SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED June 1, 1997 COMMISSION FILE NUMBER 1-5960 CONCORD FABRICS INC. (Exact name of Registrant as specified in its charter) DELAWARE 13-5673758 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 1359 Broadway, New York, New York 10018 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 760-0300 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 . 2,155,706 shares of Registrant's Class A Common Stock, par value $.50 per share and 1,509,401 shares of Registrant's Class B Common Stock, par value $.50 per share were outstanding as of July 1, 1997. 1 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 1, 1997 INDEX Page Number PART I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - Thirty-Nine Weeks Ended June 1, 1997 (Unaudited) and June 2, 1996 (Unaudited) 3 Consolidated Balance Sheets - June 1, 1997 (Unaudited), and September 1, 1996 (Derived from Audited Financial Statements) and June 2, 1996 (Unaudited) 4-5 Consolidated Statements of Cash Flows - Thirty-Nine Weeks Ended June 1, 1997 (Unaudited) and June 2, 1996 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-12 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signature Page 14 2 of 14 Item 1. Financial Statements -------------------- CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Note A) For the Thirty-Nine Weeks Ended For the Thirteen Weeks Ended ------------------------------- ---------------------------- June 1, June 2, June 1, June 2, 1997 1996 1997 1996 ----------- ------------ ----------- ----------- Net Sales ..................... $78,845,460 $110,938,359 $25,972,205 $37,475,161 ----------- ------------ ----------- ----------- Cost of Sales ................. 55,381,047 81,846,998 18,388,710 27,623,716 Merchandising Expenses ........ 5,308,159 7,509,889 1,702,323 2,391,927 Selling and Shipping Expenses . 6,992,389 9,300,785 2,205,840 3,121,792 General and Administrative Expenses ................... 7,198,442 8,635,962 2,290,216 2,813,908 Interest Expense (Net) ........ 844,051 1,411,505 253,315 453,282 Restructuring Charge .......... -0- 750,000 -0- 750,000 ----------- ------------ ----------- ----------- Total ................... $75,724,088 $109,455,139 $24,840,404 $37,154,625 ----------- ------------ ----------- ----------- Earnings before income taxes .. 3,121,372 1,483,220 1,131,801 320,536 Income tax provision .......... 1,295,000 733,000 466,000 185,000 ----------- ------------ ----------- ----------- Net Earnings .................. $ 1,826,372 $ 750,220 $ 665,801 $ 135,536 =========== ============ =========== =========== Net Earnings per Common Share . $.50 $.21 $.18 $.04 =========== ============ =========== =========== Weighted average number of shares used in computing earnings per Common Share ........... 3,660,418 3,625,591 3,665,107 3,627,442 =========== ============ =========== =========== Dividend per Common Share ..... NONE NONE NONE NONE =========== ============ =========== =========== The attached notes are made a part hereof. 3 of 14 /TABLE CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Note A) September 1, 1996 (Derived from June 1, Audited June 2, 1997 Financial 1996 A S S E T S (Unaudited) Statements) (Unaudited) - ----------- ------------ ------------ ------------ Current Assets: Cash and cash equivalents ..... $ 7,198,851 $ 9,743,024 $ 1,960,574 Held to maturity investments (at cost plus accrued interest) 7,872,563 -0- -0- Prepaid and refundable income taxes ...................... 532,527 423,200 146,889 Accounts receivable (less allowance for doubtful accounts of $2,015,000 on June 1, 1997, $1,610,000 on September 1, 1996, and $1,855,000 on June 2, 1996) .............. 20,476,371 27,097,106 28,817,907 Inventories (Note B) .......... 19,478,203 17,323,179 23,161,402 Prepaid expenses and other current assets .............. 1,264,028 1,620,319 1,496,943 Deferred income taxes ......... 1,900,000 2,189,000 2,099,000 ----------- ----------- ----------- Total Current Assets .......... $58,722,543 $58,395,828 $57,682,715 Property, plant and equipment (at cost, less accumulated depreciation and amortization of $6,463,549 on June 1, 1997, $5,424,566 on September 1, 1996, and $6,055,687 on June 2, 1996) ................. 7,711,854 8,117,040 8,257,505 Property and plant leased to others 1,927,252 2,041,372 2,079,412 Property, plant, & equipment held for sale - at estimated disposal value (Note J) ...................... 1,992,400 2,153,884 2,343,673 Other assets ..................... 2,626,663 2,456,758 2,420,197 ----------- ----------- ----------- T O T A L .................. $72,980,712 $73,164,882 $72,783,502 =========== =========== =========== The attached notes are made a part hereof. 4 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Note A) September 1, 1996 (Derived from June 1, Audited June 2, 1997 Financial 1996 L I A B I L I T I E S (Unaudited) Statements) (Unaudited) - --------------------- ------------ ------------ ------------ Current Liabilities: Accounts payable .............. $ 6,424,897 $ 6,932,477 $ 8,178,323 Accrued expenses and taxes .... 2,599,756 4,368,031 3,408,662 Income taxes payable .......... 190,000 -0- -0- ------------ ------------ ------------ Total Current Liabilities ..... $ 9,214,653 $11,300,508 $11,586,985 Notes payable - insurance company (Note D) .............. 20,000,000 20,000,000 20,000,000 Deferred income taxes ............ 601,000 601,000 214,000 Other liabilities ................ 469,249 424,249 406,090 ------------ ------------ ------------ Total Liabilities ............. $30,284,902 $32,325,757 $32,207,075 Commitments and contingencies ------------ ------------ ------------ (Note E) S T O C K H O L D E R S ' E Q U I T Y - -------------------------------------- Common stock: (Notes F & G) Class A - $.50 par value authorized 4,000,000 shares, issued 2,155,706 shares at June 1, 1997, 2,146,956 shares September 1, 1996 and 2,121,906 shares at June 2, 1996 ............... 1,077,853 1,073,478 1,060,953 Class B - $.50 par value authorized 4,000,000 shares, issued 1,509,401 shares at June 1, 1997, 1,509,401 shares at September 1, 1996 and 1,509,451 shares at June 2, 1996 ............... 754,701 754,701 754,726 Additional paid-in capital ....... 9,192,061 9,166,123 9,103,623 Retained earnings ................ 31,671,195 29,844,823 29,657,125 ----------- ----------- ----------- Total Stockholders' Equity .... $42,695,810 $40,839,125 $40,576,427 ----------- ----------- ----------- T O T A L .................. $72,980,712 $73,164,882 $72,783,502 =========== =========== =========== The attached notes are made a part hereof. 5 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Note A) For the Thirty-Nine Weeks Ended -------------------------------- June 1, June 2, 1997 1996 Cash flows from operating activities: ------------ ------------ Net earnings .................................... $ 1,826,372 $ 750,220 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ............. 1,153,103 1,068,210 Deferred income tax ....................... 289,000 73,000 Provision for doubtful accounts ........... 465,300 630,000 Changes in assets: Decrease (increase) in: Accounts receivable ................. 6,155,435 (1,538,201) Inventories ......................... (2,155,024) 910,024 Prepaid and refundable income taxes . (109,327) 1,904,111 Prepaid expenses and other current assets .................... 220,165 855,460 Other assets ........................ (169,905) (40,371) Changes in liabilities: Increase (decrease) in: Accounts payable .................... (507,580) (745,116) Accrued expenses and taxes .......... (1,768,275) (1,961,413) Income taxes payable ................ 190,000 -0- Other liabilities ................... 45,000 45,000 ------------ ------------ Net cash provided by operating activities: 5,634,264 1,950,924 Cash flows from investing activity: Purchases of held to maturity securities ........ (7,736,437) -0- Purchases of property, plant, and equipment ..... (633,797) (1,057,682) Proceeds of sale of Washington Plant machinery and equipment ................................. 161,484 656,327 ------------ ------------ Net cash (used in) investing activities: ........... (8,208,750) (401,355) Cash flows from financing activities: (Decrease) in notes payable - bank .............. -0- (2,000,000) Issuance of common stock (stock options exercised) 30,313 48,886 ------------ ------------ Net cash provided by (used in) financing activities: 30,313 (1,951,114) NET (DECREASE) IN CASH AND CASH EQUIVALENTS ........ (2,544,173) (401,545) ------------ ------------ Cash and cash equivalents - beginning of period .... 9,743,024 2,362,119 ------------ ------------ CASH AND CASH EQUIVALENTS - END OF PERIOD .......... $ 7,198,851 $ 1,960,574 ============ ============ The attached notes are made a part hereof. 6 of 14 /TABLE CONCORD FABRICS INC. AND SUBSIDIARIES NOTES TO FORM 10-Q AS AT JUNE 1, 1997 (Unaudited) Note A The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included. Operating results for the thirty-nine weeks ended June 1, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 1997. These statements should be read in conjunction with the financial statements and notes thereto included in Registrant's annual report to shareholders and Form 10-K for the fiscal year ended September 1, 1996. Note B - Inventories: Inventories are summarized by categories as follows: June 1, September 1, June 2, 1997 1996 1996 ------------ ----------- ------------ Finished goods......... $11,827,192 $ 9,750,156 $13,034,839 Work-in-process........ 3,335,302 3,268,677 4,298,025 Greige goods and yarn.. 4,315,709 4,304,346 5,828,538 ------------ ----------- ------------ Total............... $19,478,203 $17,323,179 $23,161,402 ============ =========== ============ The foregoing inventory amounts at June 1, 1997 and June 2, 1996 were derived from perpetual inventory records maintained by Registrant. Note C - Notes Payable - Banks: At June 1, 1997, Registrant was free of bank debt and had total unused bank lines of credit aggregating $20,000,000. Note D - Notes Payable - Insurance Company: On November 30, 1994, the Registrant obtained a $20,000,000 loan from John Hancock Mutual Life Insurance Company. This unsecured loan bears interest at 9.31% a per annum and is repayable in seven equal annual installments commencing on November 30, 1998. The loan agreement requires maintenance of certain financial ratios and maintenance of tangible net worth of approximately $36,000,000. The agreement also prohibits the pledging of assets and restricts dividends and 7 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES NOTES TO FORM 10-Q AS AT JUNE 1, 1997 (Unaudited) Continued redemptions of capital stock to $3,000,000 plus 50% of net earnings subsequent to August 28, 1994; the cumulative amount available for such payments aggregated approximately $3,530,000 at June 1, 1997. Note E - Purchase Commitments: At June 1, 1997, Registrant had outstanding commitments to purchase greige goods aggregating $8,800,000. At June 2, 1996 outstanding purchase commitments were approximately $5,700,000. None of Registrant's commitments have a term greater than one year. Note F - Common Stock: The Class A and Class B shares principally differ as follows: (1) The Class A shares have a 15% dividend preference and a 10% liquidation preference with respect to the Class B shares. (2) Holders of Class A shares are entitled to one vote a share whereas holders of Class B shares are entitled to ten votes a share. (3) Holders of Class A shares voting as a separate class are entitled to elect 25% of Registrant's directors and holders of Class A shares and Class B shares voting together are entitled to elect the remaining directors. (4) Class B shares are convertible into Class A shares on the basis of one share of Class A shares for each share of Class B shares; Class A shares have no conversion rights. Note G - Stock Options: Pursuant to an Incentive Program adopted on January 10, 1989, awards (as defined) may be granted to key employees of the Registrant up to a maximum of 500,000 shares of the Registrant's Class A common stock. On January 10, 1989, options to purchase an aggregate of 150,000 shares of the Registrant's Class A common stock at $3 a share (fair market value at such date) were granted to three employees. The options are exercisable in four annual installments commencing January 10, 1994 and expire ten years from the date of grant. On January 9, 1996, options to purchase an aggregate of 200,000 shares of the Registrant's Class A common stock at $4.625 a share (fair market value at such date) were granted to two employees. The options are exercisable in 8 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES NOTES TO FORM 10-Q AS AT JUNE 1, 1997 (Unaudited) Continued four annual installments commencing January 9, 1997 and expire ten years from the date of the grant. On January 9, 1996 options to purchase 5,000 shares of the Registrant's Class A common stock at $4.625 (fair market value at such date) were granted to two outside directors. On September 2, 1996, options to purchase an additional 5,000 shares of the Registrant's Class A common stock at $6.625 (fair market value at such date) were granted to those directors. On January 14, 1997, the Registrant granted an option to the Chairman of the Board of Directors to purchase an aggregate of 70,000 shares of the Registrant's Class A common stock at $7.0125 a share (110% of the fair market value at such date). This option is exercisable in five annual installments commencing January 14, 1998, and expires five years from the date of grant; the Chairman was also granted an option to purchase 30,000 shares of the Registrant's Class A common stock at $6.375 a share. This option is exercisable in five annual installments commencing January 14, 1998 and expires ten years from the date of grant. Option activity for the thirty-nine weeks ended June 1, 1997 is summarized as follows: Options Outstanding ------------------- Shares Available Number of for Grant Shares Amount Balance - September 1, 1996 .. 147,455* 261,250** $1,116,875 Thirty-Nine Weeks Ended June 1, 1997: Granted ...................(105,000) 105,000 715,250 Exercised ................. (8,750)*** (30,313) Cancelled ................. -0- -0- -0- --------- -------- ----------- Balance - June 1, 1997 ....... 42,455 357,500 $1,801,812 ========= ======== =========== * Revised to reflect amendments to stock option plan adopted January 14, 1997. ** Comprised of 56,250 shares at $3.00 per share and 205,000 shares at $4.625 per share. *** Exercise price was $3.00 per share for 6,250 shares and $4.625 for 2,500 shares. 9 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES NOTES TO FORM 10-Q AS AT JUNE 1, 1997 (Unaudited) Continued In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Statements (SFAS) No. 123, "Accounting for Stock-Based Compensation." This standard requires either the recognition or disclosure of compensation expense based on the fair value of equity instruments granted to employees. As permitted by SFAS No. 123, the Registrant has elected to adopt the disclosure provisions of the standard in 1997 when required. Note H - Earnings Per Share: Earnings per share are computed by dividing net earnings by common shares outstanding and common stock equivalents. Outstanding options did not have a material dilutive effect on earnings per share for the thirteen and thirty- nine week periods ended June 1, 1997 and June 2, 1996. In February 1997, the FASB issued Statement No. 128 "Earnings per Share," which is required to be adopted in 1998. Implementation of Statement No. 128, which will require the Registrant to report "Basic Earnings per Share" and "Diluted Earnings per Share," will not have a material impact on the earnings per share amounts as currently reported by the Registrant. Note I - Chino, California Facility: In February 1994, the Registrant leased the land and building at the Chino, California facility for a five year period at an annual net rental of $297,000; the lessee was also granted the option to purchase the land and building during the lease period for $2,900,000. Note J - Property, Plant and Equipment Held for Sale: In the fourth quarter of fiscal 1995 Registrant decided to dispose of its Washington, Georgia dyeing and finishing plant and has been actively searching for a buyer; manufacturing operations ceased October 6, 1995. Registrant provided for estimated expenses during the disposition period in its fiscal year ended September 3, 1995, and believes the provision remaining as at June 1, 1997 is adequate. Registrant estimates that the net proceeds of sale will approximate the facility's net book value. 10 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES JUNE 1, 1997 Item 2..........MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS OPERATIONS - Thirty-Nine Weeks Ended June 1, 1997 Compared With Thirty-Nine Weeks Ended June 2, 1996. Fabric sales decreased by 28.9%. The decline was attributable to the planned de-emphasis, originated in fiscal 1996, of the production of fabrics for sale to the apparel trade. This resulted in lower unit sales as anticipated and a 7.6% decline in average selling prices. Gross profit margin increased from 26.2% in fiscal 1996 to 29.8% in fiscal 1997 primarily due to Registrant's elimination of its less profitable product ranges and the implementation of its strategy to focus on the more profitable aspects of its business (Concord House and knitted fabrics). Merchandising expenses declined by 29.3% as a result of a reduction in personnel associated with the production of woven fabrics for the apparel trade. As a percent of sales merchandising expenses were 6.7% of sales in the 1997 period and 6.8% of sales in the 1996 period. Selling and shipping expenses declined by 24.8% as a result of the decrease in Registrant's sales. The decrease was less than the actual sales decrease because some of Registrant's selling expenses do not vary with sales but represent sales management costs which are more fixed in nature. In the 1997 period selling and shipping expenses were 8.9% of sales; in the 1996 period they were 8.4% of sales. General and administrative expenses declined by 16.6% as a result of a reduction in personnel and related costs as Registrant's activities became more focused. In the 1997 period general and administrative expenses were 9.1% of sales; in the 1996 period they were 7.8% of sales. Interest expense declined by 40.2% as Registrant generated cash flow from its planned reduction of business activity which stemmed from the elimination of unprofitable product lines. Short term debt was eliminated and Registrant generated interest income from cash invested in marketable securities. Earnings before income taxes for the thirty-nine weeks of fiscal 1997 were $3,121,000 compared with $1,483,000 for the thirty-nine weeks of fiscal 1996. Net earnings were $1,826,000 for 1997 and $750,000 for 1996. Registrant's 1996 earnings were net of a $450,000 (after tax benefit) restructuring charge. OPERATIONS - Thirteen Weeks Ended June 1, 1997 Compared With Thirteen Weeks Ended June 2, 1996. Fabric sales decreased by 30.7%. The decline was attributable to the planned de-emphasis, originated in fiscal 1996, of the production of fabrics for sale to the apparel trade. This resulted in lower unit sales as anticipated and a decline of 9.5% in average selling prices. 11 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES JUNE 1, 1997 Continued Item 2..........MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Gross profit margin increased from 26.3% in fiscal 1996 to 29.2% in fiscal 1997 primarily due to Registrant's elimination of its less profitable product lines and the implementation of its strategy to focus on the more profitable aspects of its business (Concord House and knitted fabrics). Merchandising expenses declined by 28.8% as a result of a reduction in personnel associated with the production of woven fabrics for the apparel trade. Merchandising expenses were 6.6% of sales in the current period and 6.4% of sales in the prior year's period. Selling and shipping expenses declined by 29.3% as a result of the decrease in Registrant's sales. They were 8.5% of sales in the current period and 8.3% of sales in the prior year's period. General and administrative expenses declined by 18.6% as a result of a reduction in personnel and related costs as Registrant's activities became more focused. General and administrative expenses were 8.8% of sales in the current period and 7.5% of sales in the prior year's period. Interest expense declined by 44.1% as Registrant generated cash flow from its planned reduction of business activity which stemmed from the elimination of unprofitable product ranges. Short term debt was eliminated and Registrant generated interest income from cash invested in marketable securities. Earnings before income taxes for the third quarter of fiscal 1997 were $1,132,000 compared with $321,000 for the third quarter of fiscal 1996. Net earnings were $666,000 for 1997 and $136,000 for 1996. Registrant's 1996 net earnings were net of a $450,000 (after tax benefit) restructuring charge. LIQUIDITY AND CAPITAL RESOURCES During the thirty-nine weeks of fiscal 1997, Registrant's operations provided $5,634,000 cash. $634,000 was used to acquire machinery and equipment. Cash decreased by $2,544,000 during the period. Registrant purchased $7,736,000 of held to maturity securities all of which had terms of 270 days or less. Working capital increased by $2,413,000 for the thirty-nine weeks ended June 1, 1997. Registrant's improved liquidity is attributable to the elimination of certain product ranges and the resultant reduction in accounts receivable and inventory. Registrant expects its lines of credit and cash flow from operations to be adequate to finance operations and meet its cash requirements for the foreseeable future. 12 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES FORM 10-Q PART II Item 6. Exhibits and reports on Form 8-K (a) Exhibits - None (b) A report on Form 8-K was filed by Registrant during the thirty-nine weeks ended June 1, 1997 and is incorporated by reference herein. 13 of 14 CONCORD FABRICS INC. AND SUBSIDIARIES ------------------------------------- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONCORD FABRICS INC. --------------------------------- Registrant Date: July 14, 1997 By /s/ Earl Kramer Earl Kramer President and Chief Executive Officer Date: July 14, 1997 By /s/ Martin Wolfson Martin Wolfson Senior Vice President-Treasurer Chief Financial Officer 14 of 14