1995 (the "1995 10-K").
10.25 Agreement of Purchase and Sale of Assets dated September 26, 1995, by and between
Falcon Products, Inc. and Decor Concepts, Inc., incorporated herein by reference
to Exhibit 10.25 to the 1995 10-K.
10.26 Amendment to the Non-Employee Director Stock Option Plan, incorporated herein by
reference to Exhibit 10.26 to the April 27, 1996 10-Q.
10.27<Fa> Falcon Products, Inc. Employee Stock Purchase Plan, incorporated herein by reference
to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended
November 1, 1997 (the "1997 10-K").
10.28<Fa> Falcon Products, Inc. Non-Employee Directors' Deferred Compensation Plan,
incorporated herein by reference to Exhibit 10.28 to the 1997 10-K.
11 Computation of Net Earnings Per Share, filed herewith.
13 Selected Portions of the Annual Report to Stockholders for the year ended October 31,
1998, filed herewith.
21 Subsidiaries of the Company, filed herewith.
23 Consent of Independent Public Accountants, filed herewith.
24 Power of Attorney (included on Signature Page hereto).
27 Financial Data Schedule (filed in EDGAR version only).
<FN>
______________
<Fa> Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
</TABLE>
19
<PAGE>
EXHIBIT 11
----------
<TABLE>
Falcon Products, Inc. and Subsidiaries
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
For the years ended October 31, 1998, November 1, 1997 and November 2, 1996
(In thousands, except per share amounts)
<CAPTION>
Basic Earnings Per Share: 1998 1997 1996
- ------------------------- ------ ------- ------
<S> <C> <C> <C>
Average number of common shares outstanding 9,156 9,665 9,591
Net earnings $6,350 $12,634 $8,433
====== ======= ======
Primary earnings per share $ .69 $ 1.31 $ .88
====== ======= ======
Diluted Earnings Per Share
- --------------------------
Average number of common shares outstanding 9,156 9,665 9,591
Assumed exercise of options (treasury stock method) 126 211 202
------ ------- ------
Shares for diluted computation 9,282 9,876 9,793
====== ======= ======
Net earnings $6,350 $12,634 $8,433
====== ======= ======
Fully diluted earnings per share $ .68 $ 1.28 $ .86
====== ======= ======
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
audited Consolidated Financial Statements and the notes thereto.
Certain information presented herein includes "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. However, there can be no assurance that the
Company's actual results will not differ materially from its
expectations. The matters referred to in forward-looking statements may
be affected by risks and uncertainties affecting the Company's business.
Continuing Operations
During the last several years, the Company has devoted substantial
resources to its sales and marketing efforts, developed new markets and
distribution networks for its products and implemented an aggressive
program of new product introductions. Significant resources have also
been devoted to developing and enlarging the Company's direct factory
sales force.
The following table sets forth, for the periods presented, certain
information relating to the continuing operations of the Company,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Results as a Percentage of Sales October 31, 1998 November 1, 1997 November 2, 1996
...................................................................................................................................
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
...................................................................................................................................
Cost of sales, including nonrecurring items 71.8 70.3 68.6
...................................................................................................................................
Special and nonrecurring items .2 3.3 --
...................................................................................................................................
Gross margin 28.0 26.4 31.4
...................................................................................................................................
Selling, general and administrative expenses 20.6 19.5 20.3
...................................................................................................................................
Operating profit 7.4 6.9 11.1
...................................................................................................................................
Interest income (expense), net (.4) .1 .1
...................................................................................................................................
Minority interest in consolidated subsidiary -- -- .1
...................................................................................................................................
Earnings from continuing operations before income taxes 7.0 7.0 11.3
...................................................................................................................................
Income tax expense 2.6 2.6 4.3
...................................................................................................................................
Net earnings from continuing operations 4.4 4.4 7.0
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Information - Before Special and Nonrecurring Items
...................................................................................................................................
Gross margin 30.4% 29.7% 31.4%
...................................................................................................................................
Operating profit 9.8 10.1 11.1
...................................................................................................................................
Earnings from continuing operations before income taxes 9.5 10.2 11.3
...................................................................................................................................
Net earnings from continuing operations 6.0 6.4 7.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Sales
In 1998, net sales from continuing operations were $143.4 million,
an increase of 26.9% over 1997 net sales of $113.0 million. The sales
increase over the prior year is primarily the result of the Howe
Furniture Corporation (Howe) acquisition and increased sales to the
hospitality market.
Net sales from continuing operations in 1997 were $113.0 million,
an increase of 12.2% over 1996 net sales of $100.7 million. The sales
increase over the prior year primarily resulted from increased sales to
the hospitality market, from strong sales of office furniture products
through the Company's Flight network of office furniture dealers and
directly to end-users and from the acquisition of The Chair Source in
late 1996. The 1997 fiscal year included 52 weeks compared with 53 weeks
in 1996, which partially offset the increase in sales.
Sales were unfavorably impacted by a decline in sales from the
Company's food service market as several of its major customers in this
market segment opened significantly fewer new stores in 1997 than in 1996.
The Company's strong sales results for both 1998 and 1997 were
favorably impacted by the Company's continued concentration of resources
on sales and marketing programs and new product introductions. During
1997, the Company increased the number of direct sales representatives
that are selling its products from 40 to 48 representatives and during
1998, to further increase the effectiveness of direct sales representatives,
efforts were redirected to have a more specialized market focus.
12
<PAGE>
<PAGE>
Costs and Expenses
The Company's fiscal year 1998 and 1997 reported operating results
each included special and nonrecurring items associated with various
strategic initiatives the Company has undertaken making direct
comparisons of reported results difficult.
During 1998, the Company recorded a $4.7 million pre-tax charge,
$2.9 million after-tax or $.32 per share, related to management's
decision to discontinue the Company's hotel casegoods line of business.
The charge entails the writedown of assets, including inventories,
equipment and goodwill, associated with the product line located in the
Tijuana, Mexico facility. Cost of sales includes a $3.3 million pre-tax
charge to write-down the carrying value of inventory. The remaining
components of the charge have been reported in Special and Nonrecurring
Items on the Consolidated Statement of Earnings.
Also during 1998, the Company recorded a $1.3 million pre-tax
gain, $0.8 million after-tax or $.09 per share, on the sale of the
Company's corporate headquarters building. The gain has been reported in
Special and Nonrecurring Items on the Consolidated Statement of
Earnings.
During 1997, the Company recorded a pre-tax charge of $3.7
million, $2.3 million after-tax or $.23 per share, for charges
associated with the announced 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 charges are reported in Special and Nonrecurring
Items on the Consolidated Statement of Earnings.
During the fourth quarter of 1998, the Company recorded additional
pre-tax charges of $0.2 million, $0.1 million after-tax or $.01 per share,
related to the consolidation of the Company's manufacturing facilities
that was announced in 1997. These charges are reported in Special and
Nonrecurring Items on the Consolidated Statement of Earnings.
In 1998, the Company's gross margin increased to $40.1 million
from $29.8 million in 1997, a 34.5% increase which was primarily due to
increased sales volume. Gross margin as a percent of sales, excluding
the special and nonrecurring items, increased to 30.4% in 1998 from
29.7% in 1997. The increase is primarily due to product mix and
incremental sales from the Howe acquisition which maintained a higher
gross margin percentage than the Company's historical business. In
addition, during the first half of 1998, the Company consolidated the
Belding, Michigan and Anaheim, California facilities into the City of
Industry, California facility to benefit from economies of scale and
further reduce its fixed overhead costs. During the fourth quarter of
1998, the Company began to exit the hotel casegoods market which began
to have a favorable impact on the gross margin percentage during the
quarter.
The Company's gross margin decreased to $29.8 million in 1997 from
$31.6 million in 1996, a 5.6% decrease primarily due to the special and
nonrecurring items reported in 1997. Gross margin as a percentage of
sales, excluding the special and nonrecurring items, was 29.7%, a
decrease from 31.4% in 1996. The decrease was primarily due to costs
associated with the development of new products manufactured at the
Company's Tijuana, Mexico and Czech Republic plants. Demand for the
Company's lodging product exceeded capacity of the Tijuana plant causing
the Company to outsource certain product components at a higher cost.
The Company has since more than doubled the capacity of the Tijuana
facility.
Selling, general and administrative expenses were $29.5 million,
$22.0 million and $20.5 million in 1998, 1997 and 1996, respectively.
The overall increase is principally related to the aforementioned
acquisitions, higher level of business and increased sales and marketing
programs including salaries, commissions, travel and literature. As a
percentage of net sales, the expense rate was 20.6% in 1998, 19.5% in
1997 and 20.3% in 1996. The increase in the expense rate in 1998 is
primarily due to the Howe acquisition which previously maintained a
higher expense rate than the Company.
The decrease in the expense rate in 1997 is primarily due to
efficiencies of higher sales volume, the impact of cost reduction
programs, and lower expenses under the Company's management bonus
program.
Interest and Taxes
Net interest expense was $619,000 in 1998, compared to net
interest income of $139,000 in 1997 and $95,000 in 1996. The interest
expense in 1998 was due to outstanding borrowings as a result of the
Howe acquisition, while the increase in interest income during 1997 is
due primarily to interest received on the proceeds from the sale of the
William Hodges division in late 1997.
Income tax expense was $3.7 million, $3.0 million and $4.3 million
in 1998, 1997 and 1996, respectively. The effective income tax rate was
36.8% in 1998, and 38.0% in 1997 and 1996.
Net Earnings
1998 net earnings from continuing operations increased to $6.4
million, or $.68 per share, from $4.9 million, or $.50 per share in
1997, an increase in earnings and earnings per share of 28.9% and 36.0%,
respectively. In 1998, net earnings were $6.4 million, compared to $12.6
million in 1997, a decrease of 49.7%. Net earnings per share was $.68 in
1998, compared with $1.28 in 1997, a 46.9% decrease. The decrease was
primarily due to the gain recognized from the sale of the William Hodges
division in 1997.
<PAGE>
Excluding the special and nonrecurring items reported in both 1998
and 1997, net earnings from continuing operations were $8.6 million, or
$.92 per share, compared to $7.2 million, or $.73 per share, in 1997; an
increase in earnings of 18.8% and an increase in earnings per share of
26.0%
Net earnings totaled $12.6 million in 1997, compared to $8.4
million in 1996, an increase of 49.8%. Earnings per share reached $1.28
in 1997, compared with $.86 in 1996, a 48.8% increase. The increase is
due primarily to an after-tax gain on the sale of the William Hodges
division of $6.8 million,
13
<PAGE>
<PAGE>
or $.69 per share, offset partially by an after-tax charge of $2.3
million, or $.23 per share, for costs associated with the strategic
initiatives undertaken in 1997. Excluding the one-time gain on the sale
and the restructuring charge for the strategic initiatives, 1997 net
earnings were $7.2 million, or $.73 per share, compared to $7.0 million,
or $.71 per share, in 1996; increases of 3.1% and 1.4%, respectively.
Liquidity and Capital Resources
The Company's working capital at October 31, 1998, was $35.8
million and its ratio of current assets to current liabilities was 2.8
to 1.0. Cash provided by operating activities was $0.6 million in 1998
and $3.4 million in 1997. Cash generated from operations in 1998
decreased primarily due to increased payments for accounts payable and
accrued liabilities.
Cash used by investing activities in 1998 was $17.4 million while
1997 investing activities generated $13.9 million. The change is
primarily due to the Howe acquisition ($16.0 million) in 1998 and the
sale of the William Hodges Division ($17.7 million) in 1997. The Company
invested $6.6 million in 1998 and $3.8 million in 1997 in capital
additions primarily to increase manufacturing capacities and to improve
operating efficiencies, as well as normal recurring capital
replacements. The Company's capital budget for 1999 is approximately
$4.0 million, which will be used primarily to acquire new equipment.
Cash provided by financing activities was $5.7 million in 1998,
and in 1997, cash used in financing activities was $6.7 million. The
increase in 1998 is due primarily to borrowings under a new loan
agreement. During 1998 and 1997, the Company acquired 567,000 and
500,000, shares of its common stock respectively, at a total cost of
$7.5 million and $7.2 million, respectively. The Company is authorized
to purchase up to 289,000 additional shares of its common stock under
the stock repurchase plan approved by the Board of Directors.
The Company has a $20.0 million unsecured revolving line of credit
agreement with a commercial bank. The revolving line of credit bears
annual interest at the Company's option, at the Prime Rate, Federal
Funds Rate or LIBOR adjusted for a spread based upon the Company's
leverage ratio, and expires on April 22, 2000. As of October 31, 1998,
the outstanding balance under the revolving line of credit was $16.9
million.
The Company expects that it will meet its ongoing working capital
and capital requirements from a combination of existing cash, internally
generated funds and available borrowings under its revolving credit
facility. The Company's operating cash flows constitute its primary
internal source of liquidity.
Generally, inflation has not had a material effect on the Company
in the past, and no such effect is expected in the near future.
Historically, the Company has been able to increase prices to offset
increases in the cost of manufacturing its products, and management
presently believes that the Company will continue to be able to do so.
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
SOP 98-1 establishes the accounting guidance for the capitalization of
certain internal-use software costs once certain criteria are met. This
accounting standard will be effective for the Company beginning November
1, 1999. The adoption of SOP 98-1 is not expected to have a material
impact on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activity."
SFAS No. 133 provides comprehensive and consistent standards for the
recognition and measurement of derivative and hedging activities. It
requires that derivatives be recorded on the Consolidated Balance Sheets
at fair value and establishes criteria for hedges of changes in the fair
value of assets, liabilities or firm commitments, hedges of variable
cash flows of forecasted transactions, and hedges of foreign currency
exposures of net investments in foreign operations. Changes in the fair
value of derivatives that do not meet the criteria for hedges would be
recognized in the Consolidated Statement of Earnings. This statement
will be effective for the Company beginning November 1, 2000. The
adoption of SFAS No. 133 is not expected to have a material impact on
the Company.
The Year 2000 Issue
The year 2000 (Y2K) issue refers to the inability of a date-
sensitive computer program to recognize a two-digit date field
designated "00" as the year 2000. Mistaking "00" for 1900 could result
in a system failure or miscalculations causing disruptions to
operations, including manufacturing, a temporary inability to process
transactions, send invoices or engage in other normal business
activities. This is a significant issue for most, if not all companies,
with far reaching implications, some of which cannot be anticipated or
predicted with any degree of certainty.
During 1998, the Company began the process of addressing its Y2K
issues. The process includes six steps: 1) plan, 2) inventory, 3)
assess, 4) remediate, 5) test, and 6) develop contingency plans. The
planning phase was completed during 1998 and resulted in the Y2K issues
being managed around four functional areas. The functional areas that
were identified are business applications, supply chain, information
technology (IT) technical infrastructure and customer issues.
<PAGE>
The Company inventoried and assessed its business applications
during 1998. At that time, the company determined that its current main
application software, Computer Associates PRMS package, was not Y2K
compliant. A Y2K compliant software upgrade version is available and in-
house. Based upon the complexity, number of modifications and custom
programming, the installation of the upgrade is a major project. The
total number of hours required to implement and test the upgrade is
estimated to be approximately 4,000 man hours and will take five to six
months to complete.
14
<PAGE>
<PAGE>
The Company has identified those companies in the supply chain
which provide materials, products or services that are critical to the
Company's operations. Critical suppliers' Y2K issues are being assessed
through the use of questionnaires and other inquiries.
The IT technical infrastructure area is primarily comprised of
desktop computer workstations and software, computer networking
infrastructure, host server systems and telecommunication systems. The
inventory and assessment of known long lead-time items has been
completed. Major projects are identified and are scheduled for
completion during 1999. An exhaustive and comprehensive follow-up
investigation of this area is underway to assure no critical components
have been overlooked.
The Company has been working with customers to address their Y2K
concerns regarding the Company's ability to operate. Any plans to
address the ability of our significant customers to accept our products
after December 31, 1999, will be determined as contingency plans are
developed.
The Company intends to perform integrated Y2K testing of critical
systems in all functional areas during the second quarter of 1999. Given
the nature of the Company's' manufacturing and other operations, full-
scale integrated testing may not be practical in some areas and,
therefore, may be limited in scope to avoid significant disruption of
the Company's operations. Statements of compliance from vendors and
other compliance evidence are expected to mitigate the risk of not
performing integrated testing in those areas.
The development of contingency arrangements for all functional
areas is early in the planning stage. Plans will include procedures that
attempt to minimize the impact of any unremediated and unresolved Y2K
issues on the Company's operations and financial position. Initial plans
are expected to be complete by mid-1999 and will continue to be refined
as developments warrant.
To date, the Company has incurred approximately $100,000 in costs
related to Y2K work. Additional costs to evaluate and remediate the
remaining issues are currently estimated to be in the range of $100,000-
$500,000 and will be expensed as incurred during 1999.
Based on the status of the Company's work to address its Y2K
issues, management does not expect the Y2K issue to pose significant
operational problems for the Company. However, if the software upgrade
is delayed or the remediation of other issues is not completed timely,
Y2K could have a material adverse effect on the Company, depending on
the nature and extent of any remaining non-compliance. Furthermore, if
the Company's customers and suppliers fail to rectify their Y2K issues
in their own systems the resultant effect on the Company may be
material. Management anticipates that the most reasonably likely worst-
case scenario would involve a temporary shutdown of certain operations.
Through the development of contingency plans, the company expects to
mitigate the effect that any such temporary shutdowns would have on the
Company or third parties.
The estimated costs and date of completion of Y2K remediation are
based on management's best estimates, which were derived from numerous
assumptions about future events. These assumptions include the
availability of certain resources, third-party modification plans and
other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially. Specific factors
that might cause material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability
to identify and correct all relevant computer codes, and the cost and
availability of replacements for devices with embedded chips.
European Monetary Union
On January 1, 1999, eleven member countries of the European Union
adopted the Euro as their common legal currency. Effective that date,
conversion rates between the existing sovereign currency (legacy
currency) of each of these participating countries and the Euro will be
irrevocably fixed, and the Euro will be available for non-cash
transactions. The legacy currencies of these countries will remain legal
tender during a transition period from January 1, 1999 to January 1,
2002. During this transition period, parties may pay for goods and
services using either the Euro or the relevant legacy currency. Currency
conversion will be performed using a method whereby one legacy currency
is converted to the Euro and then to the second legacy currency. The
conversion to the Euro will be completed in July 2002 when the legacy
currencies of the participating member countries cease to be legal
tender.
While the conversion to the Euro is expected to increase cross-
border price transparency, and therefore stimulate cross-border
competition within the single currency zone created by the participating
countries, the effect on the price of raw materials that the Company
purchases is expected to generally offset the effect on the finished
products it sells. In addition, the conversion to the Euro is expected
to have the positive effect of eliminating currency risk in cross-border
sales.
The Company has a team in place to identify issues arising from
the implementation of the Euro, plan for the changeover, and communicate
with customers, suppliers, and employees. Information systems will be
updated to allow the method of currency conversion to the requisite
number of decimal places in a timely fashion. If the updates are not
ready, currency conversion will be accomplished manually or through
outsourcing until the updates are installed. The cost of the technological
updates or any interim measures is not expected to be material.
<PAGE>
For the reasons stated above, management does not expect the
introduction of the Euro to have a material effect on the Company's
business, financial condition, or results of operations. If cross-border
price transparency causes the markets from which the Company purchases
raw materials or to which it sells finished products to behave
differently than management expects, the introduction of the Euro could
have a material effect on the Company.
15
<PAGE>
<PAGE>
<TABLE>
Consolidated Statements of Earnings
For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
October 31, 1998, and November 1, 1997
<CAPTION>
- ------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997
..........................................................................................
<S> <C> <C>
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.
</TABLE>
17
<PAGE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(In thousands) Additional Cumulative Total
Common Paid-in Treasury Translation Retained Stockholders'
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
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
18
<PAGE>
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
<CAPTION>
- -------------------------------------------------------------------------------------------------
(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>
19
<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(In thousands) 1998 1997
........................................................................
<S> <C> <C>
Raw materials $18,174 $17,579
Work in process 5,288 4,320
Finished goods, net 1,415 788
........................................................................
$24,877 $22,687
- ------------------------------------------------------------------------
</TABLE>
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.
20
<PAGE>
<PAGE>
Other Assets
Other assets consist of the following at October 31, 1998, and
November 1, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(In thousands) 1998 1997
........................................................................
<S> <C> <C>
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
- ------------------------------------------------------------------------
</TABLE>
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.
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.
<PAGE>
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.
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
21
<PAGE>
<PAGE>
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>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(In thousands) Capital Operating
Leases Leases
........................................................................
<S> <C> <C>
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
- ----------------------------------------------
</TABLE>
Total operating lease and rental expense was approximately $1,622,
$1,463 and $953 thousand in 1998, 1997 and 1996, respectively.
22
<PAGE>
<PAGE>
Note 6 - Long Term Debt
Long-term debt consists of the following at October 31, 1998, and
November 1, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In thousands) 1998 1997
.........................................................................
<S> <C> <C>
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
- -------------------------------------------------------------------------
</TABLE>
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.
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
........................................................................................
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following is a reconciliation between statutory federal income
tax expense and actual income tax expense:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
........................................................................................
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------
</TABLE>
The significant components of deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(In thousands) 1998 1997
......................................................................
<S> <C> <C>
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)
- ----------------------------------------------------------------------
</TABLE>
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.
23
<PAGE>
<PAGE>
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."
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1998 1997 1996
............................................................................
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1998 1997 1996
............................................................................
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
Stock option transactions under the plans for 1998, 1997, and 1996 are
summarized below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options outstanding at October 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
..........................................................................................
Number Remaining Weighted Average Number Weighted Average
Range of Exercise of Options Contractual Life Exercise Price of Options Exercise Price
........................................................................................................................
<S> <C> <C> <C> <C> <C>
$ 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>
24
<PAGE>
<PAGE>
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>
- ----------------------------------------------------------------------------------------------
(In thousands, except per share data) Net Shares Per Share
Earnings 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.
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.
<PAGE>
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%
- ----------------------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost of the plan, is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
..............................................................................................
<S> <C> <C> <C>
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>
The funded status of the defined benefit pension plans is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In thousands) 1998 1998 1997
...............................................................................................
Plan Whose Plan Whose
Assets Exceed Accumulated
Accumulated Benefits 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>
25
<PAGE>
<PAGE>
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 - Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
(In thousands except for share data)
- --------------------------------------------------------------------------------------------------------------
1998 First Second Third Fourth
..............................................................................................................
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 First Second Third Fourth
..............................................................................................................
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996 First Second Third Fourth
..............................................................................................................
<S> <C> <C> <C> <C>
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>
26
<PAGE>
<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
27
<PAGE>
<PAGE>
<TABLE>
Selected Financial Data
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales $143,426 $113,010 $100,702 $79,647 $67,957 $54,293
Cost of sales, including nonrecurring items 103,067 79,507 69,125 52,883 45,318 37,073
Special and nonrecurring items 271 3,700 -- -- -- --
Gross margin 40,088 29,803 31,577 26,764 22,639 17,220
Selling, general and
administrative expenses 29,482 22,044 20,469 16,992 14,354 11,177
Operating profit 10,606 7,759 11,108 9,772 8,285 6,043
Interest income (expense), net (619) 139 95 141 145 (223)
Minority interest 64 47 89 (44) 4 --
Earnings from continuing
operations before income taxes 10,051 7,945 11,292 9,869 8,434 5,820
Income tax expense 3,701 3,019 4,291 3,693 3,121 2,137
Net earnings from continuing
operations 6,350 4,926 7,001 6,176 5,313 3,683
Discontinued operations, net of tax -- 938 1,432 1,281 864 764
Gain on sale of discontinued
operations, net of tax -- 6,770 -- -- -- --
Net earnings $ 6,350 $ 12,634 $ 8,433 $ 7,457 $ 6,177 $ 4,447
--------------------------------------------------------------------------------------------------------------------------------
Earnings per share - Diluted: <F1>
Continuing operations $ .68 $ .50 $ .71 $ .64 $ .55 $ .42
Discontinued operations -- .09 .15 .13 .09 .09
Gain on sale of discontinued
operations -- .69 -- -- -- --
Net earnings per share $ .68 $ 1.28 $ .86 $ .77 $ .64 $ .50
--------------------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ .16 $ .14 $ .10 $ .07 $ .04 $ --
--------------------------------------------------------------------------------------------------------------------------------
Financial Position:
Working capital $ 35,756 $ 38,691 $ 34,531 $29,927 $25,658 $25,129
Property, plant and equipment, net 27,498 25,211 24,485 21,529 18,467 11,069
Capital expenditures 6,594 3,807 4,449 4,969 4,608 1,506
Total assets 111,974 99,357 84,388 74,884 64,905 53,228
Long-term obligations 18,815 3,446 3,490 3,424 3,550 1,648
Stockholders' equity 71,946 73,264 68,476 58,307 50,556 44,147
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>Per share data reflects adjustments related to the December 1995, 10% stock dividend and the January 1993, 50% stock dividend.
</TABLE>
28
<PAGE>
<PAGE>
BOARD OF DIRECTORS
Franklin A. Jacobs<F*>
Chairman of the Board
and Chief Executive Officer
Falcon Products, Inc.
Raynor E. Baldwin<F+>
President
Woodsmiths, Inc.
Melvin F. Brown<F+>
Chairman Emeritus
Deutsche Financial Services
Donald P. Gallop<F*>
Chairman
Gallop, Johnson & Neuman, L.C.
Attorneys At Law
James L. Hoagland
Retired, Past President and
Chief Executive Officer
Graybar Electric Company, Inc.
S. Lee Kling<F*>
Chairman of the Board
Kling Rechter & Co., Inc.
Lee M. Liberman<F+>
Retired, Past Chairman of the Board
Laclede Gas Company
Darryl C. Rosser
President and Chief Operating Officer
Falcon Products, Inc.
James Schneider
Broker
International Monetary Market
Chicago Mercantile Exchange
[FN]
<F*> Member Executive Committee
<F+> Member Audit Committee
FORM 10-K
A copy of the Annual Report to the Securities
and Exchange Commission on Form 10-K may
be obtained from the Company at no charge.
Direct your requests to:
Corporate Secretary
Falcon Products, Inc.
9387 Dielman Industrial Drive
St. Louis, Missouri 63132
TRADING INFORMATION
Falcon Products, Inc., common stock is traded
on the New York Stock Exchange, Symbol: FCP
CORPORATE OFFICERS
Franklin A. Jacobs
Chairman of the Board and Chief Executive Officer
Darryl C. Rosser
President and Chief Operating Officer
Stephen E. Cohen
Vice President, Sales and Marketing
John K. Cronin
Vice President, Contract
Michael J. Dreller
Vice President, Finance and Chief Financial Officer
Lynda Garrison
Vice President, Customer Support Services
Richard Hnatek
Senior Vice President, Sales
Michael J. Kula
Vice President, Corporate Technology
and Development
Charles A. Pineau
Vice President, Human Resources
Robert E. Rohlman
Vice President, Food Service
Jack Spidell
Vice President, Operations
<PAGE>
TRANSFER AGENT
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016
800-368-5948
CORPORATE COUNSEL
Gallop, Johnson & Neuman, L.C.
101 South Hanley Road
St. Louis, Missouri 63105
INDEPENDENT
PUBLIC ACCOUNTANTS
Arthur Andersen LLP
1010 Market Street
St. Louis, Missouri 63101
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held Wednesday, March 10, 1999,
at 4:00 p.m. in the Main Dining Room,
St. Louis Club, 16th Floor
7701 Forsyth Blvd.
Clayton, Missouri 63105
FACILITIES
Corporate Headquarters
Falcon Products, Inc.
9387 Dielman Industrial Drive
St. Louis, Missouri 63132
www.falconproducts.com
Howe Sales Office
12 Cambridge Drive
Trumbull, Connecticut 06611
Falcon de Juarez, S.A. de C.V.
APDO, Postal 2519 E.
CD Juarez, Chih., Mexico
U.S.A. - P.O. Box 12865
Falcon de Baja California, S.A. de C.V.
La Campina No. 19511
Colonia La Mesa
Tijuana, Mexico
Falcon Mimon, a.s.
Hvezdovska 644
471 24 Mimon
Czech Republic
Falcon Products (Shenzhen) Limited
Pin Hu Cun, Pin Hu Zheng
Shenzhen
The People's Republic of China
518111
Howe Europe a/s
Fabriksvej 15c Ruegle
5500 Middelfart, Denmark
Falcon/Belmont
22 Falcon Drive
Belmont, Mississippi 38827
Falcon/City of Industry
16040 Stephens Street
City of Industry, California 91745
Falcon/Lewisville
Hwy. 82 East
P.O. Box 70
Lewisville, Arkansas 71845
Falcon/Newport
810 West Highway 25/70
Newport, Tennessee 37821
Chicago Showrooms
10-161, 1169 and 1194 Merchandise Mart
Chicago, Illinois 60654
<PAGE>
EXHIBIT 21
-----------
Falcon Products, Inc. and Subsidiaries
SUBSIDIARIES OF THE COMPANY
---------------------------
The following are wholly-owned subsidiaries of the Company: Howe
Furniture Corporation; Howe Europe a/s (a Danish corporation); Johnson
Industries, Inc.; Falcon Products (Shenzhen) Limited (a Chinese
corporation); Falcon Mexican Holdings, Inc.; and Falcon De Juarez,
S.A. de C.V., Fundiciones Tecnicas, S.A., and Falcon De Baja
California, S.A. de C.V. (Mexican corporations). Falcon Mimon, a.s.
(a Czech Republic corporation) is an 84% owned subsidiary of the
Company.
<PAGE>
EXHIBIT 23
----------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
TO FALCON PRODUCTS, INC.:
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed Registration Statements File Nos. 2-98469,
33-15698, 33-46997, 33-46998, 333-18671, and 333-60735.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
January 29, 1999
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
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<ALLOWANCES> 672
<INVENTORY> 24,877
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<COMMON> 198
0
0
<OTHER-SE> 71,748
<TOTAL-LIABILITY-AND-EQUITY> 111,974
<SALES> 143,426
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<CGS> 103,067
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