<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 October 2, 1999
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 INTERNATIONAL CORPORATION
------------------------------------------------------
(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)
N/A
----------------------------------------------------
(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 November 12, 1999:
Common Stock, no par value 7,335,925 shares.
Page 1 of 15 pages
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
October 2, 1999 and July 3, 1999 3
Consolidated Statements of Operations (unaudited) for the
three months ended October 2, 1999 and September 26, 1998 4
Consolidated Statement of Shareholders' Equity (unaudited)
for the three months ended October 2, 1999 5
Consolidated Statements of Cash Flows (unaudited) for the
three months ended October 2, 1999 and September 26, 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
Page 2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
October 2, 1999 July 3, 1999
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,025,000 $ 1,671,000
Accounts receivable, net of allowances for
bad debts and customer deductions of
$1,293,000 and $1,190,000 at October 2, 1999
and July 3, 1999, respectively 17,039,000 22,009,000
Inventories (Note 3) 32,760,000 30,657,000
Deferred income taxes - current portion 2,040,000 1,947,000
Prepaid expenses and other 3,135,000 2,689,000
------------- -------------
Total current assets 56,999,000 58,973,000
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 1,574,000 1,539,000
Buildings and improvements 17,870,000 17,338,000
Machinery and equipment 26,809,000 26,996,000
------------- -------------
Total 46,253,000 45,873,000
Accumulated depreciation (14,223,000) (13,788,000)
------------- -------------
Total property and equipment, net 32,030,000 32,085,000
------------- -------------
OTHER ASSETS:
Intangible assets, net 20,634,000 20,740,000
Deferred income taxes 632,000 1,032,000
Deferred costs and other assets 285,000 549,000
------------- -------------
Total other assets 21,551,000 22,321,000
------------- -------------
TOTAL ASSETS $ 110,580,000 $ 113,379,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 732,000 385,000
Current maturities of long-term debt 2,000,000 2,000,000
Trade accounts payable 5,715,000 5,314,000
Accrued liabilities 8,577,000 13,088,000
------------- -------------
Total current liabilities 17,024,000 20,787,000
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt - revolving line 24,044,000 23,908,000
Long-term debt - note payable 15,500,000 16,000,000
Deferred income taxes -- 244,000
Other noncurrent liabilities 4,656,000 4,638,000
------------- -------------
Total noncurrent liabilities 44,200,000 44,790,000
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock (no par, 10,000,000 shares
authorized, no shares issued) -- --
Common stock (no par, 50,000,000 shares
authorized, 7,336,000 and 7,324,000
shares issued and outstanding October 2, 1999
and July 3, 1999, respectively) 16,606,000 16,596,000
Retained earnings 32,064,000 30,728,000
Accumulated other comprehensive income 686,000 478,000
------------- -------------
Total shareholders' equity 49,356,000 47,802,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 110,580,000 $ 113,379,000
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
Page 3
<PAGE> 4
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
NET SALES $ 27,341,000 $ 29,388,000
COST OF GOODS SOLD 16,200,000 17,912,000
---------------------------------------
GROSS MARGIN 11,141,000 11,476,000
---------------------------------------
OPERATING EXPENSES:
Distribution expense 2,062,000 2,405,000
Selling expense 2,534,000 2,759,000
General and administrative expense 3,087,000 3,237,000
Currency exchange loss (gain) 19,000 35,000
Intangibles amortization 226,000 179,000
---------------------------------------
Total 7,928,000 8,615,000
INCOME FROM OPERATIONS 3,213,000 2,861,000
INTEREST EXPENSE, NET 656,000 755,000
---------------------------------------
INCOME BEFORE INCOME TAXES 2,557,000 2,106,000
INCOME TAX PROVISION (Note 5) 1,126,000 665,000
---------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ 1,431,000 $ 1,441,000
---------------------------------------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAX) (95,000)
---------------------------------------
NET INCOME $ 1,336,000 $ 1,441,000
---------------------------------------
NET INCOME PER SHARE-BASIC AND DILUTED:
(Note 6)
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
Basic $ 0.20 $ 0.20
Diluted $ 0.20 $ 0.20
NET INCOME
Basic $ 0.18 $ .20
Diluted $ 0.18 $ .20
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 7,335,000 7,383,000
Diluted 7,335,000 7,384,000
</TABLE>
See notes to unaudited consolidated financial statements
Page 4
<PAGE> 5
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Accumulated
Stock Common Other
Shares Stock Retained Comprehensive Comprehensive
Issued Amount Earnings Income Total Income (Loss)
------ ------ -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 3, 1999 7,334,177 $16,596,000 $30,728,000 $ 478,000 $47,802,000
Shares issued for directors fees 1,748 10,000 10,000
Net income 1,336,000 1,336,000 1,336,000
Foreign currency translation adjustment 208,000 208,000 208,000
Balance at October 2, 1999 7,335,925 $16,606,000 $32,064,000 $ 686,000 $49,356,000
Comprehensive income for the quarter ended October 2, 1999 $1,544,000
</TABLE>
See notes to unaudited consolidated financial statements
Page 5
<PAGE> 6
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash received from customers $ 32,426,000 $ 29,700,000
Cash paid to suppliers and employees (28,668,000) (28,075,000)
Interest paid (688,000) (138,000)
Interest received 32,000 169,000
Income taxes paid (1,270,000) (523,000)
------------ ------------
Net cash provided by operating activities 1,832,000 1,133,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (458,000) (939,000)
Construction and equipment purchased for
Mexican facility and computer design equipment (258,000) (484,000)
Redemption of certificates of deposit -- 1,350,000
Costs of acquisitions/organization expenses (297,000) 32,000
------------ ------------
Net cash used in investing activities (1,013,000) (41,000)
------------ ------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (745,000) (2,593,000)
Proceeds from issuance of common stock 10,000 9,000
Net borrowing on short term debt 328,000 (161,000)
Translation adjustment (58,000) (67,000)
------------ ------------
Net cash provided by (used in) financing activities (465,000) (2,812,000)
------------ ------------
DECREASE IN CASH 354,000 (1,720,000)
CASH AT:
BEGINNING OF PERIOD 1,671,000 2,333,000
END OF PERIOD $ 2,025,000 $ 613,000
============ ============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 1,336,000 $ 1,441,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 973,000 748,000
Amortization of intangibles 226,000 193,000
Provision for deferred taxes -- (129,000)
Currency translation gain -- 35,000
Cumulative effect of change in accounting principle 95,000 --
Changes in assets and liabilities:
Accounts receivable 5,085,000 (289,000)
Inventory (1,736,000) 56,000
Prepaid expenses and other (429,000) (8,000)
(93,000) --
670,000 --
Trade accounts payable 353,000 (1,254,000)
Accrued liabilities (4,293,000) 340,000
Other non current liabilities (355,000) --
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 1,832,000 $ 1,133,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
Page 6
<PAGE> 7
CONSO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
October 2, 1999
1. CONSOLIDATION AND NEW ACCOUNTING STANDARDS
The financial statements are unaudited and include the accounts of Conso
International Corporation (the "Company"), and its wholly-owned subsidiaries,
Simplicity Capital Corporation and its subsidiaries ("Simplicity"), British
Trimmings Limited and its subsidiaries ("BT"), India Trimmings Limited, and
Conso's majority-owned subsidiary Val-Mex, S.A. de C.V.
The British Trimmings Limited and Simplicity's foreign subsidiaries' 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 exchange rates. The resulting
currency translation adjustments are accumulated and included in other
comprehensive income. From time to time the US parent company loans or is loaned
amounts from its foreign subsidiaries. The Company's policy is that such amounts
are repayable in the functional currency of the subsidiary. Translation gains
and losses and all exchange gains and losses on realized foreign currency
transactions are included in the results of operations. The India Trimmings and
Val-Mex subsidiaries' operations are not significant in relation to the
Company's operations. All material inter-company accounts and transactions and
profit and loss on inter-company transactions are eliminated in consolidation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which was effective for the Company for the
fiscal year beginning June 28, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments in its fiscal year
end financial reports. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision-maker to allocate resources
and assess performance. For the Company, the operating segments are Conso US,
Simplicity and BT. Segment information is found in Note 7.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. It requires that entities recognize all derivatives as either assets
or liabilities on the balance sheet and measure those instruments at fair value.
The accounting for changes in fair value of the derivative (i.e., gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company has not yet quantified the impact of implementing this
standard.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1), which gives guidance on accounting for the costs of computer software
developed or purchased for internal use. SOP 98-1 requires external and internal
direct costs of developing or obtaining internal use software to be capitalized
as an asset and also requires training costs and research and development costs
to be expensed. The Company does not expect the adoption of this standard to
have a material impact on the Company's financial position or operations.
In April 1998 the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-up Activities" (SOP 98-5). SOP 98-5 is effective for fiscal years
beginning after January 1, 1999, and requires that start-up/organization costs
capitalized prior to January 1, 1999 be written off and that future costs be
expensed as incurred. The Company has adopted this standard effective July 4,
1999. The cumulative effect of adopting this resulted in a charge of $95,000,
net of tax, which primarily was attributable to start-up costs to establish
India Trimmings Limited.
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months ended
October 2, 1999 and September 26, 1998 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
July 1, 2000. See note 1 to the consolidated financial statements for the year
ended July 3, 1999, for disclosure of significant accounting policies followed
by the Company.
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 first quarter of fiscal 2000 includes
13 weeks. Certain previously reported amounts have been reclassified to conform
to the current year presentation.
Page 7
<PAGE> 8
3. INVENTORIES
The composition of inventories at October 2, 1999 and July 3, 1999 was as
follows:
October 2, 1999 July 3, 1999
--------------- ------------
Raw Materials $ 9,462,000 $9,034,000
Work-In-Process 5,627,000 5,131,000
Finished Goods 19,312,000 17,973,000
Reserves (1,641,000) (1,481,000)
----------- -----------
Totals $32,760,000 $30,657,000
=========== ===========
4. LONG-TERM DEBT -- NOTE PAYABLE
Effective November 1998, the Company converted its fixed rate on its term
loan with Bank of America (at 7.4%) to a floating rate at 90-day LIBOR plus
1.45%. Concurrently, the Company entered into a $19.5 million interest rate swap
with Bank of America for a 5-year term which effectively fixes the Company's
interest rate on the term loan at 6.75%. The interest rate swap accomplishes
this rate reduction while avoiding the costs of refinancing the term loan. The
interest rate swap includes a "mark-to-market" provision should the Company
elect to terminate the swap prior to maturity.
5. INCOME TAXES
The Company did not write off any Jobs Tax Credit in the first quarter since
employment levels in South Carolina did not decrease.
6. STOCK OPTIONS
On September 5, 1995, September 5, 1996, September 5, 1997, and August 21,
1998 the Company granted options to certain key employees to purchase an
aggregate of 93,600, 79,500, 21,000, and 46,000 shares, respectively, of the
Company's common stock under its Stock Option Plan established in December 1993.
The options were granted at $6.67, $11.00, $10.30, and $7.00 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 stock splits.
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
-------------------------------------
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Net income - before change in
accounting principle $ 1,431,000 $ 1,441,000
Less compensation per SFAS 123 (16,000) (23,000)
----------- -----------
Net income - before change in
accounting principle as proforma $ 1,415,000 $ 1,418,000
=========== ===========
Net income per share - before change in
accounting principle as reported $ 0.20 $ 0.20
=========== ===========
Net income per share - before change in
accounting principle as proforma $ 0.19 $ 0.19
=========== ===========
Net income per share - before change in
accounting principle assuming
dilution - as reported $ 0.20 $ 0.20
=========== ===========
Net income per share - before change in
accounting principle assuming dilution -
as proforma $ 0.19 $ 0.19
=========== ===========
Weighted average number of shares
outstanding 7,335,000 7,383,000
Options assumed to be exercised 76,000
Shares assumed to be repurchased (75,000)
Weighted average number of shares
outstanding - assuming dilution $ 7,335,000 7,384,000
=========== ===========
</TABLE>
Page 8
<PAGE> 9
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:
<TABLE>
<CAPTION>
FY 2000 FY 1999 FY 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield None None None
Expected stock price volatility .80 .56 .38
Risk-free interest rate 5.95% 4.59% 5.81%
Expected life of options 3.2 years 3.2 years 3.2 years
Weighted average fair values of options granted -- $3.00 $4.36
</TABLE>
7. SEGMENT REPORTING
Segment reporting under SFAS 131, "Disclosure about Segments of an Enterprise
and Related Information," requires that certain segment and geographical
information be disclosed. The Company views Conso US, BT and Simplicity as its
main segments. The segment information is as follows (in thousands):
<TABLE>
<CAPTION>
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Net sales to unaffiliated customers
British Trimmings 3,354 4,135
Conso US 13,430 12,747
Simplicity 10,557 12,506
------ ------
27,341 29,388
------ ------
Operating income
British Trimmings (269) (215)
Conso US 2,376 2,144
Simplicity 1,106 932
----- ---
3,213 2,861
----- -----
Noncurrent assets
British Trimmings 4,846 5,749
Conso US 18,248 18,366
Simplicity 30,328 30,597
------ ------
53,422 54,712
------ ------
Capital spending
British Trimmings 2 100
Conso US 622 1,138
Simplicity 92 185
-- ---
716 1,423
--- -----
Depreciation and Amortization
British Trimmings 273 249
Conso US 387 321
Simplicity 539 371
--- ---
1,199 941
----- ---
Interest expense (income), net
British Trimmings 190 252
Conso US (27) (96)
Simplicity 493 599
--- ---
656 755
--- ---
</TABLE>
Simplicity has two customers who account for greater than ten percent of its
revenue. The percentage of these customers has not changed significantly since
year end. The geographical information has not changed significantly from the
information provided in the annual report.
8. SUBSEQUENT EVENT
On October 5, 1999, the Company entered into a definitive merger agreement
under which an investor group including Conso's senior management and Citicorp
Venture Capital, Ltd., will acquire Conso for $9.00 per share. Under this
proposed transaction, each share of Conso's common stock (other than a portion
of the shares held by Conso's Chairman and CEO) would be converted into a right
to receive $9.00 in cash. This proposed transaction is subject to customary
terms and conditions, including approval by the Company's shareholders and the
receipt of funding under financing commitments. This proposed transaction is
expected to be completed in early 2000.
9. DISPOSITION OF BUSINESS
In August 1999 the Company sold the fabric segment of Simplicity's UK
subsidiary to its former managing director. No gain or loss is recognized as the
assets were sold at their net book value. The fabric segment of Simplicity's UK
operation generated approximately $1.2 million in annual revenues and therefore
was not material to the Company as a whole.
Page 9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes, and with the Company's Annual
Report on Form 10-K for the fiscal year ended July 3, 1999, including the
financial information and management's discussion contained or incorporated by
reference therein.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED OCTOBER 2, 1999 COMPARED TO THE
QUARTER ENDED SEPTEMBER 26, 1998.
Net sales for the quarter ended October 2, 1999 were $27.3 million, down from
fiscal 1999's first quarter by $2.0 million or 7.0%. Simplicity's net sales were
down $1.9 million or 15.6%. British Trimmings' ("BT") net sales were down $0.8
million or 18.9% from $4.1 million. Conso US' net sales were up $0.7 million or
5.4%.
Sales for the first quarter by customer type were as follows (in thousands):
<TABLE>
<CAPTION>
Compared to the Quarter
Amount % of Net Sales Ended September 26, 1998
------ -------------- ------------------------
<S> <C> <C> <C>
Manufacturers - Conso US and BT $ 7,511 27.5% up 12.1%
Distributors - Conso US and BT 6,597 24.1 down 8.3
Retailers - Conso US and BT 2,676 9.8 down 10.4
Manufacturers - Simplicity 479 1.8 up 11.9
Distributors - Simplicity 62 .2 down 58.9
Retailers - Simplicity 10,016 36.6 down 16.0
------- -----
Total $27,341 100.0% down 7.0%
======= =====
</TABLE>
Sales to manufacturers for Conso US and BT increased 12.1% overall in the
first quarter. Sales to manufacturers by Conso US' and BT were up 16.6% in the
US and down 11.9% in the UK. In the UK, sales to manufacturers and other
customer groups continue to be hampered by the strength of the British pound
against foreign competitors' currencies, and a weak UK economy. The prior year's
dyehouse problems at Conso US have been rectified and a major competitor
temporarily realigned its production to service a retail customer causing Conso
US' sales to manufacturers to increase.
Sales to distributors for Conso US and BT were down 8.3%. Conso US sales to
distributors were down 0.4%. British Trimmings sales were down 21.7%. The
weakness in sales at BT was due to a drop in sales to reupholster wholesalers,
and price pressure from suppliers in Spain and Belgium due to a strong British
Pound.
Sales to retailers for Conso US and British Trimmings were down 10.4%. Conso
US was down 9.2% while British Trimmings was down 18.3%. The reason for the
decline at Conso US stems from lost revenue due to the bankruptcy of a regional
customer, and softness at Conso's largest retail customer. BT's sales to
retailers were down due to the weak UK economy.
Sales to retailers for Simplicity comprise 95% of its total sales. Sales to
retailers were down 16%. This decline is attributable primarily to strategic
changes with respect to the amount of new pattern collections issued during the
first quarter compared to the same period last year and disposition of the
fabric distribution business in the UK, both of which also resulted in
significant reductions in cost of goods sold. The decline in net sales was also
adversely impacted by the loss of pattern sales to a large regional retail
customer that went into bankruptcy immediately before the first quarter of this
year, a timing variance on an important pattern promotion, and pattern shipments
to newly renovated stores during the first quarter of last year that did not
occur this year.
Page 10
<PAGE> 11
Comparable international sales outside the US and UK (the Company's primary
sales regions), for the first quarter decreased 22.2% to $3.0 million from $3.8
million as detailed below:
<TABLE>
<CAPTION>
Compared to the Quarter
Conso US and British Trimmings Amount % of Net Sales Ended September 26, 1998
------ -------------- ------------------------
<S> <C> <C> <C>
Western Hemisphere $ 928 3.4% down 26.1%
Europe and Middle East 461 1.7% down 33.3%
Pacific Rim 295 1.1% down 13.9%
------ ----
Total $1,684 6.2% down 26.4%
Simplicity
Western Hemisphere $ 492 1.7% down 10.9%
Europe and Middle East 69 .3% down 77.2%
Pacific Rim 741 2.7% up 6.9%
------ ----
Total $1,302 4.7% down 15.9%
------ ----
Company Total $2,986 10.9% down 22.2%
====== ====
</TABLE>
The reasons for the overall decline in international sales are as follows:
Europe continues to be negatively affected by competition in those areas; the
strength of the British pound against the competitors' currencies; the Pacific
Rim continues to be negatively impacted by the recent changes in currency values
and other economic problems of that region; Canadian sales in the prior year
included the benefit of a new program with a major customer.
The gross margin as a percentage of net revenues increased to 40.7% from
39.1%, an increase of 1.6%. Conso US' gross margin remained flat at 38.8%.
Simplicity's gross margin increased from 45.1% to 49.9% of net revenues. This
increase in gross margin is attributable to the timing associated with new
pattern issue shipments and a purchase accounting adjustment that was required
last year to increase purchased inventory from cost to fair market value. BT's
gross margin declined slightly from 20.9% to 19.7% of net revenues. BT's gross
margin declined due to lower revenues which resulted in less overhead
absorption.
Simplicity has one customer, Wal-Mart Stores, Inc. ("Wal-Mart"), that
represented approximately 12% of the consolidated net revenues of the Company
for fiscal 1999. In September 1999, the Company and Wal-Mart renegotiated the
principal trade terms of their relationship effective January 2000. Under the
new arrangement, Simplicity will retain ownership of the pattern inventory in
Wal-Mart stores and Wal-Mart will remit payment for the patterns at the time it
sells them to its customers. The Company estimates that on an annualized basis
its net revenues will be reduced by approximately $650,000 and its expenses will
be increased by approximately $350,000, resulting in a reduction in its
after-tax net income of approximately $620,000. The Company has taken action and
has made plans for future actions at Simplicity to offset the negative financial
effects of this new arrangement when it goes into effect in January 2000,
including cost reductions, new programs to increase unit sales volume and
advertising income, and price increases. The new arrangement and other trade
terms will be subject to renegotiations or termination by either party at any
time under Wal-Mart's normal vendor agreement.
Distribution expenses decreased $343,000 or 14.3% from $2,405,000 to
$2,062,000. The primary reason for the decrease was the timing of the shipments
of Simplicity's new issue patterns and related catalogs and the disposition of
Simplicity's fabric business in the UK. Both Conso US' and BT's distribution
expense remained at 4.2% and 6.6%, respectively, as a percentage of net sales
compared to last year's first quarter.
Selling expenses declined $225,000 from $2,759,000 to $2,534,000 or 8.2%.
Overall this reduction is a result of the consolidation efforts due to the
acquisition of Simplicity in June 1998. Additionally, Simplicity's selling
expenses were reduced due to the disposition of its UK fabric business. Conso US
selling expenses were down $17,000 or 1.2% while BT's selling expenses were down
$32,000 or 6.3%.
General and administrative expenses (including amortization and currency
exchange loss) decreased $120,000 or 3.5%, from $3,451,000 to $3,332,000. The
reason for this decline stems from cost cutting efforts at BT and the
consolidation efforts associated with the acquisition of Simplicity in June
1998. As a percentage of sales, however, general and administrative expenses
increased from 11.7% to 12.2%. Conso US' general and administrative cost
remained flat at $882,000. Simplicity's general and administrative expenses
declined $53,000 or 2.3%. BT's general and administrative expenses decreased
$66,000 or 22.1%.
Operating income increased $352,000 or 12.3% primarily as a result of lower
operating costs. Conso US operating income increased $232,000 or 10.8%,
Simplicity's operating income increased $174,000 or 18.7%. BT's operating income
decreased $54,000 or 25.1%.
Interest expense decreased by $99,000 or 13.1% due to the scheduled
repayments on the term loan and the effect of the interest rate swap entered
into in the second quarter of last year.
Net income declined by $105,000 or 7.3% as a result of higher income tax
expense and a cumulative effect of accounting change. The first quarter of last
year benefited from an income tax credit associated with the acquisition of
Simplicity while the current year did not, resulting in relatively higher income
tax expense. The Company adopted SOP 98-5, causing a write-off in the first
quarter of fiscal 2000 of $95,000, net of tax, for start-up and organizational
costs primarily related to India Trimmings.
Page 11
<PAGE> 12
LIQUIDITY, CAPITAL RESOURCES AND YEAR 2000
The Company has generally been able to finance its operations and capital
requirements through internally generated funds and bank borrowings. Bank
borrowings were increased in June 1998 to finance the purchase of Simplicity. As
of the end of the first quarter, credit line availability was approximately $6.0
million under the Company's revolving loan facility and approximately $1 million
under the letters of credit facility.
In November 1998, the Company effectively fixed the interest rate under its
term loan at 6.75% until the maturity of the term loan. Borrowings under the
revolving loan facility bear interest at 1.5% over the floating 30-day LIBOR
rate (6.9% as of October 2, 1999).
Operating cash flow for the first quarter of fiscal 2000, compared to the
first quarter of fiscal 1999 increased $699,000, from $1,133,000 to $1,832,000
due to a reduction in the level of accounts receivable, somewhat offset by an
increase in inventory and a reduction in accrued liabilities.
Capital expenditures for the first quarter of fiscal 2000 were $716,000. The
significant expenditures were for the warehouse expansion at Val-Mex ($235,000);
building and improvements at Conso US ($105,000); computers and office equipment
at Conso US ($115,000); electronic catalog equipment at Simplicity ($23,000).
The Company has budgeted a total of $5.7 million for capital expenditures for
fiscal 2000. Of this $3.2 million is for the acquisition of new facilities in
Juarez, Mexico and $0.5 million for facilities in Coimbatore, India.
In 1997, Conso US and BT developed a five-phase program for addressing the
Y2K issues and to assure information and other systems compliance. Simplicity
conducted a similar program for addressing Y2K issues. The Company has completed
all phases of its Y2K program except for the implementation phase of a financial
system at its Sydney, Australia facility, and believes its systems are Y2K
compliant in all material respects. The implementation in Sydney is scheduled to
be completed by November 1999. The Company's main contingency plan is to use
additional labor to overcome any Y2K issues which were either unforeseen or for
which modifications did not adequately solve. The use of extra labor would
negatively affect the Company's earnings during the period(s) that it was
needed.
The Company has surveyed its major vendors and customers for their Y2K
readiness. The Company believes that it will not suffer any material disruptions
to its business as a result of its vendors and customers not being Y2K compliant
based on their responses.
The Company believes that cash generated by operations and available for
borrowings under lines of credit will be adequate to fund its working capital
and capital expenditure requirements (including requirements to address the Y2K
issues) for the foreseeable future, excluding possible acquisitions of other
businesses.
RECENT DEVELOPMENTS
On October 5, 1999, the Company entered into a Merger Agreement (the "Merger
Agreement") with CIC Acquisition Co. ("Parent") and CIC Acquisition Sub, Inc.
("Acquisition Sub"). Parent and Acquisition Sub are corporations newly formed by
an investor group that includes J. Cary Findlay, the Company's Chairman and
Chief Executive Officer, other members of the Company's management and Citicorp
Venture Capital, Ltd. Pursuant to the Merger Agreement and the related Plan of
Merger, and subject to shareholder approval and other closing conditions,
Acquisition Sub will be merged with and into the Company with the Company
continuing as the surviving corporation (the "Merger"). In the Merger, each
outstanding share of the Company's Common Stock (except for a portion of J. Cary
Findlay's shares, which would be converted to equity in the surviving
corporation) would be converted into the right to receive $9.00 per share in
cash.
The Company's Board of Directors has approved the Merger Agreement and the
transactions contemplated thereby, in accordance with the recommendation of a
Special Committee of outside directors. The proposed transaction is subject to
various conditions, including approval by the Company's shareholders, regulatory
approvals, receipt of funding under financing commitments, and other customary
closing conditions. The financing commitments obtained by the investor group are
also subject to customary closing conditions.
J. Cary Findlay has entered into a Support Agreement with Acquisition Sub
dated as of October 5, 1999 pursuant to which he has agreed, subject to certain
conditions, to vote all shares of the Company's common stock owned directly by
him, representing approximately 39.1% of the Company's Common Stock in favor of
the Merger. The Company currently anticipates that a special meeting of
shareholders to approve the Merger will be held in January 2000 and that the
Merger, if approved by the Company's shareholders, would be effected shortly
after the meeting.
CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION
Statements contained in this report as to the Company's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts and
other projections of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for the future operations
are "forward looking" statements, and are being provided in reliance upon the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Important factors that could cause actual results or events to differ
materially from those projected, estimated, assumed or anticipated in any such
forward looking statements include, without limitation: adverse results in any
litigation to which the Company is or becomes a party; adverse changes in the
Company's relationships with significant customers; general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, especially in the United States and the United Kingdom
but also including other areas of the world where the Company markets or
manufactures its products; changes in consumer fashion preferences for home
sewing products and finished products in the
Page 12
<PAGE> 13
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 or pattern businesses; the
Company's ability to successfully continue its international expansion and to
successfully integrate into its operations any existing businesses it may
acquire; changes in the cost and availability of raw materials; changes in
governmental regulations applicable to the Company's businesses; 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 and/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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Page 13
<PAGE> 14
PART II OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
On October 18, 1999, a putative class action complaint was filed in the South
Carolina Court of Common Pleas by the Wrape Family Charitable Trust, alleged to
be a shareholder of the Company, against the Company and its directors. The
plaintiff alleges, among other things, that the directors have breached their
fiduciary duties to the Company's public shareholders by facilitating certain
insiders' acquisition of the publicly-held shares of the company, to the
exclusion of all other potential bidders, for unfair and inadequate
consideration. The complaint seeks preliminary and permanent relief, including
injunctive relief, (a) declaring that the defendants have committed or
participated in a gross abuse of trust and have breached their fiduciary duties
or aided and abetted such breaches, (b) declaring the Merger unlawful, (c)
enjoining the Merger, and if it is consummated, rescinding the Merger, (d)
requiring the directors to abide by and uphold their fiduciary responsibilities
in selling the Company and requiring them to fully insulate themselves from any
conflict of interest that would interfere with their duties and (e) awarding the
plaintiff and the class compensatory damages and/or rescissory damages as well
as awarding the plaintiff attorneys' and experts' fees. Management believes that
this claim is without merit and that it will not have a material adverse effect
on the Merger or on the Company's financial condition, results of operations or
liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 8, 1999, the Company filed a Current Report on Form 8-K in
which it reported, pursuant to item 5 thereof, that it had entered into
a Merger Agreement, dated as of October 5, 1999 with CIC Acquisition
Co. and CIC Acquisition Sub, Inc.
Page 14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSO INTERNATIONAL CORPORATION
Dated: November 12, 1999
By: /S/ Richard A. Zonin Name: Richard A. Zonin
Title: Chief Financial Officer and
Senior Vice President of Finance
(Principal Financial Officer)
Dated: November 12, 1999
By: /S/ John M. Davis Name: John M. Davis
Title: Chief Accounting Officer and
Vice President
Page 15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 2,025
<SECURITIES> 0
<RECEIVABLES> 17,039
<ALLOWANCES> 0
<INVENTORY> 32,760
<CURRENT-ASSETS> 56,999
<PP&E> 46,253
<DEPRECIATION> 14,223
<TOTAL-ASSETS> 110,580
<CURRENT-LIABILITIES> 17,024
<BONDS> 0
0
0
<COMMON> 16,606
<OTHER-SE> 32,750
<TOTAL-LIABILITY-AND-EQUITY> 110,580
<SALES> 27,341
<TOTAL-REVENUES> 27,341
<CGS> 16,200
<TOTAL-COSTS> 7,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656
<INCOME-PRETAX> 2,557
<INCOME-TAX> 1,126
<INCOME-CONTINUING> 1,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (95)
<NET-INCOME> 1,336
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
