<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 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, South Carolina 29379
(Address of principal executive offices) (Zip Code)
864/427-9004
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 11, 1998:
Common Stock, no par value 7,323,280 shares.
Page 1 of 21 pages
A-1
<PAGE> 2
TABLE OF CONTENTS
Part I. Financial Information Page No.
Consolidated Balance Sheets (unaudited) as of
March 28, 1998 and June 28, 1997 3
Consolidated Statements of Operations (unaudited)
for the three months and nine months
ended March 28, 1998 and March 29, 1997 5
Consolidated Statements of Shareholders' Equity
(unaudited) for the three months and nine months
ended March 28, 1998 6
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended March 28, 1998 and
March 29, 1997 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 17
A-2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 28, 1998 June 28, 1997
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 247,013 $ 489,580
Accounts receivable, net of allowances for
bad debts and customer deductions of
$436,864 and $310,876 on March 28, 1998
and June 28, 1997, respectively. 11,390,182 11,747,482
Inventories (Note 3) 24,950,566 25,339,936
Deferred income taxes - current portion 576,746 625,873
Prepaid expenses and other 894,374 426,508
------------ -----------
Total current assets 38,058,881 38,629,379
------------ -----------
PROPERTY AND EQUIPMENT:
Land and improvements 1,268,509 1,177,248
Buildings and improvements 12,462,850 9,655,017
Machinery and equipment 16,708,254 14,216,300
------------ -----------
Total 30,439,613 25,048,565
Accumulated depreciation (10,121,059) (8,485,714)
------------- -----------
Total property and equipment, net 20,318,554 16,562,851
------------ -----------
DEFERRED INCOME TAXES (Note 4) 1,034,429 1,120,694
------------ -----------
DEFERRED COSTS AND OTHER 553,014 246,477
------------ -----------
TOTAL ASSETS $ 59,964,878 $56,559,401
============ ===========
</TABLE>
See notes to unaudited consolidated financial statements
A-3
<PAGE> 4
CONSO PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
March 28, 1998 June 28, 1997
-------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 12,030,832 $10,405,973
Current maturities of long-term debt 105,188 208,063
Trade accounts payable 2,684,888 4,162,339
Accrued liabilities 3,674,788 2,879,703
------------ -----------
Total current liabilities 18,495,696 17,656,078
------------ -----------
NONCURRENT LIABILITIES:
Long-term debt - -
Deferred income taxes 526,883 535,184
------------ -----------
Total noncurrent liabilities 526,883 535,184
------------ -----------
SHAREHOLDERS' EQUITY (Notes 5 through 9):
Preferred stock (no par, 10,000,000 shares
authorized, no shares issued) - -
Common stock (no par, 50,000,000 shares
authorized, 7,373,280 and 7,491,540
shares issued and outstanding
March 28, 1998 and
June 28, 1997, respectively) 16,018,741 16,970,175
Retained earnings 24,131,446 20,728,449
Cumulative translations gain 792,112 669,515
------------- -----------
Total shareholders' equity 40,942,299 38,368,139
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 59,964,878 $56,559,401
============ ===========
</TABLE>
See notes to unaudited consolidated financial statements
A-4
<PAGE> 5
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ---------------------------------
March 28, 1998 March 29, 1997 March 28, 1998 March 29, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 17,613,668 $ 19,426,593 $ 53,326,597 $ 54,973,203
COST OF GOODS SOLD 11,654,987 11,998,023 34,757,878 33,434,571
------------ ------------ ------------ ------------
GROSS MARGIN 5,958,681 7,428,570 18,568,719 21,538,632
------------ ------------ ------------ ------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Distribution expense 813,231 832,193 2,447,415 2,322,322
Selling expense 2,152,030 2,313,842 6,328,565 6,408,449
General and administrative expense 960,822 1,155,737 3,418,015 3,499,824
Currency exchange (gain) loss (11,318) 55,227 29,079 (63,477)
Gain on sale of London production
facility - (76,483) - (76,483)
------------ ------------ ------------ ------------
Total 3,914,765 4,280,516 12,223,074 12,090,635
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,043,916 3,148,054 6,345,645 9,447,997
INTEREST EXPENSE, NET 198,162 116,942 627,022 361,320
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,845,754 3,031,112 5,718,623 9,086,677
INCOME TAX PROVISION (Note 4) 758,507 1,041,542 2,315,626 3,299,136
------------ ------------ ------------ ------------
NET INCOME $ 1,087,247 $ 1,989,570 $ 3,402,997 $ 5,787,541
============ ============ ============ ============
EARNINGS PER SHARE - BASIC
(Notes 5 through 9)
Net income per share $ 0.15 $ 0.27 $ 0.45 $ 0.77
============ ============ ============ ============
Weighted average number of shares
outstanding 7,475,569 7,486,690 7,487,396 7,484,552
============ ============ ============ ============
EARNINGS PER SHARE - DILUTED
(Notes 5 through 9)
Net income per share assuming
dilution $ 0.15 $ 0.26 $ 0.45 $ 0.77
============ ============ ============ ============
Weighted average number of shares
outstanding assuming dilution 7,487,369 7,546,438 7,512,964 7,533,958
============ ============ ============ ============
</TABLE>
See notes to unaudited consolidated financial statements
A-5
<PAGE> 6
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 28, 1998
<TABLE>
<CAPTION>
Common Stock
------------------------------
Cumulative
Shares Issued Retained Translation
and Outstanding Amount Earnings Adjustments Total
--------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 27, 1997 7,494,974 $ 16,998,321 $ 23,044,199 $794,717 $ 40,837,237
Shares issued for
director fees 1,306 9,795 9,795
Net income 1,087,248 1,087,248
Translation loss (2,606) (2,606)
Stock repurchases (123,000) (989,375) (989,375)
--------- ------------ ------------ -------- ------------
March 28, 1998 7,373,280 $ 16,018,741 $ 24,131,447 $792,111 $ 40,942,299
========= ============ ============ ======== ============
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED MARCH 28, 1998
<TABLE>
<CAPTION>
Common Stock
------------------------------
Cumulative
Shares Issued Retained Translation
and Outstanding Amount Earnings Adjustments Total
--------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 28, 1997 7,491,540 $ 16,970,175 $ 20,728,449 $669,515 $ 38,368,139
Stock options exercised 1,650 11,000 11,000
Shares issued for
director fees 3,090 26,941 26,941
Net income 3,402,998 3,402,998
Translation gain 122,596 122,596
Stock repurchases (123,000) (989,375) (989,375)
--------- ------------ ------------ -------- ------------
March 28, 1998 7,373,280 $ 16,018,741 $ 24,131,447 $792,111 $ 40,942,299
========== ============ ============ ======== ============
</TABLE>
See notes to unaudited consolidated financial statements
A-6
<PAGE> 7
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Ended
-------------------------------------
March 28, 1998 March 29, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash received from customers $ 55,791,543 $ 55,894,601
Cash paid to suppliers and employees (48,411,287) (48,986,775)
Interest paid (717,934) (581,584)
Interest received 117,080 171,253
Income taxes paid (1,959,105) (2,668,279)
------------ ------------
Net cash provided by operating activities 4,820,297 3,829,216
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,266,518) (1,417,897)
Construction and equipment purchased for
new dyehouse, distribution center and
expansion (3,944,004) (1,814,010)
Payments for investment in India Trimmings
(Private) Limited (256,275) -
Payments for acquisition of assets of HFDC (Note 10) (126,209) -
Proceeds from sale of London production facility - 392,579
------------ ------------
Net cash used in investing activities (5,593,006) (2,839,328)
------------ ------------
FINANCING ACTIVITIES:
Net borrowings under line of credit
arrangements 1,585,320 1,946,417
Payments on long-term debt ( 103,744) (2,233,320)
Principal payments under capital lease obligations - (57,295)
Proceeds from issuance of common stock 37,941 45,840
Repurchases of stock (989,375) -
------------- ------------
Net cash provided by (used in) financing activities 530,142 (298,358)
------------ ------------
(DECREASE)INCREASE IN CASH (242,567) 691,530
CASH AT:
BEGINNING OF PERIOD 489,580 189,845
------------ ------------
END OF PERIOD $ 247,013 $ 881,375
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
A-7
<PAGE> 8
CONSO PRODUCTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Ended
-------------------------------------
March 28, 1998 March 29, 1997
-------------- --------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,402,997 $ 5,787,541
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,600,466 1,257,184
Amortization of deferred expenses 43,390 68,722
Provision for deferred taxes 149,038 33,522
Currency translation gain (19,967) ( 62,689)
Disposal of fixed assets 864 -
Gain on sale of London production facility - (76,483)
Changes in assets and liabilities:
Accounts receivable 401,605 (815,805)
Inventory 608,482 (4,071,771)
Prepaid expenses and other (419,188) 78,974
Income taxes receivable (131,709) 206,374
Trade accounts payable (1,515,788) 873,468
Accrued liabilities 1,296,472 (136,669)
Income taxes payable (596,365) 686,848
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 4,820,297 $ 3,829,216
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
A-8
<PAGE> 9
CONSO PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 1998
1. CONSOLIDATION AND NEW ACCOUNTING STANDARDS
The financial statements are unaudited and include the accounts of the
Company, its wholly-owned subsidiary, British Trimmings Limited and its
subsidiaries (all operating within the United Kingdom), and Conso's wholly-owned
subsidiary, India Trimmings (Private) Limited, and majority-owned subsidiary
Val-Mex, S.A. de C.V., which operates Conso's Juarez, Mexico assembly plant.
The British Trimmings Limited balances included in the consolidation are
prepared using United States generally accepted accounting principles and are
translated into US dollars based on exchange rates as published in the Wall
Street Journal. Assets and liabilities are translated based on the rates in
effect on the balance sheet date. Income statement amounts are translated using
the average of the month-end exchange rates in effect during 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 and losses on such amounts due to
foreign subsidiaries and all exchange gains and losses on realized foreign
currency transactions are included in the consolidated results of operations.
The India Trimmings and Val-Mex subsidiaries' operations are not significant in
relation to the Company's operations. All significant inter-company accounts and
transactions and profit and loss on inter-company transactions are eliminated in
consolidation.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 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 No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which will be effective for
the Company for the fiscal year ended July 3, 1999. SFAS No. 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 increases in disclosures, if any, will be
required beyond that already reported in its financial statements.
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months and
nine months ended March 28, 1998 and March 29, 1997 reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, in all material respects. All such
adjustments are of a normal recurring nature, except when disclosed otherwise in
the notes below. These financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Operating results for such interim
periods are not necessarily indicative of results to be expected for the year
ending June 27, 1998.
The Company prepares annual financial statements on the basis of a 52 or 53
week fiscal year ending on the Saturday nearest June 30th; interim reporting
periods are based on 13 week quarters. The three months and nine months periods
ended March 28, 1998 and March 29, 1997 each include 13 weeks and 39 weeks,
respectively.
Certain previously reported amounts have been reclassified to conform with
the current year presentation.
A-9
<PAGE> 10
3. INVENTORIES
The composition of inventories at March 28, 1998 and June 28, 1997 was as
follows:
<TABLE>
<CAPTION>
March 28, 1998 June 28, 1997
-------------- -------------
<S> <C> <C>
Raw Materials $ 7,504,814 $ 7,933,716
Work-In-Process $ 4,798,918 4,232,699
Finished Goods 12,646,834 13,173,521
------------ -----------
Totals $ 24,950,566 $25,339,936
============ ===========
</TABLE>
4. INCOME TAXES
The Company did not record any additional Jobs Tax Credits since there were
no increases in employment in the third quarter. In addition, as a result of
unforeseen changes in the Company's markets, including increases in competition
both domestically and from low cost imports, and resulting changes in
profitability, management believes it is more likely than not decreases in
personnel at its South Carolina location are necessary to reduce costs.
Accordingly, management has established a valuation reserve of $253,333
($168,000 net of federal tax effect) against its Jobs Tax Credits deferred tax
assets for that portion of the SC job increases over the last five years, which
may not be maintained throughout subsequent years two through six, for which
$45,333 was charged against income tax expense during the current quarter.
5. STOCK SPLIT
On September 5, 1996, the Company announced a 3-for-2 split of its common
stock, issued on October 4, 1996, to shareholders of record at the close of
business on September 16, 1996. Share and per share amounts have been adjusted
for the 3-for-2 stock split.
6. EARNINGS PER SHARE
In the second quarter of fiscal year 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share". SFAS 128 superceded APB Opinion 15, and is effective for
annual and interim periods ending after December 15, 1997. The provisions of the
statement simplify the computations of earnings per share ("EPS"). Under the new
rules, two EPS amounts are required: (1) basic EPS; and (2) diluted EPS. These
two amounts are now disclosed on the face of the income statements. The earnings
per share amounts calculated under the new SFAS 128 and disclosed on the face of
the income statements are not materially different than the EPS which would have
been disclosed if the earnings per share were calculated using the old
requirements of APB Opinion 15. See Note 8, "Stock Options," for a
reconciliation of the weighted average number of shares outstanding to the
weighted average number of shares outstanding assuming dilution. Only dilutive
(no anti-dilutive) options are considered in the calculation of weighted average
number of shares outstanding assuming dilution.
7. STOCK OPTIONS
On September 7, 1995, the Company granted options to certain key employees
to purchase an aggregate of 93,600 shares of the Company's common stock under
its 1993 Stock Option Plan of which 2775, 800, 1200, 1200, 2625, 825 and 825
options were exercised on September 18, 1996, October 28, 1996, January 27,
1997, February 28, 1997, May 23,1997, July 28, 1997 and October 16, 1997,
respectively. The options were granted at $6.67 per share and are exercisable
with respect to one-third of the total shares after one year, an additional
one-third of the shares after two years, and the final one-third of the shares
after three years. The options expire after five years and are subject to
continued employment by the employee. (All amounts have been adjusted for the
3-for-2 stock splits)
On September 5, 1996, and September 5, 1997 the Company granted additional
options to certain key employees to purchase an aggregate of 79,500 and 21,000
shares, respectively, of the Company's common stock under its 1993 Stock Option
Plan. The options were granted at $11.00 and $10.30 per share, respectively, and
are exercisable with respect to one-third of the total shares after one year, an
additional one-third of the shares after two years, and the final one-third of
the shares after three years. The options expire after five years and are
subject to continued employment by the employee. (All amounts have been adjusted
for the 3-for-2 stock split.)
A-10
<PAGE> 11
In fiscal year 1997, the Company adopted the disclosure-only provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation". Accordingly, the Company
applies APB Opinion 25 and related interpretations for its stock option plans,
and does not recognize compensation cost for the incentive stock options
referred to above. If the Company had elected to recognize compensation cost
based on fair value of the options granted at the grant date as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
March 28, 1998 March 29, 1997 March 28, 1998 March 29, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income - as reported $1,087,247 $1,989,570 $3,402,997 $5,787,541
Less compensation per FAS 123 (31,353) (39,709) (94,058) (119,126)
---------- ---------- ---------- -----------
Net income - as proforma $1,055,894 $1,949,861 $3,308,939 $5,668,415
========== ========== ========== ==========
Net income per share - as reported $ 0.15 $ 0.27 $ 0.45 $ 0.77
========== ========== ========== ==========
Net income per share - as proforma $ 0.14 $ 0.26 $ 0.44 $ 0.76
========== ========== ========== ==========
Net income per share assuming
dilution-as reported $ 0.15 $ 0.26 $ 0.45 $ 0.77
========== ========== ========== ==========
Net income per share - assuming
dilution as proforma $ 0.14 $ 0.26 $ 0.44 $ 0.75
========== ========== ========== ==========
Weighted average number of shares
Outstanding 7,475,569 7,486,690 7,487,396 7,484,552
Options assumed to be exercised 83,350 168,338 83,773 148,234
Shares assumed to be repurchased
((83,350 shares x $6.67)/$7.77) (71,550)
((88,838 shares x 6.67)/$13.51) (43,860)
((79,500 shares x 11.00)/$13.51) (64,730)
((83,773 shares x 6.67)/$9.60) (58,205)
((88,536 shares x 6.67)/$12.62) (46,793)
((59,698 shares x 11.00)/$12.62) (52,035)
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding - assuming dilution 7,487,369 7,546,438 7,512,964 7,533,958
========== ========== ========== ==========
</TABLE>
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
</TABLE>
The weighted average fair values of options granted during fiscal 1998,
fiscal 1997 and fiscal 1996 are $4.36, $4.56 and $2.32 per share, respectively.
(All amounts above have been adjusted to reflect the 3-for-2 stock splits issued
on October 4, 1996 and October 6, 1995.)
8. DIRECTORS STOCK ELECTION PLAN
In January 1997, the Company established a Stock Election Plan for
Non-Employee Directors whereby non-employee directors may elect to receive their
director compensation in common stock in lieu of cash payments. The plan permits
the award of up to 25,000 shares of the Company's stock in lieu of director
compensation. During the quarter and nine months ended March 28, 1998, 1,306 and
3,090 shares, respectively, were issued in accordance with directors' elections.
The compensation related to shares issued under this plan is not material.
9. STOCK REPURCHASE
On November 10, 1997, the Company announced that its Board of Directors
had authorized the repurchase of up to 500,000 shares of its outstanding common
stock, or about 6.7% of the outstanding shares. The state of South Carolina (the
state of incorporation of the Company) defines reacquired shares as having been
retired. Accordingly, the repurchases have been accounted for using the
constructive retirement method, consistent with the Business Corporation Act.
The following repurchases had been made as of March 28, 1998:
A-11
<PAGE> 12
<TABLE>
<CAPTION>
NUMBER REPURCHASED
REPURCHASE OF SHARES DOLLAR VALUE TOTAL COST
DATES REPURCHASED PER SHARE OF SHARES
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
3/11/98 50,000 $7.875 $393,750
3/13/98 38,000 8.125 308,750
3/18/98 20,000 8.250 165,000
3/23/98 15,000 8.125 121,875
------ -------
123,000 $989,375
======= ========
</TABLE>
Repurchases may be made from time to time depending upon market conditions.
The Company's Executive Committee will direct the specific repurchases and
approve prices and other terms. The Company expects to fund repurchases either
through internally generated funds or existing credit lines, but may consider
additional credit facilities depending upon the timing and amount of
repurchases.
10. BUSINESS ACQUISITIONS
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto, and with the Company's
Annual Report on Form 10-K for the fiscal year ended June 28, 1997, including
the financial information and management's discussion contained or incorporated
by reference therein.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 28, 1998 COMPARED TO QUARTER ENDED MARCH 29, 1997
Net sales for the quarter ended March 28, 1998, were $17.6 million, down
from the prior year's third quarter sales of $19.4 million or 9.3%. Conso US was
down $1.5 million or 10.8% from the comparable prior year quarter, while British
Trimmings decreased $296,000 or 5.6%. The sales by British Trimmings would have
been up 0.5% were it not for the sale of MacCulloch & Wallis (which is
discussed in more detail later).
Sales for the third quarter by customer type were as follows:
Manufacturers $ 6,914,000 down 16.8%
Distributors 7,766,000 down 0.2%
Retailers 2,934,000 down 12.2%
--------------------------------------------------------------------
Total $ 17,614,000 down 9.3%
--------------------------------------------------------------------
Distributor sales for the third quarter were relatively flat, coming in at
$7.8 million, as in the prior year's comparable quarter.
Sales to manufacturers, the Company's largest growth area in prior years
decreased in the third quarter after increased sales in the second quarter and
following a somewhat smaller decline in the first quarter. Sales to
manufacturers were down 16.8% overall, down 19.6% in the US and 4.2 % in the UK.
In the US, sales to manufacturers continued to be affected by increased
competition, domestically and from lower-cost imports of certain items. In some
cases, product volume has been maintained, but at the expense of revenue, due to
product reformulations and reductions in pricing to meet the competition. Price
reductions have had some negative impact on margins. The Company began
production in India in January 1998 to compete with lower cost imports and has
established special support teams to provide more focused services to the
manufacturers and major retail customers. As the India Trimmings operation
continues to move beyond its initial start-up period and increase the number and
amount of products it is producing, the Company should experience some
additional contribution to margin improvement coming from these operations.
In the UK, the rate of decline in sales to manufacturers over the prior
quarters continued to slow. But manufacturing business continues to be affected
by the competition. Delays in production experienced in the prior year, with the
installation of inventory and production systems caused some customers to place
purchase contracts with other suppliers. As these placements expire, a newly
A-12
<PAGE> 13
established team in the UK is focusing on winning this business back with
improved service levels, typically better than the competition.
Sales to the retailers were down 12.2%. Sales to retailers declined
primarily due to the sale, in August 1997, of MacCulloch & Wallis, a retail
subsidiary operation in London servicing primarily the apparel industry with
haberdashery items. This operation had made little money and was facing
potential losses due to increasing rent and other overhead costs. The business
operated until its sale (through July 1997). There were no sales reportable for
the unit for the third quarter of 1998, while the unit reported approximately
$350,000 of sales in the same period of the prior year. Without the sale of
MacCulloch & Wallis, sales to retailers would have been down only 2.8%. In
addition, and subsequent to the third quarter, the Company has established a
trim program for a major retail store chain that should improve sales to
retailers in the fourth and following quarters.
Sales outside the US and UK (the Company's major sales regions) for the
third quarter decreased $218,000 or 9.4% from the comparable prior year's
quarter, to $2.1 million. Sales outside the US and UK, by geographic region,
were as follows:
Western Hemisphere $892,000 Down 18.0%
Continental Europe, Middle East 863,000 Up 12.3%
Pacific Rim 332,000 Down 25.9%
-----------------------------------------------------------------------
Total $2,087,000 Down 9.4%
-----------------------------------------------------------------------
The Pacific Rim continued to be negatively impacted by the recent changes in
currency values and other economic problems of that region. The Western
Hemisphere and Continental Europe were negatively impacted by the timing of
orders and shipments and, for certain manufacturing customers, by factors
similar to those experienced by manufacturers in the US and UK. Additionally,
the strength of the British pound has had some negative impact on the ability to
compete in Continental Europe against other competitors manufacturing there.
The gross margin for the quarter declined to 33.8% from the prior year
quarter's 38.2%. The gross margin declined due to several factors. Changes in
sales pricing, mix, and the reformulation of product to meet competitive
offerings continued to be a significant factor. And increased costs of inventory
manufactured prior to the focus on cost controls and reductions in personnel
continued to flow through the income statement, in the US operation, for part of
the quarter, and in the UK, for most of the quarter, delaying the impact of
reductions in personnel and other costs.
In the US, gross margin for the quarter declined $910,000, and was behind
the prior year as a percent of sales, at 37.4% versus the prior year's third
quarter of 39.8%. However, the margin as a percent of sales was above the
previous quarter's 37.1%, indicating that the long awaited effects of reductions
in personnel and increased cost control are beginning to impact the cost of
inventory now being shipped.
In the UK, the gross margin declined $560,000, to 25% of sales in the
current year's third quarter versus 34.1% in the same quarter of the prior year.
With slower inventory turns, the UK operation has yet to see much of the
benefits of personnel reductions and cost cutting coming through in cost of
sales. In addition, it is estimated that $150,000 of the prior year's physical
inventory adjustment recorded at the end of the prior fiscal year was related to
and would have reduced the prior year's margin in this quarter. The sale of the
MacCulloch and Wallis division resulted in a reduction of more that $100,000 of
gross margin on sales in that group and it is estimated that the increase in
personnel effected in the prior year to restore inventory levels and deliveries
after the deterioration in the first half of fiscal 1997, cost the Company an
additional $100,000. The remainder of the reduction is attributed to changes in
product mix and pricing, and the affect of changes in the exchange rate on
consolidation.
Distribution expenses decreased $19,000 from 4.3% to 4.6% of sales. In the
UK, distribution costs decreased $85,000. British Trimmings is implementing a
change in freight carriers as an additional cost savings measure. In the US, the
$66,000 increase was primarily due to increases in depreciation on the new
distribution center.
Selling expenses decreased $162,000, a 7.0% reduction from the prior year's
quarter, from 11.5% to 12.2% of net sales. British Trimmings' selling expenses
decreased $113,000, while Conso US selling expenses decreased $48,000.
A-13
<PAGE> 14
General and administrative expenses decreased $195,000 from 5.9% to 5.5% of
net sales. In the US, which decreased $83,000, the primary contributing items
were a reduction in management bonus provisions corresponding with the
reductions in operations performance. In the UK, which decreased $112,000, the
improvement is primarily a result of reductions in personnel costs.
In the prior year, the Company reported a $55,000 foreign currency loss,
while in the current year the Company had an $11,000 gain. Action has been taken
to keep the inter-company account balances to a minimum to minimize the effect
of foreign currency exchange rates.
Operating income decreased approximately $1.1 million, or 35.1%, from 16.2%
to 11.6% of net sales.
Interest expense increased while taxes were down significantly as a result
of the reduction in operating income and, therefore, pre-tax income. The Company
reported an effective tax rate for the quarter of 41.1% compared to the prior
year's same quarter of 34.4%. The increase in the rate is due primarily to an
increase in the valuation reserve on the deferred tax asset for SC Jobs Tax
Credits.
Net income for the quarter ended March 28, 1998 was $1.1 million, a decrease
of $902,000 or 45.4% from the net income of the third quarter of the prior year
of $2.0 million, bringing earnings per share to 15 cents down from the prior
year's 27 cents. Conso US' net income decreased $651,000 to $1.2 million from
the prior year quarter's net income of $1.9 million; down from 25 cents per
share to 16 cents per share, while British Trimmings net income decreased
$251,000, (after adjustments for inter-company transactions, foreign exchange
translation and purchase accounting), declining from net income of $112,000 or 1
cent per share, to a net loss of $139,000 or 2 cents per share.
In order to restore profitability to previous levels and in light of current
sales conditions, the Company has substantially reduced its personnel
compliment. Personnel since June 1997 has declined 91 people or 12.2% in the US,
115 people or 22.1% in the UK and 6 people or 2.0% in Mexico, taking its
employment at its current production regions from 1574 to 1362. The benefits
from these and other costs reductions will not be fully realized until later
this fiscal year.
NINE MONTHS ENDED MARCH 28, 1998 COMPARED TO NINE MONTHS ENDED
MARCH 29, 1997
Net Sales for the nine months ended March 28, 1998, were $53.3 million, down
3.0% from the prior year's comparable nine month period. Conso US was down $1.3
million or 3.2% from the comparable prior year period, while British Trimmings
declined $387,000 or 2.5%.
British Trimmings' sales would have increased were it not for the sale of
the MacCulloch & Wallis retail operation in London. The operation ceased in July
of the current reporting period, during which time the Company only reported
$100,000 of sales. Prior year's sales for the same nine month period for
MacCulloch & Wallis were approximately $1.1 million. On a comparable basis (or
without the MacCulloch & Wallis sales), British Trimmings sales were up 4.7%,
bringing Company wide sales to 1.1% less than the prior year's comparable nine
month period sales.
Sales by customer type were as follows:
Manufacturers $ 21,246,000 Down 9.0%
Distributors $ 23,396,000 up 4.4%
Retailers $ 8,685,000 Down 5.9%
---------------------------------------------------------------------
Total $ 53,327,000 Down 3.0%
---------------------------------------------------------------------
The retail segment is down as a result of the sale of the MacCulloch &
Wallis retail unit in London. Without the sale of the MacCulloch & Wallis
retail unit in the prior year figures, the sales to the retail segment
increased 6.3%.
Sales to manufacturers in the US has been affected both by increased
domestic competition and low-cost imports of certain items. The Company began
production of handmade products in India early in calendar year 1998 to compete
with the lower cost imports. In the meantime, pricing reductions to meet the
competition have resulted in lower per unit sales dollars.
A-14
<PAGE> 15
Sales outside the US and UK (the Company's major sales regions) increased to
$6.4 million or a 0.8% increase. The decline in the rate of growth in this area
is due in part to the current strength of the UK pound and US dollar against
other foreign currencies. Sales by region were as follows:
Western Hemisphere $2,956,000 down 0.1%
Continental Europe, Middle East $2,199,000 up 5.9%
Pacific Rim $1,208,000 down 5.5%
-----------------------------------------------------------------------
Total $6,363,000 up 0.8%
-----------------------------------------------------------------------
The gross margin for the nine months declined to 34.8% from the prior year
nine month period's 39.2%. Increased costs of inventory produced prior to the
reductions of personnel and focus on cost controls have been recorded as cost of
goods sold. In addition, pricing pressures from competition, both domestically
and foreign have contributed to the margin's decline. In addition,
reformulations of existing products to provide cheaper alternatives have
contributed to the decline in the margin dollars.
In the US, the gross margin for the current nine month period was 38.0%
compared to the prior year's 41.1%, while at British Trimmings, the margin
declined from 34.2% in the prior year to 26.7% in the comparable current year's
nine month period. The Company has taken actions to reduce the number of
personnel considering the current sales and margin climate.
Distribution expenses increased $125,000 for the nine month's period, from
4.2% to 4.6% of net sales. British Trimmings' expenses decreased $21,000.
British Trimmings is implementing a change in freight carriers as an additional
cost savings measure. Conso US' expenses increased $146,000, due primarily to
depreciation on the new warehouse facility and related equipment including radio
frequency bar-code systems.
Selling expenses for the current nine month period decreased $80,000.
British Trimmings decreased $112,000, while Conso US increased $32,000. The
increase at Conso US was related to some targeted marketing done to encourage
the use of decorative trims through the sponsorship of some "How-to" seminars,
partially offset by cost cutting measures.
General and Administrative costs decreased $82,000 with approximately half
of the decrease coming from Conso US and the other half coming from British
Trimmings.
Currency losses of $29,000 were incurred in the first nine months. As a
result of the decline in margin and the translation losses, operating income
decreased approximately $3.1 million or 32.8% from 17.2% of net sales to 11.9%.
Interest expense increased $189,000, in connection with increases in
borrowings on the Company's revolving loan facilities to help fund the dyehouse
and warehouse projects.
The effective tax rate increased as management established a valuation
allowance for the reductions in personnel being effected which will, more likely
than not, continue through the end of the year and result in a certain amount of
lost SC Jobs Tax Credits.
Net income for the nine months declined approximately $2.4 million from $5.8
million in the prior year to $3.4 million in the same comparable period of the
current year, and from 77 cents per share to 45 cents per share. Conso US net
income declined $1.5 million while British Trimmings income declined $899,000.
LIQUIDITY AND CAPITAL RESOURCES
During December 1997, the Company reached an agreement with a US bank to
transition the overdraft (revolving-loan type) borrowing facility for its
British Trimmings subsidiary, from a UK bank. The new agreement provides
overdraft facilities totaling Pound Sterling 600,000 (or $1,009,800 at the
March 28, 1998 exchange rate) (previously Pound Sterling 500,000). The new
facility bears interest at the bank's base rate plus 1.25% (8.50% at March 28,
1998) but not less than 6%. (The previous facility was at the UK bank's base
rate plus 1.5%.)
The outstanding aggregate balances of both the Company's and British
Trimmings' lines of credit and the British Trimmings' (line of credit type)
overdraft facility were $10.9 million at March 28, 1998, with approximately $4.1
million available for future borrowings subject to satisfaction of certain
borrowing base requirements. The Company's primary revolving credit facility is
secured by Conso US' receivables and inventory, and bears interest based on
LIBOR rates plus 1.0% (5.72% for US dollar borrowings and 8.375% to 8.75% for
borrowings in British pounds sterling at March 28, 1998). Working capital
declined by $1.4 million to $19.6 million at March 28, 1998, from $21.0 million
at June 28, 1997, primarily from a partial funding of the long-term capital
projects through the revolver loan and repurchases of common stock.
A-15
<PAGE> 16
The Company anticipates that its total capital expenditures during the 1998
fiscal year, excluding major expansion projects, will be approximately $1.4
million, of which approximately $900,000, has been spent through March 28, 1998.
In the US, Conso had budgeted $2.3 million for the construction of a new
dyehouse facility and related equipment and $3.7 million for a new warehouse
facility and some new equipment. In addition, the Company had budgeted $1
million for the upfitting of the space made available by the move of the
warehouse and dyehouse facilities for more efficient production work flow and
some additional office space. As of March 28, 1998, approximately $7.7 million
had been spent on these projects with the majority of the amount going toward
the building of the new warehouse and dyehouse. An additional $2.2 million over
the original budget amount has been approved by the Board of Directors as
additional spending relating to these expansions with most of the funding for
computer equipment, the distribution center and dyeing equipment for the new
dyehouse and some spending in excess of budgeted amounts on the facilities.
Additionally, the Company has evaluated its "Year 2000" issues and
believes that they can be resolved through the modification of software, at an
estimated cost of $250,000. The Company is currently ahead of its original
implementation schedule for its "Year 2000" project.
The Company believes that cash generated by operations and available
borrowings under lines of credit will be adequate to fund its working capital
and capital expenditure requirements for the foreseeable future, but excluding
possible additional acquisitions of other businesses. Based on the Company's
financial position, the Company believes that it will also be able to obtain any
additional financing necessary to fund its planned long-term growth and
expansion. Such additional financing may include long-term debt or equity;
however, the Company has not yet made arrangements for any such additional
financing.
On November 10, 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to 500,000 shares of its outstanding common
stock, or about 6.7% of the outstanding shares. Purchases of 123,000 shares
($989,000) were made in March of 1998, and additional purchases of 50,000 shares
($409,000) were made in April of 1998.
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.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 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 No. 131, Disclosures about
Segments of an Enterprise and Related Information, which will be effective for
the Company for the fiscal year ended July 3, 1999. SFAS No. 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 increases in disclosures, if any, will be
required beyond that already reported in its financial statements.
CAUTIONARY STATEMENTS AS TO FORWARD LOOKING INFORMATION
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for the future operations are
"forward looking" statements, and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such forward
looking statements include, without limitation: generally 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 profitability integrate into its operations any existing businesses it may
acquire; changes in the cost and availability of raw materials; changes in
governmental regulations
A-16
<PAGE> 17
applicable to the Company's business; fluctuations in exchange rates relative to
the US dollar for currencies of the United Kingdom and other nations where the
Company does business; casualty to or disruption of the Company's production
facilities and equipment; delays and disruptions in the shipment of the
Company's products and raw materials; disruption of operations due to strikes or
other labor unrest; and other factors that generally affect the business of
manufacturing companies with international operations.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 28,
1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSO PRODUCTS COMPANY
Dated: May 12, 1998 By: /s/ David B. Dechant
--------------------
Name: David B. Dechant
Title: Chief Accounting Officer
Dated: May 12, 1998 By: /s/ Gilbert G. Bartell
----------------------
Name: Gilbert G. Bartell
Title: Chief Financial Officer and
Vice President of Finance/Treasurer
A-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATUS OF CONSO PRODUCTS COMPANY FOR THE NINE MONTHS ENDED
MARCH 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATUS.
</LEGEND>
<CIK> 0000914448
<NAME> CONSO PRODUCTS COMPANY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 247,013
<SECURITIES> 0
<RECEIVABLES> 11,827,046
<ALLOWANCES> 436,864
<INVENTORY> 24,950,566
<CURRENT-ASSETS> 38,058,881
<PP&E> 30,439,613
<DEPRECIATION> (10,121,059)
<TOTAL-ASSETS> 59,964,878
<CURRENT-LIABILITIES> 18,495,696
<BONDS> 0
0
0
<COMMON> 16,018,741
<OTHER-SE> 24,923,558
<TOTAL-LIABILITY-AND-EQUITY> 59,964,878
<SALES> 53,326,597
<TOTAL-REVENUES> 53,326,597
<CGS> 34,757,878
<TOTAL-COSTS> 34,757,878
<OTHER-EXPENSES> 12,223,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 627,022
<INCOME-PRETAX> 5,718,623
<INCOME-TAX> 2,315,626
<INCOME-CONTINUING> 3,402,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,402,997
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
