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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 March 27, 1999
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)
(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 May 5, 1999:
Common Stock, no par value 7,332,081 shares.
Page 1 of 17 pages
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TABLE OF CONTENTS
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of
March 27, 1999 and June 27, 1998 3
Consolidated Statements of Operations (unaudited)
for the three months and nine months ended March 27, 4
1999 and March 28, 1998
Consolidated Statements of Shareholders' Equity and
Components of Comprehensive Income (unaudited)
for the three months and nine months ended March 5
27, 1999
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 27, 1999 and
March 28, 1998 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 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 27, 1999 June 27, 1998
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 792,000 $ 2,333,000
Accounts receivable, net of allowances for
bad debts and customer deductions of
1,182 and 1,352 at March 27, 1999
and June 27, 1998, respectively 21,426,000 22,755,000
Inventories (Note 3) 30,811,000 30,358,000
Deferred income taxes - current portion 2,142,000 1,397,000
Prepaid expenses and other 3,578,000 3,781,000
------------- -------------
Total current assets 58,749,000 60,624,000
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 1,554,000 1,455,000
Buildings and improvements 17,203,000 15,114,000
Machinery and equipment 26,375,000 23,791,000
------------- -------------
Total 45,132,000 40,360,000
Accumulated depreciation (13,107,000) (10,600,000)
------------- -------------
Total property and equipment, net 32,025,000 29,760,000
------------- -------------
OTHER ASSETS:
Intangible assets 19,829,000 20,367,000
Deferred income taxes 463,000 3,273,000
Deferred costs and other assets 299,000 1,668,000
------------- -------------
Total other assets 20,591,000 25,308,000
------------- -------------
TOTAL ASSETS $ 111,365,000 $ 115,692,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 586,000 $ 558,000
Current maturities of long-term debt 2,000,000 2,104,000
Trade accounts payable 6,514,000 7,562,000
Accrued liabilities 10,184,000 15,402,000
------------- -------------
Total current liabilities 19,284,000 25,626,000
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt - revolving line 23,749,000 24,508,000
Long-term debt - note payable 17,000,000 18,000,000
Deferred income taxes 241,000 484,000
Other noncurrent liabilities 4,423,000 4,984,000
------------- -------------
Total noncurrent liabilities 45,413,000 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, 7,332,081 and 7,324,412
shares issued and outstanding March 27, 1999
and June 27, 1998, respectively) 15,790,000 15,619,000
Retained earnings 30,219,000 25,760,000
Accumulated other comprehensive income 659,000 711,000
------------- -------------
Total shareholders' equity 46,668,000 42,090,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 111,365,000 $ 115,692,000
============= =============
See notes to unaudited consolidated financial statements
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CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
March 28, 1999 March 28, 1998 March 27, 1999 March 28, 1998
--------------- --------------- --------------- ---------------
NET SALES $ 29,049,000 $ 17,614,000 $ 88,553,000 $ 53,326,000
COST OF GOODS SOLD 17,700,000 11,655,000 53,216,000 34,757,000
---------- ------------ ---------- ------------
GROSS MARGIN 11,349,000 5,959,000 35,337,000 18,569,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Distribution expense 2,372,000 813,000 7,064,000 2,447,000
Selling expense 3,019,000 2,152,000 8,571,000 6,329,000
General and administrative expense 3,056,000 961,000 9,486,000 3,418,000
Currency exchange loss (gain) 7,000 (11,000) 75,000 29,000
Intangibles amortization 178,000 - 536,000 -
------------ ------------ ------------ ------------
Total 8,632,000 3,915,000 25,732,000 12,223,000
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,717,000 2,044,000 9,605,000 6,346,000
INTEREST EXPENSE, NET 692,000 198,000 2,217,000 627,000
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 2,025,000 1,846,000 7,388,000 5,719,000
INCOME TAX PROVISION (Note 5) 887,000 759,000 2,929,000 2,316,000
------------ ------------ ------------ ------------
NET INCOME $ 1,138,000 $ 1,087,000 $ 4,459,000 $ 3,403,000
============ ============ ============ ============
NET INCOME PER SHARE
(Notes 6 through 8)
Basic $ 0.16 $ 0.15 $ 0.61 $ 0.45
============ ============ ============ ============
Diluted $ 0.15 $ 0.15 $ 0.60 $ 0.45
============ ============ ============ ============
Weighted average number of shares
Outstanding
Basic 7,334,000 7,476,000 7,357,000 7,487,000
============ ============ ============ ============
Diluted 7,335,000 7,487,000 7,357,000 7,513,000
============= ============ ============= ============
See notes to unaudited consolidated financial statements
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CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPONENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 27, 1999
Common Stock
------------
Accumulated
Shares Issued Other Total
Comprehensive and Retained Comprehensive Shareholders'
Income Outstanding Amount Earnings Income Equity
------------- --------------- ----------- ----------- -------------- -------------
Balance, December 26, 1998 $ 0 7,331,092 $15,784,000 $29,081,000 $ 707,000 $45,572,000
Shares issued in lieu of cash
payment of director fees 989 6,000 6,000
Net income 1,138,000 1,138,000 1,138,000
Translation adjustments and other
comprehensive income (48,000) (48,000) (48,000)
Stock repurchases ---------- --------- ----------- ----------- --------- -----------
March 27, 1999 $1,090,000 7,332,081 $15,790,000 $30,219,000 $ 659,000 $46,668,000
========== ========= =========== =========== ========= ===========
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPONENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
NINE MONTHS ENDED MARCH 27, 1999
Common Stock
------------ Accumulated
Shares Issued Other Total
Comprehensive and Retained Comprehensive Shareholders'
Income Outstanding Amount Earnings Income Equity
------------- ------------- ----------- ------------ -------------- -------------
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 3,881 24,000 24,000
Stock issued for conference center 78,788 650,000 650,000
Net income 4,459,000 4,459,000 4,459,000
Translation adjustments and
other comprehensive loss (52,000) (52,000) (52,000)
Stock repurchases (75,000) (503,000) (503,000)
---------- --------- ----------- ------------ ----------- -----------
March 27, 1999 $4,407,000 7,332,081 $15,790,000 $30,219,000 $ 659,000 $46,668,000
========== ========= =========== =========== =========== ===========
See notes to unaudited consolidated financial statements
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CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-----------------
March 27, 1999 March 28, 1998
------------ ------------
OPERATING ACTIVITIES:
Cash received from customers $ 89,466,000 $ 55,791,000
Cash paid to suppliers and employees (79,378,000) (48,391,000)
Interest paid (2,339,000) (718,000)
Interest received 210,000 117,000
Income taxes paid (3,218,000) (1,959,000)
------------ ------------
Net cash provided by operating activities 4,741,000 4,840,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,311,000) (1,267,000)
Construction and equipment purchased for
new dyehouse, distribution center and
computer design equipment (2,517,000) (3,944,000)
Redemption of Certificates of Deposit 1,350,000
Costs of Acquisitions/Organization Expenses (1,730,000) (382,000)
------------ ------------
Net cash used in investing activities (4,207,000) (5,593,000)
------------ ------------
FINANCING ACTIVITIES:
Net repayments under line of credit
arrangements (66,000) 1,585,000
Principal payments on long-term debt (1,550,000) (104,000)
Proceeds from issuance of common stock 24,000 38,000
Repurchases of stock (503,000) (989,000)
Translation Adjustment 20,000 (20,000)
------------ ------------
Net cash provided by (used in) financing activities (2,075,000) 510,000
------------ ------------
DECREASE IN CASH (1,541,000) (243,000)
CASH AT:
BEGINNING OF PERIOD 2,333,000 490,000
------------ ------------
END OF PERIOD $ 792,000 $ 247,000
============ ============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 4,459,000 $ 3,403,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,110,000 1,600,000
Amortization of intangibles 536,000 43,000
Provision for deferred taxes 149,000
Disposal of fixed assets 1,000
Changes in assets and liabilities:
Accounts receivable 1,285,000 402,000
Inventory (622,000) 609,000
Prepaid expenses and other 197,000 (419,000)
Income tax receivable (745,000) (132,000)
Deferred income tax 841,000
Trade accounts payable (1,023,000) (1,516,000)
Income tax payable (547,000) (596,000)
Other non current liabilities (561,000)
Accrued liabilities (1,189,000) 1,296,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,741,000 $ 4,840,000
============ ============
See notes to unaudited consolidated financial statements
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CONSO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 27, 1999
1. CONSOLIDATION AND NEW ACCOUNTING STANDARDS
The financial statements are unaudited and include the accounts of Conso
International Corporation (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.
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 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. The Company's policy is that
such amounts are repayable in the functional currency of the subsidiary.
Translation gains and losses and all exchange gains and losses on realized
foreign currency transactions are included in the results of operations. The
India Trimmings and Val-Mex subsidiaries' operations are not significant in
relation to the Company's operations. All material inter-company accounts and
transactions and profit and loss on inter-company transactions are eliminated in
consolidation.
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
earnings 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 the first year of adoption.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pension and Other Postretirement Benefits - an Amendment of FASB No. 87, 88, and
106." SFAS No. 132 revises disclosures about pensions and other postretirement
benefit plans. SFAS No. 132 is effective for the Company for the fiscal year
beginning June 28, 1998.
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.
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months and nine
months ended March 27, 1999 and March 28, 1998 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
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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-month and nine-month periods
ended March 27, 1999 and March 28, 1998 each include 13 and 39 weeks,
respectively. Certain previously reported amounts have been reclassified to
conform to the current year presentation.
3. INVENTORIES
The composition of inventories at March 27, 1999 and June 27, 1998 was as
follows:
March 27, 1999 June 27, 1998
-------------- -------------
Raw Materials $ 8,620,000 $ 8,014,000
Work-In-Process 5,556,000 5,116,000
Finished Goods 16,635,000 17,228,000
----------- -----------
Totals $30,811,000 $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 6.53% at March 27, 1999). Concurrently, the Company entered into a $19.5
million interest rate swap with NationsBank for a 5-year term which effectively
fixes the Company's interest rate on the term loan at 6.75%. 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
The Company did not record any additional Jobs Tax Credit in the third
quarter since employment levels in South Carolina did not change. For the year
the tax rate was positively affected by the recording of foreign and AMT credits
of $288,000, available in the recent tax filing period.
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 at
one-third of the total shares for a three year period. The options expire after
five years and are subject to continued employment by the employee. All amounts
are adjusted for stock splits.
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.
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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 Nine Months Ended
------------------------------------ ----------------------------------
March 27, 1999 March 28, 1998 March 27, 1999 March 28, 1998
-------------- --------------- -------------- --------------
Net income - as reported $1,138,000 $1,087,000 $4,459,000 $3,403,000
Less compensation per SFAS 123 (21,000) (31,000) (74,000) (94,000)
---------- ---------- ---------- ----------
Net income - as proforma $1,117,000 $1,056,000 $4,385,000 $3,309,000
========== ========== ========== ==========
Net income per share - as reported $ 0.16 $ 0.15 $ 0.61 $ 0.45
========== ========== ========== ==========
Net income per share - as proforma $ 0.15 $ 0.14 $ 0.60 $ 0.44
========== ========== ========== ==========
Net income per share - assuming
dilution - as reported $ 0.16 $ 0.15 $ 0.60 $ 0.45
========== ========== ========== ==========
Net income per share - assuming
dilution - as proforma $ 0.15 $ 0.14 $ 0.60 $ 0.44
========== ========== ========== ==========
Weighted average number of shares
outstanding 7,334,000 7,476,000 7,357,000 7,487,000
Options assumed to be exercised 76,000 83,000 84,000
Shares assumed to be repurchased
((83,350 shares x $6.67)/$7.77) (72,000)
((83,773 shares x $6.67)/$9.60) (58,000)
((75,755 shares x $6.67)/$6.70) (75,000)
Weighted average number of shares
outstanding - assuming dilution 7,335,000 7,487,000 7,357,000 7,513,000
========== ========== ========== ==========
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 March 27, 1999, 989 shares were issued.
During the quarter ended December 26, 1998 and the quarter ended September 26,
1998, 1,468 shares and 1,424 shares, respectively, were issued in accordance
with directors' elections. The compensation related to shares issued under this
plan has been expensed.
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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 retired.
Accordingly, the repurchases have been accounted for using the constructive
retirement method, consistent with the Business Corporation Act. No purchases
took place during the third quarter. The following are the repurchases to date:
NUMBER REPURCHASED
REPURCHASE OF SHARES DOLLAR VALUE TOTAL COST
DATES REPURCHASED* PER SHARE OF SHARES*
---------------------------------------------------------------------
Prior Periods 248 $7.66 $ 1,902
=== =======
* Amounts in thousands
Repurchases are made depending upon market conditions. The Company's
Executive Committee will direct the 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.
9. BUSINESS ACQUISITIONS
Simplicity Pattern Company - Effective June 19, 1998, the Company acquired
all the outstanding common stock of Simplicity Capital Corporation (Simplicity),
the indirect 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, in a transaction accounted for in
accordance with the purchase method of accounting.
On April 12, 1999, the Company purchased the assets of the Hwalek Corporation
("VNI") for $140,000. VNI is a resin manufacturer for decorative hardware. As
the consideration paid was not material, financial statement presentation will
not be impacted.
10. RELATED PARTY TRANSACTIONS
In July, the Company purchased real property owned jointly by Mr. and Mrs.
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 Mrs. 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).
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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, 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.
HISTORICAL RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 27, 1999 COMPARED
TO THE QUARTER ENDED MARCH 28, 1998.
Net sales for the quarter ended March 27, 1999, were $29.0 million, up from
the prior year's third quarter sales of $17.6 million or 64.9%. Net sales at
Conso Products US were up $110,000 or 0.9%, while net sales at British
Trimmings, decreased $520,000 or 10.3%. Additional sales of $11.8 million from
Simplicity, which was acquired in June 1998, accounted for most of the increase.
Sales for the third quarter by customer type were as follows:
Compared to the Quarter
Amount % of Net Sales Ended March 28, 1998
------- -------------- -----------------------
Manufacturers - Conso US and BT $ 6,823 23.5% down 0.3%
Distributors - Conso US and BT 7,116 24.5 down 9.8%
Retailers - Conso US and BT 3,265 11.3 up 13.5%
Manufacturers - Simplicity 347 1.2 new -
Distributors - Simplicity 157 .5 new -
Retailers - Simplicity 11,341 39.0 new -
------- ---- ------
Total $29,049 100.0% up 64.9%
======= ===== =====
Products sales to manufacturers (excluding Simplicity) decreased 0.3% overall
in the third quarter. These sales to manufacturers were up 1.1% in the US and
down 5.8% in the UK. 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. The sales force of Simplicity UK
and British Trimmings have been combined to provide a new direction and reduce
costs. Both the US and UK operations continue to be impacted by strong foreign
based competition.
Product sales to distributors (excluding Simplicity) were down 9.8%. Conso
Products US sales to distributors were down 7.0%. British Trimmings sales were
down 13.8%. 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 due to a strong British Pound. For Conso Products US, distributors
shipments in the third quarter were affected by production delays due to the
transfer of operations to our new dyehouse facility.
Sales to retailers for Conso Products US and British Trimmings were up 13.5%
overall. Conso Products US was up 14.9% while British Trimmings was up 3.2%. A
new program for a customer in the US and a new Canadian customer accounted for
most of the increase. In the UK, the increase in the retail business was
primarily the result of higher sales through Wendy Cushing Trimmings.
To address competition and focus on sales growth in the retail segment,
management will be utilizing Simplicity's distribution channels and joining with
Simplicity sales management and personnel to establish new and improved
relationships with customers. 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 third quarter came from
the acquisition of Simplicity. This acquisition provided $11.8 million in
additional revenue and propelled the retail segment from the smallest to the
largest for the combined company. With the addition of Simplicity, the Company
is focusing on cross merchandising and marketing opportunities to promote
increased sales of both patterns and trimmings products.
Comparable international sales (excluding Simplicity) outside the US and UK
(the Company's primary sales regions), for the third quarter decreased 10.3% to
$1.9 million, from $2.1 million in the prior year. With Simplicity's $1.9
million in sales outside the US and UK, export sales totaled $3.8 million,
accounting for 13.0% of Company-wide revenues.
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International sales, by geographic region, are as follows:
Compared to the Quarter
Amount % of Net Sales Ended March 28, 1998
------- ----------------- --------------------
Conso Products US and British Trimmings
Western Hemisphere $ 893 3.1% up 0.1%
Europe and Middle East 709 2.4 down 17.9%
Pacific Rim 269 .9 down 18.9%
------- ----
Total $ 1,871 6.4% down 10.3%
Simplicity
Western Hemisphere $ 563 2.0 new -
Europe and Middle East 670 2.3 new -
Pacific Rim 674 2.3 new -
------- ----
Total $ 1,907 6.6 new
------- ----
Company Total $ 3,778 13.0% up 65.0%
======= ====
Stronger Canadian sales have compensated for decreases in Latin and South
America. European business continues to be negatively affected by competition in
those areas, and the strength of the British pound against the competitors'
currencies. Sales in the Pacific Rim continued to be negatively impacted by the
recent changes in currency values and other economic problems of that region.
Despite these declines in international sales by Conso Products US and British
Trimmings, exports (outside of the US and UK) grew 65.0% due to export sales of
Simplicity.
As a result of the increased revenues associated with the acquisition of
Simplicity, the Company's gross margin increased from $6.0 million to $11.3
million, a $5.4 million or 90.5% improvement. In addition, the gross margin rate
increased due to Simplicity's historically higher gross margin which was 45.9%
for the current quarter. Gross margin increased as a percentage of sales at
British Trimmings and remained flat in dollar terms despite a 10.3% drop in net
sales as a result of increased prices as of January 1, 1999, cost reductions,
reduced sales of low margin specials, and increased sales of higher margin
products by Wendy Cushing Trimmings.
Conso Products US experienced a drop in gross margin from 37.4% last year to
36.6% this year. Gross margin was negatively impacted by transfer delays at the
dyehouse, greater depreciation from the dyehouse, an unfavorable medical claims
adjustment at the plan year-end, and continuing pricing pressure from
competition.
The problems at the dyehouse resulted in bottlenecks in production causing
inefficiencies in many departments. These increased costs were associated with
unfavorable production variances. These unfavorable variances will also
negatively impact the fourth quarter. The method and location of production for
many items is being reviewed to move higher labor content production to lower
cost locations (i.e. Mexico and India) to reduce cost. The transfer of dyehouse
equipment was completed in April and dyehouse production has increased
significantly.
Distribution expenses increased $1.6 million from $0.8 million to $2.4
million, and from 4.6% of sales to 8.2% of sales. The primary cause for the
increase in expense was the acquisition of Simplicity, with distribution costs
of 12.9% of its sales. At Conso Products US, distribution expenses increased
from 4.4% to 4.6%. Distribution expenses remained flat at British Trimmings, but
increased as a percent of sales from 5.2% to 5.9%, because of lower net sales.
Distribution is receiving a greater portion of fixed overhead expense due to
lower manufacturing levels at British Trimmings, which is offsetting cuts in
controllable expenses.
Selling expenses increased $867,000, but declined as a percentage of sales
from 12.2% to 10.4%. The acquisition of Simplicity added $884,000 of selling
expenses at 7.5% of its net sales. At Conso Products US, selling expenses
increased $40,000 from 12.0% to 12.2% of net sales. At British Trimmings,
selling expenses were $58,000 lower, but increased as a percentage of sales from
12.7% to 12.9% due to declining sales.
General and administrative costs (including amortization) increased $2.3
million, due primarily as a result of the Simplicity acquisition. As a
percentage of sales general and administrative costs increased from 5.4% to
11.1%. Simplicity added $2 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 $246,000, (excluding
translation losses), and increased from 5.1% to 7.0% of net sales. This increase
was primarily a result of increased travel costs and professional fees required
to manage a larger organization, pursuit of potential acquisitions, higher bonus
expense and increased investor relations efforts. British Trimmings' general and
administrative costs declined $16,000 but increased from 6.4% to 6.8% of net
sales due to declining sales. The British Trimmings reduction comes from reduced
personnel levels and lower legal fees.
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Operating income increased $673,000 or 32.9%, primarily as a result of the
changes in gross margin, lower operating costs and the Simplicity acquisition.
Conso Products US operating income declined $384,000, while British Trimmings
increased $71,000. This net decline was offset by the $987,000 in operating
income added by Simplicity.
Interest expense increased substantially with the increase in debt to
acquire the Simplicity business. The effective tax rate also 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 this quarter, resulting from the adjustment of Simplicity
inventory to market value at the purchase date as required by GAAP.
HISTORICAL RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 27, 1999
COMPARED TO THE NINE MONTHS ENDED MARCH 28, 1998.
Net sales for the nine months ended March 27, 1999, were $88.6 million, up
from the prior year's nine months sales of $53.3 million or 66.1%. Net sales at
Conso Products US were up $45,000 or 0.1%, while net sales at British Trimmings
decreased $1,524,000 or 10.1%. The additional revenue of $36.7 million from
Simplicity, which was acquired in June 1998, accounted for most of the increase
in revenue over the prior year.
Sales for the nine months by customer type were as follows:
Compared to the Nine Months
Amount % of Net Sales Ended March 28, 1998
-------- -------------- ---------------------------
Manufacturers - Conso US and BT $ 20,674 23.3% down 1.6%
Distributors - Conso US and BT 21,886 24.7 down 7.9%
Retailers - Conso US and BT 9,288 10.5 up 8.5%
Manufacturers - Simplicity 723 .8 new -
Distributors - Simplicity 391 .5 new -
Retailers - Simplicity 35,592 40.2 new
-------- ----- ----
Total $ 88,553 100.0% up 66.1%
Product sales to manufacturers (excluding Simplicity) decreased for the nine
months and were down 1.6% overall. The sales to manufacturers were up 0.4% in
the US and down 10.2% in the UK. Continuing competition and the dyehouse delays
in the second quarter offset the gain within the US manufacturing segment in the
first quarter. Shipments to manufacturers returned to prior year levels in 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 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. Both the US and UK operations continue
to be adversely impacted by competition.
Product sales to distributors (excluding Simplicity) were down 7.9%, with
Conso Products US down 4.8% and British Trimmings down 12.4%. In the US, the
majority of the decline was due to shipment delays from dyehouse inefficiencies
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 due to a strong British Pound.
Sales to retailers for Conso Products US and British Trimmings were up 8.5%
overall. These sales were up 9.0% at Conso Products US and up 6.0% at British
Trimmings. In the US, a new initial stock program to a customer accounted for
the majority of the increase. In the UK, the increase in the retail business is
primarily a result of additional sales through Wendy Cushing Trimmings.
The most substantial increase in revenues during the nine months came from
the acquisition of Simplicity. This acquisition provided $36.7 million in
additional revenue and propelled the Company's smallest segment (retail) to its
largest. With the addition of Simplicity, the Company is focusing on cross
merchandising and marketing opportunities to promote increased sales of patterns
and products.
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Comparable international sales (excluding Simplicity) outside the US and UK
(the Company's major sales regions), for the nine months decreased 3.7% to $6.1
million, from $6.3 million in the prior year. With Simplicity's $4.9 million in
sales outside the US and UK, export sales totaled $11.0 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:
Compared to the Nine Months
Amount % of Net Sales Ended March 28, 1998
------- -------------- ---------------------------
Conso Products US and British Trimmings
Western Hemisphere $ 3,131 4.2% up 5.9%
Eastern and Middle East 2,028 2.6 down 7.8
Pacific Rim 966 1.3 down 20.0
------- ----
Total $ 6,125 8.1% down 3.7%
Simplicity
Western Hemisphere $ 1,750 2.3 new -
Europe and Middle East 941 1.2 new -
Pacific Rim 2,233 2.9 new -
------- ----
Total $ 4,924 6.4% new
------- ----
Company total $11,049 14.5% up 73.6%
======= ====
European business continues to be negatively affected by competition in those
areas, and the strength of the British pound against the competitors'
currencies. Sales in the Pacific Rim continued to be negatively impacted by the
recent changes in currency values and other economic problems of that region.
Despite factors decreasing comparable international sales, exports (outside of
the US and UK) grew 73.6% due to the acquisition of Simplicity.
As a result of the increased revenues, the Company's gross margin increased
from $18.6 million to $35.3 million, a $16.8 million or 90.3% improvement
primarily due to the Simplicity acquisition. In addition, the gross margin rate
increased due to Simplicity's historically higher gross margin rate of 47.1% for
the nine months. At British Trimmings, cost controls were offset by the 10.1%
reduction in revenue, resulting in a $573,000 or 14.3% reduction in gross
margin. British Trimmings is making progress in improving its margin, with
increased prices and lower costs as the year progresses.
At Conso Products US the gross margin increased $47,000 or 0.3%. Gross margin
remains level because of competition, both domestically and from lower-cost
imports of certain items and operational problems associated with the new
dyehouse, along with higher depreciation for the dyehouse. 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. Potential increases in gross margin dollars could be accompanied by
declines in revenue dollars associated with lower priced products to meet
competitive offerings.
Distribution expenses increased $4.6 million from $2.4 million to $7.0
million, and from 4.6% of sales to 8.0% of sales. The cause for the increase in
expense is a result of the acquisition of Simplicity, with distribution costs of
12.6% of its net sales. At Conso Products US, distribution expenses increased
approximately $69,000 from 4.1% to 4.3% of sales, primarily as a result of the
increased depreciation expense relating to the new warehouse facility in Union,
SC. Distribution expenses at British Trimmings decreased $71,000 but increased
as a percentage of sales from 5.8% to 6.0% due to lower net sales. The dollar
decrease resulted from personnel changes and a decrease in credits issued for
freight, and was partially off set by larger allocations of fixed expenses from
lower manufacturing levels.
Selling expenses increased $2.2 million, but declined as a percentage of
sales from 11.9% to 9.7%. The acquisition of Simplicity added $2.6 million of
selling expenses at 7.1% of its net sales. At Conso Products US, selling
expenses declined $82,000 from 11.4% to 11.2% of net sales, and at British
Trimmings, selling expenses declined $267,000 from 13.1% to 12.6% of net sales.
General and administrative costs (including amortization) increased $6.7
million, due primarily as a result of the Simplicity acquisition. As a
percentage of sales, general and administrative costs increased from 6.5% of net
sales to 11.4%. Simplicity added $6.4 million in general and administrative
costs (including the amortization of intangibles), at 17.6% of its net sales.
Conso Products US general and administrative costs increased $425,000, excluding
transaction losses, and increased from 5.9% 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,
higher bonus expense, and increased investor relations efforts. British
Trimmings same costs declined $253,000 from 7.8% to 6.8% of its net sales. The
British Trimmings reduction comes from reduced personnel levels and lower legal
fees.
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Operating income increased $3.3 million or 51.4%, primarily as a result of
the change in margin, lower operating costs and the Simplicity acquisition. The
Simplicity acquisition resulted in a $3.7 million increase in operating income.
Conso Products US operating income decreased $412,000. British Trimmings
operating income increased $18,000.
Interest expense increased substantially due to the increase in debt incurred
to acquire the Simplicity business, while the effective tax rate was favorably
affected by a one-time tax benefit of foreign tax and alternative minimum tax
credits. This additional income has been partially offset by the additional
charge to cost of goods sold of $513,000 resulting from the write-up of
Simplicity inventory to market value at the purchase date as required by GAAP.
Net income increased $1.1 million or 32%, from $3.4 million to $4.5 million.
This gain in net income resulted in an earnings per share increase of $0.16 on a
historical basis, from $0.45 per share in the prior year, to $0.61 per share for
the current year. An increase of $1.2 million came from the addition of
Simplicity. British Trimmings losses increased by $42,000. While Conso Products
net income decreased $53,000 for the nine months, the overall effect on earnings
per share were minimal.
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 in June of 1998 to finance the purchase of
Simplicity. As of the end of the third quarter, credit line availability was
approximately $6.3 million under the Company's revolving loan facility and $1
million under the letters of credit 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
March 27, 1999). 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 decreased $99,000 for the nine months of fiscal 1999,
compared to 1998, however Simplicity provided approximately $0.9 million of
operating cash flow.
On November 10, 1997, the Board of Directors authorized the purchase of up to
500,000 shares of common stock. During the third quarter no shares were
purchased, leaving the total number of shares repurchased at 248,000.
Repurchases may be made from time to time depending upon market conditions. The
Company's executive committee will direct the specific repurchases. The Company
expects to fund repurchases either through internally generated funds or
existing credit lines, but may consider additional credit facilities.
The Company has budgeted approximately $4.0 million for a new dyehouse and
related equipment. Approximately $4.3 million dollars had been spent on this
project as of the end of the third quarter, with less than $100,000 remaining to
be spent. In July, the Company purchased real property owned jointly by Mr. and
Mrs. 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 Mrs. Findlay jointly as consideration. 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 $1.7 million was approved for the enhancement of
Simplicity's catalog software to support increased cross-merchandising
activities. Approximately $655,000 was spent on the project since its inception.
Capital expenditures for the first nine months of the year, excluding the
dyehouse and catalog projects and the purchase of the Conso Conference Center
were $2.0 million. Approximately $1.2 million is budgeted for the remainder of
fiscal year 1999 for ongoing (non-dyehouse or special project related) capital
expenditures.
The Company is on schedule with its five-phased plan for Y2K compliance.
Phase 1 is identifying systems 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
remaining Y2K issues of which approximately $177,000 has been spent. No material
amounts were expensed during the third quarter for Conso Products US and British
Trimmings, however $67,000 has been expensed year to date. Almost all planned
Y2K upgrades are complete at Conso Products US and British Trimmings. The major
outstanding projects to be completed are the replacement of a mainframe at
Simplicity and the conversion of Simplicity's financial systems to Conso US's
systems. To date, Simplicity has incurred
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labor expense of approximately $93,000 in connection with this project. The
mainframe has been purchased and should be installed by June 30th. The financial
system conversion is in the testing phase currently; and this project should
also be complete by June 30th.
The Company believes that the planned upgrades should result in its internal
systems being substantially Y2K compliant by June 30, 1999. The Company's main
contingency plan is to use additional labor to overcome any Y2K issue which was
either unforeseen or for which modifications did not adequately solve. The use
of extra labor would negatively affect the Company's earnings during the
period(s) that it was needed.
The Company has surveyed its major vendors and customers for their Y2K
readiness. The Company believes that it will not suffer any material disruptions
to its business as a result of its vendors and customers not being Y2K compliant
based on their responses.
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
businesses. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 27,
1999.
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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: By: /S/ Richard A. Zonin
Name: Richard A. Zonin
Title: Chief Financial Officer and
Vice President of Finance/Treasurer
(Principal Financial Officer)
Dated: By: /S/ Richard G. Christensen
Name: Richard G. Christensen
Title: Chief Accounting Officer and
Vice President
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