1
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 December 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 INTERNATIONAL CORPORATION
-------------------------------
(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)
CONSO PRODUCTS COMPANY
----------------------
(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 February 9, 1999:
Common Stock, no par value 7,331,092 shares.
Page 1 of 18 pages
1
2
TABLE OF CONTENTS
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of
December 26, 1998 and June 27, 1998 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended December 26, 1998
and December 27, 1997 4
Consolidated Statements of Shareholders' Equity and
Components of Comprehensive Income (unaudited) for the
three months and six months ended December 26, 1998 5
Consolidated Statements of Cash Flows (unaudited) for
the six months ended December 26, 1998 and
December 27, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securityholders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 26, 1998 June 27, 1998
----------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 406,000 $ 2,333,000
Accounts receivable, net of allowances for
bad debts and customer deductions of
$1,400,042 and $1,352,246 at December 26, 1998
and June 27, 1998, respectively 21,842,000 22,755,000
Inventories (Note 3) 30,220,000 30,358,000
Deferred income taxes - current portion 2,571,000 1,397,000
Prepaid expenses and other 3,737,000 3,781,000
------------- -------------
Total current assets 58,776,000 60,624,000
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 1,507,000 1,455,000
Buildings and improvements 16,997,000 15,114,000
Machinery and equipment 25,403,000 23,791,000
------------- -------------
Total 43,907,000 40,360,000
Accumulated depreciation (12,530,000) (10,600,000)
------------- -------------
Total property and equipment, net 31,377,000 29,760,000
------------- -------------
OTHER ASSETS:
Intangible assets 20,008,000 20,367,000
Deferred income taxes 1,962,000 3,273,000
Deferred costs and other assets 307,000 1,668,000
------------- -------------
Total other assets 22,277,000 25,308,000
------------- -------------
TOTAL ASSETS $ 112,430,000 $ 115,692,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 289,000 $ 558,000
Current maturities of long-term debt 2,000,000 2,104,000
Trade accounts payable 6,331,000 7,562,000
Accrued liabilities 13,586,000 15,402,000
------------- -------------
Total current liabilities 22,206,000 25,626,000
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt - revolving line 21,724,000 24,508,000
Long-term debt - note payable 17,500,000 18,000,000
Deferred income taxes 488,000 484,000
Other noncurrent liabilities 4,940,000 4,984,000
------------- -------------
Total noncurrent liabilities 44,652,000 47,976,000
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock (no par, 10,000,000 shares
authorized, no shares issued) - -
Common stock (no par, 50,000,000 shares
authorized, 7,331,092 and 7,324,412
shares issued and outstanding December 26, 1998
and June 27, 1998, respectively) 15,784,000 15,619,000
Retained earnings 29,081,000 25,760,000
Accumulated other comprehensive income 707,000 711,000
------------- -------------
Total shareholders' equity 45,572,000 42,090,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 112,430,000 $ 115,692,000
============= =============
See notes to unaudited consolidated financial statements
3
4
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
December 26,1998 December 27,1997 December 26,1998 December 27,1997
---------------- ---------------- ---------------- ----------------
NET SALES $30,116,000 $18,978,000 $59,504,000 $35,713,000
COST OF GOODS SOLD 17,604,000 12,490,000 35,516,000 23,103,000
----------- ----------- ----------- -----------
GROSS MARGIN 12,512,000 6,488,000 23,988,000 12,610,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Distribution expense 2,288,000 861,000 4,692,000 1,634,000
Selling expense 2,793,000 2,059,000 5,553,000 4,177,000
General and administrative
expense 3,193,000 1,044,000 6,430,000 2,457,000
Currency exchange loss (gain) 33,000 41,000 68,000 40,000
Intangibles amortization 179,000 - 358,000 -
----------- ----------- ----------- -----------
Total 8,486,000 4,005,000 17,101,000 8,308,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 4,026,000 2,483,000 6,887,000 4,302,000
INTEREST EXPENSE, NET 770,000 274,000 1,525,000 429,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,256,000 2,209,000 5,362,000 3,873,000
INCOME TAX PROVISION (Note 5) 1,376,000 924,000 2,041,000 1,557,000
----------- ----------- ----------- -----------
NET INCOME $ 1,880,000 $ 1,285,000 $ 3,321,000 $ 2,316,000
=========== =========== =========== ===========
NET INCOME PER SHARE
(Notes 6 through 8)
Basic $ 0.26 $ 0.17 $ 0.45 $ 0.31
=========== =========== =========== ===========
Diluted $ 0.26 $ 0.17 $ 0.45 $ 0.31
=========== =========== =========== ===========
Weighted average number of shares
Outstanding
Basic 7,349,000 7,494,000 7,369,000 7,493,000
=========== =========== =========== ===========
Diluted 7,349,000 7,517,000 7,369,000 7,524,000
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements
4
5
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPONENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 26, 1998
Common Stock
------------
Accumulated Total
Comprehensive Shares Issued Retained Other Shareholders'
Income and Outstanding Amount Earnings Comprehensive Equity
Income
Balance, September 26, 1998 $ -0- 7,384,624 $ 16,117,000 $ 27,201,000 $ 778,000 $44,096,000
Shares issued in lieu of cash payment of
director fees 1,468 9,000 9,000
Net income 1,880,000 1,880,000 1,880,000
Translation adjustments and other
comprehensive income (71,000) (71,000) (71,000)
Stock repurchases (55,000) (342,000) (342,000)
----------- ---------- ------------ ------------ ----------- -----------
December 26, 1998 $ 1,809,000 7,331,092 $ 15,784,000 $ 29,081,000 $ 707,000 $45,572,000
=========== ========== ============ ============ =========== ===========
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPONENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 26, 1998
Common Stock
------------
Accumulated Total
Comprehensive Shares Issued Retained Other Shareholders'
Income and Outstanding Amount Earnings Comprehensive Equity
Income
Balance, June 27, 1998 $ -0- 7,324,412 $ 15,619,000 $25,760,000 $ 711,000 $ 42,090,000
Shares issued in lieu of cash payment of
director fees 2,892 18,000 18,000
Stock issued for conference center 78,788 650,000 650,000
Net income 3,321,000 3,321,000 3,321,000
Translation adjustments and other
comprehensive income (4,000) (4,000) (4,000)
Stock repurchases (75,000) (503,000) (503,000)
----------- --------- ------------ ----------- --------- ------------
December 26, 1998 $ 3,317,000 7,331,092 $ 15,784,000 $29,081,000 $ 707,000 $ 45,572,000
=========== ========= ============ =========== ========= ============
See notes to unaudited consolidated financial statements
5
6
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
----------------
December 26, 1998 December 27, 1997
----------------- -----------------
OPERATING ACTIVITIES:
Cash received from customers $ 60,474,000 $ 37,458,000
Cash paid to suppliers and employees (52,062,000) (32,840,000)
Interest paid (1,675,000) (448,000)
Interest received 151,000 68,000
Income taxes paid (2,325,000) (1,613,000)
------------ ------------
Net cash provided by operating activities 4,563,000 2,625,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,369,000) (728,000)
Proceeds from sale of property and equipment - 3,000
Construction and equipment purchased for
new dyehouse, distribution center and expansion (914,000) (2,635,000)
Redemption of Certificates of Deposit 1,350,000 -
Costs of Acquisitions/Organization Expenses (1,246,000) (270,000)
------------ ------------
Net cash used in investing activities (2,179,000) (3,630,000)
------------ ------------
FINANCING ACTIVITIES:
Net repayments under line of credit
arrangements (376,000) 781,000
Principal payments on long-term debt (3,354,000) -
Proceeds from issuance of common stock 18,000 28,000
Repurchases of stock (503,000) -
Translation Adjustment (96,000) -
------------ ------------
Net cash provided by (used in) financing activities (4,311,000) 809,000
------------ ------------
(DECREASE) INCREASE IN CASH (1,927,000) (196,000)
CASH AT:
BEGINNING OF PERIOD 2,333,000 490,000
------------ ------------
END OF PERIOD $ 406,000 $ 294,000
============ ============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,321,000 $ 2,316,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,357,000 1,043,000
Amortization of deferred expenses 360,000 28,000
Provision for deferred taxes - 33,000
Currency translation gain - (3,000)
Disposal of fixed assets - (1,000)
Changes in assets and liabilities:
Accounts receivable 973,000 502,000
Inventory 227,000 (140,000)
Prepaid expenses and other 74,000 (348,000)
Income Tax Receivable 138,000 (132,000)
Trade accounts payable (1,249,000) (918,000)
Income Tax Payable (282,000) (799,000)
Accrued liabilities (356,000) 1,044,000
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 4,563,000 $ 2,625,000
============ ============
See notes to unaudited consolidated financial statements
6
7
CONSO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 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 exchange rates.
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 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 earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share are very similar to the previously
reported fully diluted earnings per share. 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 the statement
of operations, statement of shareholders' equity, or in a separate disclosure.
The Company has chosen to disclose these amounts in the statement of
shareholders' equity and components of comprehensive 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 in its fiscal
year end financial reports. 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. SFAS No. 131 does not apply to interim financial
information.
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. The adoption of this standard will not have a material effect on the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities", which will be effective for all
fiscal-quarters and all fiscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in fair value of the
derivative (i.e., gains and losses) depends on the intended use of the
derivative and the resulting designation. The Company has not completed its
analysis of the impact of this statement.
7
8
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months and six
months ended December 26, 1998 and December 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 and six months periods ended
December 26, 1998 and December 27, 1997 each include 13 and 26 weeks,
respectively. Certain previously reported amounts have been reclassified to
conform to the current year presentation.
3. INVENTORIES The composition of inventories at December 26, 1998 and June 27,
1998 was as follows:
December 26, 1998 June 27, 1998
----------------- -------------
Raw Materials $ 8,590,000 $ 8,014,000
Work-In-Process 5,249,000 5,116,000
Finished Goods 16,381,000 17,228,000
----------- -----------
Totals $30,220,000 $30,358,000
=========== ===========
4. LONG-TERM DEBT -- NOTE PAYABLE
Effective November 1998, the Company converted its fixed rate on its term loan
with NationsBank (at 7.4%) to a floating rate at 90 day LIBOR plus 1.45% (or
6.75% at December 26, 1998).
Concurrently, the Company entered into a $19.5 million interest rate swap with
NationsBank for a 5-year term. Under the terms of the agreement, the Company
receives interest based on the floating 90 day LIBOR rate in exchange for
payments at a fixed rate (5.3%). The LIBOR based interest received under the
swap agreement offsets the LIBOR portion of the interest due on the term-loan.
Effectively, the interest rate swap fixes the rate of interest on the Company's
term debt at a lower 6.75% rate (the 5.3% fixed under the swap plus the 1.45%
over LIBOR on the term loan which is not offset under the swap) instead of the
original 7.4% term-loan rate. The interest rate swap accomplishes this rate
reduction while avoiding the costs of refinancing the term loan.
The interest rate swap includes a "mark-to-market" provision should the company
elect to terminate the swap prior to maturity. Under this provision Conso could
realize a gain or a loss depending on the interest rate conditions at the time
the swap is terminated.
5. INCOME TAXES
Slower than anticipated revenue growth and ongoing management of costs is likely
to result in a reduction of the average South Carolina workforce for the current
year. Accordingly, the Company has recorded an additional $30,000 valuation
allowance (net of Federal Tax effect) for previously recorded South Carolina
Jobs Tax Credits that, more likely than not, will not be realized.
6. 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 December 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 stock
splits.
8
9
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 stock splits.
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 Six Months Ended
------------------------------------ ------------------------------------
December 26, 1998 December 27, 1997 December 26, 1998 December 27, 1997
----------------- ----------------- ----------------- -----------------
Net income - as reported $ 1,880,000 $ 1,285,000 $ 3,321,000 $ 2,316,000
Less compensation per FAS 123 (27,000) (31,000) (53,000) (63,000)
----------- ----------- ----------- -----------
Net income - as proforma $ 1,853,000 $ 1,254,000 $ 3,268,000 $ 2,253,000
=========== =========== =========== ===========
Net income per share - as reported $ 0.26 $ 0.17 $ 0.45 $ 0.31
=========== =========== =========== ===========
Net income per share - as proforma $ 0.25 $ 0.17 $ 0.44 $ 0.30
=========== =========== =========== ===========
Net income per share - assuming
Dilution - as reported $ 0.26 $ 0.17 $ 0.45 $ 0.31
=========== =========== =========== ===========
Net income per share - assuming dilution
- as proforma $ 0.25 $ 0.17 $ 0.44 $ 0.30
=========== =========== =========== ===========
Weighted average number of shares
Outstanding 7,349,000 7,494,000 7,369,000 7,493,000
Options assumed to be exercised 0 84,000 0 97,000
Shares assumed to be repurchased
((83,552 shares x $6.67)/$9.16) (61,000)
((83,486 shares x $6.67)/$10.51) (53,000)
((13,038 shares x $10.30)/$10.51) (13,000)
Weighted average number of shares
Outstanding - assuming dilution 7,349,000 7,517,000 7,369,000 7,524,000
=========== =========== =========== ===========
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.)
7. 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 December 26, 1998, 1,468 shares were
issued, and 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 has been expensed and is not material.
9
10
8. 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 December 26, 1998:
NUMBER
REPURCHASE OF SHARES REPURCHASED TOTAL
DATES REPURCHASED* DOLLAR VALUE PER COST OF
SHARE SHARES*
--------------------- ------------------------ ---------------------- -------------
Prior Periods 193 $8.083 $ 1,560
9/30/98 30 6.250 187
11/23/98 25 6.188 155
---------- -------------
248 $ 1,902
========== =============
* Amounts in thousands
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.
9. 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 $31,534,000 (consisting of the cash purchase price,
transaction expenses and related accruals, less the cash held by Simplicity)
plus the assumption of certain of Simplicity's liabilities, for a total purchase
price of $52,199,000 (net of cash acquired), in a transaction accounted for in
accordance with the purchase method of accounting. The balance sheet effect of
the acquisition was recorded on June 19, 1998.
10. RELATED PARTY TRANSACTIONS
In July, the Company purchased real property owned jointly by Mr. and Ms.
Findlay, the Company's Chairman and the Sr. Vice President of Business
Development, respectively, 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, 1998 at value of $650,000 (the Findlay's cost basis in the
real property).
10
11
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 DECEMBER 26, 1998
COMPARED TO THE QUARTER ENDED DECEMBER 27, 1997.
Net sales for the quarter ended December 26, 1998, were $30.1 million, up from
the prior years second quarter sales of $19.0 million or 58.7%. Net sales at
Conso Products US were down $678,000 or 5.0%, while net sales at British
Trimmings, BT, decreased $538,000 or 10.0%. The additional revenue of $12.4
million from Simplicity, which was acquired in June 1998, accounted for the
increase in revenue over the prior year.
Sales for the second quarter by customer type were as follows:
Amount % of Net Sales
------------ --------------
Manufacturers Conso US and BT $ 7,268,000 24.1% down 6.1%
Distributors Conso US and BT 7,420,000 24.6% down 9.9%
Retailers - Conso US and BT 3,067,000 10.2% up 2.1%
Retailers - Simplicity 11,752,000 39.0% new -
Manufacturers - Simplicity 376,000 1.3% new -
Distributors - Simplicity 233,000 0.8% new -
------------ ----
Total $ 30,116,000 100.0% up 58.7%
============ ===== ====
Products sales (excluding Simplicity and its subsidiaries) to manufacturers
decreased in the second quarter, down 6.1% overall. These sales to manufacturers
were down 4.1% in the US and down 13.7% in the UK. In the US, the completion of
the dyehouse project, and the related relocation of equipment and training of
new personnel to handle the additional capacity adversely impacted production,
delaying shipments and, to some degree, manufacturing orders. The dyehouse
should be fully operational within the third quarter. In the UK, sales to
manufacturers and other customer groups continue to be hampered by the strength
of the British pound against foreign competitors' currencies, and a weak UK
economy. Consolidation has been effected between the sales teams of Simplicity
UK and British Trimmings, to provide new direction and consolidation of efforts,
for example through cross merchandising. Both the US and UK operations continue
to be impacted to some degree by competition.
Product sales (excluding Simplicity and its subsidiaries) to distributors were
down 9.9%, with Conso Products US down 6.6% and British Trimmings down 14.7%. In
the US, the majority of the decline relates to a perceived temporary softening
at the retail level and some competitive pressures. The weakness in sales at
British Trimmings was due to a drop in sales to the reupholster wholesalers, and
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 2.1%
overall, down 3.9% at Conso Products US and up 29.6% at British Trimmings. As
with distributors, the majority of the decline in retail sales at Conso Products
US relates to a perceived temporary softening at the retail level and some
competitive pressures. In the UK, the increase in the retail business is
primarily a result of increased sales through Wendy Cushing Trimmings.
In an effort to improve results for Conso Products US and British Trimmings,
management will be utilizing Simplicity's distribution channel and joining with
Simplicity sales management and personnel in both the US and the UK to establish
new and improved relationships with customers working in the distributor and
retail segments. In addition, the Company will continue to look for additional
products to sell through its combined customer base.
The most substantial increase in revenues during the quarter came from the
acquisition of Simplicity. This acquisition provided $12.4 million dollars in
additional revenue and propelled the Company's 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.
11
12
Comparable international sales (excluding Simplicity and its subsidiaries) from
the US and UK (the Company's major sales regions), for the second quarter
decreased 14.1% to $2.0 million, from $2.3 million in the prior year's same
quarter. With Simplicity's $1.7 million in sales outside the US and UK, export
sales totaled $3.7 million, accounting for 12.2% of Company-wide revenues,
compared to 12.1% in the prior year. Sales outside the US and UK, by geographic
region, were as follows:
Conso Products US and British Trimmings Export Sales Amount % of Net Sales
------------ -----------------
Western Hemisphere $ 982,000 3.3% down 15.0%
Europe and Middle East 629,000 2.1% down 16.6%
Pacific Rim 354,000 1.2% down 6.3%
----------- ---- ------
Total 1,965,000 6.6% down 14.1%
---------- ---- -----
Simplicity
Western Hemisphere 635,000 2.1% new -
Europe and Middle East 194,000 0.6% new -
Pacific Rim 866,000 2.9% new
----------- ----
Total 1,695,000 5.6% new
----------- ---- -----
Company Total $ 3,660,000 12.2% up 60.0%
=========== =====
Recent bad weather, economic turmoil and election activity occurring in various
Latin and South American countries affected the Western Hemisphere export sales.
In addition, certain Canadian shipments were affected by the delays with the
dyehouse integration. European business continues to be negatively affected by
competition in those areas, and the strength of the British pound against the
competitors currencies. 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 60% due to
export sales associated with the purchase of Simplicity.
As a result of the increased revenues associated with the acquisition of
Simplicity, the Company's gross margin increased from $6.5 million to $12.5
million, a $6.0 million or 92.9% improvement. As a percent of sales, the gross
margin increased from 34.2% in the prior year's second quarter, to 41.5% in the
current year's second quarter. The main reason for the increase in the margin
dollars and percent of sales was the acquisition of Simplicity, with a
historically higher gross margin of 50.2% for the current quarter. The increase
in the gross margin as a percent of sales at British Trimmings was a result of
cost reductions, reduced sales of low margin specials, and increased sales of
higher margin products through Wendy Cushing Trimmings.
At both Conso Products US and British Trimmings, sales 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
sales dollars, and, in many cases, margin due to product reformulations and
reductions in pricing to meet the competition.
Gross margin dollars during the quarter decreased for Conso Products US by 1.0%
as a result of the 5.0% decrease in revenues. Gross margin dollars at British
Trimmings declined 8.5% due to the 10.0% reduction in its revenues. Despite the
increasing competition, the Company experienced increases in its gross margins
as a percent of sales at both Conso Products US, from 37.1% to 38.7%, and at
British Trimmings, from 26.7% to 27.2% primarily as a result of management's
focus on cost control.
The Company began production in India in January 1998 to compete with lower cost
imports and has moved additional production to Mexico. 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.
However, any increases in gross margin could be accompanied by declines in
revenue dollars with, in some cases, lower priced products to meet competitive
offerings.
Distribution expenses increased $1.4 million from $861,000 to $2,288,000, and
from 4.5% of sales to 7.6% of sales. The cause for the increase in expense is a
result of the acquisition of Simplicity, with distribution costs of 12.2% of its
net sales. At Conso Products US, distribution expenses remained relatively flat
at 4.0% of sales. Distribution expenses decreased $55,000 at British Trimmings,
and as a percent of sales from 6.0% to 5.5%, due to changes in personnel levels
and a decrease in credits issued for freight as a result of improved deliveries.
Selling expenses increased $734,000, but declined as a percent of sales, from
10.8% to 9.3%. The acquisition of Simplicity added $839,000 of selling expenses
at 6.8% of its net sales. At Conso Products US, selling expenses declined
approximately $96,000 from 10.6% to 10.4% of net sales. At British Trimmings,
selling expenses were flat in dollar terms, but increased as a percent of sales
from 11.6% to 12.7% of net sales, due to the declining sales denominator.
12
13
General and administrative costs increased $2,320,000, including increases in
the amortization of intangible assets acquired in the Simplicity purchase of
$179,000. As a percent of sales, and primarily as a result of the Simplicity
acquisition, general and administrative costs increased from 5.7% of net sales
to 11.3% of net sales. Simplicity added $2.1 million in general and
administrative costs (including the amortization of intangibles), or 17.2% of
its net sales. Conso Products US general and administrative costs increased
$276,000, (excluding translation losses), and increased from 4.9% to 7.3% of its
net sales. This increase was a result, among others, of increased travel costs
and professional fees required to manage a larger organization, pursuit of
potential acquisitions and increased investor relations efforts. British
Trimmings' general and administrative costs declined $67,000 from 7.1% to 6.5%
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 $1.5 million or 62.2%. Conso Products US
operating income declined $198,000, while British Trimmings increased $9,000.
The net decline in the Products business was offset by a $1.7 million dollar
increase in operating income due to the acquisition of Simplicity.
Interest expense increased substantially with the increase in debt to acquire
the Simplicity business and the effective tax rate increased with the addition
of the Simplicity business and its historically higher effective rate. In
addition, gross margin was impacted by the additional charge to cost of goods
sold of $171,000 resulting from the recording of Simplicity inventory at market
value at the purchase date 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 $595,000 or 46.3%, from $1.3 million to $1.9 million. This gain in net
income resulted in an earnings per share increase of $0.09 on a historical
basis, from $0.17 per share in the prior year's second quarter, to $0.26 per
share for the current year's second quarter. Of the increase, $608,000 came from
the addition of Simplicity to the Conso family. Both Conso Products US and
British Trimmings reported $0.19 and ($0.01) per share, respectively, in line
with the results of the same quarter of the prior year.
HISTORICAL RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 26, 1998
COMPARED TO THE SIX MONTHS ENDED DECEMBER 27, 1997.
Net sales for the six months ended December 26, 1998, were $59.5 million, up
from the prior year's six months sales of $35.7 million or 66.6%. Net sales at
Conso Products US were down $66,000 or 0.3%, while net sales at British
Trimmings decreased $1,004,000 or 10.0%. The additional revenue of $24.9 million
from Simplicity, which was acquired in June 1998, accounted for the increase in
revenue over the prior year.
Sales for the six months by customer type were as follows:
Amount % of Net Sales
Manufacturers Conso US and BT $14,024,000 23.6% down 2.1%
Distributors Conso US and BT 14,526,000 24.4% down 7.1%
Retailers - Conso US and BT 6,087,000 10.2% up 5.8%
Retailers - Simplicity 23,572,000 39.7% new -
Manufacturers - Simplicity 789,000 1.3% new -
Distributors - Simplicity 506,000 0.8% new -
----------- ------ -----
Total $59,504,000 100.0% up 66.6%
=========== ====== =====
Products sales (excluding Simplicity and its subsidiaries) to manufacturers
decreased for the six months and were down 2.1% overall. The sales to
manufacturers were down 0.1% in the US and down 11.5% in the UK. In the second
quarter in the US, the completion of the dyehouse project, and the related
relocation of equipment and training of new personnel to handle the additional
capacity adversely impacted production, delaying shipments and, to some degree,
manufacturing orders, offsetting the more favorable results of the first
quarter. Continuing competition and the dyehouse delays offset the gain within
the US manufacturing segment in the previous quarter. The dyehouse should be
fully operational within the third quarter. In the UK, sales to manufacturers
and other customer groups continued to be hampered by the strength of the
British pound against certain foreign competitors' currencies and a weak UK
economy. Consolidation has been effected between the sales teams of Simplicity
UK and British Trimmings, to provide new direction and consolidation of efforts,
for example through cross merchandising. Both the US and UK operations continue
to be impacted to some degree by competition.
13
14
Product sales (excluding Simplicity and its subsidiaries) to distributors were
down 7.1%, with Conso Products US down 3.7% and British Trimmings down 12.2%. In
the US, the majority of the decline was due to a perceived temporary softening
at the retail level and some competitive pressures. The weakness in sales at
British Trimmings was due to a drop in sales to the reupholster wholesalers and
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 5.8%
overall, down 0.3% at Conso Products US and up 6.5% at British Trimmings. As
with distributors, the majority of the decline in retail sales in the US appears
to have come from a perceived temporary softening at the retail level and some
competitive pressures. In the UK, the increase in the retail business is
primarily a result of additional sales through Wendy Cushing Trimmings.
In an effort to improve results for Conso US and British Trimmings, management
will be utilizing Simplicity's distribution channel and joining with Simplicity
sales management and personnel in both the US and the UK to establish new and
improved relationships with customers working in the distributor and retail
segments. In addition, the Company will continue to look for additional products
to sell through its combined customer base.
The most substantial increase in revenues during the six months came from the
acquisition of Simplicity. This acquisition provided $24.9 million dollars in
additional revenue and propelled the Company's 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 Simplicity and its subsidiaries) from
the US and UK (the Company's major sales regions), for the six months decreased
.5% to $4.25 million, from $4.28 million in the prior year. With Simplicity's
$3.0 million in sales outside the US and UK, export sales totaled $7.3 million,
accounting for 12.5% of Company-wide revenues, compared to 12.3% in the prior
year. Sales outside the US and UK, by geographic region, were as follows:
Conso Products US and British Trimmings Export Sales Amount % of Net Sales
----------- --------------
Western Hemisphere $ 2,238,000 3.8% up 8.4%
Europe and Middle East 1,319,000 2.2% down 1.3%
Pacific Rim 697,000 1.1% down 20.4%
----------- ---- -----
Total 4,254,000 7.1% down 0.5%
----------- ---- ------
Simplicity
Western Hemisphere 1,187,000 2.0% new -
Europe and Middle East 424,000 0.8% new -
Pacific Rim 1,559,000 2.6% new
----------- ---- ------
Total 3,170,000 5.4% new
----------- ---- ------
Company total $ 7,424,000 12.5% up 70.0%
=========== ===== ======
Recent bad weather, economic turmoil and election activity occurring in various
Latin and South American countries affected the Western Hemisphere export sales
in the second quarter. In addition, certain Canadian shipments were affected by
the delays with the dyehouse integration. However, the start-up of a new program
with a major retailer in Canada in the first quarter more than offset the
negative events of the second, leaving year-to-date export sales in the Western
Hemisphere with a favorable increase. European business continues to be
negatively affected by competition in those areas, and the strength of the
British pound against the competitors currencies. 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 60% 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
$12.6 million to $24.0 million, a $11.4 million or 90.2% improvement. As a
percent of sales, the gross margin increased from 35.3% in the prior year, to
40.3% in the current year. 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 47.7% for the six months. At Conso Products US the gross
margin increased $101,000 or 1.0% on the .03% reduction in revenue, due
primarily to cost controls. At British Trimmings cost controls were offset by
the 10% reduction in revenue, resulting in a $576,000 or 20.9% reduction in
gross margin.
14
15
At Conso Products US, sales 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 and sales
dollars, due to product reformulation and reductions in pricing to meet the
competition. The Company began production in India in January 1998 to compete
with lower cost imports. 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. However,
increases in margin dollars (if any) could be accompanied by declines in revenue
dollars with, in some cases, lower priced products to meet competitive
offerings.
Distribution expenses increased $3.1 million from $1.6 million to $4.7 million,
and from 4.6% of sales to 7.9% of sales. The cause for the increase in expense
is a result of the acquisition of Simplicity, with distribution costs of 12.4%
of its net sales. At Conso Products US, distribution expenses increased
approximately $44,000 from 4.0% to 4.1% of sales, primarily as a result of the
increased depreciation expense on the new warehouse facility in Union, SC.
Distribution expenses at British Trimmings decreased $77,000 from 6.2% to 6.0%
as a result of personnel changes and a decrease in credits issued for freight
with improved deliveries.
Selling expenses increased $1.4 million, but declined as a percent of sales,
from 11.7% to 9.3%. The acquisition of Simplicity added $1.7 million of selling
expenses at 6.9% of its net sales. At Conso Products US, selling expenses
declined $122,000 from 11.1% to 10.6% of net sales, and at British Trimmings,
selling expenses declined $209,000 from 13.3% to 12.5% of net sales.
General and administrative costs increased $4.4 million, including increases for
currency translation losses of $2,000 and amortization of $358,000 related to
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 7.0% of net sales to 11.5% of net sales.
Simplicity added $4.4 million in general and administrative costs (including the
amortization of intangibles), coming in at 17.7% of its net sales. Conso
Products US general and administrative costs increased $179,000, net of the
translation losses, and increased from 6.2% to 7.0% of its net sales. This
increase relates, among others, to increased travel costs and professional fees
required to manage a larger organization, pursuit of potential acquisitions, and
increased investor relations efforts. British Trimmings same costs declined
$238,000 from 8.5% to 6.8% 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 $2.6 million or 60.1%. The Simplicity
acquisition resulted in a $2.7 million increase in operating income. Conso
Products US operating income decreased $27,000, and British Trimmings operating
income declined $52,000.
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 in the first quarter of foreign tax
credits available in relation to recent tax filings. This additional income has
been partially offset by the additional charge to cost of goods sold of $171,000
resulting from the recording of Simplicity inventory at market value at the
purchase date 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 $1.0 million or 43.4%, from $2.3 million to $3.3 million. This gain in
net income resulted in earnings per share increase of $0.14 on a historical
basis, from $0.31 per share in the prior year, to $0.45 per share for the
current year. Of the increase, $963,000 came from the addition of Simplicity to
the Conso Products family. An increase in losses at British Trimmings of
$69,000, or $0.01 per share, from $0.05 loss per share in the prior year, to
$0.06 loss per share in the current year, was offset by more favorable results
from Conso Products US, which increased $111,000 or $0.02 per share, from $0.36
per share in the prior year to $0.38 per share in the current year.
LIQUIDITY, CAPITAL RESOURCES AND YEAR 2000
The Company has been able to finance its operations and capital requirements
through internally generated funds and bank borrowings, except for the
acquisition of British Trimmings in connection with the Company's IPO in 1993.
Bank borrowings were increased near the end of Fiscal 1998 to finance the
purchase of Simplicity. As of the fiscal 1999 second quarter end, credit line
availability was approximately $9,500,000 under the Company's revolving loan
facility.
In November 1998, the Company converted its fixed rate on its term loan with
NationsBank (at 7.4%) to a floating rate at 90 day LIBOR plus 1.45% (or 6.75% at
December 26, 1998). Concurrently, the Company entered into a $19.5 million
interest rate swap with NationsBank pursuant to which it effectively fixed the
interest rate under the term loan at 6.75% until the maturity of the term loan.
Operating cash flow increased $1,938,000 for the six months of fiscal 1999,
compared to the six months of fiscal 1998, with Simplicity providing
approximately $1 million of the increase.
15
16
On November 10, 1997, the Board of Directors authorized the purchase of up to
500,000 shares of common stock. During the second quarter 55,000 additional
shares were purchased bringing the total number of shares purchased to 248,000.
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 $4.0 million for the construction of a
new dyehouse and related equipment. Approximately $3.8 million dollars had been
spent on this project as of the end of the second quarter, with $195,000
remaining to be spent. In July, the Company purchased real property owned
jointly by Mr. and Ms. Findlay, the Chairman and the Sr. Vice President of
Business Development, respectively, 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, 1998 at a value of $650,000 (the Findlay's cost
basis in the real property). During the second quarter, an additional $1.5
million was approved for the enhancement of Simplicity's catalog software to
support increased cross-merchandising activities. Capital expenditures for the
first half of the year, excluding the dyehouse and catalog projects and the
purchase of the Conso Conference Center were $1.3 million. Approximately $1.8
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 $67,000 has been expensed in the first half of the year. Except
for a few personal computers, the Company has achieved 100% Y2K compliance for
Conso Products US ahead of its implementation schedule. In addition, the Company
has achieved 100% Y2K compliance at its British Trimmings location within a few
weeks of the planned implementation date. 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. Except for accounts payable and general ledger, 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. In addition it is
anticipated that the accounts payable and general ledger will be converted to
the Conso US systems, which are already Y2K compliant, by the same date. Certain
systems (other than those related to order entry, inventory control or
manufacturing) are currently in Phase 3 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 manually handle items with Y2K issues
(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 British Trimmings,
and considering the status of the Y2K plan as it relates to British Trimmings
and Simplicity, it is management's opinion that the Company will achieve
compliance in adequate time to avoid Y2K issues.
16
17
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: general 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 home sewing products and 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.
17
18
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The following tabulation sets forth the matters voted upon at the Annual Meeting
of Shareholders of the Registrant held November 9, 1998, and the votes on each
such matter:
Against/ Broker
For Withheld Abstain Nonvotes
---- -------- ------- --------
Election of Directors
J. Cary Findlay 6,405,196 0 19,286 N/A
Antony W. Laughton 6,405,197 0 19,286 N/A
John H. Maxheim 6,405,096 0 19,386 N/A
James H. Shaw 6,403,796 0 20,686 N/A
Konstance J. K. Findlay 6,405,096 0 19,386 N/A
Sara H. Bissell 6,405,096 0 19,386 N/A
Amendment to Articles of Incorporation changing
the name of the Company to
"CONSO INTERNATIONAL
CORPORATION"
6,409,569 11,836 3,076 N/A
Approval of selection of Deloitte & Touche
LLP as Independent Public Accountants 6,411,650 9,025 3,807 N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(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 INTERNATIONAL CORPORATION
Dated: February 9, 1999 By: /s/ David B. Dechant
--------------------
Name: David B. Dechant
Title: Chief Accounting Officer
Dated: February 9, 1999 By: /s/ Gilbert G. Bartell
----------------------
Name: Gilbert G. Bartell
Title: Chief Financial Officer and
Vice President of Finance/Treasurer
18