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 30, 1996
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22942
CONSO PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
South Carolina 57-0986680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
513 North Duncan Bypass, P.O. Box 326, Union, South Carolina 29379
------------------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
864/427-9004
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 10, 1996:
Common Stock, no par value.......4,987,793 shares.
Page 1 of 17 Pages
TABLE OF CONTENTS
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of March 30, 1996, and July 1, 1995 3
Consolidated Statements of Operations for the three months and nine months 5
ended March 30, 1996, and April 1, 1995
Consolidated Statements of Shareholders' Equity for the three 6
months and nine months ended March 30, 1996
Consolidated Statements of Cash Flows for the nine months ended 7
March 30, 1996, and April 1, 1995
Notes to Consolidated Financial Statements 9
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
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 30, 1996 July 1, 1995
--------------------- --------------------
ASSETS
CURRENT ASSETS:
Cash $ 174,154 $ 142,555
Accounts receivable, net of allowances for bad debts and
customer deductions of $928,808 and $767,642 on
March 30, 1996 and July 1, 1995, respectively 11,467,974 9,805,603
Inventories (Notes 3 and 4) 20,637,245 19, 931,881
Prepaid expenses and other 531,240 842,840
--------------------- --------------------
Total current assets 32,810,613 30,722,879
--------------------- --------------------
CASH SURRENDER VALUE OF OFFICER'S LIFE
INSURANCE - 39,270
--------------------- --------------------
PROPERTY AND EQUIPMENT (Note 4):
Land and improvements 1,079,145 1,089,499
Buildings and improvements 6,607,994 5,655,790
Machinery and equipment 11,490,979 10,496,453
--------------------- --------------------
Total 19,178,118 17,241,742
Accumulated depreciation (6,990,264) (5,798,641)
--------------------- --------------------
Total property and equipment, net 12,187,854 11,443,101
--------------------- --------------------
DEFERRED INCOME TAXES (Note 5) 2,122,928 1,255,366
DEFERRED COSTS 258,438 238,195
--------------------- --------------------
TOTAL ASSETS $47,379,833 $43,698,811
--------------------- --------------------
See notes to unaudited consolidated financial statements
3
CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
March 30, 1996 July 1, 1995
--------------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings (Note 9) $ 7,089,663 $ 9,073,531
Current maturities of long-term debt 508,303 571,044
Trade accounts payable 3,966,530 3,749,179
Accrued liabilities 3,108,430 2,309,342
Income taxes payable 1,061,610 550,125
--------------------- ---------------------
Total current liabilities 15,734,536 16,253,221
--------------------- ---------------------
NONCURRENT LIABILITIES:
Long-term debt 2,254,519 2,598,315
Deferred income taxes 587,334 723,544
--------------------- ---------------------
Total noncurrent liabilities 2,841,853 3,321,859
--------------------- ---------------------
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Preferred stock (no par, 10,000,000 shares authorized,
no shares issued) - -
Common stock (no par, 50,000,000 shares authorized,
4,987,793 shares issued) 16,896,346 16,571,214
Retained earnings 11,829,557 7,258,119
Cumulative translation gain 77,541 294,398
--------------------- ---------------------
Total shareholders' equity 28,803,444 24,123,731
--------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
$47,379,833 $43,698,811
--------------------- ---------------------
See notes to unaudited consolidated financial statements
4
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------------------- -- -------------------------------------
March 30, 1996 April 1, 1995 March 30, 1996 April 1, 1995
------------------ ------------------ ------------------ -----------------
NET SALES $18,135,661 $15,900,338 $52,521,185 $44,130,359
COST OF GOODS SOLD 11,540,111 10,243,895 33,651,178 28,978,695
------------------ ------------------ ------------------ -----------------
GROSS MARGIN 6,595,550 5,656,443 18,870,007 15,151,664
------------------ ------------------ ------------------ -----------------
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES
Distribution expense 772,289 630,676 2,213,563 1,728,793
Selling expense 2,326,492 1,881,269 6,069,066 5,021,816
General and administrative
expense 1,049,274 992,035 3,489,427 2,808,201
Foreign currency translation
losses (gains) (4,542) (90,097) 13,333 (148,851)
------------------ ------------------ ------------------ -----------------
Total 4,143,513 3,413,883 11,785,389 9,409,959
------------------ ------------------ ------------------ -----------------
INCOME FROM
OPERATIONS 2,452,037 2,242,560 7,084,618 5,741,705
INTEREST EXPENSE, NET 154,140 242,280 620,518 621,799
------------------ ------------------ ------------------ -----------------
INCOME BEFORE INCOME TAXES 2,297,897 2,000,280 6,464,100 5,119,906
------------------ ------------------ ------------------ -----------------
INCOME TAXES (Note 5)
Current income tax
provision before one-time
credits 666,085 632,298 1,892,662 1,703,170
Net one-time job tax
credits - (913,000) - (913,000)
------------------ ------------------ ------------------ -----------------
Total income tax
provision 666,085 (280,702) 1,892,662 790,170
------------------ ------------------ ------------------ -----------------
NET INCOME $ 1,631,812 $ 2,280,982 $ 4,571,438 $ 4,329,736
------------------ ------------------ ------------------ -----------------
Net income per share $ 0.33 $ 0.46 $ 0.92 $ 0.87
------------------ ------------------ ------------------ -----------------
Weighted average number of
shares outstanding
(Notes 6 and 7) 4,986,419 4,950,293 4,965,403 4,950,293
------------------ ------------------ ------------------ -----------------
See notes to unaudited consolidated financial statements
5
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 30, 1996
Common Stock Cumulative
---------------------------
Shares Retained Translation
Issued Amount Earnings Adjustments Total
------------- ------------- ------------- -------------- -------------
Balance, December 30, 1995 4,975,293 $16,786,354 $10,197,745 $155,771 $27,139,870
Stock options exercised 12,500 109,992 109,992
Net income 1,631,812 1,631,812
Translation loss (78,230) (78,230)
------------- ------------- ------------- -------------- -------------
March 30, 1996 4,987,793 $16,896,346 $11,829,557 $ 77,541 $28,803,444
------------- ------------- ------------- -------------- -------------
See notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED MARCH 30, 1996
Common Stock Cumulative
----------------------------
Shares Retained Translation
Issued Amount Earnings Adjustments Total
------------- ------------- ------------- -------------- -------------
Balance, July 1, 1995 4,950,293 $16,571,214 $7,258,119 $294,398 $24,123,731
Stock options exercised 37,500 325,132 325,132
Net income 4,571,438 4,571,438
Translation loss (216,857) (216,857)
------------- ------------- ------------- -------------- -------------
March 30, 1996 4,987,793 $16,896,346 $11,829,557 $ 77,541 $28,803,444
------------- ------------- ------------- -------------- -------------
See notes to unaudited consolidated financial statements
6
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-------------------------------------------
March 30, 1996 April 1, 1995
-------------------- ---------------------
OPERATING ACTIVITIES:
Cash received from customers $ 52,233,110 $ 44,431,915
Cash paid to suppliers and employees (45,294,694) (42,801,353)
Interest paid ( 785,041) ( 531,062)
Interest received 106,757 77,856
Income taxes paid ( 2,114,645) ( 1,501,602)
-------------------- ---------------------
Net cash provided by (used in) operating activities 4,145,487 ( 324,246)
-------------------- ---------------------
INVESTING ACTIVITIES:
Sale (purchase) of officer's life insurance 39,270 ( 6,612)
Purchase of London production facility ( 796,110) -
Purchase of equipment and property ( 1,339,652) ( 2,083,784)
Payments of capitalized acquisition costs ( 76,561) -
Payments for acquisition ( 93,582) -
-------------------- ---------------------
Net cash used in investing activities ( 2,266,635) ( 2,090,396)
-------------------- ---------------------
FINANCING ACTIVITIES:
Net borrowings under line of credit arrangements ( 1,800,900) 2,685,165
Principal payments on long-term debt ( 260,264) ( 243,128)
Principal payments under capital lease obligations ( 111,221) ( 147,808)
Shareholder's distribution paid - ( 35,619)
Proceeds from issuance of common stock, net of expenses 325,132 -
-------------------- ---------------------
Net cash provided by (used in) financing activities ( 1,847,253) 2,258,610
-------------------- ---------------------
INCREASE (DECREASE) IN CASH 31,599 ( 156,032)
CASH AT:
BEGINNING OF PERIOD 142,555 302,010
-------------------- ---------------------
END OF PERIOD $ 174,154 $ 145,978
-------------------- ---------------------
See notes to unaudited consolidated financial statements
7
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
Nine Months Ended
-------------------------------------------
March 30, 1996 April 1, 1995
--------------------- --------------------
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 4,571,438 $ 4,329,736
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,238,516 1,115,453
Amortization of deferred expenses 72,050 35,039
Provision for deferred taxes ( 861,293) (1,178,157)
Foreign currency translation losses (gains) 52,906 ( 174,820)
Payment of capitalized loan origination costs ( 1,111) ( 36,694)
Change in assets and liabilities:
Accounts receivable (1,729,898) (1,316,421)
Inventory ( 858,973) (3,658,538)
Prepaid expenses and other 47,822 227,852
Trade accounts payable 122,133 ( 828,427)
Accrued liabilities 441,328 472,865
Income taxes payable 1,050,569 687,866
--------------------- --------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $4,145,487 $( 324,246)
--------------------- --------------------
See notes to unaudited consolidated financial statements
8
CONSO PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 30, 1996
1. CONSOLIDATION
The financial statements are unaudited and include the accounts of the Company,
its subsidiary, British Trimmings Limited and its subsidiaries (all operating
within the United Kingdom), and Conso's subsidiary, Val-Mex, S.A. de C.V., which
operates Conso's Juarez, Mexico assembly plant (collectively the "Company").
The British Trimmings Limited balances included in the consolidation are
prepared using United States generally accepted accounting principles and are
translated into U.S. dollars based on exchange rates as published in the WALL
STREET JOURNAL. Assets and liabilities are translated based on the rates in
effect on the balance sheet date. Income statement amounts are translated using
the average of the month-end exchange rates in effect during the period. The
Val-Mex subsidiary's operations are not significant in relation to the Company's
operations. All significant intercompany accounts and transactions, and profit
and loss on intercompany transactions are eliminated in consolidation.
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months and nine
months ended March 30, 1996, and April 1, 1995, reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. All such adjustments are of a normal
recurring nature, except as discussed 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 June 29, 1996.
Certain previously reported amounts have been reclassified to conform with
the current year presentation.
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 30, 1996, and April 1, 1995, each included 13 weeks and 39 weeks,
respectively.
3. INVENTORIES
The composition of inventories at March 30, 1996, and July 1, 1995, was as
follows:
March 30, 1996 July 1, 1995
Raw Materials $ 6,771,653 $ 7,150,304
Work-In-Process 3,110,206 2,849,966
Finished Goods 10,755,386 9,931,611
-------------------- ----------------------
Totals $ 20,637,245 $ 19,931,881
-------------------- ----------------------
9
4. PROPERTY AND EQUIPMENT
In September 1995, the Company made a special provision of $250,000 to absorb
charges relating to the disposal of equipment and inventory of its embroidery
operations, which it has discontinued. The Company intends to dispose of these
assets during 1996.
In December 1995, the Company completed the purchase of a 20,000 square foot
production facility in London at a cost of $796,000. The present 9,500 square
foot facility is being offered for sale.
5. INCOME TAXES
The Company's effective tax rate for the current quarter continued to be
favorably impacted by anticipated South Carolina Jobs Tax Credits relating to
job increases at the Union, SC plants. In March 1995, Conso received a ruling
from the South Carolina Tax Commission whereby certain jobs tax credits (in the
amount of $1,383,000) earned by the corporation are available to be carried
forward to be applied against C corporation South Carolina income taxes incurred
after December 18, 1993. The prior year's quarter includes this one-time jobs
tax credits, net of federal tax effect of $913,000.
6. STOCK SPLIT
On September 7, 1995, the Company announced a 3-for-2 split of its common
stock, issued on October 6, 1995, to shareholders of record at the close of
business on September 18, 1995. All per share data presented in the accompanying
financial statements has been restated to reflect the 3-for-2 stock split.
7. STOCK OPTIONS
On September 7, 1995, the Company granted options to certain key employees to
purchase an aggregate of 62,400 shares of the Company's common stock under its
1993 Stock Option Plan. The options were granted at $10 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 of the employee.
Options to purchase an additional 37,500 shares had been previously awarded to
a key employee of which options to purchase 25,000 shares were exercised on
November 28, 1995, and the remaining options for 12,500 shares were exercised on
January 10, 1996.
8. DEFINED CONTRIBUTION PLAN
On January 1, 1996, the Company offered a 401(k) Retirement Plan to all U.S.
personnel and a similar type plan to all employees of British Trimmings. The
Company will match employee contributions up to 3% of base pay.
9. DEBT AGREEMENT
The Company's $10,000,000 revolving line of credit was amended on March 1, 1996
to extend the expiration date until December 1, 1997, decrease the interest rate
on borrowings made in U.S. dollars to the 90-day certificate of deposit rate
plus 2.75%, decrease the interest rate on borrowings made in the U.K. pounds
sterling to the adjusted London Interbank offered rate plus 1.25% and amend
certain of the financial covenants.
10
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-KSB for the fiscal year ended July 1, 1995, including
the financial information and management's discussion contained or incorporated
by reference therein.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 30, 1996, COMPARED TO QUARTER ENDED APRIL 1, 1995
Net sales for the quarter ended March 30, 1996, of $18.1 million were $2.2
million or 14.1% higher than for the comparable prior year quarter. Conso US's
sales increased to $13.2 million, a 24.9% improvement over the comparable prior
year quarter. British Trimmings' sales were below the prior year's quarter,
reflecting the slow housing industry and weak consumer spending in the United
Kingdom. However, the Company is encouraged by the fact that British Trimmings'
revenues were not only up over the second quarter of the current year, but also
the amount of incoming orders for the first few weeks of the fourth quarter are
ahead of orders for the same period of the prior year.
Sales by customer type increased as follows:
Manufacturers $ 7,513,000 up 28.0%
Distributors 7,323,000 up 7.0%
Retailers 3,300,000 up 3.7%
- ------------------------------------------------------------
Total $18,136,000 up 14.1%
- ------------------------------------------------------------
Sales outside the U.S. and U.K. (the Company's major sales regions) increased
to $1.6 million, a 20.3% increase over the comparable prior year quarter. Sales
outside the U.S. and U.K. by geographic region were as follows:
Canada, Latin America $ 669,000 up 40.7%
Continental Europe, Middle East 569,000 up 5.0%
Pacific Rim 368,000 up 16.1%
- -------------------------------------------------------------
Total $ 1,606,000 up 20.3%
- -------------------------------------------------------------
The gross margin for the quarter edged up to $6.6 million or 36.4% of net
sales, ahead of the prior year's third quarter of $5.7 million or 35.6% of net
sales. The improvement in gross margin was primarily attributable to Conso US
and resulted from price increases, process improvements and greater economies of
scale.
Distribution expenses increased $142,000 or 22.5% from 4.0% to 4.3% of net
sales over the prior year's quarter primarily as the result of the overall
increase in shipments and continued focus on exports. Conso US contributed
$125,000 of the increase while British Trimmings' distribution expenses
contributed the remaining $17,000 of the increase.
11
Selling expenses increased $445,000 or 23.7% from 11.8% to 12.8% of net sales.
As in prior quarters the increase was effected by additional sales personnel
costs, marketing costs, and the additional costs of the international sales
offices. Approximately $180,000 was spent to launch the new lines designed and
introduced by Wendy Cushing. The introduction of the Wendy Cushing collections
included the equipping of 21 designer showrooms, catalog mailouts, advertising,
trade shows, and related expenses. Conso US's selling expenses increased
$342,000 while remaining relatively flat at 12.8% of its net sales. British
Trimmings' selling expenses, representing 12.9% of its net sales, increased
$103,000 from the prior year's third quarter primarily from the addition of
marketing and sales personnel and additional promotion costs.
General and administrative expenses (excluding foreign currency translation
gains) increased $57,000 or 5.8% but declined as a percentage of net sales
from 6.2% to 5.8%. Of the increase, Conso US contributed $107,000, but its
general and administrative expense decreased as a percent of sales from 5.3%
to 5.1%. The dollar increase was primarily due to the separation of the
offices of Chairman and President, increased shareholder communications,
travel and other expenses related to domestic and international
expansion, and with some increases in supply costs (primarily paper).
British Trimmings' administrative costs, which represented 7.8% of its net
sales for the third quarter of the current year, declined $50,000 due to higher
initial data processing expenditures in the prior year and following the
introduction of Conso systems .
Operating income for the current three month period increased from $2.3 million
to $2.5 million but declined as a percentage of net sales from 14.1% to 13.5%
due to the increased distribution, selling, and general and administrative
costs.
Average interest bearing indebtedness was lower in the third quarter of the
current year than in the third quarter of the prior year. The average balance
was sufficently lower to decrease net interest costs by $88,000 over the prior
year's quarter, despite a higher average interest rate.
In March 1995, Conso received a private letter ruling from the South Carolina
Tax Commission allowing certain jobs tax credits to be carried forward and
applied against future income taxes payable to the State of South Carolina. The
net effect of these state tax credits of $913,000 was applied against the prior
year's quarter tax provision in accordance with Statement of Financial
Accounting Standards 109.
The Company's quarterly tax provision and, consequently, net income continued
to be favorably impacted ($116,000) by anticipated South Carolina Jobs Tax
Credits relating to job increases at the Union, SC plants.
Net income for the quarter was $1.6 million, a decline of $649,000 or 39.8%
from the prior year's net income of $2.2 million due to the one-time net jobs
tax credits of $913,000 that was recorded in the prior year's quarter.
Excluding the prior year's one-time net jobs tax credits net income for the
quarter was up $264,000 from $1.4 million in the prior year's quarter to $1.6
million a 19.3% increase, bringing earnings per share to 33 cents from the prior
year's 28 cents from regular operations. These earnings per share amounts
reflect the 3-for-2 stock split effected in the form of a 50% share dividend
paid on October 6, 1995.
12
Conso US's net income increased $417,000 (excluding the one-time net jobs tax
credits), while British Trimming's net income decreased $153,000 over the prior
year's quarter (after adjustments for intercompany transactions, foreign
currency translation and purchase accounting).
NINE MONTHS ENDED MARCH 30, 1996, COMPARED TO NINE MONTHS ENDED APRIL 1, 1995
Net sales for the nine month period ended March 30, 1996, grew to $52.5
million, a $8.4 million or 19% increase over the prior year's period. Sales by
Conso US were up 29.7% to $37.6 million reflecting the strong U.S. economy and
the results of prior marketing and merchandising efforts. Sales by British
Trimmings continued to be relatively flat reflecting the slow housing industry
and weak consumer spending in the United Kingdom.
Sales by customer type increased as follows:
Manufacturers $22,911,000 up 31.6%
Distributors 20,642,000 up 11.5%
Retailers 8,968,000 up 9.3%
- -------------------------------------------------------------
Total $52,521,000 up 19.0%
- -------------------------------------------------------------
Sales outside the U.S. and U.K. (the Company's major sales regions) increased
to $4.8 million, a 25.8% increase over the comparable prior year period. Sales
outside the U.S. and U.K. by geographic region were as follows:
Canada, Latin America $ 2,124,000 up 31.9%
Continental Europe, Middle East 1,759,000 up 30.5%
Pacific Rim 923,000 up 7.0%
- --------------------------------------------------------------
Total $ 4,806,000 up 25.8%
- --------------------------------------------------------------
The gross margin improved from $15.2 million or 34.3% of net sales to $18.9
million or 35.9% of net sales with margins at Conso US (after intercompany
eliminations and purchase price adjustments) improving from 35.6% to 38.2% and
decreasing from 31.8% to 30.1% at British Trimmings. At Conso US, the
improvements in gross margin were due in part to price increases, process
improvements and greater economies of scale due to increased production relating
to increased sales. At British Trimmings, improvements in gross margin,
primarily from price increases and product mix, were offset by reductions in
production volume due to flat customer orders and completion of the build
up of stock inventory earlier in the 1995 calendar year.
Distribution expenses increased $485,000 or 28% from 3.9% to 4.2% of net sales
primarily as the result of the overall increase in shipments and the continuing
focus on export sales. Conso US contributed $351,000 of the increase while
British Trimmings contributed the remaining $134,000.
Selling expenses increased $1,047,000 or 20.9% from 11.4% to 11.6% of net
sales. The increase resulted from additional sales personnel costs, marketing
costs and the additional costs of the
13
international sales offices and costs related to the introduction of the new
Wendy Cushing Trimmings' lines.
General and administrative expenses (excluding foreign currency translation
gains and losses) increased $681,000 or 24.3% from 6.4% to 6.6% of net sales.
Of the increase, Conso US contributed $657,000 through increases in its general
and administrative expenses from 5.7% to 6.1% of its net sales. As in prior
quarters, the increase was due to the separation of the offices of Chairman and
President, increased shareholder communications, travel and other expenses
related to domestic and international expansion, and some increase in supply
costs (especially paper). British Trimmings contributed the remaining $24,000
of the increase in general and administrative expenses which represented 8% of
its net sales for the nine months of the current year.
Operating income for the current nine month period increased 23.4% from $5.7
million to $7.1 million or 13.5% of net sales, even though distribution,
selling, and general and administrative costs increased.
Interest expense of $620,000 was relatively flat for the nine month period
compared to the same period of the prior year and declined as a percent of sales
from 1.4% to 1.2%.
In March 1995, Conso received a private letter ruling from the South Carolina
Tax Commission allowing certain jobs tax credits to be carried forward and
applied against future income taxes payable to the State of South Carolina. The
net effect of these state tax credits of $913,000 was applied against the prior
year's nine month period tax provision in accordance with Statement of Financial
Accounting Standards 109.
The Company's tax provision for the nine month period continued to be favorably
impacted ($283,000) by anticipated South Carolina Jobs Tax Credits relating to
job increases at the Union, S.C. plants.
Net income for the nine month period was $4.6 million, an increase of $241,000
or 5.6% over the net income of the prior year's nine month period of $4.3
million which included the one-time net jobs tax credits bringing earnings per
share to 92 cents from the prior year's 87 cents per share. These earnings per
share amounts reflect the 3-for-2 stock split effected in the form of a 50%
share dividend paid on October 6, 1995. The Company achieved the small increase
in net income in spite of the one-time net jobs tax credit of $913,000 that
was granted in the prior year's period.
Net income for the nine months increased $1.2 million over the prior year's
nine month period (before the one-time net jobs tax credits) to $4.6 million a
33.8% increase bringing earnings per share to 92 cents from the prior year's 69
cents per share.
Conso US's net income increased $1.4 million over the prior year's nine month
period net income (excluding the one-time net jobs tax credits) while British
Trimming's net income decreased by $215,000 from the prior year's nine month
period (after adjustments for intercompany transactions, foreign currency
translation and purchase accounting).
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital requirements
through both internally generated funds and bank borrowings. Other than the
acquisition of British Trimmings, capital requirements in recent years have
arisen principally from the expansion of product lines and production capacity
and increased working capital needs to support higher sales volume. Working
14
capital increased to $17.1 million at March 30, 1996, from $14.5 million at July
1, 1995, and from $11.9 million at July 2, 1994. Since the acquisition of
British Trimmings, the Company has significantly increased inventories at
British Trimmings to reduce backorders and improve deliveries, and at both
British Trimmings and Conso US to support the cross-merchandising of their
products and the introduction of new product lines. Most of such increases
occurred in fiscal 1995, and the Company expects the rate of growth in
inventories relative to sales growth to decline in fiscal 1996.
Capital expenditures for fiscal 1995, were approximately $2.7 million,
primarily for manufacturing equipment at both Conso US and British Trimmings and
data processing improvements at British Trimmings. The Company has budgeted
approximately $1.6 million for capital expenditures for fiscal 1996, (other than
capital expenditures for building expansions or possible acquisitions of other
businesses), of which approximately $1.3 million had been spent through the
third quarter of fiscal 1996. In December 1995, the Company also spent
approximately $796,000 to acquire a 20,000 square foot facility for its London
showroom and wholesale operations, and is offering for sale the 9,500 square
foot London facility previously used for that purpose. The Company is presently
considering the feasibility of expanding its dyehouse and distribution
facilities at its main plant in Union, South Carolina. The Company will consider
additional capital expenditures for building expansions or business acquisitions
as opportunities arise.
At March 30, 1996, the Company had outstanding long-term indebtedness,
consisting of term loans and capital lease obligations, of approximately $2.8
million including the current portion of long-term debt of approximately
$500,000. The Company also has a $10 million revolving line of credit with a
bank, of which approximately $5.9 million was outstanding at March 30, 1996, and
under which $4.1 million was available for additional borrowings, subject to
continued compliance with borrowing base requirements. Such revolving line of
credit permits advances under the line in British pounds sterling of up to
(pound)5,000,000 providing some protection against currency fluctuations.
British Trimmings also has an overdraft borrowing facility with its bank
(similar to a revolving line of credit) for up to (pound)500,000 ($764,000 based
upon the exchange rate at March 30, 1996), of which approximately (pound)130,000
($199,000) was outstanding at March 30, 1996, and approximately (pound)370,000
($565,000) was available for additional borrowings, subject to continued
compliance with borrowing base requirements.
The Company's borrowings are secured by Conso US's real property, inventory and
accounts receivable and certain of British Trimmings' properties. Since the
Company retired a $1.6 million equipment loan in 1994, Conso US's equipment, in
addition to certain of British Trimmings' assets, are available as collateral
for additional borrowings.
The Company believes that cash generated by operations and available borrowings
under lines of credit will be adequate to fund its working capital and capital
expenditure requirements for the foreseeable future, but excluding possible
building expansions and acquisitions 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 obtained any such additional financing.
15
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Description
10.45 Sixth Amendment dated as of March 1, 1996 to the Loan Agreement
dated as of May 6, 1994, by and between the Company and
NationsBank, N.A., a national banking association
("NationsBank") formerly known as "NationsBank of North
Carolina, N.A."
10.46 Fifth Amendment dated as of March 1, 1996 to the Security
Agreement dated as of May 6, 1994 by and between the Company
and NationsBank.
10.47 Third Amendment dated as of March 1, 1996 to the Guaranty
Agreement dated as of May 6, 1994 by and between the Company
and NationsBank.
10.48 Promissory Note dated as of March 1, 1996 issued by the Company
in favor of NationsBank in the original principal amount of up
to $10,000,000.
10.49 Promissory Note dated as of February 29, 1996 issued by British
Trimmings Limited in favor of NationsBank in the original
principal amount of up to (pound)5,000,000.
27.1 Financial Data Schedule for the quarter ended March 30, 1996
(filed in electronic format only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 30, 1996.
16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSO PRODUCTS COMPANY
Dated: May 10, 1996 By:
Name: David B. Dechant
Title: Chief Accounting Officer
Dated: May 10, 1996 By:
Name: Gilbert G. Bartell
Title: Chief Financial Officer and
Vice President of Finance/Treasurer
17
INDEX TO EXHIBITS
Exhibit Description Page No.
10.45 Sixth Amendment dated as of March 1, 1996 to the Loan 19
Agreement dated as of May 6, 1994, by and between the
Company and NationsBank, N.A., a national banking
association ("NationsBank") formerly known as "NationsBank
of North Carolina, N.A."
10.46 Fifth Amendment dated as of March 1, 1996 to the Security 22
Agreement dated as of May 6, 1994 by and between the
Company and NationsBank.
10.47 Third Amendment dated as of March 1, 1996 to the Guaranty 25
Agreement dated as of May 6, 1994 by and between the
Company and NationsBank.
10.48 Promissory Note dated as of March 1, 1996 issued by the 28
Company in favor of NationsBank in the original principal
amount of up to $10,000,000.
10.49 Promissory Note dated as of February 29, 1996 issued by 35
British Trimmings Limited in favor of NationsBank in the
original principal amount of up to (pound)5,000,000.
18