<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 29, 1997
[ ] TRANSITION REPORT UNDER 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
---------------------------
(Issuer's telephone number)
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 Exchange Act 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
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of May 13, 1997.
Common Stock, no par value.......7,488,171 shares.
Page 1 of 18 Pages
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of March 29, 1997 and
June 29, 1996 3
Consolidated Statements of Operations (unaudited) for the three
months and nine months ended March 29, 1997 and March
30, 1996 5
Consolidated Statement of Shareholders' Equity (unaudited) for the
three months and nine months ended March 29, 1997
6
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended March 29, 1997, and March 30, 1996 7
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 881,376 $ 189,845
Accounts receivable, net of allowances for bad debts
and customer deductions of $353,474 and $327,770 on
March 29, 1997 and June 29, 1996, respectively 12,499,204 11,522,528
Inventories 24,448,354 20,064,822
Prepaid expenses and other 679,943 941,702
Deferred income taxes 625,477 602,936
------------ ------------
Total current assets 39,134,354 33,321,833
------------ ------------
PROPERTY AND EQUIPMENT
Land 1,156,857 1,082,911
Buildings and improvements 8,025,761 6,779,693
Machinery and equipment 13,190,700 11,104,034
------------ ------------
Total 22,373,318 18,966,638
Accumulated depreciation (7,939,587) (6,592,375)
------------ ------------
Total property and equipment, net 14,433,731 12,374,263
------------ ------------
DEFERRED INCOME TAXES (Note 5) 1,209,119 1,282,531
------------ ------------
DEFERRED COSTS (principally loan costs) 240,817 298,885
------------ ------------
TOTAL ASSETS $ 55,018,021 $ 47,277,512
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
3
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CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 9,261,470 $ 6,990,509
Current maturities of long-term debt and capital leases 216,706 477,933
Trade accounts payable 4,366,829 3,415,876
Accrued liabilities 3,528,093 2,976,595
----------- -----------
Total current liabilities 17,373,098 13,860,913
----------- -----------
NONCURRENT LIABILITIES
Long-term debt 101,938 2,107,910
Deferred Income Taxes 593,512 530,356
----------- -----------
Total noncurrent liabilities 695,450 2,638,266
----------- -----------
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;
7,488,171 and 7,481,672 shares issued on March 29, 1997
and June 29, 1996, respectively) 16,942,186 16,896,346
Retained earnings 19,488,820 13,701,279
Cumulative translations gain 518,467 180,708
----------- -----------
Total shareholders' equity 36,949,473 30,778,333
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $55,018,021 $47,277,512
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
4
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CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 19,426,593 $ 18,135,661 $ 54,973,203 $52,521,185
COST OF GOODS SOLD 11,998,023 11,540,111 33,434,571 33,651,178
------------ ------------ ------------ -----------
GROSS MARGIN 7,428,570 6,595,550 21,538,632 18,870,007
------------ ------------ ------------ -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Distribution expense 832,193 772,289 2,322,322 2,213,563
Selling expense 2,313,842 2,326,492 6,408,449 6,069,066
General and administrative expense 1,155,737 1,049,274 3,499,824 3,489,427
Currency exchange loss (gain) 55,227 (4,542) (63,477) 13,333
Gain on sale of London production
facility (Note 4) (76,483) -- (76,483) --
------------ ------------ ------------ -----------
Total 4,280,516 4,143,513 12,090,635 11,785,389
------------ ------------ ------------ -----------
INCOME FROM OPERATIONS 3,148,054 2,452,037 9,447,997 7,084,618
INTEREST EXPENSE, NET 116,942 154,140 361,320 620,518
------------ ------------ ------------ -----------
INCOME BEFORE INCOME TAXES 3,031,112 2,297,897 9,086,677 6,464,100
INCOME TAX PROVISION (Note 5) 1,041,542 666,085 3,299,136 1,892,662
------------ ------------ ------------ -----------
NET INCOME $ 1,989,570 $ 1,631,812 $ 5,787,541 $ 4,571,438
============ ============ ============ ===========
Net income per share (Note 9) $ 0.27 $ 0.22 $ 0.77 $ 0.61
============ ============ ============ ===========
Weighted average number of
shares outstanding (Note 9) 7,486,690 7,479,611 7,484,552 7,448,087
============ ============ ============ ===========
</TABLE>
See notes to unaudited consolidated financial statements
5
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CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 29, 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Cumulative
Retained Translation
Shares Issued Amount Earnings Adjustments Total
---------------- ---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 28, 1996 7,485,247 $16,920,182 $17,499,250 $842,610 $35,262,042
Stock options exercised 2,400 16,004 16,004
Stock for director fees 524 6,000 6,000
Net income 1,989,570 1,989,570
Translation loss (324,143) (324,143)
---------------- ---------------- ---------------- --------------- -----------------
Balance, March 29, 1997 7,488,171 $16,942,186 $19,488,820 $518,467 $36,949,473
================ ================ ================ =============== =================
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED MARCH 29, 1997
<TABLE>
<CAPTION>
Common Stock
--------------------------------
Cumulative
Retained Translation
Shares Issued Amount Earnings Adjustments Total
---------------- --------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, June 29, 1996 4,987,793 $16,896,346 $13,701,279 $180,708 $30,778,333
3-for-2 stock split 2,493,879
Stock options exercised 5,975 39,840 39,840
Stock for director fees 524 6,000 6,000
Net income 5,787,541 5,787,541
Translation gain 337,759 337,759
---------------- --------------- ---------------- --------------- -----------------
Balance, March 29, 1997 7,488,171 $16,942,186 $19,488,820 $518,467 $36,949,473
================ =============== ================ =============== =================
</TABLE>
See notes to unaudited consolidated financial statements
6
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CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
March 29, 1997 March 30, 1996
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash received from customers $ 55,894,601 $ 52,233,110
Cash paid to suppliers and employees (48,986,775) (45,294,694)
Interest paid (581,584) (783,930)
Interest received 171,253 106,757
Income taxes paid (2,668,279) (2,114,645)
------------ ------------
Net cash provided by operating activities 3,829,216 4,146,598
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of officer's life insurance -- 39,270
Purchase of property and equipment (1,417,897) (1,339,652)
Purchase of new London production facility -- (796,110)
Proceeds from sale of old London production facility 392,579 --
Payments of capitalized acquisition costs -- (76,561)
Payments for acquisition -- (93,582)
Construction and equipment costs for new
dyehouse and warehouse (1,814,010) --
------------ ------------
Net cash used in investing activities (2,839,328) (2,266,635)
------------ ------------
FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit
arrangement 1,946,417 (1,800,900)
Principal payments on long-term debt (2,233,320) (260,264)
Principal payments under capital lease obligations (57,295) (111,221)
Payment of capitalized loan origination costs -- (1,111)
Proceeds from issuance of common stock, net of expenses 45,840 325,132
------------ ------------
Net cash used in financing activities (298,358) (1,848,364)
------------ ------------
INCREASE IN CASH 691,530 31,599
CASH AT:
BEGINNING OF PERIOD 189,846 142,555
------------ ------------
END OF PERIOD $ 881,376 $ 174,154
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
7
<PAGE> 8
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 5,787,541 $ 4,571,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,257,184 1,238,516
Amortization of deferred expenses 68,722 72,050
Provision for (benefit from) deferred taxes 33,522 (861,293)
Currency translation (gain) loss (62,689) 52,906
Gain on sale of London production facility (Note 4) (76,483) --
Change in assets and liabilities:
Accounts receivable (815,805) (1,729,898)
Inventory (4,071,771) (858,973)
Prepaid expenses and other 78,974 47,822
Income taxes receivable 206,374 --
Trade accounts payable 873,468 122,133
Accrued liabilities (136,669) 441,328
Income taxes payable 686,848 1,050,569
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,829,216 $ 4,146,598
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
8
<PAGE> 9
CONSO PRODUCTS COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 29, 1997
1. CONSOLIDATION
The financial statements are unaudited and include the accounts of the
parent company ("Conso" or "Conso US"), its subsidiary, British Trimmings
Limited, and its subsidiaries (all operating within the United Kingdom)
(collectively, "British Trimmings"), 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 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 reported in the Wall
Street Journal. Assets and liabilities are translated based on the exchange
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 29, 1997 and March 30, 1996, 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 the generally accepted
accounting principles for the 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 28,
1997.
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 29, 1997 and March 30, 1996, each included 13 weeks and 39
weeks, respectively.
9
<PAGE> 10
3. INVENTORIES
The composition of inventories at March 29, 1997, and June 29, 1996,
was as follows:
<TABLE>
<CAPTION>
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
Raw Materials $ 7,331,173 $ 6,357,327
Work-In-Process 4,303,169 3,325,497
Finished Goods 12,814,012 10,381,998
----------- -----------
Totals $24,448,354 $20,064,822
=========== ===========
</TABLE>
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. The Company had completed substantial disposition of the
embroidery operations by September 1996, using the full provision.
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 9,500 square foot
facility previously used by the Company was sold on January 29, 1997 for
$393,000, resulting in a gain of $76,000.
5. INCOME TAXES
The Company's effective tax rate declined in the current quarter
compared to the current year's previous quarters as the Company recorded
additional Jobs Tax Credits of $90,000 (net of Federal Income Tax effect) since
there were sufficient increases in employment in South Carolina to qualify for
the additional credits.
6. STOCK SPLITS
On September 5, 1996, the Company announced a 3-for-2 split of its
common stock, issued on October 4, 1996 to shareholders of record at the
close of business on September 16, 1996.
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.
Share and per share amounts have been adjusted for both 3-for-2 stock
splits.
7. STOCK OPTIONS AND ELECTIONS
On September 7, 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 options were exercised on
September 18, 1996, 800 options were exercised on October 28, 1996, 1,200
options were exercised on January 27, 1997, and 1,200 options were exercised on
February 28, 1997. The options were granted at $6.67 per share and are
exercisable with respect to one-third of the total shares after one year, an
additional one-third of the shares after two years, and the final one-third of
the shares after three years. The options expire after five years and are
subject to continued employment by the employee. (All amounts have been
adjusted for the 3-for-2 stock splits.)
On September 5, 1996, the Company granted additional options to certain
key employees to purchase an aggregate of 79,500 shares of the Company's common
stock under its 1993 Stock
10
<PAGE> 11
Option Plan. The options were granted at $11.00 per share and are exercisable
with respect to one-third of the total shares after one year, an additional
one-third of the shares after two years, and the final one-third of the shares
after three years. The options expire after five years and are subject to
continued employment by the employee. (All amounts have been adjusted for the
3-for-2 stock split.)
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. On
February 18, 1997, 524 shares were issued in accordance with directors'
elections.
8. DEBT AGREEMENT
In November 1996, the Company renegotiated with its US bank the terms
of its revolving loan agreement. The new agreement provides for an increase in
the total borrowings from $10 million to $15 million. Advances bear interest at
a per annum interest rate equal to the one-month, US LIBOR rate plus 1% per
annum.
On November 25, 1996, the Company paid off its $2.1 million term loan
secured by real estate (without a prepayment penalty) as a result of the new
agreement mentioned above.
9. EARNINGS PER SHARE
The Financial Standards Board has issued Statements of Financial
Accounting Standards No. 128, "Earnings Per Share." The provisions of the
Statement, which will be implemented by the Company for the fiscal year ending
June 27, 1998, requires specific computation, presentation and disclosure
requirements for earnings per share. If earnings per share for all periods
presented had been calculated using the requirements of the Statement, the
earnings per share would not have been materially different from earnings per
share presented.
11
<PAGE> 12
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 unaudited consolidated financial statements and notes thereto, and with
the Company's Annual Report on Form 10-K for the fiscal year ended June 29,
1996, including the financial information and management's discussion contained
or incorporated by reference therein.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 29, 1997 COMPARED TO QUARTER ENDED MARCH 30, 1996
Net sales for the quarter ended March 29, 1997, of $19.4 million, were
$1.3 million or 7.1% higher than for the comparable prior year quarter. Conso US
increased 6.6%, continuing the upward trend, while British Trimmings' sales
increased more appreciably at 8.4%.
Sales by customer type were as follows:
<TABLE>
<S> <C> <C>
Distributors $ 7,778,000 up 6.2%
Manufacturers 8,307,000 up 10.6%
Retailers 3,342,000 up 1.2%
- --------------------------------------------------------------------------------
Totals $19,427,000 up 7.1%
================================================================================
</TABLE>
In the prior quarter, sales to manufacturers were up at Conso US, but
relatively flat overall as some orders by British Trimmings' customers appeared
to have been delayed into the third quarter. This delay in the prior quarter
contributed to the increase in sales to manufacturers over and above increased
sales to distributors and retailers in this quarter.
Sales outside the US and UK (the Company's major sales regions)
increased to $2.3 million, a 43.4% increase over the comparable prior year
quarter. Sales outside the US and UK by geographic region were as follows:
<TABLE>
<S> <C> <C>
Western Hemisphere $ 1,088,000 up 62.6%
Continental Europe, Middle East 768,000 up 34.9%
Pacific Rim 448,000 up 21.7%
- --------------------------------------------------------------------------------
Totals $ 2,304,000 up 43.4%
================================================================================
</TABLE>
The gross margin for the quarter remained strong at $7.4 million or
38.2% of net sales, ahead of the prior year's third quarter of $6.6 million or
36.4% of net sales. The increase, coming from both Conso US (from 38.7% to
39.8%) and British Trimmings (from 30.0% to 34.1%), was primarily due to price
increases, process improvements and greater economies of scale. A portion of
the increase at British Trimmings (1.5% of sales) is due to the
reclassification of certain sampling, marketing and other selling related costs
to selling expense to conform to the Conso US presentation.
12
<PAGE> 13
Distribution expenses increased slightly while remaining flat as a
percent of sales (4.3%).
Selling expenses decreased $13,000, declining from 12.8% to 11.5% of
net sales. Conso US selling expenses declined $129,000 due to the costs in the
prior year of the Wendy Cushing Lines introductions not recurring in the
current year, and declined as a percent of net sales from 12.8% in the prior
year to 11.1% in the current year. British Trimmings' selling expenses increased
$116,000 from the prior year's third quarter but remained relatively flat as a
percent of net sales, decreasing from 12.9% to 12.7% of net sales. The increases
at British Trimmings are due to increased sampling and other marketing efforts,
advertising, and the support of the Pacific Rim from Stockport instead of from
the US operations. In addition, approximately half of the dollar increase at
British Trimmings is due to the reclassification of certain marketing related
costs to selling expense to conform to the Conso US format.
General and administrative expenses, excluding currency gains and
losses and gains on disposal of the replaced London facility, were up
approximately $106,000 over the comparable period of the prior year, increasing
both at Conso US and British Trimmings, but remained relatively flat as a
percent of net sales, increasing from 5.8% to 5.9%. A currency translation loss
further increased total selling, general and administrative costs by $60,000
over the prior year's third quarter. In addition, the Company recorded a gain on
the sale of its recently replaced London manufacturing facility of approximately
$76,000.
Average outstanding debt (with interest) was lower and overnight
deposits higher in the third quarter of the current year than in the third
quarter of the prior year. Accordingly, net interest costs decreased $37,000 in
the current quarter compared to the prior year's quarter.
The Company's effective tax rate increased in the current quarter
compared to the prior year's quarter but declined from the current year's
compared to the first and second quarters since the Company recorded additional
Jobs Tax Credits as a result of sufficient increases in employment in South
Carolina in the current year's third quarter to qualify for the credit. Jobs
Tax Credits (net of Federal Income Tax effect) of $116,000 were recorded in the
prior year's quarter while $90,000 were recorded in the current year's quarter.
Net income for the quarter ended March 29, 1997 was $1,990,000, an
increase of $358,000 or 21.9% over the net income of the third quarter of the
prior year of $1,632,000, bringing earnings per share to 27 cents from the prior
year's 22 cents. These earnings per share amounts reflect the 3-for-2 stock
splits given in the form of a 50% share dividend paid on October 4, 1996 and
October 6, 1995. Conso US' net income increased $335,000 over the prior year
quarter's net income, and British Trimmings' net income was up by $23,000 after
adjustments for intercompany transactions, foreign exchange translation and
purchase accounting adjustments.
NINE MONTHS ENDED MARCH 29, 1997
COMPARED TO NINE MONTHS ENDED MARCH 30, 1996
Net sales for the nine months ended March 29, 1997 grew to $55 million,
a $2.5 million or 4.7% increase over the prior year's nine month period. Sales
by Conso US were up 5.1% to $39.6 million. Sales by British Trimmings were up
3.5% for the nine months despite the weak first quarter, and in part as a result
of the 8.4% improvement in the third quarter.
13
<PAGE> 14
Sales by customer type were as follows:
<TABLE>
<S> <C> <C>
Distributors $22,406,000 up 7.6%
Manufacturers 23,336,000 up 3.5%
Retailers 9,231,000 up 1.0%
- -------------------------------------------------------------------------------
Totals $54,973,000 up 4.7%
===============================================================================
</TABLE>
Sales to manufacturers increased during the third quarter, moving the
year-to-date figure for the current year ahead of the figures for the same
period of the prior year. The Company continues to aggressively pursue the
manufacturing business. Distributor and retailer sales continued to increase as
well.
Sales outside the US and UK (the Company's major sales regions)
increased to $6.3 million, a 31.4% increase over the comparable prior year
period. Sales outside the US and UK by geographic region were as follows:
<TABLE>
<S> <C> <C>
Western Hemisphere $2,959,000 up 39.3%
Continental Europe, Middle East 2,078,000 up 18.2%
Pacific Rim 1,278,000 up 38.6%
- --------------------------------------------------------------------------------
Totals $6,315,000 up 31.4%
================================================================================
</TABLE>
The gross margin improved from $19.1 million or 36.4% of net sales
(before the prior year's $250,000 reserve described below) to $21.5 million or
39.2% of net sales with margins at Conso US (after intercompany eliminations and
purchase price adjustments and before the prior year's $250,000 reserve
described below) improving from 38.9% to 41.1% and increasing from 30.1% to
34.2% 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 Conso US, a
special provision of $250,000 (less than 1% of net sales) was made in the prior
year to absorb charges relating to the disposal of its embroidery operations,
the disposition of which was substantially complete by the end of the first
quarter. The provision reduced the prior year's consolidated gross margin to
35.9% from 36.4% and the Conso US gross margin to 38.2% from 38.9%. At British
Trimmings, improvements in gross margin were primarily from price increases and
product mix. A portion of the improvement at British Trimmings (1% of net sales)
was due to the reclassification of certain marketing related costs to selling
expense to conform to the Conso US presentation.
Distribution expenses remained relatively flat at 4.2% of net sales.
Selling expenses increased $339,000 but remained relatively flat as a
percentage of net sales, from 11.6% to 11.5%. The increase resulted from
additional sales personnel costs, marketing costs, the additional costs of
international sales offices, and the reclassification of certain items to
selling expense, as previously discussed.
General and administrative expenses remained relatively flat but
declined as a percentage of net sales from 6.6% to 6.4%.
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<PAGE> 15
Operating income for the current nine month period increased 33.4% from
$7.1 million or 13.5% of net sales to $9.4 million or 17.2% of net sales, even
though selling, general and administrative costs increased overall.
The Company's tax provision for the nine month period was somewhat
favorably affected by South Carolina Jobs Tax Credits since there were adequate
job increases at the Union, S.C. plants to qualify for the credit. However, the
effective tax rate continued to be significantly higher than in the prior year,
when the average increase in employment was significantly higher.
Net income for the nine month period ended March 29, 1997 was
$5,788,000, an increase of $1,217,000 or 26.6%, over the net income of the prior
year's nine month period of $4,571,000 bringing earnings per share to 77 cents
from the prior year's 61 cents per share. These earnings per share amounts
reflect the 3-for-2 stock splits effected in the form of 50% share dividends
paid on October 4, 1996 and October 6, 1995. Conso US' net income increased
$1,178,000 over the prior year's nine month period, while British Trimmings' net
income increased $38,000 from the prior year's nine month period (after
adjustments for intercompany transactions, foreign exchange translations and
purchase accounting).
LIQUIDITY AND CAPITAL RESOURCES
The Company recently completed a renegotiation of its NationsBank, N.A.
revolving loan facility to facilitate the construction of a new dyehouse and
warehouse facilities and allow for potential future expansions or the
acquisitions of other businesses. Effective November 25, 1996, the new facility
provided for an increase in the total borrowings from $10 million to $15 million
and a reduction in interest rates on borrowings in British pounds sterling from
UK LIBOR plus 125 basis points to UK LIBOR plus 100 basis points (a 25 basis
points reduction) and a change in the US borrowing rate from the 90 day CD rate
plus 275 basis points to the 30 day US LIBOR rate plus 100 basis points (a
reduction of 102 basis points as of December 28, 1996). In addition, the Company
used available cash of $2 million to repay the Company's term loan secured by US
real estate which bore interest at a fixed interest rate of 9%.
The outstanding aggregate balances of both the Company's and British
Trimmings' lines of credit and the British Trimmings' (line of credit type)
overdraft facility were $9.3 million at March 29, 1997, with approximately $6.5
million available for future borrowings subject to satisfaction of certain
borrowing base requirements. Working capital increased to $21.8 million from
$20.2 million at December 28, 1996, and remained strong, above the $19.5 million
at June 29, 1996 as in the prior two quarters, despite increased capital
expenditures, particularly for the building expansions and equipment.
The Company had originally budgeted approximately $1.3 million for
capital expenditures during the 1997 fiscal year (excluding building expansions
or possible acquisitions of other businesses). In the US, Conso had also
budgeted $2.3 million for the construction of a new dyehouse facility and
related equipment and $3.7 million for a new warehouse facility and some new
equipment. These expansions will free up much needed additional production and
some office space. At March 29, 1997, approximately $1.8 million had been spent
on these projects with the majority of this amount going toward the building of
the new warehouse facility. Excluding the dyehouse and warehouse projects,
capital expenditures through the third quarter were approximately $1.4 million.
This amount, which was greater than originally anticipated for
15
<PAGE> 16
the first six months, was due to the acceleration of expenditures at British
Trimmings to further streamline their production processes and better facilitate
the Conso US inventory control systems. In February, the Company has increased
its budget for capital expenditures (excluding building expansions or possible
acquisitions of other businesses) to $1,750,000.
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 additional acquisitions of other businesses. Based on the Company's
financial position, the Company believes that it will also 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, (except to increase its availability under its line of credit for
near-term requirements, as previously discussed) the Company has not yet made
arrangements for any such additional financing.
EARNINGS PER SHARE
The Financial Standards Board has issued Statements of Financial
Accounting Standards No. 128, "Earnings Per Share." The provisions of the
Statement, which will be implemented by the Company for the fiscal year ending
June 27, 1998, requires specific computation, presentation and disclosure
requirements for earnings per share. If earnings per share for all periods
presented had been calculated using the requirements of the Statement, the
earnings per share would not have been materially different from earnings per
share presented.
CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION
Statements contained herein as to 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 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 profitably integrate into its operations any existing businesses it may
acquire; changes in the cost and availability 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 products and raw materials;
disruption of operations 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.
16
<PAGE> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Description
-------- -----------
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 March 29, 1997.
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSO PRODUCTS COMPANY
Dated: May 13, 1997 By: /s/ David B. Dechant
--------------------------------
Name: David B. Dechant
Title: Chief Accounting Officer
Dated: May 13, 1997 By: /s/ Gilbert G. Bartell
--------------------------------
Name: Gilbert G. Bartell
Title: Chief Financial Officer and
Vice President Finance/Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATUS OF CONSO PRODUCTS COMPANY FOR THE NINE MONTHS ENDED
MARCH 29, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATUS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> MAR-29-1997
<CASH> 881,376
<SECURITIES> 0
<RECEIVABLES> 12,852,678
<ALLOWANCES> 353,474
<INVENTORY> 24,448,354
<CURRENT-ASSETS> 39,134,354
<PP&E> 22,373,318
<DEPRECIATION> (7,939,587)
<TOTAL-ASSETS> 55,018,021
<CURRENT-LIABILITIES> 17,373,098
<BONDS> 0
0
0
<COMMON> 16,942,186
<OTHER-SE> 20,007,287
<TOTAL-LIABILITY-AND-EQUITY> 55,018,021
<SALES> 54,973,203
<TOTAL-REVENUES> 54,973,203
<CGS> 33,434,571
<TOTAL-COSTS> 33,434,571
<OTHER-EXPENSES> 12,090,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 361,320
<INCOME-PRETAX> 9,086,677
<INCOME-TAX> 3,299,136
<INCOME-CONTINUING> 5,787,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,787,541
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
