<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-22942
CONSO PRODUCTS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0986680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
513 NORTH DUNCAN BYPASS, P.O. BOX 326, UNION, SC 29379
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 427-9004
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
NO PAR VALUE COMMON STOCK
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of shares of the Registrant's no par value Common
Stock, its only outstanding class of voting stock, held by non-affiliates of the
Registrant as of September 18, 1998, was $23,123,098.
The number of shares outstanding of the Registrant's no par value Common Stock,
its only outstanding class of common equity, as of September 18, 1998, was
7,411,882.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
<S> <C>
Incorporated Document Parts into which Incorporated
1998 Annual Report to Shareholders for the fiscal year ended June 27, 1998 Part II
Proxy Statement for Annual Meeting of Shareholders to be held November 9, 1998 Part III
</TABLE>
1
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Conso Products Company, together with its subsidiaries (the "Company"),
is the world's largest manufacturer of decorative trimmings for the home
furnishings industry and, through its subsidiary, Simplicity Pattern Co., Inc.
("Simplicity"), is a leading producer of patterns and other instructional
material for home sewing of apparel, home decorating, and crafts. Conso
Products, including its British Trimmings subsidiary, produces and sells a full
range of knitted and woven fringes, decorative cords, tasseled accessories,
jacquard and other woven braids, and apparel trims, as well as sewing tapes and
supplies. Conso also distributes decorative window accoutrements and other home
furnishings accessories. Through a worldwide sales force the Company's products
are marketed to manufacturers, distributors and retailers. Manufacturing
facilities are located in the United States, the United Kingdom, Mexico, and
India.
Conso's (through the parent company) US business, which can be traced back
to 1867, was acquired from Springs Industries, Inc. in 1986 when the parent
company was organized by a group of investors that included J. Cary Findlay, who
became its Chief Executive Officer and, subsequently, its sole shareholder. In
December 1993, the Company made its initial public offering of its Common Stock
and, using a portion of the proceeds of the offering, acquired British Trimmings
(Holdings) Limited, a privately held English company, which is now known as
"British Trimmings Limited" and is one of the leading producers of decorative
trimmings in the United Kingdom. In connection with the offering, Conso Products
Company changed its jurisdiction of incorporation from Delaware to South
Carolina. In June 1998, the Company completed the acquisition of Simplicity
Capital Corporation, the parent company of Simplicity Pattern Co., Inc. Unless
the context otherwise requires, all references in this report to "Conso" or
"Conso US" are to Conso Products Company, its Delaware predecessor, and its
majority-owned Mexico and India subsidiaries, all references to "British
Trimmings" are to British Trimmings Limited, its corporate predecessors and
subsidiaries, all references to "Simplicity" are to Simplicity Capital
Corporation and its subsidiaries, and all references to the "Company" include
Conso, British Trimmings, and Simplicity.
The fiscal years ended June 27, 1998, June 28, 1997 and June 26, 1996 (all
consisting of 52 weeks) are referred to herein as the "1998 fiscal year" or
"fiscal 1998", the "1997 fiscal year" or "fiscal 1997", and the "1996 fiscal
year" or "fiscal 1996", respectively.
Since acquiring British Trimmings, in connection with its public offering,
the Company has made several additional acquisitions.
In May 1994, Conso acquired the assets of Conso Graber Canada, Inc., a
Canadian producer and distributor of decorative trimmings whose business had
once been under common ownership with Conso's. The assets were acquired at a
total cost of approximately $300,000 and consisted primarily of additional
equipment which is being used at the Company's existing locations. In June 1994,
British Trimmings acquired Wendy A. Cushing Limited and Wendy Cushing Trimmings
Limited, both English companies, for approximately $112,000. Wendy A. Cushing, a
leading designer of old world decorative trimmings, serves Conso US' and British
Trimmings' upper-end customers internationally. These companies maintain a
design studio in London and a showroom in Chelsea Harbour. In March 1996, the
Company acquired all of the assets of The Claesson Company in consideration of
the assumption of approximately $310,000 in liabilities. In connection with the
acquisition, Margareta Claesson joined Conso as Manager of the Decorative
Accessories Products Division. In September 1997, Conso acquired the assets of
HFDC, Inc., which designs and sells decorative home window fashion products,
primarily under the "DUITALL" name brand, for approximately $262,000, including
the assumption of certain liabilities. Stuart R. Fraker, HFDC's President,
joined Conso as Manager of this new division of home fashion products.
In June 1998, Conso acquired all the outstanding common stock of Simplicity
Capital Corporation, the parent company of Simplicity Pattern Co., Inc. (the
operating company). The consideration paid was $33,600,000 (consisting of the
$33,000,000 cash purchase price and transaction expenses) plus the assumption of
certain of Simplicity's liabilities, for a total purchase price of $54,265,000.
Simplicity Pattern Co., Inc. was founded in 1927, and is one of the world's
largest producers of home sewing patterns. Simplicity designs its patterns in
New York and London, produces them in the United States and distributes them
worldwide.
2
<PAGE> 3
The Company's global growth strategy for the future includes:
- Additional business acquisitions as attractive opportunities are
identified;
- Continual introduction of new decorative trimmings products and the
cross-merchandising of existing products between Conso US and British
Trimmings and through Simplicity publications;
- Expansion of the Company's existing decorative accessory products and
identification, development and acquisition of additional products.
- Continued expansion of the Company's customer base, including increased
sales to manufacturers, distributors, high-end designers and mass
merchandisers;
- Expanded international production and distribution operations, as well
as increased export sales.
With the acquisition of Simplicity, the Company is focusing on the use of
patterns and the Simplicity name and its other publications to promote its
existing products and additional products which may be developed or acquired.
INDUSTRY
The decorative trimmings industry constitutes a small portion of the home
furnishings industry. The Company's management is not aware of any definitive
published data on the size of the decorative trimmings industry. Both Conso US
and British Trimmings have many competitors for various parts of their
businesses; however, many of these competitors are small and most do not offer
the same breadth or depth of collections or ranges.
Demand for Conso US' and British Trimmings' products varies as fashion
trends in home furnishings and the relative cost of various product changes.
Total demand is also affected by population growth and demographics, consumer
spending and confidence in the economy, levels of disposable income, geographic
mobility of consumers, housing starts, and residential housing sales. The
Company believes that it has been able to increase the demand for decorative
trimmings, and therefore expand the market, through aggressive merchandising
support of resellers and education of end-users as to applications for its
products. The acquisition of Simplicity enables the Company to elevate the
support of merchandisers and education of end-users through publications and
materials in regular direct contact with the end consumer, and through the use
of a widely recognized and well-respected brand name. Accordingly, the Company
intends to aggressively pursue the further promotion of Simplicity's
publications and its name to promote the Company's other products.
While the Company's primary product has been textile related, management
views the Company as a consumer products company. With some reduction in the
growth in revenues from Conso products, the Company is increasing its focus on
acquisitions, with attention given to companies that have a focus on home
decorating and can expand its existing products and product offerings. The
acquisition of Simplicity confirms the consumer products focus and positions the
Company to pursue the expansion of its business in this arena.
The home sewing and crafts industry, which Simplicity competes in, is
comprised primarily of retail store customers, and includes a variety of
products including fabric, patterns, notions, crafts and other related supplies.
The pattern segment represents a relatively small, niche market within the home
sewing and crafts industry.
The Company's management is not aware of any definitive published data on
the size of the pattern industry or the revenues of its competitors. However,
the Company believes that, based on the number of Simplicity products and its
competitors products seen in retail stores, it is one of the largest producers
of patterns in the world.
The home sewing and craft industry has significant overlap with the home
decorating industry in which the Company has a significant presence with its
trimmings and decorative hardware products. The Company is using this overlap,
and the cross-merchandising of products through selling materials and patterns,
to increase the presence of its products, including patterns within both the
home decorating and home sewing and crafts industries.
3
<PAGE> 4
PRODUCTS
The decorative trimmings produced and sold by both Conso US and British
Trimmings include various fringes, cords and tasseled accessories that are used
on the edges of chairs, sofas, decorative pillows, draperies and other home
furnishings. Fringes may include a brush fringe or ruche around the edge of a
pillow or a heavy bullion fringe around the base of a sofa. Tassel fringe is
often used to edge draperies and decorative pillows. Knitted and woven braids
produced by both companies are used to border or frame pillows, curtains and
upholstered pieces. Cord without a lip or flange may be used to border a mirror
or a room and can be used to hang pictures and mirrors.
British Trimmings also produces and sells apparel trimmings. Apparel
fashions produced and distributed by British Trimmings include sequin and
glitter trimmings, gimp trims and froggings. Some of the braids and other stock
products that are produced by both Conso US and British Trimmings are also used
in apparels.
Conso US also produces and sells sewing tapes and cords, and distributes
other sewing and workroom supplies purchased from others. Conso US and British
Trimmings import and distribute accessories for window furnishings and other
decorative accessories for the home.
With the acquisition of Simplicity, the Company has expanded its products to
include patterns. The pattern products of Simplicity are produced and sold under
the Simplicity, New Look, and Style brand names. The Simplicity brand is one of
the most respected, well-known names in the home sewing and crafts industry.
Simplicity offers approximately 1,500 patterns for sales and updates over 500 of
those designs each year to respond to market trends and keep its design
selection fresh. The patterns available from Simplicity offer consumers a wide
selection of fashion apparel, home decorating, crafts, and costume designs.
Consumers use patterns to construct fashion apparel, home sewing, craft and
costume items. An outline and instruction guide for a garment or craft shape is
designed and printed on paper. The outline is used as a blueprint which
consumers place on the fabric to properly guide the cutting of the fabric into
pieces. Using the instructions, the consumers then sew the appropriate pieces
together as noted. Simplicity is noted for superior, easy-to-follow instructions
that simplify the entire sewing process.
Operations for Simplicity for fiscal 1998 (from the period of acquisition or
June 19, 1998 through June 27, 1998) are not material and are not included in
the operations of the Company. Revenues for Simplicity, consisting primarily of
revenues from sales of Simplicity's publications, including patterns, on a pro
forma basis for the 1998 fiscal year was $53,657,000.
4
<PAGE> 5
The following table sets forth, for the periods indicated, certain
information relating to sales of Conso's and British Trimmings' product lines
for the current and prior two fiscal years:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------------------------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
--------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Catalog Trims:
Conso US $31,880 44.3% $32,988 44.9% $32,096 45.4%
British Trimmings 11,469 16.0 10,548 14.4 9,541 13.5
Wendy Cushing Trimmings 982 1.4 912 1.2 685 1.0
Manufacturers' Specials:
Conso US 12,464 17.3 12,572 17.1 12,397 17.5
British Trimmings 5,659 7.9 5,804 7.9 6,056 8.6
Wendy Cushing Trimmings 619 0.9 677 0.9 616 0.9
Decorative Accessories 1,740 2.4 1,376 1.9 865 1.2
Workroom supplies 4,459 6.2 4,557 6.2 4,593 6.5
Apparel Fashions 422 0.6 2,062 2.8 2,368 3.3
Other miscellaneous
products 2,167 3.0 1,951 2.7 1,497 2.1
------- ----- ------- ----- ------- -----
Total $71,861 100.0% $73,447 100.0% $70,714 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Details of operations and assets for the separate Conso and British
Trimmings companies and details of assets for the separate Simplicity domestic
and foreign operations are presented in the Company's Notes to Consolidated
Financial Statements for the fiscal years Ended June 27, 1998, June 28, 1997 and
June 29, 1996.
PRODUCT DESIGN AND DEVELOPMENT
Because the demand for decorative trimmings is based upon fashion appeal to
home furnishings manufacturers, interior designers and ultimately consumers, the
success of the Company's decorative trimmings business is dependent upon its
ability to design and develop a broad range of attractive products in a wide
array of colors and color combinations (known as "colorways"). Conso US' current
stock product lines of decorative trimmings include numerous items in various
yarns, stylings and colorways comprising over 19,000 stock keeping units
("SKUs"), and British Trimmings currently stocks products comprising over 3,100
SKUs. Both Conso US and British Trimmings develop and market lines of
complementary products in various stylings and colorways as "collections" or
"ranges." Both businesses also manufacture custom trimmings as specified by
their customers.
Since 1987, Conso's management has developed decorative trimmings products
in response to national market research and customer demand. The first line was
the "Empress Collection," introduced in 1987 for the medium price range market.
Wesley Mancini, a prominent designer of home furnishings fabrics, was engaged to
color the first 13 colorways in the line and develop additional lines. Conso US
has also introduced 15 additional collections of decorative trimmings in
different yarns and colorways for various markets and price points, including
the "Imperial Collection" designed by Mr. Mancini and introduced in 1989 for the
higher price range market. The "Princess Collection", developed in 1989, and the
"Louis XVII Collection", introduced in 1993 and designed by Louis Nicole,
another well-known home furnishings designer, are marketed in the lower to
medium price range for major retailers. In 1997, the Company added the "Cabaret"
collection to meet market demand for a new look in the home furnishings market.
British Trimmings has offered its "Tudor Range" since 1990 and introduced
its "Elizabethan Range" in 1993, both of which are aimed at the medium price
range market. The Tudor Range was expanded with additional colorways in 1992 and
1994. The Elizabethan Range, based on historical trimmings as would be found in
a 15th century English mansion, emphasizes Britain's heritage in marketing
British trimmings in home furnishings worldwide. In 1996, British Trimmings
introduced its "Bloomsbury Range", aimed at the upper end market. In 1997,
British Trimmings introduced "Cambridge" and "Oxford" ranges to aggressively
pursue the upholstery market.
In 1998, existing collections for both Conso and British Trimmings were
updated with new stylings and colors and an additional line is being developed
for introduction in 1999, with a focus on international trends.
Since sewing is an alternative to buying ready made items, Simplicity
pattern designs must closely resemble silhouettes and prints produced by
competitors in the apparel, home furnishings and craft industries. Simplicity is
continuously developing designs into patterns in New York and London to ensure
fresh new products for all its pattern brands. The Simplicity design team visits
key
5
<PAGE> 6
domestic and European fashion centers and subscribes to a variety of
international fashion, color and silhouette reports. Based upon this information
and historical sales data, new pattern designs are created. The Company uses
both staff and contract designers. Simplicity updates its pattern brands
(Simplicity, Style and New Look) several times a year to offer the latest
"looks" available.
MARKETING AND SALES
Conso US' decorative trimmings marketing program is directed by a marketing
department assisted by a graphic design team and sample department. The
marketing department is responsible for trade shows, advertising, sample binders
and cards, displays, videos, catalogs, brochures and other selling aids as well
as the development of new stock products.
To market its collections of decorative trimmings, Conso US has created
special sample binders for most collections. The binders allow the easy removal
and use of sample cards, as well as the insertion of cards for new colorways and
stylings added to the collections in later years. Conso US also distributes a
color wholesale catalog produced annually by its graphic design team, as well as
other brochures, sample cards and selling aids, and advertises its products in
major trade publications.
Since the acquisition of British Trimmings, the Company has established a
marketing department at British Trimmings, that works closely with and reports
to the Conso US marketing group. British Trimmings also uses sample books and
cards as its primary selling aids, as well as brochures and other materials
produced by its in-house printing operation at its Leek, England facility.
British Trimmings' first wholesale color catalog was introduced in January 1995
and is produced annually.
Conso US displays its products at showrooms located at its New York sales
office and at the Furniture Mart in Hickory, North Carolina and its Miami
international sales office. British Trimmings maintains showrooms at its
Stockport and London manufacturing facilities and Wendy Cushing Trimmings has a
showroom at Chelsea Harbour in London. In 1998, the Company displayed (or is
scheduled to display) the products of both Conso US and British Trimmings at a
total of five trade shows in the United States, three in Europe, one in
Singapore, and one in Dubai.
Conso US' products are marketed and sold through a sales force of
representatives located in various major cities, sales personnel that travel
internationally, and through foreign independent sales representatives. British
Trimmings has sales personnel operating mainly out of its Stockport, England
offices, and uses independent sales representatives located in foreign
countries. Wendy Cushing Trimmings is serviced by a sales representative in the
United Kingdom and through designer (agent) showrooms in the United States and
Canada. Since the Company's most significant sales presence is in the US and UK,
the Company focuses its international sales efforts (other than sales into the
UK) into three major sales regions: the Western Hemisphere (including Canada and
Latin and South America), Europe and the Middle East (including Africa, and
excluding the UK), and the Pacific Rim (including Australia and New Zealand).
The Company has international sales managers who are responsible for
implementing the sales and marketing programs for the foreign geographic regions
and directing services to these regions from international sales office in
Miami, Florida, for Latin America and the Caribbean and in Stockport for
Continental Europe, the Pacific Rim and the Middle East.
The key selling tools for Simplicity are the pattern catalogs that are
prominently displayed and available for viewing by consumers at retail
locations. The pattern catalog shows one or more pictures of all pattern designs
available in each brand. Auxiliary catalogs also are produced to highlight
specific merchandise categories such as children's apparel, holiday costumes,
home decorating and crafts, and to increase retail presence and save consumers
shopping time when looking for specific types of patterns.
The pattern catalogs and sales of patterns are supplemented periodically by
the use of model garments and other in-store sales materials such as posters,
wall charts and easels which provide a picture of selected new pattern designs,
and through the use of box-out displays. Box-outs are used for seasonal patterns
such as those for the Halloween, Christmas and Easter holidays, and for new
fashion trends in order to attract impulse sales, increase retail presence and
for special joint marketing programs with fabric companies.
Simplicity also uses a variety of marketing tools to make its products
available directly to consumers such as an internet home page, direct marketing
programs, telemarketing and repeat customer programs to increase sales.
Retail customers frequently use pattern promotions through price discounting
to generate store traffic and drive the sales of other sewing products such as
fabrics, notions and craft items. It is common for retail customers to sell
patterns at up to 50% off the
6
<PAGE> 7
suggested retail price. Retail customers also use pricing below this level for
selected promotional events. Newspaper ads and color circulars featuring
pictures of selected pattern designs of Simplicity are used by retail customers
to promote patterns.
ORDER PROCESSING AND CUSTOMER SERVICE
Most of Conso US' and British Trimmings' orders are received directly from
customers by customer service representatives in offices in Union, South
Carolina and Stockport, England. Roughly half of the customer orders are
received by facsimile transmission, the balance by telephone. The customer
service operations include representatives for domestic stock orders,
representatives who process international orders, representatives who handle
manufacturing specials orders, and representatives who handle custom orders,
other than manufacturing special orders.
Because most of Conso US' and British Trimmings' customer orders are for
stock items and because prompt response to customer orders is critical to
customer satisfaction, Conso US and British Trimmings emphasize customer service
and prompt fulfillment of orders. To that end, Conso US and British Trimmings
maintain large inventories of stock items in a wide range of colors and color
combinations, and have implemented computerized order entry, production,
inventory management and shipping systems, including a computerized factory
order materials requisition program and pre-established minimum and maximum
formulas for levels of inventories based on sales history and forecasts for each
SKU. These systems enable Conso US and British Trimmings to better anticipate
future demand by customers for each of its SKU's and to minimize backorders.
Simplicity receives all of its orders directly from retail customers and
processes these orders promptly through its computerized systems. Most orders in
the United States are received through electronic data interchange and are
fulfilled within one week. Simplicity maintains a complete inventory of each
pattern design and a customer service department in all major market regions.
CUSTOMERS
The Conso US' and British Trimmings' products are sold worldwide to
manufacturers, distributors and retailers, including manufacturers of
upholstered furniture, draperies, bedding, decorative pillows and other home
furnishings; trim, fabric and workroom supply distributors; and major retailers,
retail fabric store chains and interior designers. The following table sets
forth, for the periods indicated, certain information relating to sales of
products to the Company's three major categories of customers:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------------ ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Manufacturers $ 27,696 38.6% $ 31,108 42.3% $ 30,476 43.1%
Distributors 30,996 43.1 30,013 40.8 28,199 39.9
Retailers 13,169 18.3 12,326 16.9 12,039 17.0
-------- ----- -------- ----- -------- -----
Total $ 71,861 100.0% $ 73,447 100.0% $ 70,714 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Simplicity sells direct to retail customers who sell home sewing products
such as fabric, notions, crafts and other supplies to consumers. Retail
customers consist of fabric store chains, discount stores and chains and
independent fabric and craft stores. A total of approximately 8,900 retail
locations world-wide are serviced directly by Simplicity. While Conso and
British Trimmings have not had any one customer that would make up more than 10%
of their business, Simplicity's five largest retail customers represent
approximately 60% of its sales. Accordingly, the acquisition of Simplicity will
increase the Company's reliance for revenues from certain individual customers
in the pattern segment and retail customer base. The acquisition of Simplicity
will take revenues of the Company's smallest customer segment, the retail
segment, and propel it to the largest segment. Simplicity has one customer
(Wal-Mart) which represents more than 10% (approximately 14%) of the revenues of
the Company for fiscal 1998 on a pro forma combined basis. Operations for
Simplicity for fiscal 1998 (from the period of acquisition or June 19, 1998
through June 27, 1998) are not material and are not included in the operations
of the Company for the current fiscal year. Revenue for Simplicity, which
results from sales to retailers on a pro forma basis for the 1998 fiscal year
was $53,657,000.
At June 27, 1998, the Company had approximately 5,000 customer accounts with
open balances. Open customer orders at June 27, 1998 were $3.6 million as
compared to $3.7 million at June 28, 1997. The Company expects that
substantially all of the open orders at June 27, 1998 will be recognized as
revenue within the first quarter.
7
<PAGE> 8
EXPORTS
Approximately 91% of Conso US' sales of $52.3 million for fiscal 1998
were to US customers; the remainder was export sales, primarily to customers in
Canada and Central and South America. Approximately 80% of British Trimmings'
sales of $19.6 million for fiscal 1998 were to customers in the United Kingdom,
with the remainder being export sales primarily to customers in other European
countries. Operations for Simplicity for fiscal 1998 (from the date of
acquisition or June 19, 1998 through June 27, 1998) are not material and are
excluded from the operations of the Company. Exports represented approximately
20% of Simplicity's sales for the 1998 fiscal year.
The following table sets forth for the periods indicated the Company's sales
outside the United States and the United Kingdom and as a percentage of total
Company sales, by geographic region (and excluding Simplicity operations):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------------------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------------ ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Western Hemisphere $ 4,138 5.8% $ 3,985 5.4% $ 3,020 4.3%
Europe and Middle East 2,841 4.0 2,683 3.7 2,324 3.3
Pacific Rim 1,541 2.1 1,787 2.4 1,250 1.8
------- ---- ------- ---- ------- ---
Total $ 8,520 11.9% $ 8,455 11.5% $ 6,594 9.4%
======= ==== ======= ==== ======= ===
</TABLE>
MANUFACTURING AND RAW MATERIALS
Conso US and British Trimmings purchase undyed yarns, some dyed yarns and
other supplies, and manufacture their trimmings products through various
processes. Because of the variety of products they manufacture, Conso US and
British Trimmings employ a wide range of machinery and equipment in their
operations. Each business uses the generally available techniques for weaving,
knitting and braiding yarns, as well as processes for making tassel fringe, ball
and knotted fringes, laminated trims, cords and stud tapes. Much of the
machinery is developed and often constructed in their own engineering
departments. Conso US and British Trimmings have developed their own adaptations
of machinery for specific products or types of products to provide greater
speed, flexibility or novelty in production. Both Conso US and British Trimmings
employ their own staffs to continually evaluate alternative raw materials and
processes, the use of new textile technology and in-house machinery improvement.
Both Conso US and British Trimmings have their own dyehouse facilities, with
space available to add additional dyeing equipment as necessary. This enables
both businesses to dye their own yarns quickly and assure better consistency of
color. In addition, commission dyehouses are available to both businesses when
demand exceeds in-house capacity.
In the US, Conso is in the construction phase of a new 33,000 square foot
dyehouse facility with an estimated cost of $3.8 million and has completed a new
86,000 square foot distribution center at a total cost (including certain
additional distribution related equipment) of $4.5 million. Both of these
facilities are located adjacent to the existing main plant in Union, SC. The
dyehouse construction is scheduled to be completed by the end of calendar year
1998.
Certain of Conso's products require handwork assembly. Most of the handwork
is done at Conso US' facility in Juarez, Mexico, and on a piece work basis by
home workers directed from the Stockport and London facilities of British
Trimmings. In July 1997, the Company leased facilities in Coimbatore, India
which house handwork operations primarily for the UK market. Operations at this
facility began in January of 1998 with significant product shipments being
received beginning in the July of 1998. The addition of this facility will allow
the Company to be more competitive with certain low priced products.
The various departments in each of Conso US' and British Trimmings'
manufacturing plants operate one to three shifts per day, five or six days per
week, depending upon market conditions and customer orders.
The raw materials used by Conso US in its manufacturing operations include
spun rayon, spun and filament polyester, cotton and acetate yarns. The primary
yarns used by British Trimmings are spun rayon and filament viscose rayon. These
yarns are commodities generally available as needed from various suppliers
located throughout the world. The Company expects that yarn supplies will
continue to be available as needed for the Company's operations. Changes in the
price of cotton, wood pulp and petrochemicals, the
8
<PAGE> 9
base materials for most of the Company's yarns, however, could cause significant
changes in the Company's raw material costs, and there can be no assurance that
there will not be any changes in the availability, price or quality of any raw
materials.
The two key components of a pattern are printed tissue paper containing the
outline of the garment, craft or home decorating item and the written
instructions printed on newsprint. Simplicity owns and occupies a facility of
approximately 740,000 square feet in Niles, Michigan. This facility operates
principally on a one shift, five day a week basis, although certain departments
sometimes operate on a two or three shift basis. At its Niles facility,
Simplicity operates a paper mill and printing operation for the production of
tissue and printing of patterns and instructions. Simplicity out-sources the
printing of its pattern catalogs.
Principal raw materials for Simplicity are paper, pulp, wood, recycled
paper, ink and corrugate and the Company believes that an ample supply of these
raw materials will continue to be available. However, changes in the price of
paper, wood pulp, ink and the price and availability of recycled paper and other
supplies related to its operations could cause significant changes in the
Company's raw material costs, and there can be no assurance that there will not
be any changes in the availability, price or quality of any raw materials.
COMPETITION
While the business of manufacturing decorative trimmings for the home
furnishings industry is competitive, and includes many relatively small
producers with limited product lines or products designed for the lower end of
the market, there are a few US domestic or foreign manufacturers of substantial
size. The Company is the largest manufacturer of decorative trimmings for the
home furnishings industry in the world and is aware of no more than four other
major producers with which it competes for customers worldwide. In the Company's
trimmings segment, which is a relatively small, niche market within the home
decorating industry, the Company has fragmented competition coming from a large
number of smaller competitors with more limited product breadth or depth of
collections or ranges. However, the pattern segment, is dominated by a
relatively small number of companies. The pattern segment includes four major
producers, whose combined sales account for the majority of worldwide pattern
revenues. The three producers with the most significant portion of their
revenues believed to be generated in the United States include Simplicity,
McCall Pattern Company and Butterick Company, Inc. The fourth producer, Burda,
is headquartered in Germany, and has historically maintained a strong presence
in Europe, and other foreign markets.
Smaller producers of decorative trimmings often have focused on longer
production run business with manufacturers at lower prices, frequently using
lower quality products. The Company believes that the continued slow-down in the
rate of growth of sales of decorative trimmings to manufacturers this past
fiscal year may be partially attributable to competition from these smaller
producers. From time to time, the Company develops new products to provide
alternatives to products manufactured by these smaller producers and may use its
operations in Mexico and India to manufacture goods to compete with these
producers.
During the current fiscal year, the Conso US and British Trimmings
experienced increased price competition on sales of certain manufacturing
special items and hand assembled products, to an extent, by low price goods
being manufactured by smaller competitors and from low price goods being
imported from the Far East. Consequently, in August 1997, the Company announced
the formation of India Trimmings (Private) Limited to produce hand assembled
products in India. The Mexico plant continues to produce many of the hand
assembled products sold in the US. The North American Free Trade Agreement
("NAFTA") and the General Agreement on Trade and Tariffs ("GATT") could increase
US competition for sales of Conso US' products as well. While the Company
believes that the elimination of international trade barriers under both GATT
and NAFTA will be beneficial to it as it implements its strategy of expanding
its worldwide operations, there can be no assurance that increased US
competition from foreign manufacturers as a result of NAFTA or GATT or any other
trade related agreements would not have a material adverse effect on its
business.
There are a number of large manufacturers of textiles, home furnishings and
other products with resources substantially greater than those of the Company
who have the ability to enter the decorative trimmings, hardware or pattern
businesses by either establishing their own operations or acquiring and
combining other existing operations. Management is aware of no current plans by
any such manufacturer to enter the decorative trimmings or patterns businesses.
The Company has recently acquired companies, which focus on decorative
hardware items, and is marketing and distributing these items to its existing
customer base. The decorative hardware industry is a much larger industry than
trimmings or patterns with several, already well established manufacturers. The
Company intends to compete in this market through the continuous introduction
9
<PAGE> 10
of new products and product stylings and through cross-merchandising through its
selling materials and publications and to its existing customer base.
The Company, in its trimmings business, its decorative hardware business,
and its newly acquired patterns business competes on the basis of styling,
selection, color, delivery, price and customer service. The Company believes
that its ability to promptly fill customer orders, due to its large inventory,
its production and inventory management systems, its customer service and sales
staff and its control over availability of yarn colors for trimmings, production
of its own paper for patterns, its breadth of product offerings and focus on
product design, presentation, and cross-merchandising gives it a competitive
advantage and is valued by its customers.
EMPLOYEES
As of June 27, 1998, Conso US had 645 full-time employees, of whom 532 were
hourly employees and 113 were salaried employees. In addition, 350 contract
workers at Conso US' assembly plant in Juarez, Mexico work under the supervision
of a Conso US manager in a "Maquiladora" operation, which provides for contract
labor in accordance with certain Mexican regulations and India Trimmings employs
105 full-time employees at its manufacturing facility in Coimbatore, India. None
of Conso US employees are represented by a union. Conso US' management considers
its relationship with its personnel to be good. While Conso US has historically
had a high turnover rate among its hourly employees during the first three
months of employment, Conso US has been able to attract and retain qualified
personnel.
As of June 27, 1998, British Trimmings had 383 full-time employees, of whom
281 were hourly employees and 102 were salaried employees. Approximately 38% of
the employees of British Trimmings are represented by the Union of Textile
Workers (the "Union"). British Trimmings and the Union agreed in February 1998
to the annual renewal of their contract for the year ending December 31, 1998,
with an increase of 3% in the basic wage rate. Although any strike or other
disruption of operations by members of the Union could have a material adverse
effect on the Company, the Union has represented the production workers of
British Trimmings for at least 29 years, during which time there has never been
a strike or work stoppage.
As of June 27, 1998, Simplicity had approximately 450 employees, of whom 214
were represented by labor unions and 236 were non-union. Most union employees
are located in the Niles, Michigan facility. Union contracts covering these
union employees expire on January 31, 2000. Although any strike or other
disruption of operations by members of unions could have a material adverse
effect on the Company, Simplicity has not experienced any work stoppages in
recent years and believes relations with all of its employees are good.
GOVERNMENTAL REGULATION
The business and operations of the Company are subject to governmental
regulation, including employee health and safety laws and regulations; laws and
regulations governing employment practices, wages and hours, and employee
benefits; and environmental laws and regulations. The Company believes it is in
compliance in all material respects with applicable laws and regulations
(including those regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment), and that such
compliance has not materially affected its business or required major capital
expenditures. Future changes in laws and regulations or any determination that
the Company is not in compliance with applicable laws and regulations could have
a material adverse effect on the Company.
TRADEMARKS
Conso has registered the trademarks CONSO(R) for its products and
CLAESSON(R) for decorative hardware items, and British Trimmings has registered
the trademarks SPECTRUM(R) for lace, braids and woven labels and POLYUROCOL(R)
for certain yarns and threads in the United Kingdom. In September 1997, the
Company acquired substantially all of the assets of HFDC, Inc, including its
registered trademarks DUITALL FABRIC MASTER(R) and CLEARWARE DECORATING
SYSTEMS(R).
Simplicity has registered its trademarks SIMPLICITY, NEW LOOK, STYLE and
ITS SO EASY, ITS SIMPLICITY for its pattern products and licensing rights. Other
trademarks utilized by Simplicity are also registered. Simplicity enters into
the use of other trademarks periodically as business opportunities dictate and
operates an aggressive program for pursuing the registration and defense of such
trademarks. Such defense has included legal action and related costs.
10
<PAGE> 11
ITEM 2. PROPERTIES
The following table sets forth the location, utilization and approximate
size in square feet of floor space of the principal facilities of Conso, British
Trimmings and Simplicity, and whether they are owned or leased.
<TABLE>
<CAPTION>
OWNED OR SQUARE
LOCATION UTILIZATION LEASED FEET
- -------- ----------- -------- ------
<S> <C> <C> <C>
CONSO:
Union, SC (Main Plant) Offices, production, distribution and dyehouse facility Owned 340,000
Union, SC (Annex Plant) Warehousing and yarn processing Owned 101,000
New York, NY Showroom and sales office Leased(1) 2,780
Hickory, NC Showroom and sales office Leased(2) 514
Miami, FL Showroom and sales office Leased(3) 980
Juarez, Mexico Assembly plant Leased(4) 41,680
Coimbatore, India Assembly plant Leased(5) 14,762
BRITISH TRIMMINGS:
Stockport Offices and production facilities (six buildings at one location) Owned 185,000
Leek, England Warehousing, dyehouse and production facility Owned 43,000
Leek, England Printing operation Leased(6) 2,000
London, England Assembly operation Owned 20,000
London, England Chelsea Harbour showroom Leased(7) 384
London, England Chelsea Harbour showroom Leased(8) 835
SIMPLICITY:
New York, NY Offices Leased(9) 41,000
Toronto, Canada Offices Leased(10) 1,300
Biantyre, Scotland Warehouse and offices Leased(11) 41,000
London, England Offices Leased(12) 1,400
Revesby, Australia Warehouse and offices Leased(13) 25,000
Auckland, New Zealand Offices Leased(14) 1,922
Niles, Michigan Manufacturing and distribution facility Owned 740,000
(1) This facility is leased for a term expiring April 30, 1999.
(2) This facility is leased on a month-to-month basis.
(3) This facility is leased for a term expiring August 31, 2000.
(4) This facility is leased for a term expiring December 31, 1999.
(5) This facility is leased for a term expiring July 1, 2000.
(6) This facility's lease expires June 18, 2002.
(7) This facility's lease expired on November 16, 1997, but is currently being renewed for a term up to 10 years.
(8) This facility is leased for a term expiring December 24, 2001.
(9) This facility is leased for a term expiring November 30, 2010, but has an option buyout in 2003.
(10) This facility is leased for a term expiring April 30, 1999.
(11) This facility is leased for a term expiring July 20, 2003.
(12) This facility is leased on a six months notice cancelable lease.
(13) This facility is leased for a term expiring September 30, 1999.
(14) This facility is leased for a term expiring November 1, 1999.
</TABLE>
Certain of the Company's owned manufacturing facilities are subject to liens
securing its bank indebtedness. The principal manufacturing facilities are of
brick construction, are sprinklered and are generally in satisfactory operating
condition and repair. Conso US' main plant and annex plant in Union were
constructed at various times from 1959 to 1967, from 1964 to 1983, and from 1996
to present, respectively; British Trimmings' Stockport facilities were
constructed at various times between the 1920's and 1979, its Leek dyehouse and
production facilities were constructed in the 1920's and 1970's, respectively,
and its new London facility was constructed in 1980. Simplicity's plant in Niles
was constructed at various times from 1931 to 1936, from 1946 to 1953, and from
1961 to 1976. The Company believes that the facilities are suitable for their
present use. In the US, Conso completed construction of a new 86,000 square foot
distribution center in July 1997, with a total cost of $4.5 million, and has
started construction of a new 33,000 square foot dyehouse facility with an
estimated cost of $3.8 million. Both of these facilities are located adjacent to
the existing main plant in Union, SC and the dyehouse facility is scheduled to
be completed during the calendar year 1998. These expansions will free up
approximately 65,000 square feet for much needed additional production and
office space. The Company will consider additional capital expenditures for
building expansions or business acquisitions as opportunities arise.
ITEM 3. LEGAL PROCEEDINGS
11
<PAGE> 12
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information appearing (a) under the caption "Stock Price & Shareholder
Information", (b) in Note 9 under the caption "Capital Stock", and (c) in Note 1
under the caption "Organization and Summary of Significant Accounting Policies"
in the Notes to Consolidated Financial Statements in the Company's 1998 Annual
Report to Shareholders is incorporated herein by reference.
The Company has not sold any securities during the past three years in
transactions not registered under the Securities Act except as follows: On July
1, 1998, the Company purchased real property owned jointly by J. Cary Findlay
and Konstance J. K. Findlay, each of whom is a director and executive officer of
the Company, in exchange for shares of the Company's Common Stock. The Company
issued 78,788 shares of Common Stock to Mr. Findlay and Ms. Findlay jointly as
consideration for the acquisition of the real property in reliance upon an
exemption from registration under Section 4(2) of the Securities Act. Such
consideration was based upon a closing price of the Common Stock of $8.25 on
July 1, 1998 and a value of $650,000 (the Findlays' cost basis) for the real
property.
ITEM 6. SELECTED FINANCIAL DATA.
The information appearing (a) under the caption "Selected Financial Data"
and (b) in Note 9 under the caption "Capital Stock" in the Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information appearing under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" in the Company's
1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information appearing under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Quantitative and
Qualitative Disclosures about Market Risk" in the Company's 1998 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information appearing under the caption "Consolidated Balance Sheets",
"Consolidated Statements of Operations", "Consolidated Statements of
Shareholders' Equity", "Consolidated Statements of Cash Flows", "Notes to
Consolidated Financial Statements", and "Independent Auditors' Report" in the
Company's 1998 Annual Report to Shareholders is incorporated herein by
reference. See also the report of Grant Thornton dated September 5, 1997
relating to (a) the consolidated balance sheet of British Trimmings ("BT") at
June 28, 1997 and (b) the related consolidated statements of income and cash
flow of BT for the years ended June 28, 1997 and June 29, 1996 included
herewith.
13
<PAGE> 14
[Grant Thornton Letterhead]
INDEPENDENT AUDITORS' REPORT
REGARDING BRITISH TRIMMINGS LIMITED
TO THE DIRECTORS OF CONSO PRODUCTS COMPANY
We have audited the consolidation packages consisting of the consolidated
balance sheet at 28 June 1997 and the related consolidated statements of income
and cashflow of British Trimmings Limited for the years ended 28 June 1997 and
29 June 1996 expressed in pounds sterling. All information included in the
consolidation packages is the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidation packages based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
of the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The consolidation packages have been prepared on the basis of accounting
principles generally accepted in the United States of America for the purpose of
inclusion in the consolidated financial statements of Conso Products Company for
the years ended 28 June 1997 and 29 June 1996 and are intended solely for that
purpose.
In our opinion, the consolidation packages referred to above, expressed in
pounds sterling, are suitable for inclusion in the consolidated financial
statements of Conso Products Company for the years ended 28 June 1997 and 29
June 1996 and present fairly, in all material respects, the information shown
therein.
/s/ GRANT THORNTON
- ------------------------
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
MANCHESTER
UNITED KINGDOM
5 September 1997
14
<PAGE> 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 5, 1997, the Company's Audit Committee and its Board of
Directors approved expanding the engagement of Deloitte & Touche LLP, the
Company's principal accountant, to include the audit of the financial statements
of British Trimmings Limited, a significant subsidiary of the Company, for the
fiscal year ending June 27, 1998. For more than the previous two fiscal years,
the financial statements of British Trimmings Limited had been audited by Grant
Thornton and, in its audit reports as principal accountant for the Company,
Deloitte & Touche LLP had expressed reliance on the reports of Grant Thornton as
to British Trimmings Limited. As a result of the expansion of the engagement of
Deloitte & Touche LLP, Grant Thornton was no longer engaged to audit the
financial statements of British Trimmings Limited, but may be engaged to provide
or continue to provide other accounting services for the Company and its
subsidiaries.
Neither the principal accountants' reports on the financial statements of
the Company nor Grant Thornton's reports on the financial statements of British
Trimmings Limited for the two most recent fiscal years ended June 28, 1997
contained an adverse opinion or a disclaimer of opinion or was qualified or
modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years ended June 28, 1997 and
subsequent periods, (1) there were no disagreements with Grant Thornton on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which disagreement(s), if not resolved to the
satisfaction of Grant Thornton, would have caused it to make reference to the
subject matter of the disagreement(s) in its report, and (2) no "reportable
event" (as defined in Item 304(a)(1)(v) of Regulation S-K) occurred.
As the Company's principal accountant, Deloitte & Touche LLP was regularly
consulted by the Company as to various accounting, auditing and financial
reporting matters during the two most recent fiscal years and subsequent interim
periods prior to the expansion of its engagement to include the audit of British
Trimmings Limited; however, none of the matters as to which the Company
consulted Deloitte & Touche LLP during such periods were with regard to the
application of accounting principles to specified transactions or the type of
audit opinions that might be rendered on the Company's financial statements, in
either case as related only to British Trimmings Limited.
15
<PAGE> 16
PART III
ITEMS 10-13
Items 10 through 13 are incorporated herein by reference to the sections
captioned "Principal Shareholders", "Election of Directors", "Executive
Officers", "Compensation Committee Interlocks and Insider Participation",
"Executive Compensation", "Director Compensation", "Employment Agreements", and
"Section 16(a) Beneficial Ownership Reporting Compliance" on pages 2 - 12 of the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 9, 1998, which was filed with the Commission on September 25,
1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
List the following documents filed as a part of this report:
1. Financial Statements.
The following consolidated financial statements of the Company
are included as part of Exhibit 13 thereof:
Report of Deloitte & Touche LLP
Consolidated Balance Sheets as of June 27, 1998 and June 28,
1997
Consolidated Statements of Operations for fiscal years ended
June 27, 1998, June 28, 1997, and June 29, 1996
Consolidated Statements of Shareholders' Equity for the fiscal
years ended June 27, 1998, June 28, 1997, and June 29, 1996
Consolidated Statements of Cash Flows for the fiscal years
ended June 27, 1998, June 28, 1997, and June 29, 1996
Notes to Consolidated Financial Statements
The report of Grant Thorton is included in response to Item 8
hereof.
2. Financial Statement Schedules.
Financial statement schedules are omitted because the
information is either not required or is otherwise included in
the Company's Consolidated Financial Statements or the Notes
thereto.
3. Exhibits.
16
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
-------- -------------------
<S> <C>
2 Stock Purchase Agreement dated June 10, 1998 among the Company,
Simplicity Capital Corporation, and the Sellers, Sellers Representative
and Escrow Agent named herein (1)
3.4 Articles of Incorporation of the Company (2)
3.5 Bylaws of the Company (2)
10.2 Employment Agreement dated December 22, 1993 by and between
British Trimmings and A.W. Laughton (4)
10.3 Employment Agreement dated December 22, 1993 by and between
British Trimmings and C.V. Balakrishnan (4)
10.14 Letter Agreement dated August 20, 1992 by and between the
Company and Louis Nicole, Inc. (2)
10.16 Marketing Agreement dated November 3, 1988 by and between the
Company and F. Schumacher & Co. (2)
10.17 1993 Stock Option Plan (2)
10.20 Agreement dated 10 September 1993 between Calver Properties
Limited and British Trimmings (Leek) Limited (2)
10.31 Advice of Borrowing Terms of March 31, 1995 (Revision)
regarding National Westminster Bank facility letter of June
22, 1990 (3)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between the Company
and S. Duane Southerland, Jr. (4)
10.60 Letter dated March 25, 1997 by and between the Company and
Wesley Mancini Ltd. (7)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.62 Modified and Restated Loan Agreement dated June 19, 1998 among
The Company, NationsBank, N.A. and Simplicity Pattern Co. Inc. (1)
10.63 Promissory Note dated June 19, 1998 issued by the Company and
Simplicity Pattern Co. Inc. in favor of NationsBank, N.A. in the original
Principal amount of up to $30,000,000 (1)
10.64 Promissory Note dated June 19, 1998 issued by British Trimmings in
Favor of NationBank, N.A. in the original principal amount of up to
pound sterling 7,000,000 (1)
10.65 Employment Agreement dated February 15, 1991 between Simplicity
Holdings, Inc. and Louis S. Oltman (filed herewith)
10.66 Letter Agreement dated May 4, 1998 between Simplicity Pattern Co.
Inc. and Louis S. Oltman (filed herewith)
10.67 Executive Severance Policy for Simplicity Capital Corporation,
Simplicity Holdings, Inc. and Simplicity Pattern Co. Inc. (filed
herewith)
13 Portions of the Company's 1998 Annual Report to Shareholders
that are incorporated herein by reference (filed herewith)
16 Letter of Grant Thornton regarding change in certifying accountant for
British Trimmings Limited (8)
21 Subsidiaries of the Company (filed herewith)
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of Grant Thornton (filed herewith)
27 Financial Data Schedule (filed in electronic format only)
</TABLE>
MANAGEMENT CONTRACTS AND COMPENSATORY
PLANS AND ARRANGEMENTS
The foregoing exhibits include the following management contracts and
compensatory plans and arrangements:
<TABLE>
<S> <C>
10.2 Employment Agreement dated December 22, 1993 by and between
British Trimmings and A.W. Laughton (4)
10.3 Employment Agreement dated December 22, 1993 by and between
British Trimmings and C.V. Balakrishnan(4)
10.17 1993 Stock Option Plan (2)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between the Company
and S. Duane Southerland, Jr. (4)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.65 Employment Agreement dated February 15, 1991 between Simplicity
Holdings, Inc. and Louis S. Oltman (filed herewith)
10.66 Letter Agreement dated May 4, 1998 between Simplicity Pattern Co.
Inc. and Louis S. Oltman (filed herewith)
10.67 Executive Severance Policy for Simplicity Capital Corporation,
Simplicity Holdings, Inc. and Simplicity Pattern Co. Inc. (filed
herewith)
</TABLE>
(1) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Current Report on Form 8-K
filed with the Commission on July 6, 1998
(2) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Registration Statement on
Form SB-2 (Registration No. 33-71296)
(3) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Quarterly Report on Form
10-QSB for the quarterly period ended April 1, 1995
(4) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Annual Report on Form 10-KSB
for the fiscal year ended July 1, 1995
(5) Incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-85518)
(6) Incorporated herein by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration No.
333-20671)
(7) Incorporated by reference to the exhibit designated by the
same number in the Company's Annual Report on Form 10-K for
the fiscal year ended June 28, 1997
(8) Incorporated by reference to the exhibit designated by the
same number in the Company's Current Report on Form 8-K filed
with the Commission on December 11, 1997
18
<PAGE> 19
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See response to Item 14(a)(3).
(d) Financial Statement Schedules.
See response to Item 14(a)(2).
19
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSO PRODUCTS COMPANY
By: /s/ J. CARY FINDLAY
----------------------------------------------
J. Cary Findlay
Chairman, President & Chief Executive Officer
Dated: September 25, 1998
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C> <C>
/s/ J. CARY FINDLAY Director, Chairman, President and Chief September 25, 1998
-------------------------- Executive Officer (Principal Executive
J. Cary Findlay Officer)
/s/ GILBERT G. BARTELL Chief Financial Officer and Treasurer September 25, 1998
-------------------------- (Principal Financial Officer)
Gilbert G. Bartell
/s/ DAVID B. DECHANT Chief Accounting Officer and Controller September 25, 1998
-------------------------- (Principal Accounting Officer)
David B. Dechant
/s/ KONSTANCE J.K. Findlay Director September 25, 1998
--------------------------
Konstance J.K. Findlay
/s/ MARCUS T. HICKMAN Director September 25, 1998
--------------------------
Marcus T. Hickman
/s/ ANTONY W. LAUGHTON Director September 25, 1998
--------------------------
Antony W. Laughton
/s/JOHN H. MAXHEIM Director September 25, 1998
--------------------------
John H. Maxheim
/s/ JAMES H. SHAW Director September 25, 1998
--------------------------
James H. Shaw
</TABLE>
20
<PAGE> 21
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
ITEM 14(a)(3)
FORM 10-K
ANNUAL REPORT
<TABLE>
<CAPTION>
<S> <C>
For the Fiscal Year Ended June 27, 1998 Commission File Number 0-22942
</TABLE>
CONSO PRODUCTS COMPANY
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
2 Stock Purchase Agreement dated June 10, 1998 among the Company,
Simplicity Capital Corporation, and the Sellers, Sellers Representative
and Escrow Agent named herein (1)
3.4 Articles of Incorporation of the Company (2)
3.5 Bylaws of the Company (2)
10.2 Employment Agreement dated December 22, 1993 by and between
British Trimmings and A.W. Laughton (4)
10.3 Employment Agreement dated December 22, 1993 by and betweem
British Trimmings and C.V. Balakrishnan (4)
10.14 Letter Agreement dated August 20, 1992 by and between the
Company and Louis Nicole, Inc. (2)
10.16 Marketing Agreement dated November 3, 1988 by and between the
Company and F. Schumacher & Co. (2)
10.17 1993 Stock Option Plan (2)
10.20 Agreement dated 10 September 1993 between Calver Properties
Limited and British Trimmings (Leek) Limited (2)
10.31 Advice of Borrowing Terms of March 31, 1995 (Revision)
regarding National Westminster Bank facility letter of June
22, 1990 (3)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between the Company
and S. Duane Southerland, Jr. (4)
10.60 Letter dated March 25, 1997 by and between the Company and
Wesley Mancini Ltd. (7)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.62 Modified and Restated Loan Agreement dated June 19, 1998 among
The Company, NationsBank, N.A. and Simplicity Pattern Co. Inc. (1)
10.63 Promissory Note dated June 19, 1998 issued by the Company and
Simplicity Pattern Co. Inc. in favor of NationsBank, N.A. in the original
Principal amount of up to $30,000,000 (1)
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
10.64 Promissory Note dated June 19, 1998 issued by British Trimmings
in Favor of NationBank, N.A. in the original principal amount of up to
pound sterling 7,000,000 (1)
10.65 Employment Agreement dated February 15, 1991 between Simplicity
Holdings, Inc. and Louis S. Oltman (filed herewith)
10.66 Letter Agreement dated May 4, 1998 between Simplicity Pattern Co.
Inc. and Louis S. Oltman (filed herewith)
10.67 Executive Severance Policy for Simplicity Capital Corporation,
Simplicity Holdings, Inc. and Simplicity Pattern Co. Inc. (filed
herewith)
13 Portions of the Company's 1998 Annual Report to Shareholders
that are incorporated herein by reference (filed herewith)
16 Letter of Grant Thornton regarding change in certifying accountant for
British Trimmings Limited (8)
21 Subsidiaries of the Company (filed herewith)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of Grant Thornton (filed herewith)
27 Financial Data Schedule (filed in electronic format only)
</TABLE>
MANAGEMENT CONTRACTS AND COMPENSATORY
PLANS AND ARRANGEMENTS
The foregoing exhibits include the following management contracts and
compensatory plans and arrangements:
<TABLE>
<S> <C>
10.2 Employment Agreement dated December 22, 1993 by and between
British Trimmings and A.W. Laughton (4)
10.3 Employment Agreement dated December 22, 1993 by and between
British Trimmings and C.V. Balakrishnan(4)
10.17 1993 Stock Option Plan (2)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between the Company
and S. Duane Southerland, Jr. (4)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.65 Employment Agreement dated February 15, 1991 between Simplicity
Holdings, Inc. and Louis S. Oltman (filed herewith)
10.66 Letter Agreement dated May 4, 1998 between Simplicity Pattern Co.
Inc. and Louis S. Oltman (filed herewith)
10.67 Executive Severance Policy for Simplicity Capital Corporation,
Simplicity Holdings, Inc. and Simplicity Pattern Co. Inc. (filed
herewith)
</TABLE>
(1) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Current Report on Form 8-K
filed with the Commission on July 6, 1998
(2) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Registration Statement on
Form SB-2 (Registration No. 33-71296)
22
<PAGE> 23
(3) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Quarterly Report on Form
10-QSB for the quarterly period ended April 1, 1995
(4) Incorporated herein by reference to the exhibit designated by
the same number in the Company's Annual Report on Form 10-KSB
for the fiscal year ended July 1, 1995
(5) Incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-85518)
(6) Incorporated herein by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration No.
333-20671)
(7) Incorporated by reference to the exhibit designated by the
same number in the Company's Annual Report on Form 10-K for
the fiscal year ended June 28, 1997
(8) Incorporated by reference to the exhibit designated by the
same number in the Company's Current Report on Form 8-K filed
with the Commission on December 11, 1997
23
<PAGE> 1
EXHIBIT 10.65
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 15th day of February, 1991, by and between
Simplicity Holdings, Inc., a Delaware corporation ("Holdings") and Louis S.
Oltman ("Oltman").
W I T N E S S E T H:
WHEREAS, Holdings is the owner of all the capital stock of Simplicity
Pattern Co. Inc., a Delaware corporation ("Pattern"), and desires to assure
itself and Pattern of the services of Oltman; and
WHEREAS, Oltman is willing to make his services available on the terms
and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual promises
contained in this Agreement, IT IS AGREED:
1. Employment. Holdings hereby employs Oltman and Oltman hereby
accepts employment with Holdings on the terms and conditions set forth in this
Agreement. The effective date of this Agreement (the "Effective Date") shall be
February 15, 1991.
2. Term. The term of Oltman's employment hereunder (the
"Employment Period") shall commence on the Effective Date and shall continue for
three years from such later date unless earlier terminated pursuant to Section 6
hereof.
3. Duties. Oltman shall serve as the Senior Vice President -
Sales of Holdings and Pattern (hereinafter collectively referred to as the
"Simplicity Companies") and shall, under the direction of the respective Boards
of Directors thereof, faithfully and to the best of his ability perform the
duties appropriate to said office as assigned by the Boards of Directors of the
Simplicity Companies from time to time. Oltman shall devote his entire working
time, energy, and skills to such employment while so employed.
4. Compensation. Oltman's compensation for the services performed
under this Agreement shall be as follows:
(a) Base Salary. Oltman shall receive a base salary ("Base
Salary") aggregating One Hundred Forty Five Thousand Dollars ($145,000) per
year, payable in regular and equal semi-monthly installments. The Base Salary
shall be reviewed annually by the Board of Directors of Holdings or the
Simplicity Capital Corporation Compensation Committee and may be increased to
adequately reflect the scope and success of the Simplicity Companies'
operations.
<PAGE> 2
(b) Incentive Compensation. In addition to the Base Salary, Oltman
shall be eligible to earn incentive compensation ("Incentive Compensation") as a
participant in Holding's incentive compensation plan ("Incentive Compensation
Plan") as approved by the Holdings' Board of Directors and in effect from time
to time.
5. Fringe Benefits.
(a) Generally. Without limiting any other provision, Oltman shall
be entitled to the executive fringe benefits described on the Schedule of
Benefits attached hereto as Exhibit A.
(b) Vacation. Oltman shall be entitled to four weeks of paid
vacation annually. Oltman shall, in his reasonable discretion, determine the
time and intervals of such vacation.
(c) Reimbursement for Reasonable Business Expenses. Holdings shall
reimburse Oltman for reasonable expenses incurred by him in connection with the
performance of his duties pursuant to this Agreement including, but not limited
to, entertainment expenses, travel expenses, expenses in connection with
seminars, professional conventions or similar professional functions, and other
reasonable business expenses.
(d) Automobile. During the Employment Period, Holdings shall cause
Pattern to pay Oltman an annual automobile allowance of $550 per month, payable
in regular and equal semi-monthly installments subject to such reductions as may
be required by law.
(e) Management Benefit Plan. Oltman shall be entitled to
participate in the Management Benefit Plan of Holdings' parent, Simplicity
Capital Corporation ("Capital"), and shall receive such benefits thereunder as
may be determined by Capital's Board of Directors or the appropriate committee
thereof.
6. Termination of Employment.
(a) Termination for Cause. Holdings shall be entitled to terminate
Oltman's employment at any time for Cause ("Termination for Cause") upon not
less than 60 days' written notice to Oltman specifying the cause and the date of
termination. For the purposes of this Paragraph 6(a) and of Paragraph 6(b)
hereof, "Cause" shall mean that Oltman was terminated for: gross negligence or
willful misconduct; willfully ceasing to perform normal and customary duties for
an extended period for any reason other than death or disability; fraud or
embezzlement in the course of employment; intentional disclosure of confidential
information; willfully engaging in competition or purposely aiding a competitor
of Holdings, Pattern, or any of Pattern's subsidiaries; misappropriation of a
material opportunity of Holdings, Pattern, or any of Pattern's subsidiaries; the
commission or conviction of a felony, or the entering of a plea of nolo
contendre in response to an indictment for a felony; or the commission or
conviction of any crime involving moral turpitude; or any willful
misrepresentation to any stockholder, officer, or director of Holdings, Pattern,
or any of Pattern's subsidiaries. No action by Oltman shall be deemed willful
unless done in bad faith without reasonable belief that such action is in the
best interests of the Simplicity Companies.
2
<PAGE> 3
In the event of Termination for Cause, Holdings shall pay Oltman his
Base Salary, Oltman shall be entitled to receive his vested rights in all
pension and retirement plan benefits, and Oltman shall receive the benefits
described in Exhibit A to this Agreement, prorated to the date of termination.
All other obligations of Holdings under this Agreement shall cease as of the
date of termination.
(b) Termination Without Cause. Oltman's employment may be
terminated without Cause ("Termination Without Cause") under any of the
following circumstances:
(i) by the Simplicity Companies on not less than 60 days'
written notice to Oltman specifying the date of termination;
(ii) by reason of Oltman's death; and
(iii) by reason of Oltman's Disability.
For purposes of this Agreement, "Disability" means the inability of
Oltman to perform his duties because of physical or mental disability, where
such disability shall exist for an aggregate of more than six months in any
12-month period or for any period of four consecutive months.
In the event of Termination Without Cause pursuant to Paragraph 6(b)(i)
hereof, Holdings shall pay Oltman his Base Salary and Incentive Compensation as
set forth in Section 4 hereof for the full term of this Agreement as set forth
in Section 2 hereof, and Oltman shall be entitled to all benefits described in
items a, b, c, and d of the Schedule of Benefits attached as Exhibit A to this
Agreement for the full term of this Agreement as set forth in Section 2 hereof.
In the event of Termination Without Cause pursuant to Paragraph
6(b)(ii) or (iii) hereof, Holdings shall pay Oltman, or his estate, his Base
Salary and Incentive Compensation through the date of such termination and in
respect of Termination Without Cause pursuant to Paragraph 6(b)(iii) hereof,
Oltman shall be entitled to all benefits described in items a, b, c, and d of
the Schedule of Benefits attached as Exhibit A to this Agreement for the full
term of this Agreement as set forth in Section 2 hereof. All other obligations
of Holdings under this Agreement shall cease as of the date of termination. In
the event of Termination Without Cause there shall be no obligation for Oltman
to seek other employment or otherwise mitigate such payments and in the event
Oltman obtains other employment, Holdings shall continue to pay the amounts and
benefits payable to Oltman under this Agreement.
(c) Voluntary Termination.
(i) Oltman shall be entitled to terminate his employment
at any time ("Voluntary Termination") upon not less than 60 days' written notice
specifying the date of termination. In the event of such Voluntary Termination,
Holdings shall pay Oltman his Base Salary through the date of such termination.
In addition, Oltman shall be entitled to receive his vested rights, if any, in
all pension and retirement plan benefits. All other obligations of Holdings
under this Agreement shall cease as of the date of termination.
3
<PAGE> 4
(ii) Oltman shall also be entitled to terminate his
employment at any time for Cause on not less than 60 days' written notice to
Holdings specifying the Cause and the date of termination. For the purposes of
this Paragraph 6(c)(ii), "Cause" shall mean a material breach by Holdings of
this Agreement that is not cured within 30 days after written notice thereof is
given by Oltman to each member of the Board of Directors of Holdings. If Oltman
terminates his employment for Cause under this Paragraph 6(c)(ii), Oltman shall
have all of the rights and benefits to which he would have been entitled if
employment were being terminated under Paragraph 6(b)(i). All other obligations
of Holdings under this Agreement shall cease as of the date of termination. In
the event that Holdings disputes Oltman's assertion that a material breach of
this Agreement by Holdings has occurred, Holdings shall so advise Oltman within
two weeks of receipt by it of the above-mentioned notice from Oltman and the
matter shall be resolved in accordance with Section 20 of this Agreement.
7. Noncompetition.
(a) During Term of Employment. During the term of his employment
Oltman shall not, directly or indirectly, either individually or as an employee,
agent, partner, shareholder, consultant, or in any other capacity participate
in, engage in, or have a financial or other interest in any business that is
competitive with the Simplicity Companies or any of their subsidiaries or any
successor or assign thereof. The ownership of an interest constituting not more
than 1% of the outstanding debt or equity in a corporation the shares of which
are traded on a recognized stock exchange or traded in the over-the-counter
market, even though that corporation may be a competitor of the Simplicity
Companies or any of their subsidiaries, shall not be deemed financial
participation in a competitor.
(b) Upon Termination of Employment. In the event Oltman's
employment hereunder is terminated, Oltman shall not, without the written
consent of Holdings during the greater of (i) the twelve-month period following
the termination date and (ii) the balance of Oltman's term of employment
described in Section 2 hereof directly or indirectly, individually or as an
employee, agent, partner, shareholder, consultant, or in any other capacity,
participate in, engage in, or have a financial interest or management position
or other interest in any business operation or any enterprise if such operation
or enterprise engages in the sewing pattern business or solicit any other person
to engage in any of the foregoing activities. The ownership of an interest
constituting not more than 1% of the outstanding debt or equity in a corporation
the shares of which are traded on a recognized stock exchange or traded in the
over-the-counter market, even though that corporation may be a competitor of the
Simplicity Companies or any of their subsidiaries, shall not be deemed financial
participation in a competitor.
8. Confidentiality. In the course of his employment hereunder
Oltman will have access to confidential information and records, data,
specifications and other trade secrets of Pattern and its affiliates and
subsidiaries including, without limitation, information relating to its
customers, marketing arrangements, and sales plans ("Confidential Information").
During and after his employment, Oltman shall not directly or indirectly
disclose Confidential Information to any person or use any Confidential
Information, except as required in the course of such employment. All records,
files, drawings, documents, models, equipment, and the like relating
4
<PAGE> 5
to the Simplicity Companies or any of their subsidiaries' business Oltman shall
prepare or use or come into contact with, shall be and remain such company's
sole property and shall not be removed from such company's premises without its
written consent, except as required in the course of such employment.
9. Specific Performance. In the event of any breach of any
provision of this Agreement, including without limitation, Sections 7 and 8
hereof, the non-breaching party shall be entitled to seek a decree of specific
performance thereof against the breaching party. Such remedy, however, shall be
cumulative and nonexclusive and shall be in addition to any other remedy to
which the parties may be entitled.
10. Sale, Consolidation or Merger. In the event of a sale,
consolidation, or merger, the successor-in-interest to Holdings shall be deemed
to have assumed all liabilities of Holdings under this Agreement, but this
corporation shall not be released thereby from such liabilities.
11. Waiver. The failure of any party to insist, in any one or more
instances, upon performance of the terms, covenants, or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant, or
condition.
12. Withholding. Amounts paid to Oltman under this Agreement shall
be subject to appropriate required withholding, if any.
13. Notices. Any notice to be given hereunder shall be deemed
sufficient if addressed in writing, and delivered by registered or certified
mail or delivered personally, in the case of Holdings to its principal business
office and in the case of Oltman, to his address appearing on the records of
Holdings or to such other address as he may designate in writing to Holdings.
14. Severability. In the event that any provision shall be held to
be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable.
15. Amendment. This Agreement may be amended only by an agreement
in writing signed by the parties hereto.
16. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York.
17. Coverage. The provisions set forth in this Agreement with
respect to the terms and conditions of Oltman's employment will not prevent
Oltman from participating in any other employee compensation or benefit program
adopted by any of the Simplicity Companies for their key employees solely
because such programs are not specifically mentioned in this Agreement.
5
<PAGE> 6
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against Holdings, its successors and
assigns, and Oltman, his heirs, beneficiaries and legal representatives. It is
agreed that the rights and obligations of Oltman may not be delegated or
assigned except as specifically set forth in this Agreement.
19. Entire Agreement. This Agreement contains the entire agreement
of the parties with respect to Oltman's employment by Holdings and supersedes
any prior agreements between them, whether oral or written.
20. Arbitration. If Oltman receives a notice from Holdings under
Paragraph 6(c)(ii) hereof to the effect that it disagrees with an assertion by
Oltman that a breach of this Agreement by Holdings has occurred, Holdings may
elect to have the matter settled by arbitration in New York in accordance with
the rules and regulations of the American Arbitration Association then in
effect. If Oltman's position is upheld in such arbitration Holdings shall pay
Oltman's costs of arbitration.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the day, month and year first above written.
SIMPLICITY HOLDINGS, INC.
By: /s/Frank J. Rizzo
-------------------------------------
Its: Senior Vice President and CFO
---------------------------------
/s/Louis S. Oltman
-------------------------------------
Louis S. Oltman
6
<PAGE> 7
EXHIBIT A
SCHEDULE OF BENEFITS
In accordance with Section 5 of the Agreement, Oltman shall receive
those fringe benefits that are made available to other executives of Holdings
including the following:
a. Life insurance - Assuming that Oltman will make himself
available for a physical examination and is insurable, Oltman
will receive life insurance coverage in an amount commensurate
with that provided executive officers of Holdings having
similar status and Base Salary.
b. Medical and dental insurance - Oltman and his dependents may
participate in Holdings' group plan on a contributory basis.
c. Oltman shall be entitled to participate in the Simplicity
Retirement Savings Plan as of February 1, 1991.
d. Long-term disability coverage through the Holdings' group
plan.
A-1
<PAGE> 1
EXHIBIT 10.66
[SIMPLICITY PATTERN CO. INC. LETTERHEAD]
May 4, 1998
Mr. Louis S. Oltman
51 Vernasa Drive
Langhorne, PA 19053
Dear Lou:
This letter will serve as Simplicity's official notification that we shall be
reinstating and extending your Employment Agreement (copy attached) dated
February 15, 1991 and renewed on February 18, 1994. When countersigned by you,
this letter will also serve as a binding agreement between us.
This new agreement will be effective as of February 15, 1998 and will expire
February 14, 2001.
For reference purposes, your current base salary is $184,140 per year.
The only changes to the attached agreement will be as follows:
1. Upon termination without cause for reasons other than death or
disability, you will receive your annual incentive compensation only
for the year in which termination occurs. You will not be eligible for
an incentive compensation award for any other year following the year
of termination.
2. The Executive Severance Policy adopted by the Board of Directors on
July 27, 1997 will continue to apply to your employment with the
company. However, for a termination without cause, you will only
receive the greater of:
(a) the benefits outlined in your employment agreement
or
(b) the benefits in the Executive Severance Policy.
<PAGE> 2
If the foregoing accurately sets forth the agreement between us, please indicate
your acceptance by signing in the space below.
Sincerely,
/s/Louis R. Morris
Louis R. Morris
ACCEPTED: /s/Louis S. Oltman
--------------------------------
Louis S. Oltman
cc: Board of Directors
<PAGE> 1
EXHIBIT 10.67
SIMPLICITY CAPITAL CORPORATION
SIMPLICITY HOLDINGS, INC.
SIMPLICITY PATTERN CO. INC.
EXECUTIVE SEVERANCE POLICY
EFFECTIVE DATE: JULY 24, 1997
I. ELIGIBLE EXECUTIVES:
A. GROUP A EXECUTIVES
Senior Vice President - Chief Financial Officer (Frank Rizzo)
Senior Vice President - Sales and Marketing (Louis Oltman)
Senior Vice President - Fashion Product (Judy Raymond)
B. GROUP B EXECUTIVES
Vice President - International (Gordon Robinson)
Vice President - Crafts and Home Decorating (Abbie Small)
Plant Director (Eric Booker)
II. SPECIAL VOLUNTARY TERMINATION:
A. QUALIFICATION
Upon the occurrence of a recapitalization, sale, merger or
other transaction that results in a change of control the
executives listed above may voluntarily terminate their
employment within the first year following the change of
control transaction if any of the following events occur:
- Material diminution of job title
- Material diminution of job responsibilities
- Material diminution of base salary
- Material diminution of retirement benefits (other
than as required by a change in law)
- Requirement imposed by the Company to relocate more
than 50 miles from the executive's previous base of
employment
B. SEVERANCE BENEFITS
- Base salary of 12 months for Group A Executives and 9
months for Group B Executives with mitigation for any
base salary received from another employer during the
12 or 9 months after voluntary termination.
- Pro-rata share, based upon the number of days
employed, of bonus for the fiscal year during which
voluntary termination occurred.
- Pro-rata share, based upon the number of days
employed, of retirement benefits for the fiscal year
during which voluntary termination occurred.
<PAGE> 2
- Continuation of medical benefits for 12 months for
Group A Executives and 9 months for Group B
Executives after voluntary termination occurs, unless
commencement of other employment occurs sooner and
medical coverage is available from the new employer.
III. TERMINATION WITHOUT CAUSE:
A. DURING THE FIRST YEAR
If termination without cause occurs during the first year
following a change of control transaction, the executive will
be entitled to the same severance benefits as described above
in (II B.) for voluntary termination.
B. DURING THE SECOND YEAR
If termination without cause occurs during the second year
following a change of control transaction, the executive will
be entitled to the following severance benefits:
- Base salary of 12 months for Group A Executives and 9
months for Group B Executives with mitigation for any
base salary received from another employer during the
12 or 9 months after termination without cause
occurred.
- Pro-rata share, based upon the number of days
employed, of bonus for the fiscal year during which
termination without cause occurred.
- Continuation of medical benefits for 12 months for
Group A Executives and 9 months for Group B
Executives after termination without cause occurs,
unless commencement of other employment occurs sooner
and medical coverage is available from the new
employer.
C. BEYOND THE SECOND YEAR
If termination without cause occurs anytime beyond the second
year following a change of control transaction, the executive
will be entitled to the following severance benefits:
- Base salary and benefits based upon the policy in
effect at that time
- Pro-rata share, based upon the number of days
employed, of bonus for the fiscal year during which
termination without cause occurred
2
<PAGE> 1
EXHIBIT 13
PORTIONS OF CONSO PRODUCTS COMPANY'S 1998 ANNUAL REPORT
TO SHAREHOLDERS THAT ARE INCORPORATED BY REFERENCE
INTO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company's (Conso and all of its subsidiaries) fiscal year is the 52 or
53 week period ending on the Saturday nearest June 30; interim reporting periods
are based on 13 week quarters. The fiscal years ended June 27, 1998, June 28,
1997, and June 29, 1996 each include 52 weeks. On June 19, 1998, the Company
acquired all of the outstanding stock of Simplicity Capital Corporation and its
wholly owned subsidiaries (Simplicity). Simplicity's results of operations for
the period June 19, 1998 through June 27, 1998 were not material and are
excluded from the Company's results of operations.
1998 Compared with 1997
For the year ended June 27, 1998, net sales decreased 2.2% from $73.4
million to $71.9 million, before adjusting for prior year's sales through
MacCulloch & Wallis, the London subsidiary sold in August 1997. MacCulloch &
Wallis (London) Ltd., a retail subsidiary operation in London, servicing
primarily the apparel industry with haberdashery items, had made little money
and was facing potential losses due to increasing rent and other overhead costs.
Accordingly, the business was sold. The business operated until its sale
(through July 1997). There were net sales of $275,000 related to this unit,
which were recorded in fiscal year 1998, while the unit reported approximately
$1.4 million of net sales in the same period of the prior year. When excluding
sales through the MacCulloch & Wallis (London) Ltd. subsidiary, net sales were
not as negatively impacted, decreasing only 0.7%. With the acquisition of
Simplicity the Company has the opportunity to expand its presence further in the
retail markets. Gains in sales to retailers and continued growth in sales to
distributors lessened the impact of increasing competitive pressures within the
manufacturing customer segment. The following analysis of the sales results by
the separate Conso US and British Trimmings ("BT") units, are after eliminating
the effect of inter-company sales.
Total net sales through Conso US decreased 1.4% from $53.1 million to $52.3
million, as a result of the declines in sales to manufacturers, while total net
sales through BT decreased 4.2% from $20.4 million to $19.5 million, primarily
as a result of the sale of MacCulloch & Wallis (London) Ltd. Excluding the sales
of MacCulloch & Wallis (London) Ltd., net sales through BT actually increased
1.1%.
Net sales to manufacturers declined 11.0%, more than offsetting gains in net
sales to distributor and retail customers. Net sales to manufacturers through
Conso US declined 11.6%. Much of the decline in revenue dollars in the
manufacturing group serviced by Conso US came from the reformulation of products
to meet lower price points and compete with domestic competitive offerings, from
reductions in prices (primarily on hand-assembled items) to meet the foreign
competition and retain market share and in a few cases, due to changes in orders
as a result of changes in special programs offered by manufacturers to their
customers. Net sales to manufacturers serviced by BT declined 8.2%. Net sales to
manufacturers through BT were impacted primarily by competition both from
domestic and European producers, with the strength of the British pound sterling
giving an added advantage to other European competitors, and from increased
competition with foreign producers of tasseled items. The Company began
production in India in January 1998 to compete with lower cost imports and
improve margins and has established special teams to provide more focused
support to the manufacturing groups.
Net sales to distributors increased 3.3%, improving 1.8% at Conso US and
5.6% at BT, primarily as a result of the continued success of the Conso US and
BT catalogs, selling aids, and other marketing efforts, and as a result of
increased product offerings.
Overall, net sales to retailers including sales through MacCulloch & Wallis
(London) Ltd. increased 6.8%. Net sales to retailers excluding the effect of the
decline in sales as a result of the disposed MacCulloch & Wallis (London) Ltd.
operations increased 17.5%. During the fourth quarter of the current year, Conso
US established a trim program for a major retail store chain. As a result of the
new retail trim program and other sales gains, Conso US net sales to retailers
for the current year increased 19.9%, compared to the same period of the prior
year. Net sales to retailers through BT declined 34.1%, primarily due to the
sale of MacCulloch & Wallis (London) Ltd. Excluding the MacCulloch & Wallis
(London) Ltd. sales, sales to retailers for BT were up 3.6% over the prior year.
Net sales outside the US and UK (the Company's major sales regions)
increased $65,000, or 0.8% from the comparable period of the prior year, to $8.5
million, and represented 11.9% of total net sales. The Pacific Rim continued to
be negatively impacted by the recent changes in currency values and other
economic problems of that region, and net sales to that region declined by
13.7%. Export sales to the Western Hemisphere and the Europe and Middle East
regions increased 3.8% and 5.9%, respectively, despite increasing competition
from foreign producers and the strength of the British pound.
The gross margin for the year declined to $25.3 million or 35.2% of net
sales from the prior year's gross margin of $27.8 million or 37.9%. Increased
cost of inventory produced prior to the reductions of personnel and focus on
cost controls have been recorded as cost of goods sold. Pricing pressures from
competition, both domestically and foreign, have contributed to the margin's
decline, and reformulations of existing products to provide less expensive
alternatives have contributed to the decline in the margin dollars.
In the US, the gross margin for the current year was 38.7% compared to the
prior year's 40.8%, while at British Trimmings, the margin declined from 30.3%
to 25.8%. The Company has taken action to reduce the number of personnel
considering the current margin climate.
In the fourth quarter of fiscal 1998, the consolidated gross margin of 36.2%
was ahead, for the first time in fiscal 1998, of the gross margin for the
similar period of the prior year. The prior year's fourth quarter margin was
36.0% excluding the unanticipated year-
20
<PAGE> 2
end physical inventory adjustment and 34.0% including the adjustment. In
addition, the fourth quarter margin was well ahead of the third quarter's 33.8%.
This improvement indicates that the long-awaited effects of the reductions in
personnel and increased cost controls, begun earlier in the year, are beginning
to impact the Company's cost of sales as the higher cost inventory at Conso US
turned over through the early and mid-part of the year. Such turnover is still
in process at British Trimmings. The late-breaking margin improvement, coupled
with the addition of sales from products manufactured in India, should result in
improved margins in future periods.
Distribution expenses increased $140,826 for the current year, from 4.3% to
4.6% of net sales. British Trimmings' expenses decreased $88,091. British
Trimmings implemented some personnel reductions and a change in freight carrier
as an additional cost savings measure. Conso US' expenses increased $228,917,
due primarily to depreciation on the new warehouse facility and related
equipment including radio frequency optical scanning systems.
Selling expenses for the current year decreased $466,889. British Trimmings
decreased $310,511, while Conso US decreased $156,378, with the largest portion
of the decline coming from the disposal of MacCulloch & Wallis (London) Ltd.
General and Administrative costs increased $181,397. British Trimmings
decreased $14,257, while Conso US increased $195, 654. The increase in general
and administrative costs has been primarily attributable to the move of the Vice
President-Manufacturing into the Co-Managing Director roll for British Trimmings
and now as Chief Operating Officer of Conso US. Adjustments for recording
expatriate costs for this individual while residing in the UK, also contributed
to the increase in general and administrative costs.
Currency losses of $26,725 were incurred in fiscal 1998 while in the prior
year a gain of $63,097 was recorded. As a result of the decline in margin and
the currency losses, operating income decreased approximately $2.6 million or
22.4% from 15.7% of net sales to 12.4%.
Interest expense increased $69,864, in connection with increases in
borrowings on the Company's revolving loan facilities to help fund the dyehouse
and warehouse projects and acquire Simplicity.
The effective tax rate increased as management recorded reductions in SC
Jobs Tax Credits due to reductions in personnel effected through the end of the
fiscal year.
While net income for the fourth quarter increased $389,000 from $1.2 million
to $1.6 million and from 17 cents per share to 22 cents per share, net income
for the year declined approximately $2 million from $7 million in the prior year
to $5 million in the current year, and from 94 cents per share to 68 cents per
share due to the performance of the first three quarters. Conso US net income
declined $1.3 million while British Trimmings net income declined $711,000.
1997 Compared with 1996
Net sales for the year ended June 28, 1997 grew to $73.4 million, up 3.9%
from the prior year's $70.7 million. Sales by Conso US were up 3.8% to $53.1
million, net of intercompany transactions, a relatively modest increase coming
off significant sales increases of 28.1% in fiscal 1996 and 24.5% in fiscal
1995. Sales to manufacturers, the most improved group in the prior two fiscal
years, continued to show the best percentage improvement, but this category's
growth rate was affected to an extent by competition. British Trimmings' sales
increased 4.1% as a result of improvements in export sales and favorable changes
in the exchange rates. Sales outside the US and UK (the Company's major sales
regions) increased to $8.5 million, or by 28.2%. Such sales constituted 11.5% of
total sales for fiscal 1997 compared to the prior year's 9.3%.
The gross margin improved from $25.4 million or 36.0% of net sales to $27.8
million or 37.9% of net sales with margins (after intercompany eliminations and
purchase price adjustments) improving from 38.4% to 40.8% at Conso US, and
slightly from 29.6% to 30.3% at British Trimmings. At Conso US, price increases
and process improvements continued to favorably impact the gross margin. Staff
changes, a systems implementation delay, and production difficulties arising in
part from the reorganization of product offerings in the 1997 catalog hampered
improvement efforts at British Trimmings.
Distribution, selling and general and administrative expenses increased
$874,000 in the current fiscal year with the majority of the increases coming
from British Trimmings, the dollars being somewhat inflated by changes in the
exchange rates.
Distribution expenses increased $193,000. Conso US contributed $24,000 of
the increase. The remainder of the increase was a result of increased
warehousing and freight costs at British Trimmings aggravated by deterioration
in carriage services that ultimately led to a change in the primary freight
carrier. Distribution expenses, as a percentage of net sales, increased only
slightly from 4.2% to 4.3% of net sales in fiscal 1997.
Selling expenses increased $545,000 and edged up as a percentage of net
sales from 11.6% to 11.8% of net sales. Conso US contributed $91,000 of the
increase, but as a percent of net sales, Conso US' selling expenses declined.
The remainder of the dollar increase was contributed by British Trimmings,
primarily as a result of increased payroll, premises, advertising costs and the
reclassification of marketing material costs. Certain costs relating to
marketing materials at British Trimmings were recorded in cost of sales in the
prior year but are now recorded (in the current year) in selling expense. The
effect on the prior year's margin would be to increase the margin at British
Trimmings to 30.2%, all but eliminating the improvement. The effect on the prior
year's consolidated margin is only one-tenth of one percent and clearly
insignificant.
General and administrative expenses increased $136,000, but remained flat as
a percentage of net sales at 6.2%. Conso US and British Trimmings each
contributed approximately half of the increase (with British Trimmings actually
contributing less than Conso US were it not for the change in the exchange
rate).
The Company experienced gains as a result of changes in the currency
exchange rates on the
21
<PAGE> 3
intercompany account balance in British pound sterling and on money transfers
and payments in foreign currency of $63,000. In addition the Company sold its
(previously replaced) London facility during the current fiscal year for a gain
of $86,000.
Net interest costs decreased $255,000 due to decreased borrowings as a
result of improving cash flow at Conso US and the capitalization of interest of
$97,000, primarily in connection with the warehouse and dyehouse expansions in
the US.
Net income for the fiscal year ended June 28, 1997 was $7 million, an
increase of $584,000 or 9.1% over the prior year's $6.4 million. Conso US
contributed the entire increase with $7.1 million in net income offsetting the
disappointing $80,000 net loss at British Trimmings as a result of hampered
sales and margin improvements and increased distribution, selling and general
and administrative costs.
Liquidity, Capital Resources and Year 2000
The Company has historically financed its operations and capital
requirements through both internally generated funds and bank borrowings. Other
than the acquisitions of Simplicity and British Trimmings, capital requirements
in recent years have arisen principally from expansion of product lines and
production capacity and increased working capital needs to support higher sales
volume. In June 1998, the Company renegotiated its bank loan agreement with its
US bank. Under the new agreement, the Company obtained a $20 million term loan
and the Company's revolving loan was increased from $15 million to $30 million
including advances (as in the previous agreement) of up to (pound)7,000,000 (in
British pound sterling or $11.6 million at the June 27, 1998 exchange rate). The
new revolving loan does not expire and is not fully payable until December 1,
2000. Consequently, the new revolving loan is reported as long-term debt. The
refinancing provided additional funds to acquire all the outstanding share
capital of Simplicity. Due primarily to the shift in debt from short-term to
long-term and current assets and liabilities acquired in the Simplicity
acquisition, working capital increased to $35 million at June 27, 1998, from
$21.0 million at June 28, 1997, and from $19.5 million at June 29, 1996.
Operating cash flow increased from $5.1 million in fiscal 1997 to $7.2
million in fiscal 1998 primarily as a result of improved inventory management
and increased non-cash charges for depreciation and deferred tax provisions,
which were partially offset by the reduction in net income and increases in
accounts receivable due to significant shipments near the end of the fourth
quarter. Cash used in investing activities increased from $5.4 million in fiscal
1997 to $38.5 million in fiscal 1998, primarily due to the acquisition of
Simplicity and additional construction of the warehouse and dyehouse facilities
in Union, SC. Cash provided by financing activities increased from $554,000 in
fiscal 1997 to $33.1 million in fiscal 1998, primarily as a result of the
additional borrowings to fund the Simplicity acquisition, offset by the
repurchase of 173,000 shares ($1.4 million) of common stock.
On November 10, 1997, the Board of Directors authorized the repurchase of up
to 500,000 shares of common stock. In addition to purchases in fiscal 1998, an
additional 20,000 shares ($161,250) were purchased in July of 1998, subsequent
to the year-end.
Repurchases may be made from time to time depending upon market conditions.
The Company's Executive Committee will direct the specific repurchases and
approve prices and other terms. The Company expects to fund repurchases either
through internally generated funds or existing credit lines, but may consider
additional credit facilities depending upon market conditions and the timing and
amount of repurchases deemed appropriate.
Capital expenditures for fiscal 1998 (excluding major building expansions at
Conso US) were approximately $1.6 million, primarily for manufacturing equipment
at both Conso US and British Trimmings and some data processing and facilities
improvements at British Trimmings. The Company has budgeted approximately $3.3
million for capital expenditures for fiscal 1999 (other than capital
expenditures for building expansions of $1.7 million or possible acquisitions of
other businesses). During fiscal 1998, the new 86,000 square foot distribution
center was constructed and construction began on the 33,000 square foot dyehouse
facility adjacent to the main plant in Union, South Carolina. Approximately $1.2
million was spent during fiscal 1998 on the distribution center and the center
commenced operations on July 7, 1997. Approximately $2.8 million was spent on
the new dyehouse project including related equipment, and it is estimated that
an additional $800,000 will be spent during fiscal 1999. The construction of the
dyehouse is scheduled for completion by the end of calendar year 1998. These
expansions free up approximately 60,000 square feet for much needed additional
office and production space. The Company will consider additional capital
expenditures for building expansions or business acquisitions as opportunities
arise.
Additionally, the Company has performed an initial, high-level evaluation of
its "Year 2000" ("Y2K") issues, (and more detailed evaluations in connection
with its five-phased program for Y2K compliance discussed below), and believes
that they will be resolved through the purchase of certain new hardware and
software, and modification of existing software, at an estimated total cost of
$750,000. The cost of Y2K modifications to existing software is being expensed.
The purchases of new hardware and software (while they happen to address the Y2K
issues) are providing significant additional benefits to the company and are
being capitalized. Many of these purchases, anticipated for the future, have
been accelerated as a result of the Y2K issues.
During fiscal 1998, $111,000 was spent as a result of the Y2K issues,
including approximately $30,000 of labor to modify existing programs, which has
been expensed. Approximately $500,000 has been included in the budgeted capital
expenditures for fiscal 1999 to address the Y2K issues on a timely basis.
In calendar 1997, the Company developed a five-phase program for addressing
the Y2K issues and to assure information and other systems compliance by
December 1998 for Conso US and BT. Phase I is to identify those systems with
which the Company has any
22
<PAGE> 4
Y2K issues. Phase II is the development of action plans for Y2K compliance.
Phase III is the implementation of action plans through the modification or
replacement of all identified systems areas in time for adequate testing and
implementation. Phase IV is the testing phase, and Phase V is the final and
implementation phase.
The Company has established a Y2K committee, which includes certain key
management personnel, to review the status of the plan, assure timely
compliance, and apprise the Board of Directors as to the status on a quarterly
basis.
With the exception of a few personal computers being replaced, the Company
has completed all phases and is 100% Y2K compliant at Conso US, ahead of its
original implementation schedule.
At BT, the Company is still in the process of identifying minor systems
(primarily non-data processing related systems) under Phase I. Major systems
(including financial, inventory control and manufacturing systems) are in Phase
III. The Company is currently ahead of its original schedule for full Y2K
compliance at BT by December 1998.
As a result of the acquisition of Simplicity, and in order to allow time to
address all Y2K issues of the newly acquired business, the original schedule for
Company-wide compliance has been extended from December 1998 to June 1999. The
Company is still in Phase I for certain non-inventory control and
non-manufacturing related systems, and Phase III for certain basic financial
systems. The company has completed Phase IV for its inventory control and
manufacturing software; however, its hardware, used to run such software is not
Y2K compliant. The Company has identified hardware which can be purchased to
address the Y2K issues and the Company is also looking at the possibility of
converting the programs to run on less costly hardware. The cost of the hardware
is included in its fiscal 1999 budget. The decision as to which approach to take
will be finalized around the end of the 1st quarter of fiscal 1999 (September or
October 1998) and will be the one that makes the most sense to management,
considering time, resources and the Company's long-term strategic objectives as
factors in the decision making process. The Company is scheduled to complete
full Y2K compliance by June 30, 1999.
The Company has not entirely assessed the risk to the business surrounding
the Y2K issues without taking into account the company's efforts to avoid those
consequences; however, management believes the risk is substantially reduced
when compared to other highly automated environments, due to the significant
amount of programs and systems already made compliant, the small numbers of date
dependent calculations in its remaining computer programs and systems, the lack
of significant use of equipment with embedded technology, and the feasibility of
the Company's contingency plan, considering these circumstances.
The Company's current contingency plan for non-compliance consists primarily
of the use of additional labor including the use of overtime to handle items
with Y2K issues manually (which would normally be handled by the computer). Were
the Company not able to achieve timely Y2K compliance, there could be some
material impact on the business, from, for example, an increase in labor costs
to handle certain processes normally handled by the computer, in accordance with
the Company's contingency plan. In addition, significant changes in the
availability of labor and resources to fulfill the Company's contingency plan
could have an even greater impact on the business. However, having achieved full
implementation and compliance at Conso US, and considering the status of systems
at BT and Simplicity, it is the opinion of management that the Company will
achieve compliance in adequate time to avoid Y2K issues. In addition, management
believes that the identification of any additional systems that are not Y2K
compliant, to the extent it is still in Phase I with certain systems, will not
result in a substantial increase in costs, or a significant change in its
implementation schedule, due to the nature and use of those systems.
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 additional 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 made
arrangements for any such additional financing.
Employee Benefits
In December 1993, the Company established a stock option plan, which became
effective upon the completion of its initial public offering of common stock.
The plan permits the award of options, to buy up to 607,500 shares of the
Company's common stock, to certain managers and other key employees. As of June
27, 1998, the Company had granted 250,350 options of which 66,500 options had
been exercised, and 18,125 had been cancelled and returned to the plan. 375,275
options are available to be issued under the plan. Options outstanding were
granted at prices ranging from $6.67 to $11.00 per share.
Earnings Per Share
In the quarter ended December 1997 the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All prior year earnings
per share amounts have been restated for the implementation of SFAS 128.
Jobs Tax Credits carry forward
The Company recorded SC Jobs Tax Credits earned in fiscal years 1997 and 1996
of $225,000 and $630,808, respectively, resulting in net tax benefits (net of
applicable federal income tax effect) of $148,500 and
23
<PAGE> 5
$416,333, respectively. During fiscal 1998, management wrote-off $405,000 of SC
Jobs Tax Credits due to significant reductions in its workforce in SC, resulting
in a charge against income (net of applicable federal income tax effect) of
$267,300.
According to Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"), such tax credits are to be recorded as assets and
reductions of tax expense to the extent it is more likely than not that the
taxable income in future periods will be sufficient to utilize the credits and
employment levels will not decrease, causing a loss of credits recorded in prior
years. SFAS 109 also requires that, on an ongoing basis, management assess any
changes in conditions which may affect the likelihood of realizing these tax
credits and that a valuation allowance be established should a degree of
uncertainty about the likelihood of realizing these credits become apparent. A
valuation allowance would be established with a charge against income. Based on
management's review of the Company's historical and current performance and its
plans for future growth including the acquisition of Simplicity and other
acquisitions, the introduction of new products, the expansion of existing
products and expansion into international markets, management believes it is
more likely than not that the Company will be able to fully utilize these tax
credits and has concluded that no valuation allowance is considered necessary at
this time.
The Company is uncertain as to the amount and net income effect of credits,
if any, which may be earned in future years, because future credits are
contingent upon regionally specific increases in employment, and the net income
effect is contingent upon additional future South Carolina taxable income
sufficient to fully utilize such credits as may become available in the future.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes and foreign
currency fluctuations due to its $30.0 million revolving credit facility and its
foreign operations, primarily through its British Trimmings subsidiary. The
Company does not enter into derivative financial instruments for trading
purposes.
Borrowings under the Company's $30.0 million revolving credit facility bear
interest at rates based upon an adjusted LIBOR rate plus a margin that ranges
from .75% to 1.75% (depending upon the Company's consolidated leverage ratio).
Up to (pound)7,000,000 in borrowings may be made by British Trimmings in the
United Kingdom in British pounds sterling. While the Company has not entered
into any swap agreements or engaged in any other hedging activities with this
respect to this variable rate indebtedness, the Company monitors interest rate
changes and periodically reviews and considers whether it should engage in
hedging activities. [An increase of 1% in the interest rate under the Company's
revolving credit facility would decrease earnings by approximately $150,000
(assuming the Company's borrowings under the revolving credit facility averaged
$24 million during a fiscal year).]
The Company conducts business through British Trimmings in British pounds
sterling and, to a substantially lesser extent, through other subsidiaries in
other foreign currencies. As a result, the Company is subject to foreign
exchange rate risk on cash flows related to sales, expenses and financing
transactions (including borrowings in pounds sterling). Because of the
relatively stable exchange ratio related to the British pound sterling, the
Company has not historically made use of foreign currency exchange contracts or
otherwise hedged its foreign currency risk. [See note 12 to the Company's
consolidated financial statements for information related to gains attributable
to the Company's investment in British Trimmings as well as to gains from its
operations for each of the last three fiscal years.]
Effects of Inflation
During the three years ended June 27, 1998, inflation has had little effect
on the Company's capital costs and results of operations.
Cautionary Statement 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 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 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; inability of the company to retain or
obtain adequate resources to address timely its Y2K issues or related
contingency plan; and other factors that generally affect the business of
manufacturing companies with international operations.
24
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
June 27, 1998 and June 28, 1997
<TABLE>
<CAPTION>
ASSETS (Note 3) 1998 1997
-------------- ---------------
<S> <C> <C>
Current Assets
Cash $ 2,332,987 $ 489,580
Accounts receivable, net of allowances for bad debts
and customer deductions of $1,352,246 and $310,876
in 1998 and 1997, respectively (Note 1) 22,754,848 11,747,482
Inventories (Notes 1 and 2) 30,358,201 25,339,936
Deferred income taxes-current portion(Note 5) 1,396,725 625,873
Prepaid expenses and other 3,780,770 426,508
-------------- ---------------
Total current assets 60,623,531 38,629,379
-------------- ---------------
Property and Equipment (Notes 1 and 3)
Land and improvements 1,455,422 1,177,248
Buildings and improvements 15,114,190 9,655,017
Machinery and equipment 23,790,937 14,216,300
-------------- ---------------
Total 40,360,549 25,048,565
Accumulated depreciation (10,599,298) (8,485,714)
-------------- ---------------
Total property and equipment, net 29,761,251 16,562,851
-------------- ---------------
Intangible Assets (Notes 1 and 11) 20,367,102
Deferred Income Taxes (Note 6) 3,272,542 1,120,694
Other noncurrent assets 1,667,879 246,477
-------------- ---------------
Total $ 115,692,305 $ 56,559,401
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings (Note 3) $ 558,365 $ 10,405,973
Current maturities of long-term debt (Note 3) 2,103,844 208,063
Trade accounts payable 7,561,947 4,162,339
Accrued liabilities (Note 5) 15,402,057 2,879,703
-------------- ---------------
Total current liabilities 25,626,213 17,656,078
-------------- ---------------
Noncurrent Liabilities
Long-term debt(Note 3) 42,507,750
Deferred income taxes (Note 6) 484,434 535,184
Other noncurrent liabilities 4,984,000
-------------- ---------------
Total noncurrent liabilities 47,976,184 535,184
-------------- ---------------
Commitments and Contingencies (Notes 4,7,8 and 9) - -
-------------- ---------------
Shareholders' Equity (Note 9 and 13)
Preferred stock (no par, 10,000,000 shares authorized;
no shares issued) - -
Common stock (no par, 50,000,000 shares authorized; 7,324,412
and 7,491,540 shares issued in 1998 and 1997, respectively) 15,618,732 16,970,175
Retained earnings 25,760,459 20,728,449
Cumulative translations gain 710,717 669,515
-------------- ---------------
Total shareholders' equity 42,089,908 38,368,139
-------------- ---------------
Total $ 115,692,305 $ 56,559,401
-------------- ---------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE> 7
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended June 27, 1998, June 28, 1997, and June 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Net sales $ 71,860,661 $ 74,447,466 $ 70,713,651
Cost of goods sold 46,591,450 45,624,125 45,281,292
------------- ------------- ------------
Gross margin 25,269,211 27,823,341 25,432,359
------------- ------------- ------------
Selling, general and
administrative expenses:
Distribution expense 3,299,861 3,159,035 2,965,645
Selling expense 8,293,031 8,759,920 8,215,116
General and administrative expense 4,716,885 4,535,488 4,399,610
Currency exchange loss(gain) (Note 1) 26,725 (63,097) (20,114)
Gain on disposal of facility - (85,954) -
------------- ------------- ------------
Total 16,336,502 16,305,392 15,560,257
------------- ------------- ------------
Income from operations 8,932,709 11,517,949 9,872,102
------------- ------------- ------------
Interest expense (income):
Interest expense (Note 3) 724,467 654,603 917,349
Interest income (115,472) (157,057) (164,352)
------------- ------------- ------------
Total 608,995 497,546 752,997
------------- ------------- ------------
Income before income taxes 8,323,714 11,020,403 9,119,105
------------- ------------- ------------
Income taxes (Note 6)
Income tax provision
before SC Jobs Tax Credits 3,024,404 4,141,733 3,092,278
Net SC Jobs Tax (Credits)
Provision 267,300 (148,500) (416,333)
------------- ------------- ------------
Total income tax provision 3,291,704 3,993,233 2,675,945
------------- ------------- ------------
Net income $ 5,032,010 $ 7,027,170 $ 6,443,160
------------- ------------- ------------
Net income per share (Notes 1 and 9)
Basic $ 0.68 $ 0.94 $ 0.86
------------- ------------- ------------
Diluted $ 0.67 $ 0.93 $ 0.86
------------- ------------- ------------
Weighted average number of
shares outstanding (Note 9)
Basic 7,447,396 7,485,807 7,456,552
------------- ------------- ------------
Dilutd 7,470,414 7,538,616 7,479,806
------------- ------------- ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE> 8
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Fiscal Years Ended June 27, 1998, June 28, 1997, and June 29, 1996
<TABLE>
<CAPTION>
Common Stock Cumulative
Shares Retained Translations
Issued Amount Earnings Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1995 7,425,422 $ 16,571,214 $ 7,258,119 $ 294,398 $ 24,123,731
Stock options exercised 56,250 325,132 325,132
Net income 6,443,160 6,443,160
Translation loss (113,690) (113,690)
------------- ------------- ------------ ----------- ------------
Balance June 29, 1996 7,481,672 16,896,346 13,701,279 180,708 30,778,333
Stock options exercised 8,600 57,349 57,349
Shares issued for directors fees 1,268 16,480 16,480
Net income 7,027,170 7,027,170
Translation gain 488,807 488,807
------------- ------------- ------------ ----------- ------------
Balance June 28, 1997 7,491,540 16,970,175 20,728,449 669,515 38,368,139
Stock repurchases (173,000) (1,398,750) (1,398,750)
Stock options exercised 1,650 11,000 11,000
Shares issued for directors fees 4,222 36,307 36,307
Net income 5,032,010 5,032,010
Translation gain 41,202 41,202
------------- ------------- ------------ ----------- ------------
Balance June 27, 1998 7,324,412 $ 15,618,732 $ 25,760,459 $ 710,717 $ 42,089,908
------------- ------------- ------------ ----------- ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended June 27, 1998, June 28, 1997, and June 29, 1996
<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997 June 29, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,032,010 $ 7,027,170 $ 6,443,160
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,223,536 1,759,853 1,662,823
Amortization of deferred expenses 59,038 83,359 87,810
Deferred tax (benefit) expense 422,188 131,916 (757,716)
Currency transaction gain (16,225) (63,097) (20,112)
Loss (gain) on sale of plant and equipment 9,825 (85,954) (124,719)
Change in assets and liabilities excluding
effects on businesses acquired:
Accounts receivable (697,964) 8,514 (1,732,181)
Inventories 433,675 (4,701,300) (171,124)
Prepaid expenses and other (233,872) 543,121 (107,168)
Trade accounts payable (914,588) 635,559 (285,363)
Accrued liabilities 910,503 (210,953) 106,109
------------- ------------- -------------
Net cash provided by operating activities 7,228,126 5,128,188 5,101,519
------------- ------------- -------------
INVESTING ACTIVITIES
Sales of officer's life insurance -- -- 39,271
Construction of new warehouse and dyehouse (5,426,578) (3,741,161) --
Purchase of London facilities -- -- (790,919)
Purchase of other property and improvements -- (399,614) (264,156)
Purchases of equipment (1,557,878) (1,565,504) (1,546,916)
Payments for business, net of cash acquired (31,634,223) (85,472) (385,962)
Sale of plant and equipment 70,631 409,092 138,088
------------- ------------- -------------
Net cash used in investing activities (38,548,048) (5,382,659) (2,810,594)
------------- ------------- -------------
FINANCING ACTIVITIES
Net borrowings (repayments) under line of
credit arrangements 14,640,741 2,886,360 (2,006,120)
Borrowings of fixed rate debt 20,000,000 --
Principal payments on long-term debt (103,744) (2,335,789) (410,317)
Payments of capitalized loan origination costs (22,225) -- (1,111)
Principal payments under capital
lease obligations -- (70,193) (151,219)
Proceeds from issuance of common stock,
net of expenses 47,307 73,828 325,132
Repurchases of Conso common stock (1,398,750) -- --
------------- ------------- -------------
Net cash provided by (used in) financing activities 33,163,329 554,206 (2,243,635)
------------- ------------- -------------
Increase in cash 1,843,407 299,735 47,290
Cash at beginning of year 489,580 189,845 142,555
------------- ------------- -------------
Cash at end of year $ 2,332,987 $ 489,580 $ 189,845
------------- ------------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended June 27, 1998, June 28, 1997, and June 29, 1996.
1. Organization and Summary of Significant Accounting Policies
Organization and Operations - Conso Products Company (the "Company") is
headquartered at the main plant in Union, South Carolina. The Company has an
additional plant in Union. The Company also has hand-assembly operations in
Juarez, Mexico and Coimbatore, India and showrooms in New York City, Miami, and
Hickory, North Carolina. Sales representatives are located in certain major
cities in the United States and the United Kingdom. The Company also employs an
international sales force and has sales representatives located throughout the
world. Some products are sold by independent sales agents.
British Trimmings Ltd., a wholly-owned English company, is based at its main
plant in Stockport, England, and has a production and dyehouse facility and a
separate printing operation in Leek, England and a hand-assembly and production
operation and showroom in London.
The Company manufactures and sells decorative cord and narrow trimmings,
hand-assembled tasseled accessories and sewing supplies. It also markets
decorative window accoutrements and other home furnishing accessories.
On June 19, 1998, the Company acquired all of the outstanding stock of
Simplicity Capital Corporation and its wholly-owned subsidiaries, including
Simplicity Pattern Co., Inc. (Simplicity) (See Note 11). Simplicity was founded
in 1927 and is one of the leading producers of patterns and instructional
publications for the home sewing industry. Simplicity's main office is located
in New York City. Its production facility is in Niles, Michigan. It has
subsidiaries with operations in Sydney, Australia; Auckland, New Zealand;
Toronto, Canada; Mexico City, Mexico; and Glasgow, Scotland. Simplicity also has
a design studio in London. Sales personnel service retail customers throughout
the US and all of the foreign markets.
Consolidation - The financial statements include the accounts of the Company
and its wholly-owned subsidiaries: British Trimmings and its subsidiaries (all
operating within the United Kingdom), India Trimmings (Private) Limited, which
operates in Coimbatore, India, and Conso's majority-owned subsidiary, Val-Mex,
S.A. de C.V., which operates in Juarez, Mexico. The Val-Mex and India operations
are not significant in relation to the Company's operations. Simplicity Capital
Corporation and its subsidiaries balance sheet accounts are included as of June
27, 1998. (Simplicity's results of operations for the period from June 19, 1998,
the date of the acquisition, through June 27, 1998 were not material).
The results of operations are presented on a 52 or 53 week basis with the
closing on the Saturday nearest to June 30th. Fiscal years 1996, 1997, and 1998
include 52 weeks results of operations.
All significant intercompany accounts and transactions, and profit and loss
on intercompany transactions, are eliminated.
Foreign Currency Translation and Transactions - Assets and liabilities of
foreign subsidiaries are translated into US dollars at period-end exchange
rates. Income, expenses, and cash flows are translated at weighted-average rates
of exchange for the period. The resulting currency translation adjustments are
accumulated and reported as a separate component of shareholders' equity.
From time to time, the US parent company loans or is loaned amounts from its
foreign subsidiaries. It is the Company's policy that such amounts are repayable
or receivable in the foreign currency of the subsidiary. Translation gains or
losses on such amounts due to or from foreign subsidiaries and all exchange
gains and losses on realized foreign currency transactions are included in the
consolidated results of operations. The Company has not entered into any foreign
exchange transactions or any other agreements to manage the risk of foreign
exchange rate fluctuations except to the extent it is able to borrow funds in
British pound sterling. The Company does not speculate in foreign currencies.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions (e.g. allowance for bad debts and reserve for pattern
discards) that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, at the date of the financial
statements, and the reported amounts of revenues and expenses, during the
reporting period. Actual results could differ from those estimates.
29
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments - The carrying amount of cash, accounts
receivable, current liabilities and notes payable approximates their respective
fair values.
Inventories - Inventories of products (excluding patterns) are stated at the
lower of first-in first-out cost, or market. Cost includes materials, direct
production labor and production-related overhead costs. Inventories of patterns
are generally stated at average cost, not in excess of market value.
Pattern Discards - Retailers' stocks of patterns are kept up-to-date with
current fashions by the periodic issuance of new patterns embodying new styles.
When patterns are discontinued, credits are issued to retail customers for their
stock on hand. Accordingly, the balance in the Reserve for Pattern Discards
reflects the estimated dollar value of discontinued patterns for which credit
will be issued to the open account against future purchases by those retail
customers and is included in other Accrued Liabilities.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation, and depreciation is provided on a straight-line basis
over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings 25-40 years
Buildings improvements 10-40 years
Leasehold improvements 5 years
Machinery and equipment 7-10 years
Mobile and computer equipment 3-5 years
</TABLE>
Property and equipment purchased in the acquisition of businesses are stated
at their fair market values at the date of the acquisition of the business.
Maintenance and repair costs are charged to expense as incurred; costs of
major additions and betterments are capitalized. When property and equipment are
sold or otherwise disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations.
Loan Costs - The costs incurred to obtain loans and credit lines have been
deferred and are being amortized over the term of the loan on a straight-line
basis, which is not materially different from the interest method.
Long-Lived Assets - In fiscal 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company has
determined that no impairment loss need be recognized for applicable assets for
fiscal 1998 and 1997.
Advertising Costs - The Company's policy is to expense advertising costs
upon initial publication of advertisements. Advertising costs for the fiscal
years ended June 27, 1998, June 28, 1997, and June 29, 1996 were $328,909,
$362,567, and $340,175, respectively.
Intangible Assets - The Company evaluates the recoverability of goodwill
using the "fair value" method. The goodwill balance is being amortized on a
straight-line basis over 30 years.
Revenue Recognition - Revenue is recognized at the time of shipment of the
Company's products to its customers, except for certain pattern shipments.
Return of products and other discounts and allowances are netted against sales,
when incurred.
The initial base stock of patterns are shipped to most retail customers
under a deferred payment arrangement whereby revenue is recognized upon the
shipment of reordered patterns. Interest income is recognized on the deferred
payment balances. Some patterns are sold on a commission basis with revenue
recognized by the Company at the time of sale of the patterns by the retail
customer.
Income Taxes - The Company provides deferred income tax assets and
liabilities for the expected future tax consequences of differences in the
financial reporting basis and income tax basis of certain assets and
liabilities.
Undistributed earnings of subsidiaries located outside the US may or may not
be included in the taxable income reported in the US, depending upon the
Company's expectations for remitting such earnings to the parent company.
Retirement Plans - The Company has defined contribution plans covering
substantially all full-time US employees, a defined contribution plan covering
British Trimmings personnel, defined benefit plans covering Simplicity foreign
employees, non-qualified defined contribution plans for key officers and
employees, and a stock purchase plan available to all employees after a certain
period of employment.
30
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Benefits Other Than Pensions - The Company provides health
care benefits for certain eligible active and retired domestic employees. Some
of these plans are covered under collective bargaining agreements with unions
and are unfunded. Part of the costs for the health care benefits are paid by the
employees. The Company accounts for the retirement benefits in accordance with
SFAS 106.
Earnings Per Share - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", in the quarter ended December
1997. SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All prior year
earnings per share amounts have been restated for the implementation of SFAS
128.
Other Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS 130, "Reporting Comprehensive Income", which
will be effective for the Company for the fiscal year beginning June 28, 1998.
This statement establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains, and losses).
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income (including, for
example, unrealized holding gains, unrealized foreign currency translation
gains, and losses on available-for-sale securities) be reported in a financial
statement similar to the statement of income and retained income. The
accumulated balance of other comprehensive income will be disclosed separately
from retained income in the equity section of the balance sheet.
Also, in June 1997, the FASB issued SFAS 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 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The Company has
not yet completed its analysis of which additional operating segments, if any,
it will report on separately, or increase in disclosures, if any, will be
required beyond that already reported in its financial statements.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits - an Amendment of FASB Statements No.
87, 88, and 106." SFAS 132 revises disclosures about pension and other
postretirement benefit plans, but it does not change the measurement or
recognition of those plans. SFAS 132 is effective for the Company for the fiscal
year beginning June 28, 1998.
Reclassifications - Certain balances in prior years have been reclassified
to conform with the presentation adopted in the current fiscal year.
- -------------------------------------------------------------------------------
2. Inventories
<TABLE>
<CAPTION>
June 27, 1998 June28,1997
------------- -----------
<S> <C> <C>
Raw materials $ 8,013,942 $ 8,188,073
Work-in-progress 5,115,817 3,634,638
Finished goods 17,228,442 13,517,225
------------- -----------
Total $ 30,358,201 $25,339,936
------------- -----------
</TABLE>
3. Notes Payable and Long-Term Debt
In June 1998, in conjunction with the acquisition of Simplicity (Note 11),
the Company renegotiated its bank loan agreement with a US bank. Under the new
agreement, the Company obtained a $20,000,000 term loan repayable quarterly on a
ten-year amortization basis beginning October 1, 1998, with a fixed annual
interest rate of 7.40% and a $10,000,000 balloon payment due at the end of five
years. In addition, the Company's revolving loan was increased from $15,000,000
to $30,000,000 including advances (as in the previous agreement) of up to
(pound)7,000,000 (in British pounds sterling or $11,631,000 at the June 27, 1998
exchange rate). The new revolving loan expires and is fully payable on December
1, 2000, unless renewed by mutual agreement. Consequently, the new revolving
loan is reported as long-term debt.
31
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, on June 19, 1998, the Bank committed $3,000,000, which the
Company may use for letters of credit. At June 27, 1998, the Company has
$2,500,000 of letters of credit outstanding.
Advances in US dollars under the revolver bear interest at the annual rate
of 1.50% over the floating 30 day LIBOR rate as quoted in the Wall Street
Journal (7.1875% as of June 27, 1998). Advances in British pounds sterling are
made under UK LIBOR contracts. These contracts bear interest based on the
adjusted LIBOR rates for specific periods (based on seven days, fourteen days,
one month or three months) plus 1.50% (previously 1.00%)(7.3906%, 7.5625%,
7.6250%, and 7.8672%, respectively) as of June 27, 1998.
At June 27, 1998, $5,492,250 was available for borrowing under the new
revolving loan agreement. Of the available balance at June 27, 1998,
(pound)500,000 ($830,750) of the amount was available for borrowing in British
pounds sterling (or US dollars), with the additional $4,661,500 available for
borrowing in US dollars only.
At June 27, 1998, the US dollar borrowings on the revolving loan amounted to
$13,708,000. At June 27, 1998, borrowings in British pounds sterling by British
Trimmings totaled (pound)6,500,000 (or $10,799,750 at the June 27, 1998 exchange
rate), under LIBOR contracts in the amounts of (pound)1,000,000, (pound)750,000,
(pound)3,250,000, (pound)1,250,000, and (pound)250,000 for 90, 90, 90, 92, and
92 days at interest rates of 8.6250%, 8.5000%, 8.5625%, 8.5000%, and 9.3125%,
respectively.
The average US dollar borrowings outstanding under line of credit agreements
for the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996 were
$498,899, $1,066 and $2,935,041 at weighted average interest rates of 6.98%,
8.22% and 8.84%, respectively. The maximum outstanding US dollar borrowings
during these periods were $13,776,000, $194,000, and $8,550,944, respectively.
The average borrowings outstanding in British pounds sterling under the line
of credit agreements for the fiscal years ended June 27, 1998, and June 28,
1997, were (pound)6,150,000 ($10,163,490) and (pound)4,330,137 ($7,207,513), at
weighted average interest rates of 8.6400% and 7.2924%, respectively. The
maximum outstanding borrowings during these periods were (pound)6,500,000
($10,799,750 at the June 27, 1998 exchange rate) and (pound)5,750,000
($9,570,875 at the June 28, 1997 exchange rate), respectively.
British Trimmings has overdraft borrowing facilities (similar to revolving
loan facilities used in the US) available in British pounds sterling with a
United Kingdom branch of a United States based bank for itself and certain of
its subsidiaries, which provides overdraft facilities totaling (pound)600,000
(or $996,900 at the June 27, 1998 exchange rate). Prior to a change in banks on
December 11, 1997, the overdraft borrowing facility was provided by a United
Kingdom-based bank in the amount of (pound)500,000 (or $830,750). Overdrafts
bear interest at the bank's base rate plus 1.50% (subject to a minimum rate of
6.00%), which was 8.64% at June 27, 1998. Borrowings under this facility at June
27, 1998, totaled (pound)336,061 (or $558,365 at the June 27, 1998 exchange
rate).
At June 27, 1998, (pound)263,939 ($438,535) was available for borrowings
under this overdraft facility. The average overdraft outstanding under the
overdraft facility was (pound)261,109 ($431,509), (pound)452,426 ($753,063), and
(pound)180,091 ($279,861) (at the average exchange rates for the fiscal years
ended June 27, 1998, June 28, 1997 and July 29, 1996, at weighted average
interest rates of 8.64%, 7.47% and 7.89%, respectively). The maximum overdraft
outstanding during the fiscal years ended June 27, 1998, June 28, 1997, and June
29, 1996 was (pound)839,413 ($1,387,214) (pound)868,389 ($1,445,433), and
(pound)707,410 ($1,097,900), respectively (at the average exchange rates during
the periods). The bank provides British Trimmings with other services including
letters of credit and bank-guaranteed standby credit for value-added tax
payments of an additional (pound)200,000 (or $332,300 at the June 27, 1998
exchange rate) bearing the same interest rates as in the overdraft facility.
There were no material other services used or outstanding at June 27, 1998.
The balances owed under the long-term agreements are as follows:
<TABLE>
<CAPTION>
June 27, 1998 June28,1997
------------- -----------
<S> <C> <C>
Fixed-rate term loan $ 20,000,000 $ -
Revolving bank loan 24,507,750
European Coal & Steel Community
(ECSC)loan 103,844 208,063
------------ -----------
Total 44,611,594 208,063
Less current portion 2,103,844 208,063
------------ -----------
Total long-term debt $ 42,507,750 $ -
------------ -----------
</TABLE>
Maturities of long-term debt at July 27, 1998 are as follows:
<TABLE>
<CAPTION>
Year:
<S> <C>
1999 $ 2,000,000
2000 2,000,000
2001 1,500,000
2002 2,000,000
2003 2,000,000
Thereafter 10,500,000
-------------
Total $ 20,000,000
-------------
</TABLE>
32
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Of the Company's assets, virtually all of the Company's US assets are
pledged as collateral.
The loan agreement contains various covenants requiring, among other things,
that the Company maintain certain minimum levels of working capital, net worth
(as defined), and other ratios. In the opinion of management, the Company was in
compliance with all such covenants at June 27, 1998.
Net interest paid (net of amount capitalized) during the fiscal years ended
June 27, 1998, June 28, 1997, and June 29, 1996 was $473,522, $487,860, and
$700,746, respectively. During the fiscal year ended June 27, 1998 and June 28,
1997, $338,963 and $96,832 of interest expense was capitalized primarily in
connection with warehouse and dyehouse expansions in the US.
- -------------------------------------------------------------------------------
4. Leases
The Company's operations utilize property, facilities, equipment, and
vehicles leased from others. Buildings and facilities leased from others
primarily are for design and sales offices, showrooms, distribution centers, and
the Val-Mex and India manufacturing operations. The lease arrangements generally
provide for a fixed basic rent, and in some instances adjustments for inflation.
Initial terms of leases generally are not more than eleven years exclusive of
options to renew. Leases of other equipment primarily consist of manufacturing
equipment and vehicles. Information regarding the Company's leasing activities
at June 27, 1998, is as follows:
<TABLE>
<CAPTION>
Operating Leases
Minimum
Year: Lease Payments
<S> <C>
1999 $ 1,252,422
2000 1,347,178
2001 1,247,910
2002 1,201,000
2003 1,185,000
2004 2,825,000
- ----- ------------
Total $ 9,058,510
===== ============
</TABLE>
5. Accrued Liabilities
<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997
------------- -------------
<S> <C> <C>
Reserve for pattern discards $ 3,911,000 $ -
Purchase accounting reserve 1,500,000
Accrued payroll costs 1,412,446 1,019,217
Vacation accrual 1,264,913 375,121
Income taxes payable 1,058,358
Other accrued liabilities 6,255,340 1,485,365
------------- --------------
$ 15,402,057 $ 2,879,703
------------- --------------
</TABLE>
6. Income Taxes
The US and foreign components of the provision for income taxes for the
fiscal years ended June 27, 1998, June 27, 1997, and June 29, 1996 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current Provision:
Federal $ 3,002 $ 3,734 $ 3,261
State 243 326 295
Foreign (194) 65 (122)
------- ------- -------
Total current provision 3,051 4,125 3,434
------- ------- -------
Deferred Provision
Federal 312 123 (16)
State 117 (173) (623)
Foreign (188) (82) (119)
------- ------- -------
Total deferred provision 241 (132) (758)
------- ------- -------
Total Provision for income taxes $ 3,292 39.5% $ 3,993 36.2% $ 2,676 29.3%
------- ----- ------- ----- ------- -----
</TABLE>
33
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Undistributed earnings of British Trimmings aggregated $1,296,000 as of June
27, 1998. Under existing laws, such earnings will not be subject to US tax until
distributed as dividends, because, at this time, it is not expected that the
undistributed earnings of British Trimmings will be remitted to the parent
company. No provision has been made for US federal or state income taxes to be
paid on the undistributed earnings. If these amounts were not expected to be
reinvested, additional deferred tax of approximately $485,000 would have to be
provided. A reconciliation of the income tax provision at the statutory tax rate
to the Company's effective tax rate is as follows (shown in percentages):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected provision at statutory US tax rate 34.0% 34.0% 34.0%
Difference between statutory US tax rate and UK tax 1.7 0.1 (3.4)
Effective US state tax rate 2.5 3.4 3.3
Adjustment for Jobs Tax Credits * 2.3 (1.3) (4.6)
Other differences (1.0) - -
---- ---- ----
Total 39.5% 36.2% 29.3%
---- ---- ----
</TABLE>
* In fiscal years 1997 and 1996, the Company recorded SC Jobs Tax Credits
totalling $225,000 and $630,808, resulting in a net tax benefit (net of
applicable federal income tax effect) of $148,500 and $416,333 for credits
earned in the fiscal years, respectively. The recording of these credits
resulted in a charge to a deferred tax asset for the future utilization of the
credits by being applied against income taxes. According to Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109),
such tax credits are to be recorded as assets to the extent it is more likely
than not that the taxable income in future periods will be sufficient to utilize
the credits and employment levels will not decrease, causing a loss of credits
recorded in prior years. SFAS 109 also requires that, on an on-going basis,
management assess any changes in conditions which may affect the likelihood of
realizing these tax credits and that a valuation allowance be established should
a degree of uncertainty about the likelihood of realizing these credits become
apparent. During fiscal 1998, management wrote-off $405,000 against the deferred
tax asset relating to the SC Jobs Tax Credits as a result of reductions in its
workforce in SC, resulting in a charge against income (net of applicable federal
income tax effect) of $267,300. Based on management's review of the Company's
historical and current performance and its plans for future growth, including
the recent Simplicity acquisition and other acquisitions, the introduction of
new products, the expansion of existing products, and expansion into
international markets, management believes, at this time, it is more likely than
not that the Company will be able to fully utilize these tax credits and no
valuation allowance is considered necessary at this time. The Company is
uncertain as to the amount of additional credits, if any, which may be earned in
future years, because future credits are contingent upon regionally specific
increases in employment and are contingent upon additional future taxable income
sufficient to fully utilize such credits as may become available in the future.
34
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax asset and net deferred tax liability are attributable to
the following temporary differences:
<TABLE>
<CAPTION>
1998 1997
---- ----
British Simplicity Simplicity British
Conso US Trimmings Domestic Foreign Conso US Trimmings
---------- --------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Purchase accounting $ -- $(127,027) $1,338,000 $ -- $ -- $(179,083)
Intercompany inventory 29,532 107,382 -- -- 30,134 100,668
Accounts receivable reserve 79,930 -- 334,000 -- 74,495 --
Inventory reserve 137,733 -- -- -- 132,591 --
Discard returns -- -- 373,000 96,000 -- --
New design costs (Unicap) 15,022 -- 390,000 -- -- --
Prepaid expense (57,168) -- -- -- (23,536) --
Accruals 372,653 -- 509,000 -- 378,966 --
Depreciation (567,342) (477,206) (892,000) -- (507,508) (493,398)
Jobs tax credit 1,320,167 -- -- -- 1,587,467 --
Supplemental Executive
Retirement Plan -- -- 362,000 -- -- --
Post Retirement Benefits -
Other than pensions -- -- 843,000 -- -- --
Other temporary differences (12,260) 10,417 -- -- 73,958 36,629
Net deferred tax asset (liability)
---------- --------- ---------- -------- ---------- -----------
$1,318,267 $(486,434) $3,257,000 $ 96,000 $1,746,567 $(535,184)
---------- --------- ---------- -------- ---------- -----------
</TABLE>
Income taxes paid by the Company during the fiscal years ended June 27,1998,
June 28, 1997, and June 29,1996 were $2,573,661, $3,966,011, and $3,821,745,
respectively.
Simplicity has foreign net operating loss carryforwards of approximately
$4,046,000, which are available to offset future foreign taxable income. A
valuation allowance has been recorded to offset the tax benefit of these foreign
net operating loss carry forwards.
- ------------------------------------------------------------------------------
7. Retirement Benefits
Employees may elect to purchase shares of the Company's common stock on the
open market through the Company, either by lump sum payment or payroll
deduction. The employee may elect to have up to 10% of his/her salary withheld
for the purchase of Company common stock.
In accordance with the plan, the Company contributes an additional 10% of
the employee's amount paid or withheld and pays the transaction fees and
administrative costs of the plan. Company contributions are treated as
additional compensation to the plan participants.
At fiscal year end June 27, 1998, there were 15 active participants in the
payroll deduction plan. Company contributions and transaction and administrative
fees for the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996
were $4,312, $4,477, and $3,862, respectively.
Conso operates a non-qualified deferred compensation plan for certain of its
key officers and employees. As of June 27, 1998 and June 28, 1997, the unfunded
liabilities included in accrued liabilities and representing the plan balance
were $197,030 and $152,006, respectively.
The British Trimmings subsidiary operates a defined benefit contribution
plan for the benefit of a certain executive. The cost for the fiscal years ended
June 27, 1998, June 28, 1997, and June 29, 1996, amounted to (pound)54,815
($90,659), (pound)44,062 ($71,420), and (pound)44,915 ($69,807), respectively,
and these amounts have been included in general and administrative expenses.
Management of the Company has determined that the obligation of remaining
contributions to the executive's private pension fund is not material to the
Company's financial statements due to the length of service and related
contribution amounts remaining under the agreement with the executive.
In January 1996, the Company established a defined contribution plan in the
US pursuant to Section 401(k) of the Internal Revenue Code, which covers all US
employees (excluding Simplicity). The Company matches each employee's
contribution up to a maximum of 3% of each employee's compensation. Aggregate
Company contributions of $388,785, $374,006, and $180,113 were made for the
fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996 (since plan
inception), respectively.
British Trimmings "defined contribution" type (group personal pension) plan
was established in July 1995, pursuant to the United Kingdom's Inland Revenue
codes and covers substantially all UK employees (excluding Simplicity). British
Trimmings matches each employee's contribution up to a maximum of 3% of each
employee's compensation. Aggregate contributions by British Trimmings of
(pound)68,869 ($113,902), (pound)50,678 ($82,144), and (pound)34,362 35
35
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($53,402) were made for the fiscal years ended June 27, 1998, June 28, 1997, and
June 29, 1996 (since plan inception), respectively.
Simplicity has two defined contribution retirement plans, which cover
substantially all full-time domestic employees, and maintains various other
retirement plans covering employees in its foreign subsidiaries, including a
defined benefit plan for employees located in the UK.
The projected pension benefit obligation for Simplicity's UK Plan is
determined using the projected unit value method, an average discount rate of 7%
and the average long-term compensation increase of 5%. The unrecognized
transition liability is being amortized over 15 years. The average expected rate
of return on plan assets is 9%. A summary of this plan is shown as of June 27,
1998:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of accumulated obligation,
including vested benefits $ 5,752,000
-------------
Plan assets $ 6,139,000
Actuarial present value of projected benefit obligations 5,752,000
-------------
Surplus of plan assets 387,000
Unrecognized net gain 144,000
Unrecognized prior service costs 21,000
Remaining unrecognized net assets (292,000)
-------------
Prepaid pension benefits $ 260,000
==============
</TABLE>
Simplicity also has a non-qualified defined contribution Supplemental Executive
Retirement Plan for certain key employees. Benefits earned under this plan are
generally determined as a percentage of each participant's annual salary.
Simplicity does not fund this plan, however, the present value of the related
liability of $971,627, has been included in other non-current assets as of June
27, 1998.
- -------------------------------------------------------------------------------
8. Commitments and Contingencies
Royalties - The Company has entered into agreements with several designers
requiring royalty payments, which are accrued currently based on sales of
specific product styles. Royalty expenses were $96,882, $187,052, and $195,840,
for fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996,
respectively.
Litigation - The Company is routinely involved in various disputes and legal
actions related to its business operations. In the opinion of management, based
on the advice of the Company's legal counsel, the ultimate resolution of these
actions will not have a material effect on the Company's financial position or
future results of operations.
Employment Contracts and Severances - The Company has employment contracts
with several key employees and severance policies relating to termination of
employment by the Company. Provisions have been made for the estimated severance
costs, which may be incurred by the Company in connection with the acquisition
of Simplicity ( See Note 10).
Proposed Tax Adjustments - From time to time, various regulatory taxing
authorities assess the Company for estimated unpaid taxes. The Company has made
provisions for such taxes, which it believes may be payable. In some cases, the
Company does not believe the assessments will be paid and no provisions have
been recorded.
9. Capital Stock
Capital Stock Transactions - All per share data presented in the
accompanying financial statements has been restated to reflect the 3-for-2 stock
splits in October 1996 and 1995. Since becoming a publicly traded company in
December 1993, the Company has not paid a cash dividend. The directors
periodically review the advisability of paying a cash dividend.
Stock Repurchase Plan - In November 1997, the Board of Directors authorized
the Company to repurchase up to 500,000 shares of its outstanding common stock
at prices to be determined, from time to time, by the Executive Committee of the
Board of Directors. In March and April 1998, the Company repurchased 173,000
shares of common stock at an average price of $8.09 for a total of $1,398,750.
An additional 20,000 shares were purchased in July 1998 for $162,000.
Stock Option Plan - In December 1993, the Company established an incentive
stock option plan to issue up to 607,500 shares of the Company's common stock to
certain managers and other key employees. As of June 27, 1998, the Company had
outstanding options to purchase 165,725 shares of common stock. 375,275 options
are available to be issued under the plan. The stock options are exercisable
with respect to one-third of the total options after one year, an 36
36
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional one-third of the total options after two years, and the final
one-third of the options after three years. The options expire after five years,
and are subject to continued employment of the employee. A summary of the status
of the Company's incentive stock option plan as of June 27, 1998, June 28, 1997,
and June 29, 1996, and changes during the years ended on those dates, is
presented below.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the fiscal years 164,500 $ 8.76 93,600 $ 6.67 -- --
Granted 21,000 $ 10.30 79,500 $11.00 93,600 $6.67
Exercised (1,650) $ 6.67 (8,600) $ 6.67 -- --
Cancellations (18,125) $ 9.22 -- -- -- --
------- ------- ------
Outstanding at end
of the fiscal year 165,725 $ 8.93 164,500 $ 8.76 93,600 $6.67
======= ======= ======
Options exercisable at year end 71,450 $ 8.09 22,600 $ 6.67 -- --
======= ======= ======
</TABLE>
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 stock options referred to above
as the exercise price equals the market price of the stock on the grant date. 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 123, net income and
earnings per share would have been reduced to the proforma amounts indicated in
the table below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income-as reported $ 5,032,010 $ 7,027,170 $ 6,443,160
Less compensation (net of tax effect) per SFAS 123 (118,690) (106,509) (36,646)
----------- ----------- -----------
Net income - as proforma $ 4,913,320 $ 6,920,661 $ 6,406,514
=========== =========== ===========
Net income per share - as reported $ 0.68 $ 0.94 $ 0.86
=========== =========== ===========
Net income per share - as proforma $ 0.66 $ 0.92 $ 0.86
=========== =========== ===========
Net income per share assuming
dilution as reported $ 0.67 $ 0.93 $ 0.86
=========== =========== ===========
Net income per share - assuming dilution
as proforma $ 0.66 $ 0.92 $ 0.86
=========== =========== ===========
Weighted average number of shares
outstanding 7,447,396 7,485,807 7,456,552
Options assumed to be exercised 79,463 154,595 76,371
Shares assumed to be repurchased
(79,463 shares x $6.67)/$9.39) (56,445)
(89,728 shares x $6.67)/$12.89) (46,430)
(64,867 shares x $11.00)/$12.89) (55,356)
(76,371 shares x $6.67)/$9.59) (53,117)
----------- ----------- -----------
Weighted average number of shares
outstanding - assuming dilution 7,470,414 7,538,616 7,479,806
=========== =========== ===========
</TABLE>
All amounts above have been adjusted to reflect the 3-for-2 stock splits
issued on October 4, 1996 and October 6, 1995. 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):
<TABLE>
<CAPTION>
FY 1998 FY 1997 FY 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield None None None
Expected stock price volatility 37.59% 33.92% 25.51%
Risk-Free interest rate 5.81% 6.72% 6.04%
Expected life of options 3.2 years 3.2 years 3.2 years
Weighted average fair values $ 4.36 $ 4.56 $ 2.32
of options granted
</TABLE>
37
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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's compensation in the Company's 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 fiscal years
ended June 27, 1998 and June 28, 1997, 4,222 and 1,268 shares were issued in
accordance with directors' elections. The compensation expense under this plan
is immaterial.
- -------------------------------------------------------------------------------
10. Postretirement Benefits Other Than Pensions
Continuing health care benefits are provided to eligible employees who
retire as a member of a collective bargaining unit and have attained age 61. A
20-year minimum service requirement is also required for eligible employees
retiring after December 31, 1993. Eligible employees who retire before age 65
may elect to continue health care benefits provided by health maintenance
organizations or indemnity insurance programs until age 65, with the retiree
paying a portion of the cost.
Employees are eligible for the reimbursement of a defined amount as payment
towards the Medicare premium upon reaching age 65, however, if they retired
before age 65 they are only eligible for the medicare reimbursements if they
waived continuing coverage of health care benefits from the date they retired
until age 65.
The accumulated postretirement benefit obligation (APBO) as of June 27, 1998 is
summarized as follows and are included in other noncurrent liabilities:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Retirees $1,138,000
Active participants, fully eligible 996,000
Other participants 178,000
----------
Total APBO $2,312,000
==========
</TABLE>
For measurement purposes, an 8.75% annual rate of increase for medical costs
was assumed and was reduced each year to an ultimate level of 5.50% by the year
2005 and thereafter. The discount rate used to determine the APBO was 7%.
The health care cost trend rate assumption has a significant effect on the
APBO and net periodic benefit costs. A 1% increase in the trend rate for health
care costs regarding postretirement benefits valuation, would have increased the
APBO by 0.8%.
- -------------------------------------------------------------------------------
11. Business Combinations and Acquisitions
The Claesson Company - On March 4, 1996, the Company acquired the assets of
The Claesson Company. The purchase price and related acquisition costs totaled
$385,962. The acquisition was accounted for in accordance with the purchase
method of accounting.
HFDC - On September 2, 1997, the Company acquired the assets of HFDC. The
purchase price and related acquisition costs totalled $262,000. The acquisition
was accounted for in accordance with the purchase method of accounting.
Simplicity Pattern Company - On June 19, 1998, the Company acquired all the
outstanding common stock of Simplicity Capital Corporation (Simplicity), parent
company of Simplicity Pattern Co., Inc. (the operating company). The
consideration paid was $33,600,000 (consisting of the cash purchase price and
transaction expenses) plus the assumption of certain of Simplicity's
liabilities, for a total purchase price of $54,265,000, in a transaction
accounted for in accordance with the purchase method of accounting. The balance
sheet effect of this transaction was recorded on June 19, 1998.
38
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Purchase price:
Cash portion $ 33,000,000
Transaction expenses (professional fees, etc.) 600,000
------------
Total consideration 33,600,000
Simplicity's liabilities assumed 20,665,000
------------
Total purchase price $ 54,265,000
------------
Allocations of purchase price:
Current assets $ 21,825,000
Property and equipment, net 8,346,000
Other assets 3,727,000
Intangible assets 20,367,000
------------
Total purchase price $ 54,265,000
------------
Purchase accounting adjustments:
Book value of Simplicity's net
assets prior to the acquisition (40,565,000)
Discharge of subordinated notes and
certain liabilities of Simplicity in
connection with the acquisition
-Subordinated notes 70,077,000
-Management Benefit Plan
(net of deferred tax benefit) 1,735,000
Write-down of Plant, Property and
Equipment to fair market value
net of taxes (1,543,000)
Adjustments of various other assets and
liabilities to fair market value,
net of taxes 242,000
Adjustment of intangible assets for
the amount the total consideration
exceeds the fair market value of
net tangible assets 3,654,000
------------
Total consideration $ 33,600,000
------------
</TABLE>
The fair value adjustments have been determined by the management of the
Company based on available information, including real estate and equipment
appraisal information prepared by an independent appraiser. The intangible
assets consist of the value of the name brand, customer list, and goodwill of
Simplicity. The intangibles are not deductible for income tax purposes and are
amortized on a straight line basis over an average of 30 years.
The Company's proforma results of operations for the fiscal year ended June
27, 1998 and June 28, 1997 (computed as if the acquisition of Simplicity had
occurred as of the beginning of each period) is shown below. Proforma net income
and net income per share amounts assume (a) adjustment to cost of sales
resulting from higher inventory costs based on restatement of Simplicity's
inventories to fair value at purchase date, (b) an increase in interest expense
at 7.4% as a result of the additional borrowings, (c) an increase in
amortization on intangible assets acquired, (d) adjustments to depreciation and
other expenses, and (e) the resulting income tax effect computed at 37.0% of
such adjustments (excluding amortization of intangibles), in connection with the
payment and purchase accounting adjustments for the Simplicity acquisition.
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Net sales $ 125,517,661 $ 127,840,466
Net income 6,966,696 9,051,395
Net income per share:
Basic $ 0.94 $ 1.21
Diluted $ 0.93 $ 1.20
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
results that would have been attained had the acquisition occurred at the
beginning of the periods noted above or of results which may occur in the
future.
39
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Foreign Operations
The financial information of the foreign subsidiaries contained in the
historical financial statements has been derived from the historical financial
statements stated in the following foreign currencies and prepared in accordance
with generally accepted accounting principles in the United States. The
Consolidated financial statements have been translated into US dollars based on
exchange rates as published in the Wall Street Journal and include additional
foreign currencies as of June 27, 1998 as a result of the acquisition of
Simplicity on June 19, 1998. Simplicity operations were not material for the
fiscal year ended June 27, 1998 and have been excluded. The balance sheet has
been translated using the exchange rate in effect on June 27,1998 ($1.6615 =
(pound)1.00, $.68 = CA $1.00, $.60 = A $1.00, $.51 = NZ $1.00), June 28, 1997
($1.6645 = (pound)1.00), and June 29, 1996 ($1.5520 = (pound)1.00),
respectively. The statements of operations and cash flows have been translated
using the average of the month-end average rates for each quarter weighted by
the income activity in British pound sterling for each quarter for the fiscal
years ended June 27, 1998 ($1.6539 = (pound)1.00) June 28, 1997 ($1.6209 =
(pound)1.00), and June 29, 1996 ($1.5542 = (pound)1.00), respectively.
The following financial information presents the assets and liabilities as
of June 27, 1998 and June 28, 1997, and gains attributable to the Company's
investment in British Trimmings (including Wendy Cushing Trimmings) and
operations for the fiscal years ended June 27, 1998, June 28, 1997, and June 29,
1996:
<TABLE>
<CAPTION>
June 27,1997
-------------------------
Conso British Simplicity Simplicity
US Trimmings Domestic Foreign Total
--------- --------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Individual Company Assets
and Consolidating Adjustments:
Total Assets $ 83,178 $ 19,475 $ 49,218 $ 6,654
Elimination of intercompany receivable (3,544) -- (4,273) --
Intercompany inventory adjustment (86) (307) -- (19)
Purchase accounting adjustments (38,457) 1,026 2,827 --
--------- --------- --------- --------- ---------
Consolidated net assets $ 41,091 $ 20,194 $ 47,772 $ 6,635 $ 115,692
--------- --------- --------- --------- ---------
Balance sheets
(after consolidating adjustments):
Assets $ 41,091 $ 20,194 $ 47,772 $ 6,635 $ 115,692
Liabilities 38,396 14,399 18,81 3 1,994 73,602
--------- --------- --------- --------- ---------
Subtotal 2,695 5,795 28,959 4,641 42,090
Intercompany receivable (payable) (378) 378 4,273 (4,273)
Investment in subsidiaries 38,457 (4,857) (33,232) (368)
--------- --------- --------- --------- ---------
Shareholders' equity $ 40,774 $ 1,316 -- -- $ 42,090
--------- --------- --------- --------- ---------
<CAPTION>
June 28,1997
-------------------------
Conso British
US Trimmings Total
--------- --------- ---------
<S> <C> <C>
Selected Individual Company Assets
and Consolidating Adjustments:
Total Assets $ 43,931 $ 20,125
Elimination of intercompany receivable (3,391)
Intercompany inventory adjustment (88) (288)
Purchase accounting adjustments (4,857) 1,127
--------- ---------
Consolidated net assets $ 35,595 $ 20,964 $ 56,559
--------- --------- ---------
Balance sheets
(after consolidating adjustments):
Assets $ 35,595 $ 20,964 $ 56,559
Liabilities 4,225 13,966 18,191
--------- --------- ---------
Subtotal 31,370 6,998 38,368
Intercompany receivable (payable) 101 (101)
Investment in subsidiaries 4,855 (4,855)
--------- --------- ---------
Shareholders' equity $ 36,326 $ 2,042 $ 38,368
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
June 27, 1998 June 28,1997
------------------------------------------------------------------
Conso British Conso British
US Trimmings Total US Trimmings Total
----- --------- ----- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Details of investment and equity in subsidiary:
Original investment at acquisition date $4,857 $4,855
Retained earnings of subsidiary since
acquisition date 584 1,375
Cumulative translation gain 732 667
Total investment and equity in
British Trimmings $6,173 $6,897
------ ------
<CAPTION>
June 29,1996
---------------------------
Conso British
US Trimmings Total
----- --------- -----
<S> <C> <C> <C>
Details of investment and equity in subsidiary:
Original investment at acquisition date $4,855
Retained earnings of subsidiary since
acquisition date 1,455
Cumulative translation gain 181
Total investment and equity in
British Trimmings $6,491
------
</TABLE>
40
<PAGE> 22
<TABLE>
<CAPTION>
June 27,1998
Conso British
US Trimmings Total
-------- --------- --------
<S> <C> <C> <C>
Selected Individual Company Operations and
Consolidating Adjustments:
Total net sales $ 54,743 20,262
Less adjustment for intercompany sales (2,412) (732)
-------- -------- --------
Consolidated net sales $ 52,331 19,530 $ 71,861
-------- -------- --------
Operating income 9,166 (69)
Elimination of intercompany transactions 2 (19)
Purchase accounting adjustments
(127)
Intercompany currency translation (loss) gain (20)
-------- -------- --------
Consolidated operating income $ 9,148 $ (215) $ 8,933
-------- -------- --------
Operations (after consolidating adjustments):
Net sales $ 52,331 $ 19,530 $ 71,861
Cost of sales 32,095 14,497 46,592
-------- -------- --------
Gross margin 20,236 5,033 25,269
Selling, general and administrative
expenses 11,088 5,248 16,336
-------- -------- --------
Operating income 9,148 (215) 8,933
Interest (income) expense, net (343) 952 609
-------- -------- --------
Income (loss) before taxes 9,491 (1,167) 8,324
Income taxes, net 3,668 (376) 3,292
-------- -------- --------
Net income (loss) $ 5,823 (791) $ 5,032
-------- -------- --------
<CAPTION>
June 28,1997
Conso British
US Trimmings Total
-------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Selected Individual Company Operations and
Consolidating Adjustments:
Total net sales $ 54,873 $ 20,978
Less adjustment for intercompany sales (1,813) (590)
-------- -------- --------
Consolidated net sales $ 53,060 $ 20,388 $ 73,448
-------- -------- --------
Operating income 10,782 660
Elimination of intercompany transactions 71 70
Purchase accounting adjustments
(128)
Intercompany currency translation (loss) gain 63
-------- -------- --------
Consolidated operating income $ 10,916 $ 602 $ 11,518
-------- -------- --------
Operations (after consolidating adjustments):
Net sales $ 53,060 $ 20,387 $ 73,447
Cost of sales 31,414 14,210 45,624
-------- -------- --------
Gross margin 21,646 6,177 27,823
Selling, general and administrative
expenses 10,730 5,575 16,305
-------- -------- --------
Operating income 10,916 602 11,518
Interest (income) expense, net (201) 699 498
-------- -------- --------
Income (loss) before taxes 11,117 (97) 11,020
Income taxes, net 4,010 (17) 3,993
-------- -------- --------
Net income (loss) $ 7,107 $ (80) $ 7,027
-------- -------- --------
<CAPTION>
June 29,1996
Conso British
US Trimmings Total
-------- --------- --------
<S> <C> <C> <C>
Selected Individual Company Operations and
Consolidating Adjustments:
Total net sales 52,757 $ 20,047
Less adjustment for intercompany sales (1,632) (458)
-------- -------- --------
Consolidated net sales $ 51,125 $ 19,589 $ 70,714
-------- -------- --------
Operating income 9,047 965
Elimination of intercompany transactions (49) 17
Purchase accounting adjustments
(128)
Intercompany currency translation (loss) gain 20
-------- -------- --------
Consolidated operating income $ 9,018 $ 854 $ 9,872
-------- -------- --------
Operations (after consolidating adjustments):
Net sales $ 51,125 $ 19,589 $ 70,714
Cost of sales 31,501 13,781 45,282
-------- -------- --------
Gross margin 19,624 5,808 25,432
Selling, general and administrative
expenses 10,606 4,954 15,560
-------- -------- --------
Operating income 9,018 854 9,872
Interest (income) expense, net 106 647 753
-------- -------- --------
Income (loss) before taxes 8,912 207 9,119
Income taxes, net 2,917 (241) 2,676
-------- -------- --------
Net income (loss) $ 5,995 $ 448 $ 6,443
-------- -------- --------
</TABLE>
In addition to the operations of British Trimmings, US exports (by Conso US)
constituted additional foreign sales of $4.6 million, $4.5 million, and $3.3
million, for the fiscal years ended June 27, 1998, June 28, 1997, and June 29,
1996, respectively. The following table sets forth consolidated sales by region:
<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997 June 26, 1996
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
US $47,818 $48,739 $48,006
UK 15,523 16,253 16,113
Other countries 8,520 8,455 6,595
------- ------- -------
Total $71,861 $73,447 $70,714
------- ------- -------
</TABLE>
Note 13. Related Party Transaction
On July 1, 1998, the Company purchased real property owned jointly by Mr.
Findlay and Ms. Findlay for use as a conference center in exchange for shares of
the Company's Common Stock. The Company issued 78,788 shares of Common Stock to
Mr. Findlay and Ms. Findlay jointly as consideration for the acquisition of the
real property. Such consideration was based upon a closing price of the Common
Stock of $8.25 on July 1, 1998 and a value of $650,000 (the Findlays' cost
basis) for the real property.
41
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Conso Products Company
We have audited the accompanying consolidated balance sheets of Conso
Products Company and its subsidiaries ("the Company") as of June 27, 1998 and
June 28, 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the fiscal years ended June 27, 1998,
June 28, 1997, and June 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of British Trimmings Limited, a consolidated subsidiary,
for the years ended June 28, 1997 and June 29, 1996, which statements reflect
total assets constituting 37% of consolidated total assets at June 28, 1997, and
total revenues constituting 28% of consolidated total revenues for the fiscal
years ended June 28, 1997, and June 29, 1996. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the 1997 and 1996 amounts included for British Trimmings Limited
is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of Conso Products Company and its subsidiaries as of June
27, 1998 and June 28, 1997, and the results of their operations and their cash
flows for the fiscal years ended June 27, 1998, June 28, 1997, and June 29,
1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Greenville, South Carolina
September 4, 1998
42
<PAGE> 24
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998(a) 1997(a) 1996(a)
------------- ------------- -------------
<S> <C> <C> <C>
Summary of Operations (in thousands):
Net sales $ 71,861 $ 73,447 $ 70,714
Gross margin 25,269 27,823 25,432
Operating income 8,933 11,518 9,872
Income before income taxes 8,324 11,020 9,119
Income taxes 3,292 3,993 2,676
Net income $ 5,032 $ 7,027 $ 6,443
------------- ------------- -------------
Average Common Stock Outstanding
(in thousands)(m) 7,447 7,486 7,457
------------- ------------- -------------
Per Share of Common Stock: (m)
Net income $ .68 $ .94 $ .86
Shareholders' equity (f) 5.65 5.13 4.13
------------- ------------- -------------
Common stock price range (g)(m):
High $ 14.75 $ 16.25 $ 13.17
Low 7.25 10.17 5.78
Price at fiscal year end 8.25 13.70 10.83
------------- ------------- -------------
Statistical Data:
Gross margin to net sales 35.2% 37.9% 36.0%
Operating income to net sales 12.4% 15.7% 14.0%
Net income to net sales 7.0% 9.6% 9.1%
Net income to average shareholders' equity 12.5% 20.2% 23.6%
Operating return on assets employed (h) 12.8% 22.2% 21.6%
Inventory turnover (i) 1.8 2.0 2.3
Accounts receivable turnover (j) 5.3 6.3 6.5
Net sales divided by average assets 1.0 1.4 1.5
Current ratio 2.4 2.2 2.4
Long term debt to equity ratio 1.0 - .1
Total liabilities to equity ratio 1.7 .5 .5
Capital expenditures (in thousands) $ 1,558(k) $ 1,965(k) $ 1,811(k)
Depreciation and amortization (in thousands) $ 2,283 $ 1,843 $ 1,751
EBITDA (in thousands) (l) $ 11,216 $ 13,361 $ 11,623
Approximate number of shareholders 1,800 1,300 1,200
Number of employees and associates at year end 1,378 1,569 1,446
------------- ------------- -------------
Selected Balance Sheet Data (in thousands):
Working capital $ 34,997 20,973 $ 19,461
Property:
Cost 40,360 25,049 18,966
Accumulated depreciation (10,599) (8,486) (6,592)
Net 29,761 16,563 12,374
Total assets 115,692 56,559 47,278
Long-term debt 42,508 0 2,108
Total liabilities 73,602 18,191 16,499
Shareholders' equity (f) 42,090 38,368 30,778
------------- ------------- -------------
</TABLE>
(a) Fiscal years 1993 and thereafter are presented on a 52 or 53 week basis
with the closing on the Saturday nearest to June 30th, and include British
Trimmings since its acquisition in December 1993. Fiscal year 1998 selected
balance sheet data includes Simplicity. Since Simplicity was acquired in
late June 1998, Simplicity operations were not material and are excluded
from the income statement items.
(b) 1992 and prior years were on a calendar year basis and are presented as an
average for each of the two years combined, as indicated.
(c) Proforma US income taxes computed at a combined federal and state tax rate
of 37%. Prior to December 18, 1993, the Company was treated as an S
Corporation for income tax purposes.
(d) 1995 net income includes $913,000 or 13 cents per share for a one-time
carry forward of SC Jobs Tax Credits.
(e) Proforma average common stock outstanding for the years 1992 and prior have
been adjusted for the 38,568 to 1 stock split effected December 1993 and
for the number of shares which would have been necessary to distribute
accumulated retained earnings at an offering price of $5.00 less issuance
expenses.
(f) Shareholders' equity used in this calculation is historical. Net income
used is proforma using a C Corporation tax provision. The effect on
shareholders' equity is not material since, prior to December 1993,
distributions were made equivalent to the personal income taxes payable by
the Company's shareholders.
43
<PAGE> 25
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Average (b) Average (b) Average (b)
1995(a) 1994(a) 1993(a) 1992/1991 1990/1989 1988/1987
--------------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 59,621 $ 41,559 $ 26,045 $ 22,371 $ 21,746 $ 16,328
20,736 13,215 8,246 7,135 6,728 4,659
7,696 5,102 2,805 2,340 2,184 1,233
6,826 4,414 1,926 1,408 1,039 533
1,287(d) 1,638 713(c) 521(c) 384(c) 197(c)
$ 5,539(d) $ 2,776 $ 1,213 $ 887 $ 655 $ 336
-------- -------- -------- -------- -------- --------
7,425 6,159 4,787 4,623(e) 4,280(e) 4,105(e)
-------- -------- -------- -------- -------- --------
$ .75(d) $ .45 $ .25 (c) $ .19 (c) $ .16 (c) $ .09 (c)
3.25 2.99 .84 .67 .45 .28
-------- -------- -------- -------- -------- --------
$ 7.00 $ 7.11
5.22 5.00
6.22 6.11
-------- -------- -------- -------- -------- --------
34.8% 31.8% 31.7% 31.9% 31.0% 28.6%
12.9% 12.3% 10.8% 10.5% 10.1% 7.5%
9.3%(d) 6.7% 4.7% 3.9% 3.1% 2.1%
26.0%(d) 24.8% 31.3% 31.7% 36.8% 37.7%
18.8% 17.6% 18.8% 17.3% 16.5% 13.5%
2.2 2.5 2.4 2.3 2.6 3.2
6.3 6.0 7.0 7.1 7.8 8.4
1.5 1.7 1.7 1.7 1.7 1.9
1.9 1.9 1.5 1.8 1.6 1.3
.1 .2 1.0 1.6 2.8 3.6
.8 .9 3.2 3.5 5.9 8.0
$ 2,678 $ 1,891(k) $ 1,408 $ 830 $ 383 $ 628
$ 1,519 $ 1,010 $ 762 $ 724 $ 708 $ 390
$ 9,215 $ 6,111 $ 3,567 $ 1,614 $ 1,346 $ 1,413
1,100 1,000 1 1 2 4
1,472 1,177 654 577 593 413
-------- -------- -------- -------- -------- --------
$ 14,470 $ 11,944 $ 4,099 $ 4,126 $ 2,999 $ 1,150
17,242 14,637 7,309 6,375 5,305 3,958
(5,799) (4,518) (3,556) (2,849) (1,576) (507)
11,443 10,119 3,753 3,518 3,730 3,451
43,699 35,326 16,778 13,752 13,079 10,081
2,598 3,127 3,930 4,686 5,334 3,980
19,575 16,924 12,777 10,659 11,142 8,926
24,124 18,402 4,001 3,093 1,937 1,155
-------- -------- -------- -------- -------- --------
</TABLE>
(g) Common stock was not publicly traded prior to December 15, 1993. (h)
Pre-tax income before interest expense divided by average of month-end
total assets. (i) Cost of goods sold divided by average of month-end total
inventories.
(j) Net sales divided by average of month-end receivables.
(k) Excludes the purchase of British Trimmings' assets, the Leek, England
building, the Conso/Graver Canada assets, and Wendy Cushing Ltd. In 1994,
the purchase of the London production facility and the Claesson assets in
1996, the new Conso US warehouse and dyehouse facilities begun in 1997 and
the purchase of HFDC's assets and Simplicity's assets in 1998.
(l) Represents earnings before deductions for interest, income taxes,
depreciation and amortization ("EBITDA"), a non-GAAP (generally accepted
accounting principles) measurement. EBITDA is not intended to represent
cash flow from operations as defined by GAAP, and should not be considered
as an alternative to net income as an indicator of operating performance or
to cash flows (determined in accordance with GAAP) as a measure of
liquidity. This calculation may not be comparable to other similarly titled
measures reported by other companies.
(m) Per share amounts and stock prices have been restated to reflect the
3-for-2 stock splits in October 1995 and 1996 effected in the form of 50%
share dividends.
44
<PAGE> 26
STOCK PRICE AND SHAREHOLDERS INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the
symbol CNSO. The following table presents the high and the low sales prices of
the common stock reported on the Nasdaq National Market for each quarter in the
fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996, and adjusted
for the stock splits described in note (a) above. The price earnings ratio (P/E)
has been calculated on annualized earnings per share by using trailing four
quarters earnings and the average of the high and low stock prices for the
quarter.
<TABLE>
<CAPTION>
1998 1997 1996
High Low P/E High Low P/E High Low P/E
--------------------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 14.75 $ 9.75 14.50 $ 13.33 $ 10.00 12.77 $ 7.67 $ 5.78 8.24
Second Quarter $ 11.13 $ 7.25 12.41 $ 14.50 $ 12.25 13.70 $ 12.67 $ 7.11 11.42
Third Quarter $ 8.50 $ 7.38 12.80 $ 15.50 $ 12.25 13.56 $ 13.17 $ 9.92 14.86
Fourth Quarter $ 11.00 $ 8.00 14.12 $ 16.25 $ 11.50 14.78 $ 12.00 $ 10.33 12.92
</TABLE>
Approximate number of shareholders of record on September 9, 1998: 147
45
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or other Jurisdiction of
Name Incorporation of Organization
- ---- -----------------------------
British Trimmings Limited (1) England
Dominion Simplicity Patterns Limited (2) Canada
Itatrim Limited (3) England
MacCulloch & Wallis (London) Limited (3) England
Simplicity Capital Corporation (4) Delaware
Simplicity Holdings, Inc. (5) Delaware
Simplicity Limited (2) United Kingdom
Simplicity Limited (2) New Zealand
Simplicity Pattern Co. Inc. (6) Delaware
Simplicity PTY Limited (2) Australia
Simplicity S.A. de C.V. (2) Mexico
Style Patterns (Australia) PTY Limited (2) Australia
Style Patterns (N.Z.) Limited (2) New Zealand
Val-Mex, S.A. de C.V. Mexico
Each Subsidiary does business under its own name.
(1) British Trimmings Limited was acquired by the Registrant on December 22,
1993.
(2) Subsidiary of Simplicity Pattern Co. Inc.
(3) Subsidiary of British Trimmings Limited.
(4) Simplicity Capital Corporation was acquired by the Registrant on June 19,
1998.
(5) Subsidiary of Simplicity Capital Corporation.
(6) Subsidiary of Simplicity Holdings, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Conso Products Company
We hereby consent to the incorporation by reference in the Company's
Registration Statements on Forms S-8 (Registration Nos. 333-20671 33-97146 and
33-85518) of our report dated September 4, 1998 incorporated by reference in the
Annual Report on form 10-K of Conso Products Company for the fiscal year ended
June 27, 1998.
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
September 22, 1998
<PAGE> 1
EXHIBIT 23.2
[GRANT THORNTON LETTERHEAD]
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We have issued our report dated 5 September 1997, accompanying the
consolidation package expressed in pounds sterling consisting of the
consolidated balance sheet at 28 June 1997 and the related consolidated
statements of income and cashflow of British Trimmings Limited for the years
ended 28 June 1997 and 29 June 1996 for the purpose of inclusion in the
consolidated financial statements of Conso Products Company for the fiscal year
ended 27 June 1998. We hereby consent to the incorporation by reference of said
report on forms S-8 (file nos 333-20671, effective 29 January 1997, 33-97146,
effective 20 September 1995 and 33-85518, effective 20 October 1994),
incorporated by reference in the Annual Report on form 10-K of Conso Products
Company for the fiscal year ended 27 June 1998.
/s/ Grant Thornton
GRANT THORNTON
MANCHESTER
UNITED KINGDOM
25 September 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF CONSO PRODUCTS COMPANY AND ITS SUBSIDIARIES
FOR THE YEAR ENDED JUNE 27, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 2,332,987
<SECURITIES> 0
<RECEIVABLES> 24,107,094
<ALLOWANCES> 1,352,246
<INVENTORY> 30,358,201
<CURRENT-ASSETS> 60,623,531
<PP&E> 40,360,549
<DEPRECIATION> 10,599,298
<TOTAL-ASSETS> 115,692,305
<CURRENT-LIABILITIES> 25,626,213
<BONDS> 0
0
0
<COMMON> 15,618,732
<OTHER-SE> 26,471,176
<TOTAL-LIABILITY-AND-EQUITY> 115,692,305
<SALES> 71,860,661
<TOTAL-REVENUES> 71,860,661
<CGS> 46,591,450
<TOTAL-COSTS> 46,591,450
<OTHER-EXPENSES> 16,336,502
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 608,995
<INCOME-PRETAX> 8,323,714
<INCOME-TAX> 3,291,704
<INCOME-CONTINUING> 5,032,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,032,010
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.67
</TABLE>
