<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 19, 1998
-------------
CONSO PRODUCTS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 0-22942 57-0986680
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
513 North Duncan Bypass, Union, South Carolina 29379
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 803/427-9004
------------
Not applicable
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Page 1 of 30
Exhibit Index on Page 4
1
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
On July 6, 1998, the Registrant filed a current report on Form 8-K
reporting that the Registrant acquired on June 19, 1998 all of the capital stock
of Simplicity Capital Corporation, a Delaware corporation engaged in the
business of designing, producing and selling patterns and pattern catalogs for
apparel, costumes, crafts, home decorations, and other home sewing applications.
This amendment to that report is filed for the purpose of presenting the
financial statements required by Item 7(a) and the pro forma financial
information required by Item 7(b).
(a) Financial statements of businesses acquired.
The financial statements required by Item 7(a) of Form 8-K with respect
to Simplicity are included in this report beginning at Page 5.
(b) Pro forma financial information.
The pro forma financial information required by Item 7(b) of Form 8-K
with respect to the acquisition of Simplicity is included in this report
beginning at Page 24.
(c) Exhibits
2 Stock Purchase Agreement dated June 10, 1998 among Conso
Products Company, Simplicity Capital Corporation, and the
Sellers, Sellers Representative and Escrow Agent named
therein.*
10.1 Modified and Restated Loan Agreement dated June 19, 1998 among
NationsBank, N.A., Conso Products Company and Simplicity
Pattern Co. Inc.*
10.2 Promissory Note dated June 19, 1998 issued by Conso Products
Company and Simplicity Pattern Co. Inc. in favor of
NationsBank, N.A. in the original principal amount of
$20,000,000.*
10.3 Promissory Note dated June 19, 1998 issued by Conso Products
Company and Simplicity Pattern Co. Inc. in favor of
NationsBank, N.A. in the original principal amount of up to
$30,000,000.*
10.4 Promissory Note dated June 19, 1998 issued by British
Trimmings Limited in favor of NationsBank, N.A. in the
original principal amount of up to (pound)7,000,000.*
23 Consent of Arthur Andersen LLP.
- -------------
* Incorporated by reference to the Registrant's Report on Form 8-K filed with
the Commission on July 6, 1998.
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSO PRODUCTS COMPANY
By: /s/ David B. Dechant
----------------------------
Name: David B. Dechant
Title: Chief Accounting Officer
Dated: September 4, 1998
3
<PAGE> 4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
FORM 8-K
CURRENT REPORT
Date of Report Commission File Number
June 19, 1998 0-22942
CONSO PRODUCTS COMPANY
EXHIBIT INDEX
Exhibit No Exhibit Description
- ---------- -------------------
2 Stock Purchase Agreement dated June 10, 1998 among
Conso Products Company, Simplicity Capital
Corporation, and the Sellers, Sellers Representative
and Escrow Agent named therein.*
10.1 Modified and Restated Loan Agreement dated June 19,
1998 among NationsBank, N.A., Conso Products Company
and Simplicity Pattern Co. Inc.*
10.2 Promissory Note dated June 19, 1998 issued by Conso
Products Company and Simplicity Pattern Co. Inc. in
favor of NationsBank, N.A. in the original principal
amount of $20,000,000.*
10.3 Promissory Note dated June 19, 1998 issued by Conso
Products Company and Simplicity Pattern Co. Inc. in
favor of NationsBank, N.A. in the original principal
amount of up to $30,000,000.*
10.4 Promissory Note dated June 19, 1998 issued by British
Trimmings Limited in favor of NationsBank, N.A. in
the original principal amount of up
to (pound)7,000,000.*
23 Consent of Arthur Andersen LLP. (Page 30 of the
sequentially numbered pages).
-------------
* Incorporated by reference to the Registrant's Report on Form 8-K filed with
the Commission on July 6, 1998.
4
<PAGE> 5
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Simplicity Capital Corporation:
We have audited the accompanying consolidated balance sheets of Simplicity
Capital Corporation (a Delaware corporation) and subsidiaries as of January 31,
1998 and January 31, 1997, and the related consolidated statements of income
(loss), shareholders' deficit and cash flows for each of the three years in the
period ended January 31, 1998. 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Simplicity Capital Corporation
and subsidiaries as of January 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
August 6, 1998
5
<PAGE> 6
SIMPLICITY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1998 AND 1997
(000'S)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $6,854 $4,583
Trade accounts receivable, less allowance for
doubtful accounts of $1,245 in 1998 and $982 in 1997 6,742 5,926
Inventories 5,183 5,464
Deferred income tax benefits 265 1,685
Other current assets 626 697
------- -------
Total current assets 19,670 18,355
------- -------
Property, plant and equipment, net 11,398 12,721
Restricted cash 1,350 800
Deferred income tax benefits 1,554 1,481
Investment in field patterns 2,524 2,598
Other assets 1,039 417
Goodwill, less accumulated amortization of
$20,374 in 1998 and $19,782 in 1997 17,168 17,760
------- -------
Total Assets $54,703 $54,132
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving credit facility - $615
Interest payable on subordinated debt due shareholders $1,828 -
Current portion of senior term debt - 700
Accounts payable 4,353 6,506
Accrued income taxes 1,210 1,072
Reserve for pattern discards 2,981 3,479
Accrued liabilities 6,800 6,657
------- -------
Total current liabilities 17,172 19,029
------- -------
Subordinated debt due shareholders 70,298 71,791
Other long-term liabilities 6,732 7,010
------- -------
Total liabilities 94,202 97,830
------- -------
Redeemable preferred stock - 28,161
Commitments and Contingencies
Shareholders' Equity (Deficit):
Preferred Stock, Class A ($.01 par value, 1,000 shares
authorized, issued and outstanding) - -
Preferred Stock, Class B ($.01 par value, 1,000 shares
authorized, issued and outstanding) - -
Common stock ($.01 par value, 244,000 shares authorized,
242,500 shares issued and outstanding) 2 2
Warrants to purchase common stock 17 17
Paid-in-capital 34,866 4,998
Accumulated deficit (73,939) (76,704)
Cumulative translation adjustment (445) (172)
------- -------
(39,499) (71,859)
------- -------
Total liabilities and shareholders' deficit $54,703 $54,132
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
6
<PAGE> 7
SIMPLICITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $68,628 $63,243 $63,632
Operating costs and expenses:
Cost of sales 27,323 26,489 30,343
Selling, general and administrative 33,471 32,013 31,036
Amortization of goodwill 592 592 2,544
Write-off of goodwill - 63,049 -
------------- ------------- -------------
Operating income (loss) 7,242 (58,900) (291)
Interest expense, net 245 180 187
------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item 6,997 (59,080) (478)
Income tax provision (benefit) 2,450 909 (145)
------------- ------------- -------------
Income (loss) before extraordinary item 4,547 (59,989) (333)
Extraordinary item:
Recognition of unrecognized benefit - 554 2,823
------------- ------------- -------------
Net income (loss) $4,547 $ (59,435) $2,490
============= ============= =============
Net income (loss) per common share - basic and diluted $18.75 ($245.09) $10.27
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE> 8
SIMPLICITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
(000'S)
<TABLE>
<CAPTION>
WARRANTS TO
PURCHASE CUMULATIVE
CAPITAL COMMON PAID-IN- ACCUMULATED TRANSLATION
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL
-------------- ---------------- -------------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1995 $2 $17 $4,998 ($13,538) ($62) ($8,583)
Net income 2,490 $2,490
Dividends and accretion (2,939) ($2,939)
Translation gain 38 $38
-------------- ---------------- -------------- ---------------- ---------------- -------------------
Balance at January 31, 1996 $2 $17 $4,998 ($13,987) ($24) ($8,994)
Net loss (59,435) ($59,435)
Dividends and accretion (3,282) ($3,282)
Translation loss (148) ($148)
-------------- ---------------- -------------- ---------------- ---------------- -------------------
Balance at January 31, 1997 $2 $17 $4,998 ($76,704) ($172) ($71,859)
Net Income 4,547 $4,547
Dividends and accretion (1,782) ($1,782)
Redemption of preferred stock 29,868 $29,868
Translation loss (273) ($273)
-------------- ---------------- -------------- ---------------- ---------------- -------------------
Balance at January 31, 1998 $2 $17 $34,866 ($73,939) ($445) ($39,499)
============== ================ ============== ================ ================ ===================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE> 9
SIMPLICITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
(000'S)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $4,547 ($59,435) $2,490
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Effect of restructuring - Recognition of unrecognized benefit - (554) (2,823)
Depreciation 1,965 1,571 1,812
Amortization of goodwill 592 592 2,544
Write-off of goodwill - 63,049 -
Provision for doubtful accounts 408 48 261
Deferred income taxes 1,347 (411) (579)
Loss on disposition and write down of property, plant, and
equipment 595 71 622
Changes in assets and liabilities -
(Increase) decrease in accounts receivable (1,224) 775 541
Decrease in inventory 281 70 1,058
Decrease (increase) in other current assets 71 (42) 124
Decrease in accounts payable (2,153) (168) (1,514)
Increase (decrease) in accrued income taxes 138 (375) (332)
Decrease in reserve for pattern discards (498) (102) (2,126)
Increase (decrease) in accrued liabilities 143 (754) (638)
Decrease in investment in field patterns 74 334 316
Increase in other assets (622) (327) (90)
(Decrease) increase in other long-term liabilities (278) 813 1,154
-------------- ------------ ---------------
Cash provided by operating activities 5,386 5,155 2,820
-------------- ------------ ---------------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (1,250) (1,940) (1,081)
Purchase of certificates of deposit (550) - -
-------------- ------------ ---------------
Cash used in investing activities (1,800) (1,940) (1,081)
-------------- ------------ ---------------
Cash flows from financing activities:
Payment of senior term debt (700) (2,700) (1,500)
Payment of revolving credit facility (615) - -
Other, net - 12 (30)
-------------- ------------ ---------------
Cash used in financing activities (1,315) (2,688) (1,530)
-------------- ------------ ---------------
Increase in cash 2,271 527 209
Cash and cash equivalents at beginning of year 4,583 4,056 3,847
-------------- ------------ ---------------
Cash and cash equivalents at end of year $6,854 $4,583 $4,056
============== ============ ===============
Cash paid during the year for:
Interest $30 $246 $474
Income taxes $1,340 $1,833 $932
Non-cash activities during the year for:
Interest paid in-kind $2,730 $2,586 $2,344
Preferred stock accrued dividends and accretion $1,782 $3,282 $2,939
Redemption of Preferred Stock $29,868 - -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
9
<PAGE> 10
SIMPLICITY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
Simplicity Capital Corporation ("Capital") is the parent company of
Simplicity Holdings, Inc. ("Holdings"). Holdings is the parent company of
Simplicity Pattern Co., Inc. ("Simplicity"). Simplicity and its wholly owned
subsidiaries (collectively referred to as the "Pattern Companies") produce and
distribute sewing patterns for the home sewing industry in the United States and
other English speaking markets. Capital, Holdings, and the Pattern Companies are
hereinafter collectively referred to as the "Company".
Throughout these notes to consolidated financial statements, the fiscal
years ended January 31, 1998, 1997 and 1996 are referred to as 1998, 1997 and
1996, respectively.
Basis of Consolidation:
The consolidated financial statements include the accounts of Capital,
Holdings, and the Pattern Companies. All material intercompany transactions with
subsidiaries, including estimated intercompany profits or losses in inventories,
have been eliminated in the accompanying consolidated financial statements.
Foreign Currency Translation:
Assets and liabilities of foreign subsidiaries are translated into
United States dollars at the rates of exchange in effect on the balance sheet
date. Income and expense items are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments are excluded from
the results of operations and are reported as a separate component of
shareholders' equity (deficit). The effect of exchange rate changes on cash is
not significant.
Cash and Cash Equivalents:
Cash and cash equivalents consists of cash in banks and money market
accounts.
Inventories and Investment in Field Patterns:
Inventories are generally stated at average cost, not in excess of
market. Investment in field patterns represents the Company's equity, stated at
average cost, of the base stock of patterns held by retailers.
Reserve for Pattern Discards:
Retailer stocks are kept up to date with current fashions by the
periodic issuance of new patterns embodying new styles. Generally three to four
times each year, the Company discontinues patterns and issues credit to retail
customers. Accordingly, the year-end balance in the reserve for pattern discards
reflects the estimated dollar amount of discontinued patterns for which credit
will be issued to open account against future purchases.
10
<PAGE> 11
Income Taxes:
The Company files consolidated Federal and State tax returns. The
Company provides for taxes on the unremitted earnings of subsidiaries located
outside the United States as the Company is currently required to include such
earnings under the Internal Revenue Code.
Property, Plant, Equipment and Depreciation:
Property, plant and equipment are stated at cost. Depreciation is
generally provided on a straight-line basis over the estimated useful lives
ranging from three to thirty-three years. Amortization of leasehold improvements
is provided over the useful life of the asset or the term of the related lease,
whichever is shorter. Maintenance and repairs are expensed as incurred. Assets
are reduced, net of related accumulated depreciation, for equipment retired or
disposed of with gains or losses included in income.
Revenue Recognition:
The Company ships the initial base stock of patterns to most of its
retail customers under a deferred payment arrangement referred to as the Pattern
Standing Debit ("PSD"). Revenue from the shipment of the initial base stock of
patterns is not recognized unless the PSD is subsequently purchased by the
retail customer.
As consumers purchase patterns out of the retailer's base stock, the
Company recognizes revenue upon the shipment of patterns reordered by retailers
to replenish the base stock. The Company also recognizes revenue from certain
retail customers upon the shipment of new pattern designs, less a provision for
credits issued to retailers for discontinued patterns. These credits are applied
against future purchases made by the retailer.
Volume related promotional allowances granted to retail customers are
reflected in Selling, general and administrative expenses in the accompanying
consolidated statements of income (loss).
The Company has a business arrangement with one of its retail customers
which is different from the conventional arrangement with other retail customers
as described above. Under this arrangement, the Company recognizes revenue at
the retail price upon the purchase of patterns by the consumer out of the
retailer's base stock and pays the retailer a commission.
The Company also recognizes revenue for interest charged to retailers
on PSD balances and for the sale of pattern catalogs shipped to retailers.
Retirement Plans:
The Company has two defined contribution employee retirement plans
covering substantially all of its full-time domestic employees and several
foreign employee retirement plans. It is the Company's policy to fund the cost
of retirement plans, although such funding may be limited to the amount
deductible for tax purposes. In addition, the Company has a defined contribution
plan for certain key employees of the Company.
11
<PAGE> 12
Goodwill:
Prior to 1997, Goodwill was being amortized on a straight-line basis
over 40 years and the Company evaluated the recoverability of Goodwill using an
"undiscounted future cash flow" method in accordance with APB Opinion No. 17.
During 1997, the Company changed to a "fair value" method to evaluate the
recoverability of Goodwill to more accurately reflect the realizability of this
asset, which resulted in a write-off of Goodwill, as more fully described in
Note 17. The resulting Goodwill balance is being amortized over the remaining 31
years.
Use of Estimates:
Generally accepted accounting principles require the use of estimates
and assumptions that affect the amounts reported by the Company on the
consolidated financial statements. Actual results may differ from the estimates
used.
Disclosures about Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" requires disclosure of the fair value of
financial instruments when it is practicable. Fair value is the amount that
could be received in a current transaction between willing parties, other than
in a forced or liquidation sale.
The Subordinated debt due shareholders on the accompanying consolidated
balance sheets represents the carrying value of these financial instruments for
generally accepted accounting purposes. Management estimates that the fair value
of these financial instruments is between $19,500,000 and $22,900,000.
Recent Accounting Pronouncements:
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard No. 128, "Earnings per Share," which revises the
manner in which earnings per share is calculated. The Company adopted this
statement as of January 31, 1998, and all per share amounts included herein have
been restated accordingly. The effect of the adoption was not material as basic
earnings per share equals diluted earnings per share.
The Financial Accounting Standards Board recently issued Statements of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and No.
131 "Disclosures about Segments of an Enterprise and Related Information." These
statements, which are effective for fiscal years subsequent to 1998, expand and
modify presentation and disclosure and, accordingly, will have no significant
impact on the Company's financial condition.
Reclassifications:
Certain reclassifications have been made to prior year financial
statements to conform to current year presentation.
12
<PAGE> 13
NOTE 2 - INVENTORIES
Inventories as of January 31, are summarized as follows (000's
omitted):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Raw materials and supplies $ 794 $ 854
Work in progress 348 519
Finished goods 2,822 2,779
Consignment inventory 1,219 1,312
------ ------
$5,183 $5,464
====== ======
</TABLE>
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment as of January 31,
are as follows (000's omitted):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land $ 483 $ 483
Building and improvements 7,593 7,538
Machinery and equipment 17,651 17,461
Leasehold improvements 597 557
Construction in progress 819 821
------- -------
27,143 26,860
Less - Accumulated depreciation 15,745 14,139
------- -------
$11,398 $12,721
======= =======
</TABLE>
Depreciation expense for 1998, 1997 and 1996 was $1,965,000, $1,571,000
and $1,812,000, respectively.
NOTE 4 - RESTRICTED CASH
The Company has collateralized letters of credit with Certificates of
Deposit. As of January 31, 1998 and 1997 these Certificates of Deposit were
$1,350,000 and $800,000, respectively. They are reflected in "Restricted cash"
on the accompanying consolidated balance sheets.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities as of January 31, are summarized as follows (000's
omitted):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Liability for future customer credits $1,526 $1,324
Accrued payroll and related payroll expense 2,359 2,643
Other 2,915 2,690
------ ------
$6,800 $6,657
====== ======
</TABLE>
13
<PAGE> 14
NOTE 6 - SENIOR DEBT
On September 10, 1990 ("Restructuring Date"), the Company completed a
restructuring of its senior debt, subordinated debt and shareholders' equity
(deficit) ("Restructuring"), and entered into a Credit Agreement ("Credit
Agreement") which provided a $31,000,000 Senior Term Facility to Capital
("Senior Term Notes"), a $6,000,000 Revolving Credit Facility to Simplicity
("Revolver") and a $1,100,000 Letter of Credit Facility to Simplicity. The
Senior Term Notes, the Revolver, and Letter of Credit Facility collectively are
referred to as the "Capital Senior Debt". At January 31, 1997 total letters of
credit outstanding under the Letter of Credit Facility was $2,695,000. During
1998, the Letter of Credit Facility expired.
On February 27, 1998, the Credit Agreement was amended to modify the
terms and extend the maturity date of the Revolver ("Amended Revolver"). The
Amended Revolver provides a commitment of $5,000,000, of which $3,000,000 can be
used for letters of credit, and charges interest, payable monthly, at the prime
rate for any outstanding balances. The Company must also cash collateralize 50%
of all outstanding letters of credit ("Cash Collateral"). The amount available
under the Amended Revolver for borrowing and letters of credit is subject to a
borrowing base, as defined, plus any Cash Collateral. During 1998, the Company
did not borrow any amounts under the Revolver or the Amended Revolver. At
January 31, 1998, total letters of credit outstanding under the Amended Revolver
were $2,520,000 and the related Cash Collateral was $1,350,000. The maturity
date of the Amended Revolver is August 31, 1998.
As of January 31, 1997, $700,000 in principal of the Senior Term Notes
remained outstanding. This amount was repaid during 1998 and is reflected as
Current portion of senior term debt on the accompanying consolidated balance
sheets. Prior to repayment, interest was payable monthly in cash at the prime
rate plus 1/2% per annum.
On the Restructuring Date, an unrecognized benefit was recorded on the
balance sheet which represented the difference between the carrying value of the
senior debt of Holdings prior to the Restructuring, net of the costs incurred
related to the Restructuring and including accrued interest and deferred
financing costs, and the face amount of the Senior Term Notes incurred in the
Restructuring. The unrecognized benefit was being amortized over the life of the
Senior Term Notes as the related future interest was incurred. Unrecognized
benefit was also recognized proportionally, as an extraordinary gain, as the
Senior Term Notes were repaid. During 1997, the final amount of $554,000 of
extraordinary gain was recognized as the remaining portion of the Senior Term
Notes were repaid in March of 1997 as described above.
The Capital Senior Debt is collateralized by pledges of 1)
substantially all of the outstanding common stock of Holdings, 2) all of the
outstanding common stock of Simplicity, and 3) substantially all of the
outstanding common stock of significant foreign subsidiaries of Simplicity. In
addition, the Capital Senior Debt is further secured by first liens on all
assets of Capital, Holdings, and Simplicity including intellectual property
rights of the Pattern Companies.
The Credit Agreement contains various restrictive covenants as to 1)
the amount and type of indebtedness permitted, 2) capital expenditures, 3)
maintenance of certain financial ratios, 4) dividends declared or paid, 5)
subordinated debt payments, 6) investments, 7) the sale or disposition of
property, and 8) other types of transactions as defined in the Credit Agreement.
The Company is in compliance with the terms, conditions, and covenants contained
in the Credit Agreement, as amended.
14
<PAGE> 15
NOTE 7 - SUBORDINATED DEBT DUE SHAREHOLDERS:
On the Restructuring Date, holders of $59,500,000 face amount of the
$61,000,000 of 14.5% Senior Subordinated Notes of Holdings, due in 1996
("Holdings Subordinated Debt") exchanged their Holdings Subordinated Debt,
including accrued interest of $13,090,000, and warrants to purchase common
shares of Holdings, for $43,893,000 face amount of Capital Subordinated Notes
(as defined below) and common stock of Capital having a par value of $595.
The Subordinated debt due shareholders on the accompanying consolidated
balance sheets reflect $18,533,000 (including paid in kind interest) for the
13.15% Senior Subordinated Notes of Capital ("Senior Subordinated Notes") and
$39,993,000 (including paid in kind interest) for the 4.88% Junior Subordinated
Notes of Capital ("Junior Subordinated Notes") as of January 31, 1998. The
Capital Subordinated Notes have a maturity date of September 1, 2000, (the
Senior and Junior Subordinated Notes are collectively referred to as the
"Capital Subordinated Notes") and combined have unrecognized benefit of
$11,772,000 and $14,861,000 as of January 31, 1998 and 1997, respectively. The
unrecognized benefit represents the difference between the carrying value of the
exchanged Holdings Subordinated Debt prior to the Restructuring, including
interest and deferred financing costs, and the face amount of the Capital
Subordinated Notes on the Restructuring Date, less interest incurred subsequent
to the Restructuring Date. The unrecognized benefit is amortized over the life
of the Capital Subordinated Notes as the related future interest is incurred.
The unrecognized benefit was reduced by approximately $3,089,000 and $2,250,000
relating to a portion of the interest incurred on the Capital Subordinated Notes
during 1998 and 1997, respectively. Any unamortized unrecognized benefit will be
recognized as an extraordinary gain when the Capital Subordinated Notes are
repaid. Interest expense related to the Capital Subordinated Notes will
approximate $12,059,000 over the remaining term and will exceed the remaining
unrecognized benefit of $11,772,000 as of January 31, 1998 by $287,000. The
$287,000 net amount is being reflected as interest expense over the remaining
term of the Capital Subordinated Notes.
The Subordinated debt due shareholders on the accompanying consolidated
balance sheets represents the carrying value of these financial instruments for
generally accepted accounting purposes. As common shareholders of Capital, the
holders of the Capital Subordinated Notes are subject to certain agreements that
provide, under certain circumstances, for the Company's early discharge of these
financial instruments at amounts less than the carrying value.
Scheduled mandatory principal payments are not required on the Capital
Subordinated Notes other than from the excess cash flow of the Company.
Beginning in April 1999, for the year ended January 31, 1999, 50% of excess cash
flow, as defined, is to be used to repay the Senior Subordinated Notes until
paid in full. Thereafter, 60% of excess cash flow is to be used to repay the
Junior Subordinated Notes.
The holders of the Capital Subordinated Notes have a junior lien on all
of the outstanding common stock of Simplicity and are common shareholders of
Capital.
Substantially all of the interest expense on the Capital Subordinated
Notes incurred in future periods will be charged to the unrecognized benefit
component of Subordinated debt due shareholders, resulting in reduced levels of
interest expense charged to earnings. However, beginning in March 1998, the
Company is required to pay cash interest on the Capital Subordinated Notes of
approximately $4.4 million annually.
15
<PAGE> 16
The Capital Subordinated Notes, accrued interest thereon, and the
unrecognized benefit are reflected as Subordinated debt due shareholders on the
accompanying consolidated balance sheets and are summarized below as of
January 31, (000's omitted):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
13.15% Senior Subordinated Notes, interest payable
in-kind annually until September 1, 1997, thereafter,
payable in cash semi-annually $18,533 $16,378
1.48% Junior Subordinated Notes, interest payable
in-kind annually until September 1, 1997, thereafter,
payable in cash semi-annually at the rate of
4.88% per annum 39,993 39,411
------- -------
Capital Subordinated Notes 58,526 55,789
Interest payable 1,828 1,141
Unrecognized Benefit 11,772 14,861
------- -------
72,126 71,791
Less: Current portion of interest payable 1,828 --
------- -------
Subordinated debt due shareholders $70,298 $71,791
======= =======
</TABLE>
On June 19, 1998, Capital was acquired by Conso Products Company
pursuant to which the Capital Subordinated Notes were fully redeemed, cancelled
and discharged. Accordingly, as of June 19, 1998, Capital no longer has any
obligations with respect to the Capital Subordinated Notes.
NOTE 8 - OTHER LONG-TERM LIABILITIES
Other long-term liabilities as of January 31, are summarized as follows
(000's omitted):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation $2,312 $2,500
Retirement plan 879 1,364
Management Benefit Plan 2,765 2,000
Other 776 1,146
------ ------
$6,732 $7,010
====== ======
</TABLE>
The Management Benefit Plan rewards certain key management participants
based upon the long-term financial performance of the Company. Incentives vest
over four years and payments are required if a participant in the plan is no
longer employed by the Company. On June 19, 1998, Capital was acquired by Conso
Products Company pursuant to which all obligations of the Company with respect
to the Management Benefit Plan were fully discharged.
16
<PAGE> 17
NOTE 9 - CAPITAL STOCK
Capital is authorized to issue 244,000 shares of common stock, of which
242,500 shares are issued and outstanding, 1,000 shares of Class A Preferred
Stock, and 1,000 shares of Class B Preferred Stock, all the aforementioned
having a par value of $.01 per share. All of the Class A and Class B Preferred
Stock is issued and outstanding. The Class A Preferred Stock does not pay
dividends and does not have conversion privileges to other classes of capital
stock. The Class B Preferred Stock does not pay dividends and has an automatic
conversion feature to 5% of the outstanding common stock, on a fully diluted
basis, at the time of conversion upon the occurrence of certain specified
events.
On June 19, 1998, Capital was acquired by Conso Products Company
pursuant to which the Class A and Class B Preferred Stock were fully redeemed,
cancelled, and discharged.
On the Restructuring Date, Capital acquired substantially all of the
outstanding common stock of Holdings by issuing 134,200 shares of its common
stock to previous shareholders of Holdings.
In connection with the acquisition of Simplicity by Holdings in
February 1988 ("Acquisition"), Holdings issued 1,000 shares of Redeemable
Preferred Stock ("Holdings Preferred") having a redemption value of $10,000,000
in 1998 as partial consideration for the Acquisition. The Holdings Preferred
issued at the date of the Acquisition was assigned a fair value of $8,496,000
and the difference between this and the redemption value was accreted as a
charge to Accumulated deficit over the ten year period. Holdings was authorized
to issue 1,500 shares and as of January 31, 1997, 1,131.02 were issued and
outstanding. Each share was entitled to cumulative cash dividends of $1,200 per
year, which commenced on September 1, 1988. The terms of the Holdings' loan
agreements prohibited the payment of cash dividends under certain conditions and
to the extent that such dividends were deferred and not paid, each holder
elected to receive, in lieu of a deferred cash dividend payment, additional
shares of Holdings' Preferred with a redemption value equal to the amount of the
underlying unpaid cash dividend. Dividends due since March 1, 1989, have been
accrued and reflected in Redeemable preferred stock on the accompanying
consolidated balance sheets, however, they were not declared or paid due to the
continued default position of Holdings under its loan agreements covering the
senior and subordinated debt now held by Capital and restrictions imposed by
state law. In addition, Holdings was prohibited from redeeming any shares of the
Holdings Preferred, as well as paying any accrued and unpaid dividends, as long
as Holdings continued to be in default under its loan agreements.
These restrictions with regard to the payment of dividends and the
redemption of outstanding shares substantially reduced their economic value.
During 1998, the Company reached an agreement to redeem all the Holdings
Preferred, accrued dividends, and the common shares of Holdings held by holders
of the Holdings Preferred for $75,000 in cash. This redemption resulted in an
increase in Paid-in-capital of $29,868,000 during 1998.
17
<PAGE> 18
Also in connection with the Acquisition, Holdings issued warrants to
the holders of the Holdings Preferred to purchase shares of Holdings common
stock at an exercise price of $6.60 per common share ("$6.60 Warrants"). The
holders of the $6.60 Warrants have exercised warrants to purchase 100 shares of
Holdings common stock and warrants to purchase 798 shares of common stock
remained outstanding as of January 31, 1997. These remaining $6.60 Warrants
expired unexercised on February 9, 1998.
Holdings also issued detachable Warrants to purchase 2,499 shares of
Holdings common stock at an exercise price of $6.50 per common share ("$6.50
Warrants") with the issuance of the Holdings Subordinated Debt in 1988. None of
the $6.50 Warrants were exercised and they all expired on February 19, 1998.
NOTE 10 - SPECIAL WRITE-OFFS
During 1998, the Company recorded a charge to earnings in the amount of
$706,000 associated with project costs incurred to implement new management
information systems. The project was discontinued during 1998 and the write-off
of purchased software, consulting fees and other related costs is reflected in
Selling, general and administrative expenses during 1998 in the accompanying
consolidated statements of income (loss).
During 1996, the Company recorded a charge to earnings in the amount of
$2,050,000 associated with costs incurred to significantly modify the format of
its pattern catalog and outsourcing the production of the pattern catalog. This
charge included the write-off of production equipment and raw material
inventory, severance costs, expenses for special color separations, and
production costs for duplicate pattern catalogs during the transition period and
is reflected in cost of sales during 1996 in the accompanying consolidated
statements of income (loss).
NOTE 11 - INCOME TAXES
Income (loss) before income taxes and extraordinary item for domestic
and foreign operations is as follows (000's omitted):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Pretax income:
Domestic $ 7,199 $(59,883) $(1,382)
Foreign (202) 803 904
-------- -------- -------
$ 6,997 $(59,080) $ (478)
======== ======== =======
</TABLE>
The following is a summary of the components of Income tax provision (benefit)
(000's omitted):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Current:
Federal $ 695 $ 872 $ 543
State and local 173 199 84
Foreign 236 271 272
------ ------- -------
Total Current $1,104 $ 1,342 $ 899
====== ======= =======
Deferred:
Federal $1,165 (372) $ (898)
State and local 181 (61) (146)
------ ------- -------
Total Deferred 1,346 (433) (1,044)
====== ======= =======
$2,450 $ 909 $ (145)
====== ======= =======
</TABLE>
18
<PAGE> 19
The Deferred income tax assets (liabilities) recorded on the
accompanying consolidated balance sheets as of January 31, are as follows (000's
omitted):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current:
Discard returns $ 375 $ 771
New design costs (Unicap) 462 457
Bad debt reserve 342 227
Vacation accrual 201 230
Deferred revenue (1,115) --
------- -------
Total current deferred income tax benefits $ 265 $ 1,685
------- -------
Long-term:
Management Benefit Plan $ 1,030 $ 745
Supplemental executive retirement plan 328 509
Postretirement benefits other than pensions 860 932
Accelerated depreciation (953) (1,131)
Other long-term liabilities 289 426
------- -------
Total long-term deferred income tax benefits $ 1,554 $ 1,481
------- -------
Total deferred tax benefits $ 1,819 $ 3,166
======= =======
</TABLE>
The Company's effective income tax rate for 1998, 1997 and 1996 differs
from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% (34.0%) (34.0%)
State and local income taxes, net
of federal benefit 3.1 .2 (9.1)
Write-off of goodwill -- 36.3 --
Impact of foreign operations 6.8 .7 37.7
Amortization of goodwill 2.9 .3 181.0
Amortization of organization costs (2.6) (.5) (90.6)
Interest expense (9.4) (1.1) (119.5)
Other, net .2 (.4) 4.2
------ ------ -------
Effective income tax rate 35.0% 1.5% (30.3%)
====== ====== =======
</TABLE>
The Company has foreign net operating loss carryforwards available to
offset future foreign taxable income of approximately $4,046,000. There are no
expiration dates applicable to these foreign net operating loss carryforwards
and a valuation allowance has been recorded to offset the tax benefit.
NOTE 12 - EXTRAORDINARY ITEM
The Restructuring, as more fully described in Notes 6 and 7, and
subsequent principal payments of the Senior Term Notes, has resulted in an
Extraordinary item : Recognition of unrecognized benefit during 1997 and 1996 of
$554,000 and $2,823,000, respectively.
19
<PAGE> 20
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Total payments made for warehouse, machinery and office space for 1998,
1997 and 1996 amounted to approximately $1,578,000, $1,584,000 and $1,770,000,
respectively.
Total payments to be made by the Company in the future for warehouse,
machinery and office space under various non-cancelable operating leases are as
follows (000's omitted):
Fiscal year ending January 31:
1999 $1,364
2000 1,333
2001 1,228
2002 1,191
2003 1,185
Thereafter 2,557
------
$8,858
======
The Company has an employment agreement with a key management employee
which provides for severance payments and the continuation of specified benefits
if the employee is terminated without cause. The estimated contingent liability
at January 31, 1998 under this agreement is approximately $668,000.
The Company had letters of credit outstanding at January 31, 1998 and
1997 totaling $2,520,000 and $2,695,000, respectively.
The Company has received proposed state tax assessments of
approximately $878,000 and a proposed audit adjustment for sales and use tax of
approximately $2,776,000. The Company has contested these proposed assessments
and adjustments and does not believe the outcome will have an adverse effect on
the financial position or results of operations of the Company.
The Company is a party to various actions and proceedings incidental to
its normal business. Liability in the event of a final adverse determination in
any of these matters, in the opinion of the Company, after review with outside
counsel, should not, individually or in the aggregate, have a material adverse
effect on the financial position or results of operations of the Company.
NOTE 14 - PENSION PLANS
The Company has two defined contribution retirement plans, which cover
substantially all full-time domestic employees. Company contributions to these
plans are at the discretion of the Board of Directors based upon the financial
performance of the Company and the cost of these plans during 1998, 1997 and
1996 were $652,000, $864,000 and $718,000, respectively.
20
<PAGE> 21
The Company maintains various other pension plans covering employees in
its foreign subsidiaries.
Pension expense for the Company's foreign defined benefit plans are
computed using the projected unit credit method as specified under SFAS No. 87.
The pension (income) expense for these plans is comprised of the following
components (000's omitted):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Service cost $ 69 $ 62 $ 74
Interest cost 383 357 391
Amortization of net assets (10) (53) (54)
Return on assets (558) (469) (403)
----- ----- -----
Net pension (income) expense $(116) $(103) $ 8
===== ===== =====
</TABLE>
In 1998 and 1997, the projected benefit obligation was determined using
an average discount rate of 7% and 8%, respectively, and the average long-term
compensation increase was assumed to be 5%. The unrecognized transition
liability is being amortized over 15 years. The average expected rate of return
on plan assets is 9% in 1998 and 1997. A summary of these plans is shown below
as of January 31, (000's omitted):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Actuarial present value of accumulated obligation,
including vested benefits of $5,722 and $4,993 in
1998 and 1997, respectively $ 5,752 $ 4,993
======= =======
Plan assets $ 6,139 $ 5,906
Actuarial present value of
projected benefit obligation $ 5,752 $ 4,993
------- -------
Surplus of plan assets as compared
to projected benefit obligation 387 913
Unrecognized net gain (loss) 144 (504)
Unrecognized prior service costs 21 25
Remaining unrecognized net asset (292) (355)
------- -------
Prepaid pension expense $ 260 $ 79
======= =======
</TABLE>
In 1992, the Company established a non-qualified defined contribution
Supplemental Executive Retirement Plan ("SERP") for certain key employees.
Benefits earned under this plan are generally determined as a percentage of each
participant's annual salary. The Company does not fund this plan. During 1998,
the Company changed from a gross value method to a discounted value method to
account for the SERP. As a result of this change, a credit of $631,000 was
recorded to earnings and Other long term liabilities were reduced by the same
amount in 1998.
Total expense for all retirement plans during 1998, 1997 and 1996 was
$951,000 (excluding the $631,000 credit in 1998 described above), $1,109,000 and
1,005,000, respectively.
21
<PAGE> 22
NOTE 15 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to providing pension benefits, the Company provides health
care benefits for eligible active and retired domestic union employees. These
plans are covered under collective bargaining agreements and are unfunded.
The Company provides continuing health care benefits to employees who
retire as a member of the 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. At age 65, the Company reimburses eligible
retirees a monthly defined amount as payment towards their Medicare premium.
This benefit is provided to the retirees for the remainder of their life.
Under new collective bargaining contracts that became effective January
31, 1997, employees who retire before age 65 are only eligible for the
reimbursement of the defined amount as payment towards the Medicare premium upon
reaching age 65 if they waived continuing coverage of health care benefits from
the date they retired until age 65.
Net postretirement benefit costs for 1998, 1997 and 1996, exclusive of
the transition obligation, are summarized as follows (000's omitted):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Service cost of benefits earned during the year $ 7 $ 11 $ 19
Interest cost on accumulated postretirement benefit
obligation ("APBO") 104 128 151
Amortization of Prior Service Cost (36) (36) --
Amortization of excess actuarial gain (56) (49) (81)
----- ----- -----
Net postretirement benefit cost $ 19 $ 54 $ 89
===== ===== =====
</TABLE>
The APBO as of January 31, are summarized as follows (000's omitted):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Retirees $1,138 $1,222
Active participants, fully eligible 996 1,085
Other participants 178 193
------ ------
Total APBO $2,312 $2,500
====== ======
</TABLE>
For measurement purposes, an 8.75% annual rate of increase for medical
costs was assumed for 1998 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% and 7.75% for 1998 and 1997, respectively.
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 the 1998 postretirement benefits valuation, would
have increased the APBO by 0.8% and service and interest costs by 1.2%.
22
<PAGE> 23
NOTE 16 - CONCENTRATION OF BUSINESS
The Company's five largest domestic retail customers represent
approximately 61%, 58% and 58% of the Company's consolidated net revenues for
1998, 1997 and 1996, respectively. In addition, the Company's two largest
domestic retail customers individually represent approximately 27% and 14% for
1998, 23% and 15% for 1997, and 24% and 16% for 1996, of consolidated net
revenues. The Company grants credit to its retail customers in the normal course
of business, and as of January 31, 1998, has accounts receivable from these
retail customers. The Company does not believe this situation represents a
material risk of loss to its financial position as of January 31, 1998.
NOTE 17 - WRITE-DOWN OF GOODWILL
Effective February 1, 1996, the Company changed from an "undiscounted
future cash flow" method to a "fair value" method, which management believes is
a more preferable method, to evaluate the recoverability of Goodwill in
accordance with APB No. 17. For purposes of determining fair value, the Company
received a fair value estimate which used a multiple of earnings before
interest, taxes, depreciation, and amortization. As a result of this change in
accounting estimate, a charge of $63,049,000 was recorded in 1997 and recurring
goodwill amortization was reduced by $1,952,000 during 1998 and 1997.
NOTE 18 - SPECIAL TRANSACTION
On March 19, 1998, the Company and one of its retail customers reached
a settlement with respect to credits previously issued by the Company and claims
made by the retail customer for new store openings and discontinued patterns
prior to January 31, 1998. The net impact of the settlement resulted in a
benefit to Net revenues and Income (loss) before income taxes and extraordinary
item of approximately $3,800,000 during 1998.
NOTE 19 - SUBSEQUENT EVENT
On June 10, 1998 Capital entered into a Stock Purchase Agreement (the
"Agreement") with Conso Products Company ("Conso") and various other parties,
including the holders of Capital's common stock, pursuant to which Conso
purchased all of the outstanding common stock of Capital for an aggregate
purchase price of $33,000,000 (the "Conso Acquisition"). The Agreement also
provided, with no additional consideration, for the full redemption,
cancellation and discharge of other securities and claims of Capital including
the Class A Preferred Stock, the Class B Preferred Stock, the Senior
Subordinated Notes, the Junior Subordinated Notes and the claims of participants
in a Management Benefit Plan. The Conso Acquisition subsequently closed on June
19, 1998 and Capital became a wholly owned subsidiary of Conso at that time. As
a result, the Company has no further obligations to the holders of the Senior
Subordinated Notes or the Junior Subordinated Notes after June 19, 1998.
In connection with the Conso Acquisition, the Company became a party to
a Modified and Restated Loan Agreement, along with Conso and a Conso subsidiary,
comprised of a $30,000,000 revolving loan, a $20,000,000 term loan, and
$3,000,000 available for letters of credit.
23
<PAGE> 24
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma unaudited consolidated financial statements as of
June 27, 1998 and for the year then ended present the effect of the acquisition
of Simplicity Capital Corporation ("Simplicity") by Conso Products Company
("Conso") on June 19, 1998 and related transactions. The pro forma unaudited
consolidated financial statements have been prepared using the purchase method
of accounting, whereby the total costs of the acquisition are allocated to the
tangible and intangible assets acquired and liabilities assumed based on their
respective fair values at the effective date of the acquisition. The pro forma
unaudited information is based on the historical financial statements of Conso
and Simplicity and on the assumptions and adjustments described below and in the
accompanying notes. The pro forma unaudited consolidated financial statements
do not reflect any other benefits anticipated by management as a result of the
acquisition or the implementation of Conso's business strategies for the newly
acquired operations, or the combined operations of Conso and Simplicity.
Historically, Simplicity prepared its financial statements on a fiscal
year ending on the last day of January of each year; interim reporting periods
ended on the last day of each month. For purposes of these pro forma unaudited
financial statements, the historical balance sheet data of Simplicity is as of
June 27, 1998, and the historical income statement data of Simplicity is for
the fiscal year ended June 27, 1998.
The pro forma unaudited consolidated balance sheet was prepared
assuming the acquisition occurred on June 27, 1998, and includes the effects of
the increase in debt, addition of Simplicity assets, assumption of Simplicity's
liabilities and changes in Simplicity's asset values that occurred as a result
of the acquisition, and related purchase accounting adjustments.
The pro forma unaudited consolidated statement of operations was
prepared assuming the acquisition occurred as of July 1, 1997, and includes the
effects on operations of the increase in debt, and changes in Simplicity's net
asset values that occurred as a result of the acquisition, and related purchase
accounting adjustments.
The pro forma unaudited consolidated financial statements may not be
indicative of the results that actually would have occurred if the acquisition
had been effective on the dates indicated or which may be obtained in the
future. The pro forma consolidated financial statements should be read in
conjunction with the financial statements of Simplicity contained elsewhere
herein.
24
<PAGE> 25
CONSO PRODUCTS COMPANY
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Consolidated
Conso Simplicity Simplicity Conso
Products Capital Capital Products
Company Corporation Pro Forma Corporation Company
Historical Historical Adjustments Pro Forma Pro Forma
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $71,861 $53,657 $53,657 $125,518
Cost of goods sold 46,592 26,766 ($398) (a) 26,368 72,960
--------------------------------------------------------------------------------------
Gross profit 25,269 26,891 398 27,289 52,558
Selling, general and
Administrative expenses:
Distribution expense 3,300 5,333 5,333 8,633
Selling expense 8,293 4,839 4,839 13,132
General and administrative
expense 4,717 11,392 (833) (b) 10,559 15,276
Amortization of intangible
assets - 596 71 (c) 667 667
Currency translation loss 26 - - 26
--------------------------------------------------------------------------------------
Total 16,336 22,160 (762) 21,398 37,734
--------------------------------------------------------------------------------------
Income from operations 8,933 4,731 1,160 5,891 14,824
--------------------------------------------------------------------------------------
Interest expense (income):
Interest expense 724 266 2,106 (d) 2,372 3,096
Interest income (115) - - (115)
--------------------------------------------------------------------------------------
Total 609 266 2,106 2,372 2,981
--------------------------------------------------------------------------------------
Income before income taxes 8,324 4,465 (946) 3,519 11,843
--------------------------------------------------------------------------------------
Income taxes
Income tax provision before
credits 2,814 1,564 20 (e) 1,584 4,398
Net Jobs Tax Provision -
current 478 - - 478
--------------------------------------------------------------------------------------
Total income tax
provision 3,292 1,564 20 1,584 4,876
--------------------------------------------------------------------------------------
Net income $ 5,032 $ 2,901 ($ 966) $ 1,935 $ 6,967
--------------------------------------------------------------------------------------
Net income per share $ .68 $ .39 ($ .13) $ .26 $ .94
--------------------------------------------------------------------------------------
</TABLE>
See Notes to Pro Forma Unaudited Consolidated Financial Statements
25
<PAGE> 26
CONSO PRODUCTS COMPANY
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JUNE 27, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Consolidated
Conso Simplicity Simplicity Conso
Products Capital Capital Products
Company Corporation Pro Forma Corporation Company
Historical Historical Adjustments Pro Forma Pro Forma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 267 $ 2,066 $ 2,066 $ 2,333
Trade accounts receivable, net of
allowances for bad debts and
customer deductions 12,445 10,310 10,310 22,755
Inventories 25,007 4,667 $ 684 (a) 5,351 30,358
Deferred income taxes - current
portion 423 1,227 (253) (b) 974 1,397
Prepaid expenses and other 656 3,124 3,124 3,780
------------------------------------------------------------------------------------
Total current assets 38,798 21,394 431 21,825 60,623
------------------------------------------------------------------------------------
INVESTMENTS:
Investment in Simplicity 33,600 - (33,600) (c) (33,600) -
------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land 1,255 200 200 1,455
Building and improvements 13,314 1,800 1,800 15,114
Machinery and equipment 17,445 8,795 (2,449) (d) 6,346 23,791
------------------------------------------------------------------------------------
Total 32,014 10,795 (2,449) 8,346 40,360
Accumulated depreciation (10,599) - - (10,599)
------------------------------------------------------------------------------------
Total property and equipment, net 21,415 10,795 (2,449) 8,346 29,761
------------------------------------------------------------------------------------
DEFERRED ASSETS
Intangible assets - 16,713 3,654 (e) 20,367 20,367
Deferred tax assets 896 1,631 746 (b) 2,377 3,273
Other non-current assets 318 1,350 1,350 1,668
------------------------------------------------------------------------------------
Total deferred assets 1,214 19,694 4,400 24,094 25,308
------------------------------------------------------------------------------------
TOTAL ASSETS $95,027 $51,883 ($31,218) $ 20,665 $115,692
------------------------------------------------------------------------------------
</TABLE>
See Notes to Pro Forma Unaudited Consolidated Financial Statements
26
<PAGE> 27
CONSO PRODUCTS COMPANY
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JUNE 27, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Consolidated
Conso Simplicity Simplicity Conso
Products Capital Capital Products
Company Corporation Pro Forma Corporation Company
Historical Historical Adjustments Pro Forma Pro Forma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 558 $ - $ - $ 558
-
Current maturities of long-term debt 2,104 - - 2,104
Trade accounts payable 3,273 4,289 4,289 7,562
Accrued liabilities 3,737 5,196 $1,500 (f) 6,696 10,433
Income taxes payable 273 1,637 (852) (b) 785 1,058
Other current liabilities - 3,911 3,911 3,911
------------------------------------------------------------------------------------
Total current liabilities 9,945 15,033 648 15,681 25,626
------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES:
Long-term debt 42,508 - - 42,508
Subordinated debt due 2000 - 70,077 (70,077) (g) - -
Management benefit plan - 2,765 (2,765) (h) - -
Deferred income taxes 484 - - 484
Other non-current liabilities - 4,132 852 (i) 4,984 4,984
------------------------------------------------------------------------------------
Total non-current liabilities 42,992 76,974 (71,990) 4,984 47,976
------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock (no par, 10,000,000
shares authorized, no shares
issued) - - - -
Common stock (no par, 50,000,000
shares authorized, 7,324,412
issued in 1998) 15,619 2 (2) (j) - 15,619
Warrants to purchase common stock - 17 (17) (j) - -
Paid-in-capital - 34,866 (34,866) (j) - -
Retained earnings 25,760 (74,450) 74,450 (j) - 25,760
Cumulative translations gain 711 (559) 559 (j) - 711
------------------------------------------------------------------------------------
Total shareholders' equity 42,090 (40,124) 40,124 - 42,090
------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $95,027 $51,883 ($31,218) $20,665 $115,692
------------------------------------------------------------------------------------
</TABLE>
See Notes to Pro Forma Unaudited Consolidated Financial Statements
27
<PAGE> 28
Notes to Pro Forma Unaudited Consolidated Financial Statements:
Notes to Pro Forma Unaudited Consolidated Statement of Operations for
the Fiscal Year Ended June 27, 1998:
(a) Pro forma reduction of depreciation expense of $1,081,686 associated with
a reduction in the book basis of property, plant and equipment to fair
market value offset by an increase of $684,000 associated with the
write-up of finished goods inventory which would have been sold during the
period.
(b) Pro forma reduction in expense related to the disposition of the
Management Benefit Plan concurrent with the acquisition. The primary
recipient of such plan is no longer with the combined Company.
Additionally, the combined Company does not have and there are no plans
to have a similar type plan.
(c) Pro forma increase in amortization of $71,000 to $667,000 associated with
additional intangible assets recorded in accordance with purchase
accounting.
(d) Pro forma adjustments to reduce interest expense $336,000 relating to
subordinated notes paid off in the acquisition and to increase interest
expense $2,442,000 for additional borrowings used to fund the acquisition.
(e) Pro forma tax adjustments to adjust the tax provision to the expected
ongoing rate of 38%.
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Notes to Pro Forma Unaudited Consolidated Financial Statements (continued):
Notes to Pro Forma Unaudited Consolidated Balance Sheet as of
June 27, 1998:
(a) Write-up of finished goods inventory to fair market value less direct
disposition costs.
(b) Tax effect of certain pro forma adjustments.
(c) Elimination of investment in Simplicity account for purposes of
consolidation.
(d) Write-down of fixed assets to fair market value.
(e) Write-up of intangible asset (goodwill) for remaining purchase price,
after adjusting assets acquired and liabilities assumed to fair market
value.
(f) Accrual of additional one-time costs of $1,500,000 which includes
approximately $1,200,000 of involuntary employee severance costs and
approximately $300,000 of costs associated with closing duplicate
facilities.
(g) Elimination of the Subordinated debt due in the year 2000, as a result
of the redemption as a part of the purchase transaction.
(h) Extinguishment of the Management Benefit Plan, as a result of payouts
in connection with the acquisition.
(i) Record additional liabilities for a tax benefit payable to the
recipients of the Management Benefit Plan payout (see note (h) above)
upon the realization by the company of a future tax deduction
associated with such payout.
(j) Elimination of historical equity accounts, including warrants expiring
unexercised and cumulative translation adjustment, in accordance with
purchase accounting.
29
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EXHIBIT 23
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K, into the Company's
previously filed Registration Statements on Form S-8 (Registration Nos.
333-20671, 33-97146 and 33-85518).
/s/ Arthur Andersen LLP
New York, NY
September 3, 1998
30
