THIS DOCUMENT IS A COPY OF THE FORM 10Q FILED ON NOVEMBER 12, 1998
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-22942
CONSO PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
South Carolina 57-0986680
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
513 North Duncan Bypass, P.O. Box 326, Union, South Carolina 29379
(Address of principal executive offices) (Zip Code)
864/427-9004
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1998:
Common Stock, no par value 7,354,624 shares.
TABLE OF CONTENTS
Part I. Financial Information
Consolidated Balance Sheets (unaudited) as of
.........September 26, 1998 and June 27, 1998
Consolidated Statements of Operations (unaudited)
.........for the three months ended
September 26, 1998
.........and September 27, 1997
Consolidated Statements of Shareholders' Equity
.........(unaudited) for the three months ended
.........September 26, 1998
Consolidated Statements of Cash Flows(unaudited)for
.........the three months ended September 26, 1998
......... and September 27, 1997
Notes to Consolidated Financial Statements
Item 2...Management's Discussion and Analysis of
.........Financial Condition and Results of
Operations
Part II. Other Information
Item 6...Exhibits and Reports on Form 8-K
Signatures
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 26, 1998 June 27, 1998
ASSETS
CURRENT ASSETS:
Cash $ 613,022 $ 2,332,987
Accounts receivable, net of allowances for
bad debts and customer deductions of
$1,300,841 and $1,352,246 on September 26 1998
and June 27, 1998, respectively. 23,276,215 22,754,848
Inventories (Note 3) 30,560,097 30,358,201
Deferred income taxes - current portion 1,634,764 1,396,725
Prepaid expenses and other 3,631,547 3,780,770
------------ -----------
Total current assets 59,715,645 60,623,531
------------ -----------
PROPERTY AND EQUIPMENT:
Land and improvements 1,476,605 1,455,422
Buildings and improvements 16,276,133 15,114,190
Machinery and equipment 24,531,657 23,790,937
------------ -----------
Total 42,284,395 40,360,549
Accumulated depreciation (11,388,129) (10,599,298))
Total property and equipment, net 30,896,266 29,761,251
------------ -----------
INTANGIBLE ASSETS 20,189,000 20,367,102
DEFERRED INCOME TAXES 3,217,961 3,272,542
DEFERRED COSTS AND OTHER 408,345 1,667,879
------------ -----------
TOTAL ASSETS $114,427,217 $115,692,305
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 890,558 $ 558,365
Current maturities of long-term debt 2,000,000 2,103,844
Trade accounts payable 6,331,011 7,561,947
Accrued liabilities 15,717,874 15,402,057
------------ -----------
Total current liabilities 24,939,443 25,626,213
------------ -----------
NONCURRENT LIABILITIES:
Long-term debt - revolving line 21,823,950 -
Long-term debt - note payable 18,106,867 42,507,750
Deferred income taxes 5,460,738 484,434
Other noncurrent liabilities 4,984,000
------------ -----------
Total noncurrent liabilities 45,391,555 47,976,184
------------ -----------
SHAREHOLDERS' EQUITY:
Preferred stock (no par, 10,000,000 shares
Authorized, no shares issued) - -
Common stock (no par, 50,000,000 shares Authorized,
7,384,624 and 7,324,412 shares issued and
outstanding September 26,
1998
and June 27, 1998, respectively) 16,116,814 15,618,732
Retained earnings 27,201,640 25,760,459
Accumulated other comprehensive income 777,765 710,717
------------ ------------
Total shareholders' equity 44,096,219 42,089,908
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $114,427,217 $115,692,305
============ ============
See notes to unaudited consolidated financial statements
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 26,1998 September 27,1997
NET SALES $ 29,387,633 $ 16,734,699
COST OF GOODS SOLD 17,911,825 10,612,393
------------ ------------
GROSS MARGIN 11,475,808 6,122,306
------------ ------------
OPERATING EXPENSES:
Distribution expense 2,404,574 773,069
Selling expense 2,759,320 2,117,490
General and administrative 3,237,572 1,412,903
expense
Currency exchange loss (gain) 34,650 (544)
Intangibles amortization 179,000 -
------------ -----------
Total 8,615,116 4,302,918
------------ ------------
INCOME FROM OPERATIONS 2,860,692 1,819,388
INTEREST EXPENSE, NET 754,647 154,959
------------ ------------
INCOME BEFORE INCOME TAXES 2,106,045 1,664,429
INCOME TAX PROVISION (Note 4) 664,864 633,462
------------ ------------
NET INCOME 1,441,181 1,030,967
Other comprehensive income, net of
tax -
Foreign translation adjustments 67,048 (237,350)
COMPREHENSIVE INCOME 1,508,229 793,617
NET INCOME PER SHARE
(Notes 5 through 7)
Basic $ 0.20 $ 0.14
============ ============
Diluted $ 0.20 $ 0.14
============ ============
Weighted average number of shares
Outstanding
Basic 7,382,592 7,492,236
============ ============
Diluted 7,384,486 7,534,441
============ ============
See notes to unaudited consolidated financial statements
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPONENT OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 26, 1998
Common Stock
Accumulated
Shares Issued and Retained -------------
Outstanding Amount Earnings Other Total
Comprehensive
Income
Balance, June 27, 1998 7,324,412 $ 15,618,732 $ 25,760,459 $710,717 $ 42,089,908
Shares issued for director 1,424 9,332 9,332
fees
Stock issued for conference
center 78,788 650,000 650,000
Net income 1,441,181 1,441,181
Translation adjustments 67,048 67,048
Stock repurchases (161,250) (161,250)
--------- -------------- ------------ ------------- --------------
(20,000)
September 26, 1998 7,384,624 $ 16,116,814 $ 27,201,640 $777,765 $ 44,096,219
========== ============= ============ ======== ============
See notes to unaudited consolidated financial statements
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
September 26, 1998 September 27, 1997
OPERATING ACTIVITIES:
Cash received from customers $ 29,700,418 $ 17,897,746
Cash paid to suppliers and employees (28,075,184) (16,122,975)
Interest paid (137,723) (223,436)
Interest received 168,576 31,908
Income taxes paid (523,290) 17,596
------------ ------------
Net cash provided by operating activities 1,132,797 1,600,839
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (938,408) (849,352)
Proceeds from sale of property and equipment 4,000
Construction and equipment purchased for
new dyehouse, distribution center and (484,237) (1,338,148)
expansion
Payments for investment in India Trimmings
(Private)
Limited (211,035)
Redemption of Certificates of Deposit 1,350,000
Payments for acquisition of HSDC 31,880 (186,718)
------------ -------------
Net cash used in investing activities (40,765) (2,581,253)
------------ -------------
FINANCING ACTIVITIES:
Net repayments under line of credit
Arrangements (2,593,080) 714,390
Proceeds from issuance of common stock 9,333 15,965
Repurchases of stock (161,250)
Translation Adjustment (67,000) -
------------- ------------
Net cash provided by (used in) financing (2,811,997) 730,355
------------- ------------
activities
(DECREASE)INCREASE IN CASH (1,719,965) (250,059)
CASH AT:
BEGINNING OF PERIOD 2,332,987 489,580
------------ ------------
END OF PERIOD $ 613,022 $ 239,521
============ ============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 1,441,181 $ 1,030,967
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation 748,425 478,149
Amortization of deferred expenses 192,587 14,600
Provision for deferred taxes (129,132) (105,301)
Currency translation gain 35,046 (544)
Changes in assets and liabilities:
Accounts receivable (289,364) 595,153
Inventory 56,198 (635,643)
Prepaid expenses and other (7,516) (221,391)
Trade accounts payable (1,253,897) (182,297)
Income Tax Payable
263,632
Accrued liabilities 75,637 627,146
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 1,132,797 $ 1,600,839
============ ============
See notes to unaudited consolidated financial statements
CONSO PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 26, 1998
1. CONSOLIDATION AND NEW ACCOUNTING STANDARDS
The financial statements are unaudited and include the accounts of the
Company, and its wholly-owned subsidiaries, Simplicity Capital Corporation and
its subsidiaries, British Trimmings Limited and its subsidiaries, India
Trimmings Limited, and Conso's majority-owned subsidiary Val-Mex, S.A. de C.V.,
which operates Conso's Juarez, Mexico assembly plant.
The British Trimmings Limited and Simplicity's foreign subsidiaries balances
included in the consolidation are prepared using United States generally
accepted accounting principles and are translated into US dollars based on
exchange rates as published in the Wall Street Journal. Assets and liabilities
are translated based on the rates in effect on the balance sheet date. Income
statement amounts are translated using the average of the month-end exchange
rates in effect during the period. The resulting currency translation
adjustments are accumulated and reported as a separate component of
shareholders' equity. From time to time the US parent company loans or is loaned
amounts from its foreign subsidiaries. It is the Company's policy that such
amounts are repayable or receivable in the foreign currency of the subsidiary.
Translation gains and losses on such amounts due to foreign subsidiaries and all
exchange gains and losses on realized foreign currency transactions are included
in the consolidated results of operations. The India Trimmings and Val-Mex
subsidiaries' operations are not significant in relation to the Company's
operations. All significant inter-company accounts and transactions and profit
and loss on inter-company transactions are eliminated in consolidation.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128 "Earnings per Share", in the quarter ended December 1997. SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earning per share. Unlike primary earning per share, basic earning per
share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earning per share is very similar to the previously reported
fully diluted earning per share. The prior years earnings per share amounts have
been restated for the implementation of SFAS 128.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130, " Reporting
Comprehensive Income", which is effective for the Company for the fiscal year
beginning June 28, 1998. This statement establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses). This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
(including, for example, unrealized holding gains, unrealized foreign currency
translation gains, and losses on available-for-sale securities) be reported in a
format similar to the statement of income and retained income. The accumulated
balance of other comprehensive income is disclosed separately from retained
income in the equity section of the balance sheet.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which will be effective for
the Company for the fiscal year beginning June 28, 1998. SFAS No. 131 redefines
how operating segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating segments. The
Company has not yet completed its analysis of which additional operating
segments, if any, it will report on separately, or increase in disclosures, if
any, will be required beyond that already reported in its financial statements.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure About
Pension and Other Postretirement Benefits - an Amendment of FASB No. 87,88, and
106." SFAS 132 revises disclosures about pensions and other postretirement
benefit plans. SFAS 132 is effective for the Company for the fiscal year
beginning June 28, 1998.
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months and
nine months ended September 26, 1998 and September 27, 1997 reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, in all material
respects. All such adjustments are of a normal recurring nature, except when
disclosed otherwise in the notes below. These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Operating
results for such interim periods are not necessarily indicative of results to be
expected for the year ending July 3, 1999.See note 1 to the consolidated
financial statements for the year ended June 27,1998, for disclosure of
significant accounting policies followed by the Company.
The Company prepares annual financial statements on the basis of a 52 or 53
week fiscal year ending on the Saturday nearest June 30th; interim reporting
periods are based on 13 week quarters. The three months periods ended September
26, 1998 and September 27, 1997 each include 13 weeks. Certain previously
reported amounts have been reclassified to conform with the current year
presentation.
3. INVENTORIES The composition of inventories at September 26, 1998 and June 27,
1998 was as follows:
September 26, 1998 June 27, 1998
Raw Materials $ 8,666,749 $ 8,013,942
Work-In-Process 4,788,807 5,115,817
Finished Goods 17,104,541 17,228,442
----------- ----------
Totals $30,560,097 $30,358,201
=========== ===========
4. INCOME TAXES
The Company did not record any additional Jobs Tax Credits since there were
no increases in employment in South Carolina in the current year's first
quarter. The effective tax rate was positively effected by the recording of
foreign credits of $288,000, avialable in recent tax filing period.
5. STOCK OPTIONS
On September 5, 1995, the Company granted options to certain key employees
to purchase an aggregate of 93,600 shares of the Company's common stock under
its 1993 Stock Option Plan of which 2,775, 800, 1,200, 1,200, 2,625, 825 and 825
options were exercised on September 18, 1996, October 28, 1996, January 27,
1997, February 28, 1997, May 23,1997, July 28, 1997 and October 16, 1997,
respectively. The options were granted at $6.67 per share and are exercisable
with respect to one-third of the total shares after one year, an additional
one-third of the shares after two years, and the final one-third of the shares
after three years. The options expire after five years and are subject to
continued employment by the employee. (All amounts have been adjusted for the
3-for-2 stock splits.) See the notes of the consolidated financial for the year
ended June 27,1998.
On September 5, 1996, September 5, 1997, and August 21, 1998 the Company
granted additional options to certain key employees to purchase an aggregate of
79,500, 21,000, and 46,000 shares, respectively, of the Company's common stock
under its 1993 Stock Option Plan. The options were granted at $11.00, $10.30,
and $7.00 per share, respectively, and are exercisable with respect to one-third
of the total shares after one year, an additional one-third of the shares after
two years, and the final one-third of the shares after three years. The options
expire after five years and are subject to continued employment by the employee.
(All amounts have been adjusted for the 3-for-2 stock split.) See the notes of
the consolidated financial for the year ended June 27,1998
In fiscal year 1997, the Company adopted the disclosure-only provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation". Accordingly, the Company
applies APB Opinion 25 and related interpretations for its stock option plans,
and does not recognize compensation cost for the incentive stock options
referred to above. If the Company had elected to recognize compensation cost
based on fair value of the options granted at the grant date as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below:
Three Months Ended
September 26, 1998September 27, 1997
Net income - as reported $1,441,181 $1,030,967
Less compensation per FAS 123 (23,541) (25,391)
- ------- ----------
Net income - as proforma $ 1,417,640 $ 1,005576
============== ==========
Net income per share - as reported $ 0.20 $ 0.14
========== ==========
Net income per share - as proforma $ 0.19 $ 0.13
========== ==========
Net income per share - assuming
dilution - as reported $ 0.20 $ 0.14
========== ==========
Net income per share - assuming
dilution
- as proforma $ 0.19 $ 0.13
========== ==========
Weighted average number of shares
Outstanding 7,382,,592 7,492,236
Options assumed to be exercised 76,225 165,547
Shares assumed to be repurchased
((76,225 shares x $6.67)/$6.84) (74,331)
((82,717 shares x $6.67)/$11.83) (46,638)
((77,522 shares x $11.00)/$11.83) (72,083)
((5,308 shares x $10.30)/$11.83) (4,621)
Weighted average number of shares
outstanding - assuming dilution 7,384,486 7,534,441
========== ==========
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions (for
options issued in years):
FY 1999 FY 1998 FY 1997 FY 1996
------------ ------------ ------------ ----------
Expected dividend yield None None None None
Expected stock price volatility 56.02% 37.59% 33.92% 25.51%
Risk-Free interest rate 4.59% 5.81% 6.72% 6.04%
Expected life of options 3.2 years 3.2 years 3.2 years 3.2 years
The weighted average fair values of options granted during fiscal 1998,
fiscal 1997 and fiscal 1996 are $4.36, $4.56 and $2.32 per share, respectively.
(All amounts above have been adjusted to reflect the 3-for-2 stock splits issued
on October 4, 1996 and October 6, 1995.)
6. DIRECTORS STOCK ELECTION PLAN
In January 1997, the Company established a Stock Election Plan for
Non-Employee Directors whereby non-employee directors may elect to receive their
director compensation in common stock in lieu of cash payments. The plan permits
the award of up to 25,000 shares of the Company's stock in lieu of director
compensation. During the quarter ended September 26, 1998, 1,424 shares were
issued in accordance with directors' elections. The compensation related to
shares issued under this plan is not material.
7. STOCK REPURCHASE
On November 10, 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to 500,000 shares of its outstanding common
stock, or about 6.7% of the outstanding shares. The state of South Carolina (the
state of incorporation of the Company) defines reacquired shares as having been
retired. Accordingly, the repurchases have been accounted for using the
constructive retirement method, consistent with the Business Corporation Act.
The following repurchases had been made as of September 26, 1998:
NUMBER REPURCHASED
REPURCHASE DATES OF SHARES REPURCHASED DOLLAR VALUE PER TOTAL COST OF
SHARE SHARES
--------------------- ------------------------ ---------------------- ----------------
Prior Year 173,000 $8.085 $1,398,750
7/20/98 20,000 8.063 161,250
---------- -----------
193,000 $1,560,000
========== ==========
Repurchases may be made from time to time depending upon market conditions.
The Company's Executive Committee will direct the specific repurchases and
approve prices and other terms. The Company expects to fund repurchases either
through internally generated funds or existing credit lines, but may consider
additional credit facilities depending upon the timing and amount of
repurchases.
8. BUSINESS ACQUISITIONS
Simplicity Pattern Company - On June 19, 1998, the Company acquired all the
outstanding common stock of Simplicity Capital Corporation (Simplicity), parent
company of Simplicity Pattern Co., Inc. (the operating company). The
consideration paid was $33,600,000 (consisting of the cash purchase price and
transaction expenses) plus the assumption of certain of Simplicity's
liabilities, for a total purchase price of $54,265,000, in a transaction
accounted for in accordance with the purchase method of accounting. The balance
sheet effect of this transaction was recorded on June 19, 1998.
9. RELATED PARTY TRANSACTIONS
In July, the Company purchased real property owned jointly by Mr. and Ms.
Findlay for use as a conference center in exchange for shares of the Company's
common stock. The company issued 78,788 shares of common stock to Mr. and Ms.
Findlay jointly as consideration for the acquisition of the real property. Such
consideration was based upon a closing price of the common stock of $8.25 on
July 1, 998 at value of $650,000 (the Findlay's cost basis in the real
property). Capital expenditures for the first quarter, excluding the dyehouse
project and the purchase of the Conso Conference Center were $654,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto, and with the Company's
Annual Report on Form 10-K for the fiscal year ended June 27, 1998, including
the financial information and management's discussion contained or incorporated
by reference therein.
HISTORICAL RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 26, 1998
COMPARED TO THE QUARTER ENDED SEPTEMBER 27, 1997.
Net sales for the quarter ended September 26, 1998, were $29.4 million, up from
the prior year's first quarter sales of $16.7 million or 75.6%. Conso Products
US was up $612,000 or 5.0%, while British Trimmings decreased $465,000 or 10.1%.
Sales for the first quarter by customer type were as follows:
Manufacturers $ 6,756,000 23.0% up 2.5%
Distributors 7,106,000 24.2% down 3.9%
Retailers - Conso US and BT 3,020,000 10.3% up 9.9%
Retailers - Simplicity 12,506,000 42.5% new -
---------- -----
Total $29,388,000 100.0% up 75.6%
Sales to manufacturers increased in the first quarter, up 2.5% overall; up 9.5%
in the US and down 3.6% in the UK. In the UK, sales to manufacturers and other
customer groups continues to be hampered by the strength of the British pound, a
weak UK economy and the additional costs of production delays with the
implementation of inventory and production systems in the UK. A newly
established sales team is focusing on winning this business back, but with the
strength of the pound giving an advantage to certain competition, it is proving
to be a slower process than had been anticipated.
Sales to distributors were down 3.9%, with Conso Products US up 5.3% and British
Trimmings down 7.2%. The weakness in sales at British Trimmings was due to a
drop in sales to the reupholster wholesalers and from price pressure from
suppliers in Spain and Belgium from a strong British Pound.
Sales to retailers for Conso Products US and British Trimmings were up 9.9%
overall, up 21.2% at Conso Products US and down 12.4% at British Trimmings. The
increase was due in part to the establishment of a trim program for a major
store retail chain in the fourth quarter of fiscal 1998 and continuing forward
from that time.
Overall the performance for the quarter at Conso Products US was very positive.
The performance at British Trimmings continued to be disappointing. In light of
the performance at British Trimmings, management will be taking advantage of
Simplicity's distribution channel and work together with Simplicity sales
management and personnel in the UK and other foreign countries to establish new
and improved relationships with customers working in the distributor and retail
segments.
The most substantial increase in revenues during the quarter came from the
acquisition of Simplicity. This acquisition provided $12.5 million dollars in
additional revenue and propelled the companies smallest segment (retail) to its
largest. With the addition of Simplicity, the company will focus on
cross-merchandising and marketing opportunities to promote increased sales of
patterns and products.
Comparable international sales (excluding the newly purchased Simplicity) from
the US and UK (the Company's major sales regions), for the first quarter
increased 15.1% to $2.3 million, from $2.0 million in the prior year's same
quarter. With Simplicity's $1.3 million in sales outside the US and UK, export
sales totaled $3.6 million, accounting for 12.3% of company wide revenues,
compared to 11.9% in the prior year. Sales outside the US and UK, by geographic
region, were as follows:
Conso Products US and British Trimmings Export Sales % of sales
Western Hemisphere $ 1,256,000 4.3% up 38.2%
Europe and Middle East 690,000 2.3% up 18.4%
Pacific Rim 343,000 1.2% down 31.2%
-------------- ----
Total 2,289,000 7.8% up 15.1%
----------- ----
Simplicity
Western Hemisphere 552,000 1.9% new -
Europe and Middle East 77,000 0.3% new -
Pacific Rim 693,000 2.4% new -
Total 1,322,000 4.5% new -
------------- ------
Company total $ 3,611,000 12.3% up 81.5%
The Pacific Rim continued to be negatively impacted by the recent changes in
currency values and other economic problems of that region. Despite this
decline, exports (outside of the US and UK) grew 81.5% due to the acquisition of
additional export sales with the purchase of Simplicity.
As a result of the increased revenues, the Company's gross margin increased from
$6.1 million to $11.5 million, a $5.4 million or 87.4% improvement. As a percent
of sales, the gross margin increased from 36.6% in the prior year's first
quarter, to 39.0% in the current year's first quarter. The main reason for the
increase in the margin dollars and percent of sales was attributable to the
acquisition of Simplicity, with a gross margin of 45.2% for the current quarter.
At Conso Products US, and BT, the gross margin declined 0.5% and 7.5%,
respectively.
At Conso Products US, sales to manufacturers continued to be affected by
increased competition, domestically and from lower-cost imports of certain
items. In some cases, product volume has been maintained but at the expense of
margin, due to product reformulations and reductions in pricing to meet the
competition. Even so, the margin dollars during the quarter increased for Conso
Products US by 3.2% as a result of the 5.0% increase in revenues. The Company
began production in India in January 1998 to compete with lower cost imports and
has established special teams to provide more focused support to the
manufacturing groups. As the India Trimmings operation continues to move beyond
its initial start-up period and increase the number and amount of products it is
producing, the Company may experience some additional contribution to margin
improvement coming from these operations. In addition, the Company implementing
plans to better utilize sales personnel and cost reviews to improve the British
Trimming's operation.
Distribution expenses increased $1.6 million from $773,000 to $2,405,000, and
from 4.6% of sales to 8.2% of sales. The cause for the increase in expense is a
result of the acquisition of Simplicity, with distribution costs of 12.7% of its
net sales. At Conso Products US, distribution expenses increased approximately
$69,000 from 3.9% to 4.3% of sales, primarily as a result of the increased
depreciation expense on the new warehouse facility in Union, SC. Distribution
expenses decreased $22,000 at British Trimmings, but increased as a percent of
sales from 6.4% to 6.6% due to weaker sales results.
Selling expenses increased $642,000, but declined as a percent of sales, from
12.7% to 9.4%. The acquisition of Simplicity added $900,000 of selling expenses
at 8.4% of its net sales. At Conso Products US, selling expenses declined
approximately $26,000 from 11.6% to 10.9% of net sales, and at British
Trimmings, selling expenses declined $200,000 from 15.4% of net sales to 12.3%,
through continued focus on cost reduction opportunities.
General and administrative costs increased $2,038,863, including increases for
currency translation losses of $35,000 and amortization of $179,000 on
intangible assets acquired in the Simplicity purchase. As a percent of sales,
and primarily as a result of the Simplicity acquisition, general and
administrative costs increased from 8.4% of net sales to 11.7% of net sales.
Simplicity added $2.3 million in general and administrative costs (including the
amortization of intangibles), coming in at 18.1% of its net sales. Conso
Products US general and administrative costs increased $61,000, net of the
translation losses, and declined from 7.8% to 6.9% of its net sales, while
British Trimmings' same costs declined $171,000 from 10.2% to 7.2% of its net
sales. The British Trimmings reduction comes from reduced personnel levels and
lower legal fees.
As a result of the change in margin, operating costs and the Simplicity
acquisition, operating income increased $1.0 million or 57.2%. Of the increase,
$932,000 was due to the Simplicity acquisition. Conso Products US operating
income increased $170,000, while British Trimmings declined $61,000.
Interest expense increased substantially due to the increase in debt to acquire
the Simplicity business, while the effective tax rate was favorably affected by
a one time tax benefit from the recording of foreign tax credits available in
relation to recent tax filings. This additional income was partially offset by
the write-off of inventory margin recorded to mark inventory to market in
connection with the Simplicity acquisition and as required by purchase
accounting.
As a result of the increase in sales, the acquisition of Simplicity, the
monitoring of costs, and the changes in interest expense and taxes, net income
increased $410,000 or 39.8%, from $1.0 million to $1.4 million. This gain in net
income resulted in an earnings per share increase of $0.06 on a historical
basis, from $0.14 per share in the prior year's first quarter, to $0.20 per
share for the current year's first quarter. Of the increase, $355,000 came from
the addition of Simplicity to the Conso Products family. An increase in losses
at British Trimmings of $87,000, or $0.01 per share, from $0.03 loss per share
in the prior year's same quarter, to $0.04 loss per share in the current
quarter, was offset by more favorable results from Conso Products US, which
increased $142,000 or $0.02 per share, from $0.17 per share in the prior year's
first quarter to $0.19 per share in the current year's quarter.
LIQUIDITY, CAPITAL RESOUCES AND YEAR 2000.
The Company has been able to finance its operations and capital requirements
through internally generated funds and bank borrowings, with the exception of
the acquisition of British Trimmings in connection with the Company's IPO. Bank
borrowings were increased near the end of Fiscal 1998 to finance the purchase of
Simplicity. As of the fiscal 1999 first quarter end, availability was
approximately $8,000,000 under the Company's revolving loan facility.
Operating cash flow decreased $468,000 for the first quarter of fiscal 1999,
compared to the first quarter of fiscal 1998, primarily as a result of payments
on liabilities assumed in the acquisition of Simplicity. However, operating cash
flow remained strong, coming in at $1.1 million, despite these additional
payments.
On November 10, 1997, the Board of Directors authorized the purchase of up to
500,000 shares of common stock. During the first quarter 20,000 additional
shares were purchased bringing the total number of shares purchased to 193,000.
Repurchases may be made from time to time depending upon market conditions. The
Company's executive committee will direct the specific repurchases and approve
prices and other terms. The Company expects to fund repurchases either through
internally generated funds or existing credit lines, but may consider additional
credit facilities depending upon market conditions and the timing and amount of
repurchases deemed appropriate.
The Company has budgeted approximately $4,000,000 for the construction of a new
dyehouse and related equipment. Approximately $3.5 million dollars had been
spent on this project as of the end of the first quarter, with $500,000
remaining to be spent. In July, the Company purchased real property owned
jointly by Mr. and Ms. Findlay for use as a conference center in exchange for
shares of the Company's common stock. The company issued 78,788 shares of common
stock to Mr. and Ms. Findlay jointly as consideration for the acquisition of the
real property. Such consideration was based upon a closing price of the common
stock of $8.25 on July 1, 998 at value of $650,000 (the Findlay's cost basis in
the real property). Capital expenditures for the first quarter, excluding the
dyehouse project and the purchase of the Conso Conference Center were $654,000.
Approximately $2.9 million is budgeted for the remainder of the fiscal year
ended 1999 for ongoing (non-dyehouse or special project related) capital
expenditures.
The Company has performed an initial, high-level evaluation of its "Year 2000"
("Y2K") issues, (and more detailed evaluations in connection with its
five-phased program for Y2K compliance discussed below), and believes that they
will be resolved through the purchase of certain new hardware and software, and
modifications of existing software, at an estimated total cost of $750,000. The
cost of Y2K modifications to existing software is being expensed. The purchases
of new Y2K compliant hardware and software are providing significant additional
benefits to the Company and are being capitalized. Many of these purchases,
anticipated for the future, have been accelerated as a result of the Y2K issues.
As discussed in the Company's Form 10-K filing for the fiscal year ended 1998,
the Company is on schedule with its five-phased program for Y2K compliance.
Phase 1 is identifying system with Y2K issues. Phase 2 is the development of
action plans for Y2K compliance. Phase 3 is the implementation of action plans
through the modification or replacement of all necessary hardware and software
in time for adequate testing, and implementation to avoid Y2K issues. Phase 4 is
the testing phase, and Phase 5 is the final and implementation phase.
The Company has budgeted $500,000 of capital expenditures to address the
remaining Y2K issues. Most of this amount remains to be spent. Expenditures to
date have consisted primarily of labor to modify existing systems, of which
approximately $25,000 has been expensed in the current quarter. Except for a few
personal computers, the Company has achieved 100% Y2K compliance for Conso
Products US ahead of its implementation schedule. While the company is in Phase
1 for certain facility systems (e.g. security systems) at its British Trimmings
location, the company has made significant progress with the modification of its
primary operational systems during the current quarter, under phase 3 of its Y2K
plan. As a result of this progress, the Company remains on track to achieve 100%
Y2K compliance at its British Trimmings location by December 1998. Subsequent to
the first quarter, and prior to the filing of this report, it was determined
that the hardware at Simplicity, which runs the software for order entry,
invoicing, inventory control and manufacturing would be replaced by the purchase
of additional hardware, to meet Y2K compliance at a cost estimated to be less
than the amount originally budgeted. The software has already been modified to
handle a four digit date format. It is anticipated that the hardware will be
installed, software ported to the new hardware, tested, and placed in operations
by June 30, 1999. Certain systems (other than those related to order entry,
inventory control or manufacturing) are currently in Phase 2 of the company's
plan. Based on all progress so far, the Company does not anticipate any problems
achieving 100% Y2K compliance for its Simplicity operations by June 30, 1999, at
this time.
Due to the Company's progress thus far, and the limited number of programs and
embedded technology that are affected by date functionality, the Company's
contingency plan for non-compliance consists primarily of the use of additional
labor including the use of overtime to handle items with Y2K issues manually
(which would normally be handled by the computer). Were the Company not able to
achieve timely Y2K compliance, there could be some material impact on the
business from, for example, increased labor costs. Significant changes in the
availability of labor and resources to fulfill the Company's contingency plan
could have a further negative impact on the business. However, having achieved
full implementation and compliance at Conso Products US, and considering the
status of the Y2K plan as it relates to BT and Simplicity, it is management's
opinion that the Company will achieve compliance in adequate time to avoid Y2K
issues.
The Company believes that cash generated by operations and available for
borrowings under lines of credit will be adequate to fund its working capital
and capital expenditure requirements (including requirements to address the Y2K
issues). For the foreseeable future, excluding possible acquisition of other
business, based on the Company's financial position, the Company believes that
it will be able to obtain any additional financing necessary to fund its planned
long-term growth and expansion. Such additional financing may include long-term
debt or equity; however, the Company has not yet made arrangements for such
additional financing.
CAUTIONARY STATEMENTS AS TO FORWARD LOOKING INFORMATION
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for the future operations are
"forward looking" statements, and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such forward
looking statements include, without limitation: generally economic conditions in
the Company's markets, including inflation, recession, interest rates and other
economic factors, especially in the United States and the United Kingdom but
also including other areas of the world where the Company markets its products;
changes in consumer fashion preferences for finished products in the home
furnishings market, which may affect the demand for the Company's products; any
loss of the services of the Company's key management personnel; increased
competition in the United States and abroad, both from existing competitors and
from any new entrants in the decorative trimmings business; the Company's
ability to successfully continue its international expansion and to successfully
and profitability integrate into its operations any existing businesses it may
acquire; changes in the cost and availability of raw materials; changes in
governmental regulations applicable to the Company's business; fluctuations in
exchange rates relative to the US dollar for currencies of the United Kingdom
and other nations where the Company does business; casualty to or disruption of
the Company's production facilities and equipment; delays and disruptions in the
shipment of the Company's products and raw materials; disruption of operations
due to strikes or other labor unrest; and other factors that generally affect
the business of manufacturing companies with international operations.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 26,
1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSO PRODUCTS COMPANY
Dated: November 12, 1998 By: /s/ David B. Dechant
--------------------
Name: David B. Dechant
Title: Chief Accounting Officer
Dated: November 12, 1998 By: /s/ Gilbert G. Bartell
----------------------
Name: Gilbert G. Bartell
Title: Chief Financial Officer and
Vice President of Finance/Treasurer