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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-22942
CONSO INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0986680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
513 NORTH DUNCAN BYPASS, P.O. BOX 326, UNION, SC 29379
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 427-9004
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of shares of the Registrant's Common Stock, its only
outstanding class of voting stock, held by non-affiliates of the Registrant as
of September 15, 1999, was $37,624,328.
The number of shares outstanding of the Registrant's Common Stock, its only
outstanding class of common equity, as of September 15, 1999, was 7,334,177.
DOCUMENTS INCORPORATED BY REFERENCE
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Incorporated Document Parts into which Incorporated
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<S> <C>
1999 Annual Report to Shareholders for the fiscal year ended
July 3, 1999 Part II
Proxy Statement for Annual Meeting of Shareholders to be
held November 9, 1999 Part III
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PART I
ITEM 1. BUSINESS
GENERAL
Conso International Corporation, together with its subsidiaries (the
"Company"), is the world's largest manufacturer of decorative trimmings for the
home furnishings industry and, through its subsidiary, Simplicity Pattern Co.,
Inc. ("Simplicity"), is a leading producer of patterns and other instructional
material for home sewing of apparel, home decorating, and crafts. Conso
International Corporation, including its British Trimmings ("BT") subsidiary,
produces and sells a full range of knitted and woven fringes, decorative cords,
tasseled accessories, jacquard and other woven braids, and apparel trims, as
well as sewing tapes and supplies. Conso also distributes decorative window
accoutrements and other home furnishings accessories. Through a worldwide sales
force, the Company's products are marketed to manufacturers, distributors and
retailers. Manufacturing facilities are located in the United States, the United
Kingdom, Mexico, and India.
Conso's US business, which can be traced back to 1867, was acquired from
Springs Industries, Inc. in 1986 when Conso International was organized by a
group of investors that included J. Cary Findlay, who became its Chief Executive
Officer and, subsequently, its sole shareholder. In December 1993, the Company
made its initial public offering of its Common Stock and, using a portion of the
proceeds of the offering, acquired British Trimmings (Holdings) Limited, a
privately held English company, which is now known as "British Trimmings
Limited" and is one of the leading producers of decorative trimmings in the
United Kingdom. In connection with the offering, Conso Products Company changed
its jurisdiction of incorporation from Delaware to South Carolina. In June 1998,
the Company completed the acquisition of Simplicity Capital Corporation, the
parent company of Simplicity Pattern Co., Inc. Effective November 10, 1998,
Conso Products Company changed its name to Conso International Corporation.
However, the Company still does business as Conso Products Company.
Unless the context otherwise requires, all references in this report to
"Conso" or "Conso US" are to Conso International Corporation, its Delaware
predecessor, and its majority-owned Mexican and Indian subsidiaries; all
references to "BT" are to British Trimmings Limited, its corporate predecessors
and subsidiaries; all references to "Simplicity" are to Simplicity Capital
Corporation and its subsidiaries; and all references to the "Company" include
Conso, BT, and Simplicity.
The fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997 are
referred to herein as the "1999 fiscal year" or "fiscal 1999", the "1998 fiscal
year" or "fiscal 1998", and the "1997 fiscal year" or "fiscal 1997",
respectively. The 1999 fiscal year consists of 53 weeks, while fiscal 1998 and
1997 each consist of 52 weeks.
In June 1998, Conso acquired all the outstanding common stock of Simplicity
Capital Corporation, the parent company of Simplicity Pattern Co., Inc. (the
operating company). The consideration paid was $31,702,000 (consisting of the
$33,000,000 cash purchase price, less cash acquired of $2,066,000 and including
$768,000 of transaction expenses) plus the assumption of certain of Simplicity's
liabilities, for a total purchase price of $53,456,000. Simplicity Pattern Co.,
Inc. was founded in 1927, and is one of the world's largest producers of home
sewing patterns. Simplicity designs its patterns in New York and London,
produces them in the United States and distributes them worldwide.
The Company's global growth strategy for the future includes:
- Additional business acquisitions as attractive opportunities are
identified;
- Continual introduction of new decorative trimmings products and the
cross-merchandising of existing products between Conso US and BT and
through Simplicity publications;
- Expansion of the Company's existing decorative accessory products and
identification, development and acquisition of additional products.
- Continued expansion of the Company's customer base, including increased
sales to manufacturers, distributors, high-end designers and mass
merchandisers;
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- Expanded international production and distribution operations, as well
as increased export sales.
With the acquisition of Simplicity, the Company is focusing on the use of
patterns and the Simplicity name and its other publications to promote its
existing products and additional products which may be developed or acquired.
INDUSTRY
The decorative trimmings industry constitutes a small portion of the home
furnishings industry. The Company's management is not aware of any definitive
published data on the size of the decorative trimmings industry. Both Conso US
and BT have many competitors for various parts of their businesses; however,
many of these competitors are small and most do not offer the same breadth or
depth of collections or ranges of products.
Demand for Conso US' and BT's products varies as fashion trends in home
furnishings and the relative cost of various products changes. Total demand is
also affected by population growth and demographics, consumer spending and
confidence in the economy, levels of disposable income, geographic mobility of
consumers, housing starts, and residential housing sales. The Company believes
that it has been able to increase the demand for decorative trimmings, and
therefore expand the market, through aggressive merchandising support of
resellers and education of end-users as to applications for its products. The
acquisition of Simplicity enables the Company to elevate the support of
merchandisers and education of end-users through publications and materials in
regular direct contact with the end consumer, and through the use of a widely
recognized and well-respected brand name. Accordingly, the Company intends to
aggressively pursue the further promotion of Simplicity's publications and its
name to promote the Company's other products.
While the Company's primary product has been textile related, management
views the Company as a consumer products company. With some reduction in the
growth in revenues from Conso products, the Company is increasing its focus on
acquisitions, with attention given to companies that have a focus on home
decorating and can expand its existing products and product offerings. The
acquisition of Simplicity confirms the consumer products focus and positions the
Company to pursue the expansion of its business in this arena.
Simplicity competes in the home sewing and crafts industry, and distributes
its products primarily through retailers. The home sewing and crafts industry
includes a variety of products such as fabric, patterns, notions, crafts and
other related supplies. The pattern segment represents a relatively small, niche
market within the home sewing and crafts industry.
The Company's management is not aware of any definitive published data on
the size of the pattern industry or the revenues of its competitors. However,
the Company believes that, based on the number of Simplicity products and its
competitors' products seen in retail stores, it is one of the largest of the
four major producers of patterns in the world.
The home sewing and craft industry has significant overlap with the home
decorating industry in which the Company has a significant presence with its
trimmings and decorative accessories products. The Company's strategy is to use
this overlap, and the cross-merchandising of products through selling materials
and patterns, to increase the presence of its products, including patterns,
within both the home decorating and home sewing and crafts industries.
PRODUCTS
Decorative trimmings produced and sold by both Conso US and BT include
various fringes, cords and tasseled accessories that are used on the edges of
chairs, sofas, decorative pillows, draperies and other home furnishings. Fringes
may include a brush fringe or ruche around the edge of a pillow or a heavy
bullion fringe around the base of a sofa. Tassel fringe is often used to edge
draperies and decorative pillows. Knitted and woven braids produced are used to
border or frame pillows, curtains and upholstered pieces. Cord without a lip or
flange may be used to border a mirror or a room and can be used to hang pictures
and mirrors.
BT also produces and sells apparel trimmings including sequin and glitter
trimmings, gimp trims and froggings. Some of the braids and other stock products
that are produced by both Conso US and BT are also used in apparel.
Conso US also produces and sells sewing tapes and cords, and distributes
other sewing and workroom supplies purchased from others. Conso US and BT design
and distribute accessories for window furnishings and other decorative
accessories for the home.
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The Company currently sources the production of most of its decorative
accessories to both foreign and domestic vendors. With the purchase of VNI in
April 1999, the Company purchased its main supplier of resin hardware products
to allow for quicker product development and better quality control. This
purchase was the first step in internalizing more decorative accessories
production.
With the acquisition of Simplicity, the Company has expanded its products to
include home sewing patterns. The pattern products of Simplicity are produced
and sold under the Simplicity, New Look, and Style brand names. The Simplicity
brand is one of the most respected, well-known names in the home sewing and
crafts industry. Simplicity offers approximately 1,500 patterns for sale and
updates over 500 of those designs each year to respond to market trends and keep
its design selection fresh. The patterns available from Simplicity offer
consumers a wide selection of fashion apparel, home decorating, crafts, and
costume designs.
Consumers use patterns to construct fashion apparel, home sewing, craft and
costume items. An outline and instruction guide for a garment or craft shape is
designed and printed on paper. The outline is used as a blueprint which
consumers place on the fabric to properly guide the cutting of the fabric into
pieces. Using the instructions, the consumers then sew the appropriate pieces
together as noted. Simplicity is known for superior, easy-to-follow instructions
that simplify the entire sewing process.
The following table sets forth, for the periods indicated, certain
information relating to sales of Conso's and BT's product lines for the current
and prior two fiscal years. Simplicity sales are included in the current year:
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FISCAL YEARS ENDED
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JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Catalog Stock Products
Conso US - Trimmings $ 28,660 24.0% $31,880 44.3% $32,988 44.9%
British Trimmings 13,842 11.6 11,469 16.0 10,548 14.4
Wendy Cushing Trimmings 1,275 1.1 982 1.4 912 1.2
Decorative Accessories 1,944 1.6 1,740 2.4 1,376 1.9
Workroom supplies 4,629 3.9 4,459 6.2 4,557 6.2
Manufacturers' Specials:
Conso US $ 14,619 12.2% 12,464 17.3 12,572 17.1
British Trimmings 4,235 3.5 5,659 7.9 5,804 7.9
Wendy Cushing Trimmings 648 0.5 619 0.9 677 0.9
Other miscellaneous products 1,611 1.3 2,589 3.6 4,013 5.5
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Subtotal Conso/BT $ 71,463 59.7 $71,861 100.0% $73,447 100.0%
Simplicity Pattern Products $ 48,197 40.3 -- -- -- --
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Total $119,660 100.0% $71,861 100.0% $73,447 100.0%
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</TABLE>
Details of operations and assets for the separate Conso US, Simplicity and
BT companies are presented in the Company's Notes to Consolidated Financial
Statements (Note 12) for the fiscal years Ended July 3, 1999, June 27, 1998 and
June 28, 1997.
PRODUCT DESIGN AND DEVELOPMENT
Because the demand for decorative trimmings is based upon fashion appeal to
home furnishings manufacturers, interior designers and ultimately consumers, the
success of the Company's decorative trimmings business is dependent upon its
ability to design and develop a broad range of attractive products in a wide
array of colors and color combinations (known as "colorways"). Conso US' current
stock product lines of decorative trimmings include numerous items in various
yarns, stylings and colorways comprising over 20,000 stock keeping units
("SKUs"), and BT currently stocks products comprising over 3,500 SKUs. Both
Conso US and BT develop and market lines of complementary products in various
stylings and colorways as "collections" or "ranges." Both businesses also
manufacture custom trimmings as specified by their customers.
Since 1987, the Company has developed decorative trimmings products in
response to national market research and customer demand. The first line was the
"Empress Collection," introduced in 1987 for the medium price range market.
Wesley Mancini, a prominent designer of home furnishings fabrics, was engaged to
select the first 13 colorways in the line and develop additional lines. Conso US
has also introduced 15 additional collections of decorative trimmings in
different yarns and colorways for various markets and price points, including
the "Imperial Collection" designed by Mr. Mancini and introduced in 1989 for the
higher price range market. The "Princess Collection", developed in 1989, and the
"Louis XVII Collection", introduced in 1993 and designed by Louis Nicole,
another well-known home furnishings designer, are marketed in the lower to
medium price range for major retailers. In 1997, the Company added the "Cabaret"
collection to meet market demand for a new look in the home furnishings market.
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BT has offered its "Tudor Range" since 1990 and introduced its "Elizabethan
Range" in 1993, both of which are aimed at the medium price range market. The
Tudor Range was expanded with additional colorways in 1992 and 1994. The
Elizabethan Range, based on historical trimmings that would be found in a 15th
century English mansion, emphasizes Britain's heritage in marketing British
trimmings in home furnishings worldwide. In 1996, BT introduced its "Bloomsbury
Range", aimed at the upper end market. In 1997, BT introduced "Cambridge" and
"Oxford" ranges to aggressively pursue the upholstery market.
The "Jaipur Collection" was added in 1999 at both Conso US and BT. The
collection draws on a blend of styling, fabrications, and colorways from around
the world to elegantly capture the trend of blending different styles within the
same room. The eclectic mix is also designed to make the Company more
competitive in the international market. Wendy Cushing is developing a new
floral collection. This collection, with an extensive stock range, will be
launched in Europe in September 1999 and in the US in 2000.
With the acquisition of VNI, our major supplier of resin products, the
Company increased the development of coordinating decorative accessories such as
finials, curtain rods, brackets, tiebacks, rings, and sconces.
Because sewing is an alternative to buying ready made items, Simplicity
pattern designs must closely resemble silhouettes and prints produced by
competitors in the apparel, home furnishings and craft industries. Simplicity is
continuously developing designs into patterns in New York and London to ensure
fresh new products for all its pattern brands. The Simplicity design team visits
key domestic and European fashion centers and subscribes to a variety of
international fashion, color and silhouette reports. Based upon this information
and historical sales data, new pattern designs are created. The Company uses
both staff and contract designers. Simplicity updates its pattern brands
(Simplicity, Style and New Look) several times a year to offer the latest
"looks" available.
Simplicity introduced an upscale fashion line "Millennium by Simplicity" in
the spring 1999 season. "Retro Simplicity" was also introduced in 1999; the line
leverages Simplicity's archives to feature designs from earlier in the century.
Simplicity expanded its medieval pattern selection as Renaissance Fairs and
related activities have become more popular.
MARKETING AND SALES
Conso US' decorative trimmings marketing program is directed by a marketing
department assisted by a graphic design team and sample department. The
marketing department is responsible for trade shows, advertising, sample binders
and cards, displays, videos, catalogs, brochures and other selling aids as well
as the development of new stock products.
To market its collections of decorative trimmings, Conso US has created
special sample binders for most collections. The binders allow the easy removal
and use of sample cards, as well as the insertion of cards for new colorways and
stylings added to the collections in later years. Conso US also distributes a
color wholesale catalog that is produced annually by its graphic design team,
and also produces brochures, sample cards and selling aids, and advertises its
products in major trade publications.
Since the acquisition of BT, the Company has established a marketing
department at BT that works closely with and reports to the Conso US marketing
group. BT also uses sample books and cards as its primary selling aids, as well
as brochures and other materials produced by its in-house printing operation at
its Leek, England facility. BT's first wholesale color catalog was introduced in
January 1995 and is produced annually.
Conso US displays its products at showrooms located at its New York sales
office and at the Furniture Mart in Hickory, North Carolina and its Miami
international sales office. BT maintains showrooms at its Stockport and London
manufacturing facilities and Wendy Cushing Trimmings has a showroom at Chelsea
Harbour in London. In calendar 1999, the Company will display the products of
both Conso US and BT at a total of two trade shows in the United States, three
in Europe, one in Singapore, and one in Dubai.
Conso US' products are marketed and sold through a sales force of
representatives located in various major US cities, sales personnel that travel
internationally, and through foreign independent sales representatives. BT has
sales personnel operating in various UK major cities, and uses independent sales
representatives located in foreign countries. Wendy Cushing Trimmings is
serviced by a sales representative in the United Kingdom and through designer
(agent) and distributor showrooms in the United States and Canada. Since the
Company's most significant sales presence is in the US and UK, the Company
focuses its international sales efforts (other than sales into the UK) into
three major sales regions: the Western Hemisphere (including Canada and Latin
and South
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America), Europe and the Middle East (including Africa, and excluding the UK),
and the Pacific Rim (including Australia and New Zealand). The Company has
international sales managers who are responsible for implementing the sales and
marketing programs for the foreign geographic regions and directing services to
these regions from international sales office in Miami, Florida, for Latin
America and the Caribbean and in Stockport for Continental Europe, the Pacific
Rim and the Middle East.
Both Simplicity (www.simplicity.com) and Conso US (www.conso.com) have web
sites. The sites are designed to provide information about the Company's
products and allow customers to purchase catalogs. Currently, the Company does
not directly distribute products using these sites.
The key selling tools for Simplicity are the pattern catalogs that are
prominently displayed and available for viewing by consumers at retail
locations. The pattern catalog shows one or more pictures of all pattern designs
available in each brand. Auxiliary catalogs also are produced to highlight
specific merchandise categories such as children's apparel, holiday costumes,
home decorating and crafts, and to increase retail presence and save consumers
shopping time when looking for specific types of patterns. In 1999, Simplicity
purchased new computer design and digital fabric scanning equipment that will
allow the presentation of current fabrics in the pattern catalogs. This new
catalog concept will be introduced in spring 2000.
The pattern catalogs and sales of patterns are supplemented periodically by
the use of model garments and other in-store sales materials such as posters,
wall charts and easels which provide a picture of selected new pattern designs,
and through the use of box-out displays. Box-outs are used for seasonal patterns
such as those for the Halloween, Christmas and Easter holidays, and for new
fashion trends in order to attract impulse sales, increase retail presence and
for special joint marketing programs with fabric companies.
Simplicity also uses a variety of marketing tools to make its products
available directly to consumers such as a web site, direct marketing programs,
telemarketing and repeat customer programs to increase sales.
Retail customers frequently use pattern promotions through price discounting
to generate store traffic and drive the sales of other sewing products such as
fabrics, notions and craft items. It is common for retail customers to sell
patterns at up to 50% off the suggested retail price. Retail customers also use
pricing below this level for selected promotional events. Newspaper ads and
color circulars featuring pictures of selected pattern designs of Simplicity are
used by retail customers to promote patterns.
ORDER PROCESSING AND CUSTOMER SERVICE
Customer service representatives in offices in Union, South Carolina and
Stockport, England receive most of Conso US' and BT's orders directly from
customers. Conso receives approximately 60% of orders by fax and 40% by phone,
while BT receives approximately 80% of orders by fax and 20% by phone. The
customer service operations include representatives for domestic stock orders,
representatives who process international orders, and representatives who handle
manufacturing specials orders.
Because most of Conso US' and BT's customer orders are for stock items and
because prompt response to customer orders is critical to customer satisfaction,
Conso US and BT emphasize customer service and prompt fulfillment of orders. To
that end, Conso US and BT maintain large inventories of stock items in a wide
range of colors and color combinations, and have implemented computerized order
entry, production, inventory management and shipping systems, including a
computerized factory order materials requisition program with pre-established
minimum and maximum formulas for levels of inventories based on sales history
and forecasts for each SKU. These systems enable Conso US and BT to better
maintain inventory levels for future demand by customers for each of its SKU's
and to minimize backorders.
Simplicity receives all of its orders directly from retail customers and
processes these orders promptly through its computerized systems. Most orders in
the United States are received through electronic data interchange and are
fulfilled within one week. Simplicity maintains a complete inventory of each
pattern design and a customer service department in all major market regions.
CUSTOMERS
The Conso US' and BT products are sold worldwide to manufacturers,
distributors and retailers, including manufacturers of upholstered furniture,
draperies, bedding, decorative pillows and other home furnishings; trim, fabric
and workroom supply distributors; and major retailers, retail fabric store
chains, and interior designers. Simplicity sells direct to retail customers who
sell
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home sewing products such as fabric, notions, crafts and other supplies to
consumers. Retail customers consist of fabric store chains, discount stores and
chains and independent fabric and craft stores. A total of approximately 9,700
retail locations worldwide are serviced directly by Simplicity.
While Conso and BT have not had any one customer that would make up more
than 10% of their business, Simplicity's two largest retail customers represent
approximately 54% of this segment's sales. 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 patterns inventory in Wal-Mart stores and Wal-Mart will
remit payment for the patterns at the time it sells them to its customers. Had
this new arrangement been in effect throughout fiscal 1999, the Company
estimates that on a pro forma basis its net revenues would have been reduced by
approximately $650,000 and its expenses would have 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 renegotiation or
termination by either party at any time under Wal-mart's normal vendor
agreement.
The following table sets forth, for the periods indicated, certain
information relating to sales of products to the Company's three major
categories of customers:
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FISCAL YEARS ENDED
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JULY 3, 1999 JUNE 27,1998 JUNE 28, 1997
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Manufacturers $ 30,405 25.4% $ 27,696 38.6% $ 31,108 42.3%
Distributors 30,416 25.4 30,996 43.1 30,013 40.8
Retailers 58,839 49.2 13,169 18.3 12,326 16.9
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Total $119,660 100.0% $ 71,861 100.0% $ 73,447 100.0%
======================================================================================
</TABLE>
At July 3, 1999, the Company had approximately 14,500 customer accounts with
open balances. Conso and BT had open customer orders at July 3, 1999 of $4.2
million as compared to $3.6 million at June 27, 1998. The Company expects that
substantially all of the open orders at July 3, 1999 will be recognized as
revenue within the first quarter. Simplicity's open orders are insignificant on
a consolidated basis, because most of its orders are handled through electronic
data interchange and are shipped within one week.
EXPORTS
Consolidated net sales to the Company's two major market areas, the United
States and the United Kingdom, were $87.8 million and $17.1 million,
respectively. The remaining sales of $14.8 million were export sales
representing 12.4% of consolidated net revenue. The following table sets forth
for the periods indicated the Company's sales outside the United States and the
United Kingdom and as a percentage of total Company sales, by geographic region:
<TABLE>
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FISCAL YEARS ENDED
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JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Western Hemisphere $ 6,617 5.5% $ 4,138 5.8% $ 3,985 5.4%
Europe and Middle East 3,840 3.2 2,841 4.0 2,683 3.7
Pacific Rim 4,370 3.7 1,541 2.1 1,787 2.4
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Total $14,827 12.4% $ 8,520 11.9% $ 8,455 11.5%
============================================================================================
</TABLE>
MANUFACTURING AND RAW MATERIALS
Conso US and BT purchase undyed yarns, some dyed yarns and other supplies,
and manufacture their trimmings products through various processes. Because of
the variety of products they manufacture, Conso US and BT employ a wide range of
machinery and equipment in their operations. Each business uses the generally
available techniques for weaving, knitting and braiding yarns, as well as
processes for making tassel fringe, ball and knotted fringes, cords and sewing
tapes. Much of the machinery is developed and often constructed in their own
engineering departments. Conso US and BT have developed their own adaptations of
machinery for specific products or types of products to provide greater speed,
flexibility or novelty in production. Both Conso US and BT employ their own
staffs to continually evaluate alternative raw materials and processes, the use
of new textile technology and in-house machinery improvement.
Both Conso US and BT have their own dyehouse facilities, with space
available to add additional dyeing equipment as necessary. This enables both
businesses to dye their own yarns quickly and assure better consistency of
color. In the US, Conso completed construction of a new 33,000 square foot
dyehouse facility with a cost of $4.6 million, which enables us to do virtually
all dyeing in house.
Certain of Conso's products require handwork assembly. Most of the handwork
is done at Conso US' facility in Juarez, Mexico, and on a piece work basis by
home workers directed from the Stockport and London facilities of BT. In July
1997, the Company
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leased facilities in Coimbatore, India which house handwork operations.
Operations at this facility began in January 1998 with product shipments being
received beginning in July 1998. The addition of this facility will allow the
Company to be more competitive with certain low priced products. The Company has
budgeted approximately $3.7 million to acquire new production facilities in
Mexico and India in fiscal 2000.
The various departments in each of Conso US' and BT's manufacturing plants
operate one to three shifts per day, five or six days per week, depending upon
market conditions and customer orders.
The raw materials used by Conso US in its manufacturing operations include
spun rayon, spun and filament polyester, cotton and acetate yarns. The primary
yarns used by BT are spun rayon and filament viscose rayon. The primary yarns
used in the India operations are filament rayon and cotton. These yarns are
commodities that generally are available as needed from various suppliers
located throughout the world. The Company expects that yarn supplies will
continue to be available as needed for the Company's operations. Changes in the
price of cotton, wood pulp and petrochemicals, the base materials for most of
the Company's yarns, however, could cause significant changes in the Company's
raw material costs, and there can be no assurance that there will not be any
changes in the availability, price or quality of any raw materials.
The two key components of a pattern are printed tissue paper containing the
outline of the garment, craft or home decorating item and the written
instructions printed on newsprint. Simplicity owns and occupies a facility of
approximately 740,000 square feet in Niles, Michigan. This facility operates
principally on a one-shift, five day-a-week basis, although certain departments
sometimes operate on a two or three shift-basis. At its Niles facility,
Simplicity operates a paper mill and printing operation for the production of
tissue and printing of patterns and instructions. Simplicity out-sources the
printing of its pattern catalogs.
Principal raw materials for Simplicity are paper, pulp, recycled paper, ink
and corrugated cardboard and the Company believes that an ample supply of these
raw materials will continue to be available. However, changes in the price of
paper, pulp, ink and the price and availability of recycled paper and other
supplies related to its operations could cause significant changes in the
Company's raw material costs, and there can be no assurance that there will not
be any changes in the availability, price or quality of any raw materials.
The Company does not have any vendor who represents more than 10% of raw
material purchases.
COMPETITION
While the business of manufacturing decorative trimmings for the home
furnishings industry is competitive, and includes many relatively small
producers with limited product lines or products designed for the lower end of
the market, there are a few US domestic or foreign manufacturers of substantial
size. However, the Company is the largest manufacturer of decorative trimmings
for the home furnishings industry in the world and is aware of no more than four
other major producers with which it competes for customers worldwide. In the
Company's trimmings segment, which is a relatively small, niche market within
the home decorating industry, the Company has fragmented competition coming from
a large number of smaller competitors with more limited product breadth or depth
of collections or ranges. However, the pattern segment, is dominated by a
relatively small number of companies. The pattern segment includes four major
producers, whose combined sales account for the majority of worldwide pattern
revenues. The three producers with the most significant portion of their
revenues believed to be generated in the United States include Simplicity,
McCall Pattern Company and Butterick Company, Inc. The fourth producer, Burda,
is headquartered in Germany, and historically has maintained a strong presence
in Europe, and other foreign markets.
Smaller producers of decorative trimmings often have focused on longer
production run business with manufacturers at lower prices, frequently using
lower quality products. From time to time, the Company develops new products to
provide alternatives to products manufactured by these smaller producers and may
use its operations in Mexico and India to manufacture goods to compete with
these producers.
Conso US and BT experienced increased price competition on sales of certain
manufacturing special items and hand assembled products, to an extent, by low
priced goods being manufactured by smaller competitors and from low priced goods
being imported from India and the Far East. Consequently, in August 1997, the
Company announced the formation of India Trimmings (Private) Limited to produce
hand-assembled products in India. The Company's Mexico plant continues to
produce many of the hand-assembled products sold in the US, although some of
this production is being shifted to India Trimmings. The North American Free
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Trade Agreement ("NAFTA") and the General Agreement on Trade and Tariffs
("GATT") could increase US competition for sales of Conso US' products as well.
While the Company believes that the elimination of international trade barriers
under both GATT and NAFTA will be beneficial to it as it implements its strategy
of expanding its worldwide operations, there can be no assurance that increased
US competition from foreign manufacturers as a result of NAFTA or GATT or any
other trade-related agreements would not have a material adverse effect on its
business.
There are a number of large manufacturers of textiles, home furnishings and
other products with resources substantially greater than those of the Company
who have the ability to enter the decorative trimmings, accessories or pattern
businesses by either establishing their own operations or acquiring and
combining other existing operations. Management is aware of no current plans by
any such manufacturer to enter the decorative trimmings or patterns businesses.
The Company recently has acquired companies that focus on decorative
accessories items, and is marketing and distributing these items to its existing
customer base. The decorative accessories industry is a much larger industry
than trimmings or patterns with several, already well established manufacturers.
The Company intends to compete in this market through the continuous
introduction of new products and product stylings and through
cross-merchandising through its selling materials and publications and to its
existing customer base.
The Company, in its trimmings business, its decorative accessories business,
and its patterns business competes on the basis of styling, selection, color,
delivery, price and customer service. The Company believes that its ability to
promptly fill customer orders, due to its large inventory, its production and
inventory management systems, its customer service and sales staff and its
control over availability of yarn colors for trimmings, production of its own
paper for patterns, its breadth of product offerings and focus on product
design, presentation, and cross-merchandising gives it a competitive advantage
and is valued by its customers.
EMPLOYEES
As of July 3, 1999, Conso US had 643 full-time employees, of whom 551 were
hourly employees and 92 were salaried employees. In addition, 282 contract
workers at Conso US' assembly plant in Juarez, Mexico work under the supervision
of a Conso US manager in a "Maquiladora" operation, which provides for contract
labor in accordance with certain Mexican regulations. India Trimmings employs
133 full-time employees at its manufacturing facility in Coimbatore, India. None
of Conso US employees are represented by a union. Conso US' management considers
its relationship with its personnel to be good. While Conso US has historically
had a high turnover rate among its hourly employees during the first three
months of employment, Conso US has been able to attract and retain qualified
personnel.
As of July 3, 1999, BT had 348 full-time employees, of whom 246 were hourly
employees and 102 were salaried employees. Approximately 34% of the employees of
BT are represented by the Union of Textile Workers (the "Union"). BT and the
Union verbally agreed in July 1999 to the annual salary review for the year
ending July 31, 2000, with an increase of 3% in the basic wage rate. Although
any strike or other disruption of operations by members of the Union could have
a material adverse effect on the Company, the Union has represented the
production workers of BT for at least 30 years, during which time there has
never been a strike or work stoppage.
As of July 3, 1999, Simplicity had approximately 406 employees, of whom 181
were represented by labor unions and 225 were non-union. Most union employees
are located in the Niles, Michigan facility. Union contracts covering these
union employees expire on January 31, 2000. Although any strike or other
disruption of operations by members of unions could have a material adverse
effect on the Company, Simplicity has not experienced any work stoppages in
recent years and believes relations with all of its employees are good.
GOVERNMENTAL REGULATION
The business and operations of the Company are subject to governmental
regulation, including employee health and safety laws and regulations; laws and
regulations governing employment practices, wages and hours, and employee
benefits; and environmental laws and regulations. The Company believes it is in
compliance in all material respects with applicable laws and regulations
(including those regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment), and that such
compliance has not materially affected its business or required major capital
expenditures. Future changes in laws and
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regulations or any determination that the Company is not in compliance with
applicable laws and regulations could have a material adverse effect on the
Company.
TRADEMARKS
Conso has registered the trademarks CONSO(R) for its products and
CLAESSON(R), DUITALL FABRIC MASTER(R), and CLEARWARE DECORATING SYSTEMS(R) for
decorative hardware items. BT has registered the trademarks SPECTRUM(R) for
lace, braids and woven labels and POLYUROCOL(R) for certain yarns and threads in
the United Kingdom. Simplicity has registered its trademarks SIMPLICITY(R), NEW
LOOK(R), STYLE(R) and ITS SO EASY(R), ITS SIMPLICITY(R) for its pattern products
and licensing rights. Other trademarks utilized by Simplicity are also
registered. Simplicity enters into the use of other trademarks periodically as
business opportunities dictate and operates an aggressive program for pursuing
the registration and defense of such trademarks.
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ITEM 2. PROPERTIES
The following table sets forth the location, utilization and approximate
size in square feet of floor space of the principal facilities of Conso, BT and
Simplicity, and whether they are owned or leased.
<TABLE>
<CAPTION>
OWNED OR SQUARE
LOCATION UTILIZATION LEASED FEET
- -------- ----------- --------- --------
<S> <C> <C> <C>
CONSO:
Union, SC (Main Plant) Offices, production, distribution and dyehouse facility Owned(1) 340,000
Union, SC (Annex Plant) Warehousing and yarn processing Owned 101,000
Hickory, NC Showroom and sales office Leased(2) 514
Miami, FL Showroom and sales office Leased(3) 980
Juarez, Mexico Assembly plant Leased(4) 41,680
Coimbatore, India Assembly plant Leased(5) 14,762
BRITISH TRIMMINGS:
Stockport Offices and production facilities (six buildings at Owned 185,000
one location)
Leek, England Warehousing, dyehouse and production facility Owned 43,000
Leek, England Printing operation Leased(6) 2,000
London, England Assembly operation Owned 20,000
London, England Chelsea Harbour showroom Leased(7) 384
London, England Chelsea Harbour showroom Leased(8) 835
SIMPLICITY:
New York, NY Offices Leased(9) 41,000
Toronto, Canada Offices Leased(10) 1,300
Blantyre, Scotland Distribution and offices Leased(11) 41,000
London, England Offices Leased(12) 1,400
Revesby, Australia Distribution and offices Leased(13) 25,000
Auckland, New Zealand Offices Leased(14) 1,922
Niles, Michigan Manufacturing and distribution facility Owned 740,000
</TABLE>
(1) Legal title has been transferred to Union County, South Carolina in
connection with a "fee-in-lieu of taxes" arrangement for the distribution
center and dyehouse facilities. The Company has the option to purchase
these facilities for nominal consideration.
(2) This facility is leased on a month-to-month basis.
(3) This facility is leased for a term expiring August 31, 2000
(4) This facility is leased for a term expiring December 31, 1999.
(5) This facility is leased for a term expiring July 1, 2000.
(6) This facility's lease expires June 18, 2002.
(7) This facility's lease expires on November 16, 2007.
(8) This facility is leased for a term expiring December 24, 2001.
(9) This facility is leased for a term expiring November 30, 2010, but has an
option buyout in 2003.
(10) This facility is leased for a term expiring September 30, 2001.
(11) This facility is leased for a term expiring July 20, 2002.
(12) This facility is being cancelled effective September 30, 1999.
(13) This facility is leased for a term expiring September 30, 2004.
(14) This facility is leased for a term expiring November 1, 1999.
Certain of the Company's owned manufacturing facilities are subject to liens
securing its bank indebtedness. The principal manufacturing facilities are of
brick construction, and are generally in satisfactory operating condition and
repair. Conso US' main plant and annex plant in Union were constructed at
various times from 1959 to 1967, from 1964 to 1983, and from 1996 to 1999,
respectively; BT's Stockport facilities were constructed at various times
between the 1920's and 1979, its Leek dyehouse and production facilities were
constructed in the 1920's and 1970's, respectively, and its new London facility
was constructed in 1980. Simplicity's plant in Niles was constructed at various
times from 1931 to 1936, from 1946 to 1953, and from 1961 to 1976. The Company
believes that the facilities are suitable for their present use. In the US,
Conso completed construction of an 86,000 square foot distribution center in
July 1997, with a total cost of $4.5 million, and has completed construction of
a 33,000 square foot dyehouse facility with a total cost of $4.6 million. Both
of these facilities are located adjacent to the existing main plant in Union,
SC. These expansions freed up approximately 65,000 square feet for additional
production and office space. The Company has budgeted approximately $3.7 million
to acquire new production facilities in Mexico and India in fiscal 2000. The
Company will consider additional capital expenditures for building expansions or
business acquisitions as opportunities arise.
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ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information appearing (a) under the caption "Stock Price & Shareholder
Information", (b) in Note 9 under the caption "Common Stock", and (c) in Note 1
under the caption "Organization and Summary of Significant Accounting Policies"
in the Notes to Consolidated Financial Statements in the Company's 1999 Annual
Report to Shareholders is incorporated herein by reference.
The Company has not sold any securities during the past three years in
transactions not registered under the Securities Act except as follows: On July
1, 1998, the Company purchased real property owned jointly by J. Cary Findlay
and Konstance J. K. Findlay, each of whom is a director and executive officer of
the Company, in exchange for shares of the Company's Common Stock. The Company
issued 78,788 shares of Common Stock to Mr. Findlay and Mrs. Findlay jointly as
consideration for the acquisition of the real property in reliance upon an
exemption from registration under Section 4(2) of the Securities Act. Such
consideration was based upon a closing price of the Common Stock of $8.25 on
July 1, 1998 and a value of $650,000 (the Findlays' cost basis) for the real
property.
ITEM 6. SELECTED FINANCIAL DATA.
The information appearing (a) under the caption "Selected Financial Data"
and (b) in Note 9 under the caption "Common Stock" in the Notes to Consolidated
Financial Statements in the Company's 1999 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Conso International Corporation's (the "Company") fiscal year is the 52
or 53 week period ending on the Saturday nearest June 30; interim reporting
periods are based on 13 week quarters. The fiscal year ended July 3, 1999
included 53 weeks. The fiscal years ended June 27, 1998 and June 28, 1997 each
included 52 weeks.
1999 Compared with 1998
The fiscal year ended July 3, 1999 included the results of Simplicity
Capital Corporation ("Simplicity"), while the fiscal year ended June 27, 1998
excluded Simplicity's operations. Simplicity was acquired on June 19, 1998 and
Simplicity's results for the period June 19, 1998 through June 27, 1998 were not
material and therefore were excluded from the Company's results of operations
for fiscal year 1998.
For the year ended July 3, 1999, total consolidated net sales increased
$47.8 million or 66.5% from $71.9 million to $119.7 million. The primary reason
for the increase was due to the acquisition of Simplicity, which had $48.2
million in net sales. With the acquisition of Simplicity, the Company has
significantly expanded its presence in the retail segment. Gains in sales to
retailers and continued growth in sales to manufacturers lessened the impact of
increasing competitive pressures within the distributor segment. The following
analysis of the sales results by the separate Conso US and British Trimmings
("BT") units are after eliminating the effect of intercompany sales.
Total net sales of Conso US increased $1.3 million or 2.5% from $52.3
million to $53.6 million. The primary reason for the increase was the year
consisting of 53 weeks in fiscal 1999 as compared to 52 weeks in fiscal 1998.
Total net sales of BT decreased $1.6 million, or 8.2%, from $19.5 million to
$17.9 million primarily due to declining sales to the reupholster wholesalers
and manufacturers. Additionally, pricing pressures occurred due to a strong
British pound sterling that enabled suppliers in Spain and Belgium to make
inroads into BT's markets.
Comparable net sales to manufacturers (Conso US and BT) increased $1.1
million, or 3.9%, led by a strong fourth quarter at Conso US which offset weak
second and third quarters, as well as softness at BT. Net sales to manufacturers
through Conso US increased $1.7 million, or 7.4%, primarily due to the bedding
portion of the home furnishings market. Net sales to manufacturers by BT
declined $0.6 million, or 10.5%, primarily due to competition from both domestic
UK and European producers, as well as the strength of the British pound sterling
against European currencies.
Comparable net sales to distributors (Conso US and BT) decreased $1.2
million, or 3.8%. Conso US sales to distributors were flat at $18.7 million. BT
sales to distributors were down $1.0 million, or 8.3%, primarily due to the
strong British pound sterling and pricing pressure from European competitors,
particularly with respect to tasseled items. In an effort to be able to compete
more effectively, production of tasseled items is being shifted to India.
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Conso and BT overall comparable net sales to retailers decreased $0.3
million, or 2.2%. Conso US net sales to retailers for the current year decreased
$0.2 million, or 2.0%. The reduction in net sales occurred due to the shipment
of an initial stocking order of $1.4 million to a major retailer in the fourth
quarter of 1998. Excluding the effect of the initial stocking order, continuing
business is up over last year. Net sales to retailers through BT decreased
slightly.
Net sales outside the US and UK (the Company's major sales regions)
increased $6.3 million, or 74.1% from the prior year to $14.8 million, and
represented 12.4% of total net sales due to the addition of Simplicity. On a
comparable basis (Conso US and BT), international sales were down $0.3 million,
or 3.5%. The Pacific Rim continued to be negatively impacted by the recent
changes in currency values and other economic problems of that region, causing
net sales on a comparable basis to decline 7.1%. However, overall sales to the
Pacific Rim region were up 184% due to the acquisition of Simplicity. Export
sales to the Western Hemisphere on a comparable basis increased 3.0% primarily
due to gains in the Canadian market. With Simplicity's presence in the Canadian
and Mexican markets, the sales to this area increased 59.9%. Europe and Middle
East regions increased 34.5% and 37.2%, respectively, primarily due to the
acquisition of Simplicity.
The gross margin for the year increased to $47.3 million, or 39.5% of
net sales from the prior year's gross margin of $25.3 million, or 35.2% of net
sales, primarily due to the Simplicity acquisition and its historically higher
margins. The gross margin for Conso US for the current year was 38.8%, compared
to the prior year's 38.7%. At BT, the margin declined to 24.7% from 25.8%, due
to lower sales to cover overheads, in spite of reductions of labor and
materials. The Company is currently implementing a shift of manufacturing
operations from high cost to low cost areas in an effort to improve
profitability.
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 patterns inventory in
Wal-Mart stores and Wal-Mart will remit payment for the patterns at the time it
sells them to its customers. Had this new arrangement been in effect throughout
fiscal 1999, the Company estimates that on a pro forma basis its net revenues
would have been reduced by approximately $650,000 and its expenses would have
been 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 renegotiation or termination by either party at any
time under Wal-Mart's normal vendor agreement.
Distribution expenses increased $6.1 million compared to the prior
year, from 4.6% to 7.9% of net sales. This increase is primarily attributable to
the acquisition of Simplicity. Simplicity accounted for $6.0 million of the
increase in distribution expenses. BT's distribution expenses decreased, but
increased as a percentage of sales from 5.8% to 6.1% due to lower net sales.
Conso US' expenses increased as a percentage of sales from 4.1% to 4.2%, due
primarily to depreciation on the warehouse facility and related equipment.
Selling expenses for the current year increased $3.1 million but
decreased as a percentage of sales from 11.5% to 9.5% due to the acquisition of
Simplicity. Simplicity accounted for a $3.4 million increase in selling
expenses. Selling expenses at BT decreased $280,000, while Conso increased
$27,000.
General and administrative costs increased $7.8 million and increased
as a percentage of sales from 6.6% to 10.5%, primarily due to the Simplicity
acquisition. General administration costs at BT decreased $362,000, while Conso
US increased $403,000. The increase in general and administrative costs at Conso
US was related primarily to higher travel expenses, personnel costs, higher
bonus levels, and professional fees related to managing a larger organization
and pursuing acquisitions.
Currency losses of $84,000 were realized in fiscal 1999, while in the
prior year a loss of $27,000 was recorded.
Intangible amortization of $715,000 relates to the Simplicity
acquisition. Operating income of $13.1 million was $4.2 million greater than
fiscal 1998. This increase was attributable to Simplicity, while operating
income at BT and Conso US was basically flat.
Interest expense increased $2.4 million primarily due to the borrowings
associated with the Simplicity acquisition.
The effective tax rate increased due to Simplicity's higher effective
tax rate from non-deductible intangible amortization and losses in its foreign
operations.
Net income increased $0.8 million, from $5.0 million to $5.8 million.
Earnings per share increased from $.68 to $.78, a $.10 per share increase. Of
the $.10 per share increase, $.08 was attributable to Simplicity and $.02 was
attributable to Conso, while BT's loss remained flat compared to prior year.
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1998 Compared with 1997
For the year ended June 27, 1998, net sales decreased 2.2% from $73.4
million to $71.9 million, before adjusting for prior year's sales through
MacCulloch & Wallis, the London subsidiary sold in August 1997. MacCulloch &
Wallis (London) Ltd., a retail subsidiary operation in London, servicing
primarily the apparel industry with haberdashery items, had made little money
and was facing potential losses due to increasing rent and other overhead costs.
Accordingly, the business was sold. The business operated until its sale
(through July 1997). There were net sales of $275,000 related to this unit,
which were recorded in fiscal year 1998, while the unit reported approximately
$1.4 million of net sales in the same period of the prior year. When excluding
sales through the MacCulloch & Wallis (London) Ltd. subsidiary, net sales were
not as negatively impacted, decreasing only 0.7%. With the acquisition of
Simplicity, the Company has the opportunity to expand its presence further in
the retail markets. Gains in sales to retailers and continued growth in sales to
distributors lessened the impact of increasing competitive pressures within the
manufacturing customer segment. The following analysis of the sales results by
the separate Conso US and BT units are after eliminating the effect of
intercompany sales.
Total net sales through Conso US decreased 1.4% from $53.1 million to
$52.3 million,as a result of the decline in sales to manufacturers, while total
net sales through BT decreased 4.2% from $20.4 million to $19.5 million,
primarily as a result of the sale of MacCulloch & Wallis (London) Ltd. Excluding
the sales of MacCulloch & Wallis (London) Ltd., net sales through BT actually
increased 1.1%.
Net sales to manufacturers declined 11.0%, more than offsetting gains
in net sales to distributor and retail customers. Net sales to manufacturers
through Conso US declined 11.6%. Much of the decline in revenue dollars in the
manufacturing group serviced by Conso US came from the reformulation of products
to meet lower price points and compete with domestic competitive offerings, from
reductions in prices (primarily on hand-assembled items) to meet the foreign
competition and retain market share and, in a few cases, due to changes in
orders as a result of changes in special programs offered by manufacturers to
their customers. Net sales to manufacturers serviced by BT declined 8.2%. Net
sales to manufacturers through BT were impacted primarily by competition both
from domestic and European producers, with the strength of the British pound
sterling giving an added advantage to other European competitors, and from
increased competition with foreign producers of tasseled items. The Company
began production in India in January 1998 to compete with lower cost imports and
improve margins and has established special teams to provide more focused
support to the manufacturing groups.
Net sales to distributors increased 3.3%, improving 1.8% at Conso US
and 5.6% at BT, primarily as a result of the continued success of the Conso US
and BT catalogs, selling aids, and other marketing efforts and as a result of
increased product offerings.
Overall, net sales to retailers, including sales through MacCulloch &
Wallis (London) Ltd., increased 6.8%. Net sales to retailers, excluding the
effect of the decline in sales as a result of the disposed MacCulloch & Wallis
(London) Ltd. operations, increased 17.5%. During the fourth quarter of fiscal
1998, Conso US established a trim program for a major retail store chain. As a
result of the new retail trim program and other sales gains, Conso US' net sales
to retailers for fiscal 1998 increased 19.9%, compared to the same
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period of the prior year. Net sales to retailers through BT declined 34.1%,
primarily due to the sale of MacCulloch & Wallis (London) Ltd. Excluding the
MacCulloch & Wallis (London) Ltd. sales, sales to retailers for BT were up 3.6%
over the prior year.
Net sales outside the US and UK (the Company's major sales regions)
increased $65,000, or 0.8% from the comparable period of the prior year, to $8.5
million, and represented 11.9% of total net sales. The Pacific Rim continued to
be negatively impacted by the recent changes in currency values and other
economic problems of that region, and net sales to that region declined by
13.7%. Export sales to the Western Hemisphere and the Europe and Middle East
regions increased 3.8% and 5.9%, respectively, despite increasing competition
from foreign producers and the strength of the British pound sterling.
The gross margin for the year declined to $25.3 million or 35.2% of net
sales from the prior year's gross margin of $27.8 million or 37.9%. Increased
cost of inventory produced prior to the reductions of personnel and focus on
cost controls have been recorded as cost of goods sold. Pricing pressures from
competition, both domestic and foreign, have contributed to the margin's
decline, and reformulation of existing products to provide less expensive
alternatives have contributed to the decline in the margin dollars.
In the US, the gross margin for fiscal 1998 was 38.7% compared to the
prior year's 40.8%, while at BT, the margin declined from 30.3% to 25.8%. The
Company has taken action to reduce the number of personnel considering the
current margin climate.
In the fourth quarter of fiscal 1998, the consolidated gross margin of
36.2% was ahead,for the first time in fiscal 1998, of the gross margin for the
similar period of the prior year. The prior year's fourth quarter margin was
36.0% excluding the unanticipated year-end physical inventory adjustment and
34.0% including the adjustment. In addition, the fourth quarter margin was well
ahead of the third quarter's 33.8%. This improvement indicates that the
long-awaited effects of the reductions in personnel and increased cost controls,
begun earlier in the year, are beginning to impact the Company's cost of sales
as the higher cost inventory at Conso US turned over through the early and
mid-part of the year. Such turnover is still in process at BT.
Distribution expenses increased $141,000 in fiscal 1998, from 4.3% to
4.6% of net sales. BT's expenses decreased $88,000. BT implemented some
personnel reductions and a change in freight carrier as an additional cost
savings measure. Conso US' expenses increased $229,000, due primarily to
depreciation on the new warehouse facility and related equipment including radio
frequency optical scanning systems.
Selling expenses for fiscal 1998 decreased $467,000. BT decreased
$311,000, while Conso US decreased $156,000, with the largest portion of the
decline coming from the disposal of MacCulloch & Wallis (London) Ltd.
General and administrative costs increased $182,000. BT decreased
$14,000, while Conso US increased $196,000. The increase in general and
administrative costs has been primarily attributable to the move of the Vice
President-Manufacturing into the Co-Managing Director roll for BT and now as
Chief Operating Officer of Conso US.
Currency losses of $27,000 were incurred in fiscal 1998 while in the
prior year a gain of $63,000 was recorded. As a result of the decline in margin
and the currency losses, operating income decreased approximately $2.6 million
or 22.4%, from 15.7% of net sales to 12.4%.
Interest expense increased $70,000, in connection with increases in
borrowings on the Company's revolving loan facilities to help fund the dyehouse
and warehouse projects and to acquire Simplicity.
The effective tax rate increased as management recorded reductions in
South Carolina Jobs Tax Credits due to reductions in personnel effected through
fiscal 1998.
While net income for the fourth quarter increased $389,000 from $1.2
million to $1.6 million and from 17 cents per share to 22 cents per share, net
income for the year declined approximately $2 million from $7 million in the
prior year to $5 million in the current year, and from 94 cents per share to 68
cents per share due to the performance of the first three quarters. Conso US'
net income declined $1.3 million while BT's net income declined $711,000.
Liquidity and Capital Resources
The Company has historically financed its operations and capital
requirements through both internally generated funds and bank borrowings. Other
than the acquisitions of Simplicity and BT, capital requirements in recent years
have arisen principally from expansion of product lines and production capacity
and increased working capital needs to support higher sales volume. In June
1998, the Company renegotiated its bank loan agreement with its US bank. Under
this agreement, the Company obtained a $20 million term loan and the Company's
revolving loan was increased from $15 million to $30 million including advances
of up to (pound)7,000,000 ($11.2 million at the July 3, 1999 exchange rate). A
total of $6.1 million was available for borrowings under the revolver agreement
at July 3, 1999. This revolving loan expires on December 1, 2000, unless renewed
by mutual agreement. Consequently, the revolving loan is reported as long-term
debt.
In November 1998, the Company converted its fixed rate on its term loan
(at 7.4%) to a floating rate at 90-day LIBOR plus 1.45% (or 6.66% at July 3,
1999). Concurrently, the Company entered into a $19.5 million interest rate swap
for a 5-year term that 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-
16
<PAGE> 17
to-market" provision should the Company elect to terminate the swap prior to
maturity. Under this provision, Conso could realize a gain or loss, depending on
the interest rate conditions at the time the swap is terminated. The Company
estimates that a gain of $424,000 would have been realized had the swap
terminated as of July 2, 1999.
The impact of changes in the relationship of other currencies
(primarily the British pound sterling) to the US dollar have historically not
been significant, and such changes in the future are not expected to have a
material impact on the Company's results of operations or cash flows. The euro
has not had, nor does the Company anticipate, a material impact on the results
of operations or cash flows. BT has set up a euro denominated account to handle
the small number of transactions currently occurring.
Due primarily to the shift in debt from short-term to long-term, and
current assets and liabilities acquired in the Simplicity acquisition, working
capital increased to $38.2 million at July 3, 1999 from $35.0 million at June
27, 1998.
Operating cash flow increased from $7.2 million in fiscal 1998 to $7.3
million in fiscal 1999 primarily as a result of increased earnings and improved
inventory management. Cash used in investing activities decreased from $38.5
million in fiscal 1998 to $5.1 million in fiscal 1999, primarily due to the
acquisition in 1998 of Simplicity, but was partially offset by additional
spending on the dyehouse facility in Union, South Carolina during fiscal 1999.
Cash provided by financing activities changed from a source of $33.2 million in
fiscal 1998 to a use of $2.9 million in fiscal 1999, as the Company began
servicing the debt incurred for the Simplicity acquisition.
On November 10, 1997, the Board of Directors authorized the repurchase
of up to 500,000 shares of common stock. To date 248,000 shares have been
repurchased at a cost of $1,902,000,of which 75,000 shares at a cost of $503,000
occurred in fiscal 1999. Repurchases may be made from time to time depending
upon market conditions. The Company's Executive Committee will direct the
specific repurchases and approve prices and other terms.
Capital expenditures for fiscal 1999 were approximately $5.2 million.
These expenditures were primarily for manufacturing equipment at Conso US,
digital catalog design equipment at Simplicity, and some facilities improvements
at Conso US, BT, and Simplicity. The Company has budgeted approximately $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. During fiscal 1999, approximately $1.5 million
was spent on the new dyehouse bringing this project to completion. The Company
will consider additional capital expenditures for expansion or acquisition as
the opportunities arise.
Year 2000
In 1997, Conso US and BT developed a five-phase program for addressing
the Y2K issues and to assure information and other systems compliance. 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 is satisfied with the results. The implementation in Sydney is scheduled to
be completed by October 1999, and the remaining cost is immaterial to the
Company.
The Company's main contingency plan is to use additional labor to
overcome any Y2K issue which was 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 spent $509,000 on Y2K issues since the program
commenced. Of this amount, $319,000 has been capitalized (primarily for the
purchase of new hardware and software), while $190,000 has been expensed (the
cost of modifications to existing software). During fiscal 1999, $398,000 was
spent on Y2K issues, including approximately $160,000 of labor to modify
existing programs, which was expensed.
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.
New Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging
Activities. "This statement requires companies to record derivatives on the
balance sheet as assets or liabilities, and measure the fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This standard will be effective for fiscal 2001 and the
Company has not determined the extent of the impact of the implementation of
this standard on the financial statements.
Jobs Tax Credits Carryforward
The Company recorded South Carolina Jobs Tax Credits earned in fiscal
year 1997 of $225,000, resulting in net tax benefits of $149,000 (net of
applicable federal income tax effect). During fiscal 1998, management wrote-off
$405,000 of South Carolina Jobs Tax Credits due to significant reductions in its
workforce in South Carolina, resulting in a charge against income (net of
applicable federal income tax effect) of $267,000. During fiscal 1999, no
additional credits or write-offs were required.
According to SFAS 109, "Accounting for Income Taxes, "such tax credits
are to be recorded as assets and reductions of tax expense to the extent it is
more likely
17
<PAGE> 18
than not that the taxable income in future periods will be sufficient to utilize
the credits and employment levels will not decrease, causing a loss of credits
recorded in prior years. SFAS 109 also requires that, on an ongoing basis,
management assess any changes in conditions which may affect the likelihood of
realizing these tax credits and that a valuation allowance be established should
a degree of uncertainty about the likelihood of realizing these credits become
apparent. A valuation allowance would be established with a charge against
income. Based on management's review of the Company's historical and current
performance and its plans for future growth including acquisitions, the
introduction of new products, the expansion of existing products and expansion
into international markets, management believes it is more likely than not that
the Company will be able to fully utilize these tax credits and has concluded
that no valuation allowance is necessary at this time.
The Company is uncertain as to the amount and net income effect of
credits, if any, which may be earned in future years, because future credits are
contingent upon regionally specific increases in employment, and the net income
effect is contingent upon additional future South Carolina taxable income
sufficient to fully utilize such credits as may become available in the future.
Effects of Inflation
During the three years ended July 3, 1999, inflation has had little
effect on the Company's capital costs and results of operations.
Cautionary Statement as to Forward Looking Information
Statements contained in this report as to the Company's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts and
other projections of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for the future operations
are "forward looking" statements, and are being provided in reliance upon the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Important factors that could cause actual results or events to differ
materially from those projected, estimated, assumed or anticipated in any such
forward looking statements include, without limitation: 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 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.
18
<PAGE> 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes and
foreign currency fluctuations due to its $30.0 million revolving credit facility
and its foreign operations, primarily through its UK based subsidiaries. The
Company does not enter into derivative financial instruments for trading
purposes. Such products are only used to manage well-defined interest rate risk,
such as the interest rate swap used to lower the Company's term loan interest
rate (See Note 3).
Borrowings under the Company's $30.0 million revolving credit facility
bear interest at rates based upon an adjusted LIBOR rate plus a margin that
ranges from .75% to 1.75% (depending upon the Company's consolidated leverage
ratio). Up to (pound)7,000,000 in borrowings may be made by BT in the United
Kingdom in British pound sterling. [An increase of 1% in the interest rate under
the Company's revolving credit facility would decrease earnings by approximately
$140,000 (assuming the Company's borrowings under the revolving credit facility
averaged $22,000,000 during a fiscal year).]
The Company conducts business through BT in British pounds sterling
and, to a substantially lesser extent, through other subsidiaries in other
foreign currencies. As a result, the Company is subject to foreign exchange rate
risk on cash flows related to sales, expenses and financing transactions
(including borrowings in British pounds sterling). Because of the relatively
stable exchange ratio related to the British pound sterling, the Company has not
historically made use of foreign currency exchange contracts or otherwise hedged
its foreign currency risk. Prior foreign currency gains and losses have not been
material and are expected to continue to be immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information appearing under the caption "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," and "Independent Auditors' Report" in the
Company's 1999 Annual Report to Shareholders is incorporated herein by
reference. See also the report of Grant Thornton dated September 5, 1997
relating to (a) the consolidated balance sheet of British Trimmings ("BT") at
June 28, 1997 and (b) the related consolidated statements of income and cash
flow of BT for the year ended June 28, 1997 included herewith.
19
<PAGE> 20
[Grant Thornton Letterhead]
INDEPENDENT AUDITORS' REPORT
REGARDING BRITISH TRIMMINGS LIMITED
TO THE DIRECTORS OF CONSO INTERNATIONAL CORPORATION (FORMERLY KNOW AS CONSO
PRODUCTS COMPANY)
We have audited the consolidation packages consisting of the consolidated
balance sheet at 28 June 1997 and the related consolidated statements of income
and cashflow of British Trimmings Limited for the year ended 28 June 1997
expressed in pounds sterling. All information included in the consolidation
packages is the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidation packages based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
of the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The consolidation packages have been prepared on the basis of accounting
principles generally accepted in the United States of America for the purpose of
inclusion in the consolidated financial statements of Conso International
Corporation (formerly know as Conso Products Company) for the year ended 28 June
1997 and are intended solely for that purpose.
In our opinion, the consolidation packages referred to above, expressed in
pounds sterling, are suitable for inclusion in the consolidated financial
statements of Conso International Corporation (formerly know as Conso Products
Company) for the year ended 28 June 1997 and present fairly, in all material
respects, the information shown therein.
/s/ Grant Thornton
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
MANCHESTER
UNITED KINGDOM
5 September 1997
20
<PAGE> 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 5, 1997, the Company's Audit Committee and its Board of
Directors approved expanding the engagement of Deloitte & Touche LLP, the
Company's principal accountant, to include the audit of the financial statements
of British Trimmings Limited, a significant subsidiary of the Company, for the
fiscal year ended June 27, 1998. For more than the previous two fiscal years,
the financial statements of British Trimmings Limited had been audited by Grant
Thornton and, in its audit reports as principal accountant for the Company,
Deloitte & Touche LLP had expressed reliance on the reports of Grant Thornton as
to British Trimmings Limited. As a result of the expansion of the engagement of
Deloitte & Touche LLP, Grant Thornton was no longer engaged to audit the
financial statements of British Trimmings Limited, but may be engaged to provide
or continue to provide other accounting services for the Company and its
subsidiaries.
Neither the principal accountants' reports on the financial statements of
the Company nor Grant Thornton's reports on the financial statements of British
Trimmings Limited for the fiscal year ended June 28, 1997 contained an adverse
opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the Company's fiscal year ended June 28, 1997 (1) there were no
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
disagreement(s), if not resolved to the satisfaction of Grant Thornton, would
have caused it to make reference to the subject matter of the disagreement(s) in
its report, and (2) no "reportable event" (as defined in Item 304(a)(1)(v) of
Regulation S-K) occurred.
As the Company's principal accountant, Deloitte & Touche LLP was regularly
consulted by the Company as to various accounting, auditing and financial
reporting matters during the two most recent fiscal years and subsequent interim
periods prior to the expansion of its engagement to include the audit of British
Trimmings Limited; however, none of the matters as to which the Company
consulted Deloitte & Touche LLP during such periods were with regard to the
application of accounting principles to specified transactions or the type of
audit opinions that might be rendered on the Company's financial statements, in
either case as related only to British Trimmings Limited.
21
<PAGE> 22
PART III
ITEMS 10-13
Items 10 through 13 are incorporated herein by reference to the sections
captioned "Principal Shareholders," "Election of Directors," "Executive
Officers," "Certain Transactions," "Compensation Committee Interlocks and
Insider Participation," "Compensation Committee Report," "Shareholders' Return
Performance Graph," "Executive Compensation," "Director Compensation,"
"Employment Agreements," and "Section 16(a) Beneficial Ownership Reporting
Compliance" on pages 2 - 12 of the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held November 9, 1999, which was filed with
the Commission on September 22, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
List the following documents filed as a part of this report:
1. Financial Statements.
The following consolidated financial statements of the Company
are included as part of Exhibit 13 thereof:
Report of Deloitte & Touche LLP
Consolidated Balance Sheets as of July 3, 1999 and June 27, 1998
Consolidated Statements of Operations for fiscal years ended
July 3, 1999 June 27, 1998, and June 28, 1997
Consolidated Statements of Shareholders' Equity for the fiscal
years ended July 3, 1999, June 27, 1998, and June 28, 1997
Consolidated Statements of Cash Flows for the fiscal years
ended July 3, 1999, June 27, 1998, and June 28, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
Financial statement schedules are omitted because the
information is either not required or is otherwise included in
the Company's Consolidated Financial Statements or the Notes
thereto.
3. Exhibits.
22
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
2 Stock Purchase Agreement dated June 10, 1998 among the Company,
Simplicity Capital Corporation, and the Sellers, Sellers Representative
and Escrow Agent named herein (1)
3.4 Articles of Incorporation of the Company (2)
3.5 Bylaws of the Company (2)
10.14 Letter Agreement dated August 20, 1992 by and between the Company and
Louis Nicole, Inc. (2)
10.17 1993 Stock Option Plan (2)
10.20 Agreement dated 10 September 1993 between Calver Properties Limited and
British Trimmings (Leek) Limited (2)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between the Company and S.
Duane Southerland, Jr. (4)
10.60 Letter dated March 25, 1997 by and between the Company and Wesley
Mancini Ltd. (7)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.62 Modified and Restated Loan Agreement dated June 19, 1998 among The
Company, NationsBank, N.A. and Simplicity Pattern Co. Inc. (1)
10.63 Promissory Note dated June 19, 1998 issued by the Company and
Simplicity Pattern Co. Inc. in favor of NationsBank, N.A. in the
original Principal amount of up to $30,000,000 (1)
10.64 Promissory Note dated June 19, 1998 issued by British Trimmings in
Favor of NationBank, N.A. in the original principal amount of up to
pound sterling 7,000,000 (1)
10.65 Employment Agreement dated February 15, 1991 between Simplicity
Holdings, Inc. and Louis S. Oltman (9)
10.66 Letter Agreement dated May 4, 1998 between Simplicity Pattern Co. Inc.
and Louis S. Oltman (9)
10.67 Executive Severance Policy for Simplicity Capital Corporation,
Simplicity Holdings, Inc. and Simplicity Pattern Co. Inc. (9)
10.68 Letter Agreement dated September 28, 1998 by and between Simplicity
Capital Corporation and Frank Rizzo (filed herewith)
10.69 Modified and Restated Promissory Note dated November 16, 1998 issued by
the Company and Simplicity Pattern Co, Inc. in favor of NationsBank,
N.A. in the original principal amount of $19,500,000 (filed herewith)
13 Portions of the Company's 1999 Annual Report to Shareholders that are
incorporated herein by reference (filed herewith)
16 Letter of Grant Thornton regarding change in certifying accountant for
British Trimmings Limited (8)
21 Subsidiaries of the Company (filed herewith)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of Grant Thornton (filed herewith)
27 Financial Data Schedule (filed herewith)
</TABLE>
23
<PAGE> 24
MANAGEMENT CONTRACTS AND COMPENSATORY
PLANS AND ARRANGEMENTS
The foregoing exhibits include the following management contracts and
compensatory plans and arrangements:
10.17 1993 Stock Option Plan (2)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between
the Company and S. Duane Southerland, Jr. (4)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.65 Employment Agreement dated February 15, 1991 between
Simplicity Holdings, Inc. and Louis S. Oltman (9)
10.66 Letter Agreement dated May 4, 1998 between Simplicity
Pattern Co. Inc. and Louis S. Oltman (9)
10.67 Executive Severance Policy for Simplicity Capital
Corporation, Simplicity Holdings, Inc. and Simplicity
Pattern Co. Inc. (9)
10.68 Letter Agreement dated September 28, 1999 by and
between Simplicity Capital Corporation and Frank
Rizzo (filed herewith)
(1) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Current Report on Form 8-K filed with the
Commission on July 6, 1998
(2) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Registration Statement on Form SB-2
(Registration No. 33-71296)
(3) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 1, 1995
(4) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Annual Report on Form 10-KSB for the fiscal
year ended July 1, 1995
(5) Incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-85518)
(6) Incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Registration No. 333-20671)
(7) Incorporated by reference to the exhibit designated by the same number
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 28, 1997
(8) Incorporated by reference to the exhibit designated by the same number
in the Company's Current Report on Form 8-K filed with the Commission
on December 11, 1997
(9) Incorporated by reference to the exhibit designated by the same number
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1998.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
24
<PAGE> 25
See response to Item 14(a)(3).
(d) Financial Statement Schedules.
See response to Item 14(a)(2).
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSO INTERNATIONAL CORPORATION
By: /s/ J. Cary Findlay
---------------------------------------------
J. Cary Findlay
Chairman, President & Chief Executive Officer
Dated: September 30, 1999
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------------- ---------------------------------- ------------------
<S> <C> <C>
/s/ J. Cary Findlay Director, Chairman, President and September 30, 1999
- --------------------------- Chief Executive Officer (Principal
J. Cary Findlay Executive Officer)
/s/ Richard A. Zonin Chief Financial Officer September 30, 1999
- --------------------------- (Principal Financial Officer)
Richard A. Zonin
/s/ John M. Davis Chief Accounting Officer September 30, 1999
- --------------------------- (Principal Accounting Officer)
John M. Davis
/s/ Konstance J.K. Findlay Director September 30, 1999
- ---------------------------
Konstance J.K. Findlay
/s/ Sara H. Bissell Director September 30, 1999
- ---------------------------
Sara H. Bissell
/s/ Antony W. Laughton Director September 30, 1999
- ---------------------------
Antony W. Laughton
/s/ John H. Maxheim Director September 30, 1999
- ---------------------------
John H. Maxheim
Director September __, 1999
- ---------------------------
James H. Shaw
</TABLE>
26
<PAGE> 27
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
ITEM 14(a)(3)
FORM 10-K
ANNUAL REPORT
For the Fiscal Year Ended July 3, 1999 Commission File Number 0-22942
CONSO INTERNATIONAL CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------- -------------------
2 Stock Purchase Agreement dated June 10, 1998 among the Company,
Simplicity Capital Corporation, and the Sellers, Sellers Representative
and Escrow Agent named herein (1)
3.4 Articles of Incorporation of the Company (2)
3.5 Bylaws of the Company (2)
10.14 Letter Agreement dated August 20, 1992 by and between the Company and
Louis Nicole, Inc. (2)
10.17 1993 Stock Option Plan (2)
10.20 Agreement dated 10 September 1993 between Calver Properties Limited and
British Trimmings (Leek) Limited (2)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between the Company and S.
Duane Southerland, Jr. (4)
10.60 Letter dated March 25, 1997 by and between the Company and Wesley
Mancini Ltd. (7)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.62 Modified and Restated Loan Agreement dated June 19, 1998 among The
Company, NationsBank, N.A. and Simplicity Pattern Co. Inc. (1)
10.63 Promissory Note dated June 19, 1998 issued by the Company and
Simplicity Pattern Co. Inc. in favor of NationsBank, N.A. in the
original Principal amount of up to $30,000,000 (1)
10.64 Promissory Note dated June 19, 1998 issued by British Trimmings in
Favor of NationBank, N.A. in the original principal amount of up to
pound sterling 7,000,000 (1)
10.65 Employment Agreement dated February 15, 1991 between Simplicity
Holdings, Inc. and Louis S. Oltman (9)
10.66 Letter Agreement dated May 4, 1998 between Simplicity Pattern Co. Inc.
and Louis S. Oltman (9)
27
<PAGE> 28
10.67 Executive Severance Policy for Simplicity Capital Corporation,
Simplicity Holdings, Inc. and Simplicity Pattern Co. Inc. (9)
10.68 Letter Agreement dated September 28, 1999 by and between Simplicity
Capital Corporation and Frank Rizzo (filed herewith)
10.69 Modified and Restated Promissory Note dated November 16, 1998 issued by
the Company and Simplicity Pattern Co, Inc. in favor of NationsBank,
N.A. in the original principal amount of $19,500,000 (filed herewith)
13 Portions of the Company's 1999 Annual Report to Shareholders that are
incorporated herein by reference (filed herewith)
16 Letter of Grant Thornton regarding change in certifying accountant for
British Trimmings Limited (8)
21 Subsidiaries of the Company (filed herewith)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of Grant Thornton (filed herewith)
27 Financial Data Schedule (filed herewith)
MANAGEMENT CONTRACTS AND COMPENSATORY
PLANS AND ARRANGEMENTS
The foregoing exhibits include the following management contracts and
compensatory plans and arrangements:
10.17 1993 Stock Option Plan (2)
10.36 1994 Employee Stock Purchase Plan (5)
10.37 Letter Agreement dated May 12, 1995 by and between
the Company and S. Duane Southerland, Jr. (4)
10.61 Stock Election Plan for Non-Employee Directors (6)
10.65 Employment Agreement dated February 15, 1991 between
Simplicity Holdings, Inc. and Louis S. Oltman (9)
10.66 Letter Agreement dated May 4, 1998 between Simplicity
Pattern Co. Inc. and Louis S. Oltman (9)
10.67 Executive Severance Policy for Simplicity Capital
Corporation, Simplicity Holdings, Inc. and Simplicity
Pattern Co. Inc. (9)
10.68 Letter Agreement dated September 28, 1999 by and
between Simplicity Capital Corporation and Frank
Rizzo (filed herewith)
(1) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Current Report on Form 8-K filed with the
Commission on July 6, 1998
(2) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Registration Statement on Form SB-2
(Registration No. 33-71296)
(3) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 1, 1995
28
<PAGE> 29
(4) Incorporated herein by reference to the exhibit designated by the same
number in the Company's Annual Report on Form 10-KSB for the fiscal
year ended July 1, 1995
(5) Incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-85518)
(6) Incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Registration No. 333-20671)
(7) Incorporated by reference to the exhibit designated by the same number
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1998
(8) Incorporated by reference to the exhibit designated by the same number
in the Company's Current Report on Form 8-K filed with the Commission
on December 11, 1997
(9) Incorporated by reference to the exhibit designated by the same number
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1998.
29
<PAGE> 1
EXHIBIT 10.68
FRANK J. RIZZO
74 Wintercress Lane
East Northport, New York 11731
September 28, 1998
Mr. J. Cary Findlay Mr. J. Cary Findlay
President and Chief Executive Officer President and Chief Executive Officer
Conso Products Company Simplicity Holdings, Inc.
513 North Duncan Bypass 2 Park Avenue
Union, SC 29379 New York, NY 10016
Dear Cary,
This letter describes the terms and conditions that you and I have
agreed upon with respect to my continued employment with Simplicity Holdings,
Inc. ("Holdings"). Simplicity Capital Corporation ("Capital") owns all of the
outstanding common stock of Holdings and Simplicity Pattern Co. Inc.
("Simplicity") is a wholly-owned operating subsidiary of Holdings. Holdings,
Capital and Simplicity are collectively referred to herein as the "Simplicity
Group."
Conso Products Company, to be renamed Conso International Company,
("Conso") acquired all of the outstanding common stock of Capital on June 19,
1998 and Capital became a wholly-owned subsidiary of Conso on that date
("Acquisition"). Conso and the Simplicity Group believe it is in their best
interest to continue my employment during the transition period following the
Acquisition until at least December 31, 1998.
Accordingly, Holdings, Conso, and I (referred to as "Rizzo" herein) have agreed
upon the following terms and conditions:
1. Rizzo, presently the Senior Vice President, Chief Financial Officer of
the Simplicity Group, will become the Chief Operating Officer of the
Simplicity Group and a Senior Vice President of Conso effective
September 1, 1998.
2. Rizzo's base salary and all benefits will remain the same except for
the management bonus program of the Simplicity Group and the
Supplemental Executive Retirement Plan subsequent to August 31, 1998.
Rizzo will become a participant, at a level appropriate for Rizzo's
position, in a new management bonus plan to be implemented
corporate-wide for management employees of Conso and the Simplicity
Group effective as of July 1, 1998 ("Bonus Plan").
<PAGE> 2
Page #2
3. Rizzo will provide 60 days written notice to the Simplicity Group and
Conso if he resigns and the effective date of resignation (including
the Notice Period defined below) is later than December 31, 1998. Conso
and/or the Simplicity Group will provide 60 days written notice to
Rizzo if they terminate Rizzo's employment at any time. The 60 days
written notice that each party must give the other described in this
paragraph is referred to herein as the "Notice Period."
4. Rizzo will be entitled to receive the following payments if he resigns
and the effective date of his resignation (including the required
Notice Period) is later than December 31, 1998:
a) Retention payment equal to one month of base salary for every
month Rizzo remains in the employ of the Simplicity Group
(including the Notice Period) subsequent to June 30, 1998 up
to a maximum of 12 months ("Retention Payment"). The Retention
Payment will be made in a lump sum on Rizzo's last day of
employment regardless of whether Rizzo has secured other
employment by that date or any date thereafter.
b) Payment of any unused vacation time remaining on the last day
of employment ("Vacation Payment") up to a maximum of 20 days.
c) Payment of an amount equal to the present value of Rizzo's
accrued benefits as of December 31, 1998 under the
Supplemental Executive Retirement Plan ("SERP") of Holdings
("SERP Payment"). Rizzo will release Holdings from any further
obligations under the SERP upon receipt of the SERP Payment.
d) Payment for a pro-rata portion (based upon the number of full
months Rizzo is employed by the Simplicity Group during the
fiscal year ended June 30, 1999) of any bonus earned under the
Bonus Plan ("Bonus Payment").
The Vacation Payment and SERP Payment will both be made to Rizzo on the
last day of his employment. The Bonus Payment will be made at the same
time other participants receive payment for bonus amounts earned under
the Bonus Plan.
If Rizzo resigns and the effective date of his resignation is on or
before December 31, 1998, then this paragraph shall not apply and Rizzo
shall not be entitled to any severance benefits under this letter
agreement or otherwise.
<PAGE> 3
Page #3
5. Rizzo will be entitled to receive the following payments if Conso or
the Simplicity Group terminates Rizzo's employment without cause at any
time.
a) Severance (5 months pay) in accordance with the Simplicity
Severance Pay Plan described on page 2 of Policy II-8 for
Exempt Employees in the Employee Manual based upon Rizzo's
base salary and 15 years of service ("Severance Payments").
b) A Retention Payment equal to 7 months of Rizzo's base salary.
The Retention Payment will be made in a lump sum on Rizzo's
last day of employment regardless of whether Rizzo has secured
other employment by that date or any date thereafter.
c) If Rizzo forfeits any of the Severance Payments because he
secures employment prior to the latest date the Severance
Payments apply to, an additional retention payment will be
made for an amount equal to the Severance Payments forfeited
("Additional Retention Payment"). The Additional Retention
Payment will be made on the date the last Severance Payment
would have been made if it had not been forfeited.
d) The Vacation Payment and SERP Payment both of which are to be
paid on Rizzo's last day of employment.
e) The Bonus Payment, which is to be paid at the same time other
participants receive payment for bonus amounts earned under
the Bonus Plan.
Notwithstanding the above, Rizzo shall receive the benefit of the
required Notice Period prior to the effective date of termination.
"Cause" shall be defined as gross negligence or willful misconduct,
willfully ceasing to perform normal and customary duties for an
extended period for any reason other than death or disability,
willfully failing to follow the lawful and proper directives of an
officer senior to Rizzo or the Board of Directors, fraud or
embezzlement in the course of employment, intentional disclosure of
confidential information, willfully engaging in competition or
purposely aiding a competitor, the commission or conviction of a felony
or any other crime that results in material injury or damage to the
Simplicity Group. No action by Rizzo shall be deemed willful unless
done in bad faith without reasonable belief that such action is in the
best interests of the Simplicity Group.
<PAGE> 4
Page #4
6. The policies and procedures described in the Simplicity Group's
Employee Manual will apply to Rizzo with respect to continued benefits,
including medical, dental, life insurance, and disability, after the
last day of employment. The provisions in the Simplicity Retirement
Savings Plan ("Retirement Plan") regarding termination of employment
will apply to Rizzo with respect to his account balance in the
Retirement Plan.
7. Prior to April 30, 1999, Rizzo, Conso, and the Simplicity Group will
mutually agree whether Rizzo's employment will continue beyond June 30,
1999. If employment will continue, an appropriate multi-year Employment
Agreement will be negotiated and executed at that time.
8. This letter agreement and the documents referred to herein represent
the entire agreement between the parties with respect to Rizzo's
employment by Holdings and supersedes any prior agreements between
them, whether oral or written, including, without limitation, the
Executive Severance Policy of the Simplicity Group that was effective
July 24, 1997.
9. Any disputes with respect to this letter agreement shall be resolved
through arbitration in New York City by the American Arbitration
Association.
10. Conso represents that it is, through its ownership of all the
outstanding common stock of Capital, the ultimate parent company of
Holdings and agrees to take any and all such actions necessary to cause
Holdings, Capital, and Simplicity to abide by the terms of this letter
agreement.
<PAGE> 5
Page #5
If the contents herein accurately reflects your understanding of our
agreement, please sign where indicated below and return one copy of this letter
to me.
Thank you.
Sincerely,
/s/ Frank J. Rizzo
Frank J. Rizzo
AGREED AND APPROVED:
CONSO PRODUCTS COMPANY
AND
SIMPLICITY HOLDINGS, INC.
BY:
/s/ J. Cary Findlay
- -------------------
J. Cary Findlay
President and Chief Executive Officer, Conso Products Company
President and Chief Executive Officer, Simplicity Holdings, Inc.
<PAGE> 1
EXHIBIT 10.69
MODIFIED AND RESTATED
PROMISSORY NOTE
U.S. $19,500,000 November 16, 1998
FOR VALUE RECEIVED, the undersigned, CONSO INTERNATIONAL CORPORATION
f/k/a, CONSO PRODUCTS COMPANY, a South Carolina corporation ("Conso"), and
SIMPLICITY PATTERN CO., INC., a Delaware corporation ("Simplicity") (hereinafter
Conso and Simplicity are sometimes collectively referred to as the "Borrowers"),
jointly and severally promise to pay to the order of
NATIONSBANK, N.A., a national banking association (the "Bank") at its
office in Charlotte, North Carolina (or at such other place or places as the
Bank may designate) the principal sum of up to
NINETEEN MILLION FIVE HUNDRED THOUSAND DOLLARS (U.S. $19,500,000)
pursuant to the terms and conditions hereinafter set forth and the terms and
conditions set forth in that certain Modified and Restated Loan Agreement, dated
June 19, 1998, executed by and among the Borrowers and the Bank (the "Loan
Agreement").
Term Loan. The Bank has previously made a term loan of $20,000,000 to
the Borrowers (the "Term Loan") the outstanding principal balance of which on
the date hereof is $19,500,000.
Principal. The outstanding principal balance of the Term Loan shall be
repayable in 19 consecutive quarterly installments on the first day of each
January, April, July and October commencing January 1, 1999. The first 18 of
such installments shall each be in the principal amount of $500,000. The 19th
and final of such installments due and payable on July 1, 2003 shall be in an
amount equal to the remaining principal balance of the Term Loan.
Interest. The outstanding principal balance of the Term Loan for each
Interest Period shall bear interest at a rate equal to the Adjusted LIBOR Rate
for such Interest Period plus 1.45% per annum. Accrued interest calculated at
the foregoing rate shall be payable in arrears on the first day of each calendar
quarter. Whenever a payment on this Note is stated to be due on a day which is
not a business day, such payment shall be made on the next succeeding business
day with interest accruing to the date of payment. Interest hereunder shall be
computed on the basis of actual number of days elapsed over a year of 360 days.
As used herein, "Interest Period" means the period from the date hereof through
December 31, 1998 and each three month period
-1-
<PAGE> 2
commencing on January 1, 1999; provided, however, that each Interest Period
which would otherwise end on a day which is not a business day shall end on the
next succeeding business day unless such succeeding business day falls in the
next calendar month and then in such case on the next preceding business day;
"Adjusted LIBOR Rate" means for the respective Interest Period, a per annum
interest rate offered by the Bank to the Borrower in accordance with the
foregoing terms equal to the per annum rate obtained by dividing (a) the rate of
interest determined by the Bank to be the average (rounded upward to the nearest
whole multiple of 1/16 of 1% per annum, if such average is not such a multiple)
of the per annum rates at which deposits in U.S. dollars are offered to the Bank
in the London interbank market in an amount substantially equal to the then
outstanding principal balance hereunder and for a period equal to such Interest
Period by (b) a percentage (expressed as a decimal fraction) equal to 100% minus
maximum reserve requirements which may be applicable thereafter.
Indemnification. The Borrower agrees to indemnify the Bank against all
reasonable losses, expenses and liabilities sustained by the Bank on account of
the Borrower making a prepayment prior to the last day of an Interest period.
Subject to the foregoing, the Borrowers may prepay this Note in whole or in part
at any time without any penalty whatsoever; provided, however, partial
prepayments shall be applied to principal installments in the inverse order of
maturities.
Yield Indemnification. In the event the Bank shall determine (which
determination shall be presumed correct absent evidence of error) that:
(i) Unavailability. On any date for determining the
appropriate Adjusted LIBOR Rate for any Interest Period, that by reason
of any changes arising on or after the date of this Note affecting the
London interbank dollar market, dollar deposits in the principal amount
requested are not generally available in the London interbank market or
adequate and fair means do not exist for ascertaining the applicable
interest rate on the basis provided for in the definition of Adjusted
LIBOR Rate then pricing based upon the Adjusted LIBOR Rate will not be
available until such time as the Bank shall notify the Borrower that
the circumstances giving rise thereto no longer exist.
(ii) Increased Costs. At any time that the Bank shall incur
increased costs or reductions in the amounts received or receivable
hereunder because of any change since the date of this Note in any
applicable law, governmental rule, regulation, guideline or order (or
in the interpretation or administration thereof and including the
introduction of any new law or governmental rule, regulation, guideline
or order) including without limitation the imposition, modification or
deemed applicability of any reserves, deposits or similar requirements
as related to pricing based upon the Adjusted LIBOR Rate (such as, for
example, but not limited to, a change in official reserve requirements,
but, in all events, excluding reserves to the extent included in the
computation of the Adjusted LIBOR Rate), then the Borrower shall pay to
the Bank promptly upon written demand therefor (which demand shall
state the basis therefor), such additional amounts (in the
-2-
<PAGE> 3
form of an increased rate of, or a different method of calculating,
interest or otherwise as the Bank may determine in its reasonable
discretion) as may be required to compensate the Bank for such
increased costs or reductions in amounts receivable hereunder. Upon
determining in good faith that any additional amounts will be payable
pursuant to this subsection, the Bank will give prompt written notice
thereof to the Borrower, which notice shall set forth in reasonable
detail the basis of the calculation of such additional amounts.
(iii) Illegality. At any time that the offering of interest
rates based on the Adjusted LIBOR Rate has become unlawful by
compliance by the Bank in good faith with any law, governmental rule,
regulation, guideline or order (or would conflict with any such
governmental rule, regulation, guideline or order not having the force
of law even though the failure to comply therewith would not be
unlawful), or has become impractical as a result of a contingency
occurring after the date of this Note which materially and adversely
affects the London interbank dollar market, then pricing based on the
Adjusted LIBOR Rate will no longer be available.
Payments. All payments made on this Note shall be in U.S. dollars.
Amounts repaid may not be reborrowed.
Events of Default. Upon the occurrence of an Event of Default under the
Loan Agreement, (a) this Note and all other debts due the Bank by the Borrowers
shall immediately become due and payable upon written notice to the Borrowers
(except that in the case of any Event of Default relating to a bankruptcy
petition filed by either Borrower, this Note and all other debts due the Bank
shall become immediately due and payable without the necessity of demand or
other action by the Bank) without the necessity of any other demand,
presentment, protest or notice of any kind, all of which are hereby waived by
the Borrowers, (b) the then remaining unpaid principal amount and accrued but
unpaid interest shall bear interest at a per annum rate equal to the prime rate
of NationsBank (as it changes from time to time) plus two percent (2%) until
such principal and interest has been paid in full and (c) regardless of the
adequacy of the collateral, the Bank shall have the right, immediately and
without further action by it, to set-off against this Note all money owed by the
Bank in any capacity to either Borrower, whether or not due, and the Bank shall
be deemed to have exercised such right of set-off and to have made a charge
against any such money immediately upon the occurrence of such Event of Default
even though such charge is made or entered on the books of the Bank subsequent
thereto.
No Waiver. No failure or delay on the part of the Bank in the exercise
of any right, power or privilege hereunder or under any other Loan Document
shall operate as a waiver of any such right, power or privilege nor shall it
preclude any other or further exercise thereof. The Borrowers assent to any one
or more extensions or postponements of the time of payment or other indulgences,
to any substitutions, exchanges or releases of collateral if at any time there
is collateral available to the holder of this Note, and to the additions or
releases of any other parties or persons primarily or secondarily liable.
-3-
<PAGE> 4
Late Charge. Should any payment due hereunder be in default for more
than fifteen (15) days, there may be imposed, to the extent permitted by law, a
delinquency charge not to exceed four percent (4%) of such payment in default.
In addition, at the option of the Bank, any accrued and unpaid interest, fees or
charges may, for purposes of computing accruing interest on a daily basis after
the due date for such interest fees or charges, be deemed to be a part of the
principal balance thereof, and interest shall accrue on a daily compounded basis
after such date at the rate provided for hereunder until the entire balance of
principal and interest is paid in full.
Notices. All notices and other communications hereunder shall be
sufficiently given and shall be deemed given when delivered or when mailed by
registered or certified mail, postage prepaid, addressed as follows:
(a) If to the Borrowers:
c/o Conso Products Company
513 North Duncan Bypass
P.O. Box 326
Union, South Carolina 29379
Attn: Mr. J. Cary Findlay
Telephone: 864-427-9004
Telecopy: 864-427-8820
with a copy to:
Kennedy Covington Lobdell & Hickman, L.L.P.
NationsBank Corporate Center
Suite 4200
100 N. Tryon Street
Charlotte, North Carolina 28202-4006
Attn: Sean M. Jones
Telephone: (704) 331-7400
Telecopy: (704) 331-7598
(b) If to the Bank:
NationsBank, N.A.
NationsBank Plaza, NC1-002-03-10
Charlotte, North Carolina 28255
Attention: William A. Serenius
Telephone: (704) 386-8577
Telecopy: (704) 386-1023
-4-
<PAGE> 5
Attorneys' Fees. In the event this Note is not paid when due at any
stated or accelerated maturity, the Borrowers will pay, in addition to principal
and interest, all costs of collection, including reasonable attorneys' fees.
Choice of Law. This Note shall be governed by and construed in
accordance with, the laws of the State of North Carolina. In addition, the
Borrowers hereby consent and submit to the jurisdiction and venue of the federal
and state courts located in Mecklenburg County, North Carolina.
Joint and Several Obligations. The obligations of the Borrowers
hereunder shall be joint and several.
Modification and Restatement. This Note modifies, restates and replaces
that certain Promissory Note, dated June 19, 1998, executed by the Borrowers in
favor of the Bank in the original principal amount of $20,000,000.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the Borrowers have caused this Note to be executed
under seal by its duly authorized officers as of the day and year first above
written.
CONSO INTERNATIONAL CORPORATION
f/k/a CONSO PRODUCTS COMPANY
ATTEST:
By: /s/ Konstance J.K. Findlay By: /s/ J. Cary Findlay
Title: Secretary Title: President
(Corporate Seal)
SIMPLICITY PATTERN CO., INC.
ATTEST:
By: /s/ Konstance J.K. Findlay By: /s/ J. Cary Findlay
Title: Secretary Title: President
(Corporate Seal)
-6-
<PAGE> 1
EXHIBIT 13
Portions of Conso International Corporation's 1999 Annual Report to Shareholders
Incorporated by Reference into Annual Report on Form 10-K for the Fiscal Year
Ended July 3, 1999
Consolidated Balance Sheets
July 3, 1999 and June 27, 1998
ASSETS (Note 3)
<TABLE>
<CAPTION>
Current Assets 1999 1998
<S> <C> <C>
Cash $ 1,671,000 $ 2,333,000
Accounts receivable, net of allowances for bad debts
and customer deductions of $1,190,000 and $1,352,000
in 1999 and 1998, respectively (Note 1) 22,009,000 22,755,000
Inventories (Notes 1 and 2) 30,657,000 30,358,000
Deferred income taxes (Note 6) 1,947,000 1,397,000
Prepaid expenses and other 2,689,000 3,781,000
Total current assets 58,973,000 60,624,000
Noncurrent Assets
Property and Equipment (Notes 1 and 3)
Land and improvements 1,539,000 1,455,000
Buildings and improvements 17,338,000 15,114,000
Machinery and equipment 26,996,000 23,791,000
Total 45,873,000 40,360,000
Accumulated depreciation (13,788,000) (10,599,000)
Total property and equipment, net 32,085,000 29,761,000
Intangible assets, net (Notes 1 and 11) 20,740,000 20,367,000
Deferred Income Taxes (Note 6) 1,032,000 3,272,000
Other noncurrent assets 549,000 1,668,000
Total Assets $ 113,379,000 $ 115,692,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities 1999 1998
Short-term borrowings (Note 3) $ 385,000 $ 558,000
Current maturities of long-term debt (Note 3) 2,000,000 2,104,000
Trade accounts payable 5,314,000 7,562,000
Accrued liabilities (Note 5) 13,088,000 15,402,000
Total current liabilities 20,787,000 25,626,000
Noncurrent Liabilities
Long-term debt (Note 3) 39,908,000 42,508,000
Deferred income taxes (Note 6) 244,000 484,000
Other noncurrent liabilities 4,638,000 4,984,000
Total noncurrent liabilities 44,790,000 47,976,000
Commitments and contingencies (Notes 4, 7, 8) -- --
Shareholders' Equity (Notes 9 and 13)
Preferred stock (no par, 10,000,000 shares authorized;
no shares issued) -- --
Common stock (no par, 50,000,000 shares authorized;
7,334,000 and 7,324,000 shares issued and outstanding
in 1999 and 1998, respectively) 16,596,000 16,245,000
Retained earnings 30,728,000 25,134,000
Accumulated other comprehensive income 478,000 711,000
Total shareholders' equity 47,802,000 42,090,000
Total Liabilities and Shareholders' Equity $ 113,379,000 $ 115,692,000
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 2
Consolidated Statements of Operations
For the fiscal years ended July 3, 1999, June 27, 1998, and June 28, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net Sales $ 119,660,000 $ 71,861,000 $ 73,447,000
Cost of goods sold 72,377,000 46,591,000 45,624,000
Gross Margin 47,283,000 25,270,000 27,823,000
Selling, general and administrative
expenses:
Distribution expense 9,396,000 3,300,000 3,159,000
Selling expense 11,415,000 8,293,000 8,760,000
General and administrative expense 12,549,000 4,717,000 4,535,000
Currency exchange loss (gain) (Note 1) 84,000 27,000 (63,000)
Gain on disposal of facility -- -- (86,000)
Intangible amortization 715,000 -- --
Total 34,159,000 16,337,000 16,305,000
Income from operations 13,124,000 8,933,000 11,518,000
Interest expense (income):
Interest expense (Note 3) 3,167,000 724,000 655,000
Interest income (263,000) (115,000) (157,000)
Total interest expense, net 2,904,000 609,000 498,000
Income before income taxes 10,220,000 8,324,000 11,020,000
Income taxes (Note 6) 4,458,000 3,292,000 3,993,000
Net Income $ 5,762,000 $ 5,032,000 $ 7,027,000
Net income per share (Notes 1 and 9)
Basic $ 0.78 $ 0.68 $ 0.94
Diluted $ 0.78 $ 0.67 $ 0.93
Weighted average number of shares
outstanding (Note 9)
Basic 7,349,000 7,447,000 7,486,000
Diluted 7,349,000 7,470,000 7,539,000
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 3
Consolidated Statements of Shareholders' Equity
For the fiscal years ended July 3, 1999, June 27, 1998, and June 28, 1997
<TABLE>
<CAPTION>
Accumulated
Common Common Other
Stock Stock Retained Comprehensive Comprehensive
Shares Issued Amount Earnings Income Total Income
<S> <C> <C> <C> <C> <C> <C>
Balance June 29, 1996 7,481,672 $ 16,896,000 $ 13,701,000 $ 181,000 $30,778,000
Stock options exercised 8,600 57,000 57,000
Shares issued for directors fees 1,268 16,000 16,000
Net income 7,027,000 7,027,000 $ 7,027,000
Foreign currency translation
adjustment 489,000 489,000 $ 489,000
Balance June 28, 1997 7,491,540 $ 16,969,000 $ 20,728,000 $ 670,000 $38,367,000
Comprehensive income for year
ended June 28, 1997 $ 7,516,000
Stock repurchases (173,000) $ (772,000) $ (626,000) $(1,398,000)
Stock options exercised 1,650 11,000 11,000
Shares issued for directors fees 4,222 37,000 37,000
Net income 5,032,000 5,032,000 $ 5,032,000
Foreign currency translation
adjustment 41,000 41,000 $ 41,000
Balance June 27, 1998 7,324,412 $ 16,245,000 $ 25,134,000 $ 711,000 $42,090,000
Comprehensive income for year
ended June 27, 1998 $ 5,073,000
Stock repurchases (75,000) $ (335,000) (168,000) $ (503,000)
Shares issued for directors fees 5,977 36,000 36,000
Shares issued for conference center 78,788 650,000 650,000
Net income 5,762,000 5,762,000 $ 5,762,000
Foreign currency translation
adjustment (233,000) (233,000) $ (233,000)
Balance July 3, 1999 7,334,177 $ 16,596,000 $ 30,728,000 $ 478,000 $47,802,000
Comprehensive income for year
ended July 3, 1999 $ 5,529,000
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 4
Consolidated Statements of Cash Flows
For the fiscal years ended July 3, 1999, June 27, 1998, and June 28, 1997
<TABLE>
<CAPTION>
Operating Activities 1999 1998 1997
<S> <C> <C> <C>
Net Income $ 5,762,000 $ 5,032,000 $ 7,027,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,278,000 2,224,000 1,760,000
Amortization of intangibles 716,000 59,000 84,000
Deferred tax (benefit) expense 1,457,000 241,000 (132,000)
Currency transaction loss (77,000) (17,000) (63,000)
Change in assets and liabilities excluding
effects of businesses acquired:
Accounts receivable 670,000 (698,000) 9,000
Inventories (652,000) 434,000 (4,702,000)
Prepaid expenses and other 1,251,000 (234,000) 543,000
Trade accounts payable (2,203,000) (915,000) 636,000
Accrued liabilities (2,904,000) 1,092,000 53,000
Net cash provided by operating activities 7,298,000 7,218,000 5,215,000
Investing Activities
Redemption of certificates of deposit 1,350,000 -- --
Construction of new warehouse and dyehouse (1,493,000) (5,427,000) (3,741,000)
Purchase of digital catalog design equipment (997,000) -- --
Purchases of other property and improvements (93,000) -- (400,000)
Purchases of equipment (2,590,000) (1,558,000) (1,566,000)
Sale of plant and equipment -- 81,000 323,000
Payments for businesses, net of cash acquired (1,228,000) (31,634,000) (85,000)
Net cash used in investing activities (5,051,000) (38,538,000) (5,469,000)
Financing Activities
Net borrowings (repayments) under
line of credit arrangements (259,000) 14,641,000 2,886,000
Borrowings of long-term debt -- 20,000,000 --
Principal payments on long-term debt (2,183,000) (104,000) (2,336,000)
Payment of capitalized loan origination costs -- (22,000) --
Principal payments under capital lease obligations -- -- (70,000)
Proceeds from issuance of common stock, net of expenses 36,000 47,000
74,000
Repurchase of common stock (503,000) (1,399,000) --
Net cash provided by (used in) financing activities (2,909,000) 33,163,000 554,000
Increase (decrease) in cash (662,000) 1,843,000 300,000
Cash at beginning of year 2,333,000 490,000 190,000
Cash at end of year $ 1,671,000 $ 2,333,000 $ 490,000
Noncash Investing and Financing Activities 1999 1998 1997
Conference center purchased with common stock $ 650,000 -- --
Supplemental Cash Flow Information 1999 1998 1997
Interest paid (net of capitalized interest) $ 3,080,000 $ 474,000 $ 488,000
Income taxes paid $ 3,877,000 $ 2,574,000 $ 3,966,000
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 5
Notes to Consolidated Financial Statements
For the Fiscal Years Ended July 3, 1999, June 27, 1998, and June 28, 1997
1. Organization and Summary of Significant Accounting Policies
Organization and Operations
Conso International Corporation (the "Company") is headquartered in
Union, South Carolina. The three main operating divisions are Conso Products
Company (Conso US), Simplicity Pattern Co., Inc., (Simplicity) and British
Trimmings Limited (BT). In addition, the Company operates production facilities
in Juarez, Mexico and Coimbatore, India.
Conso US has two production plants, a dyehouse facility and a
distribution facility in Union, South Carolina; showrooms are located in New
York City, Miami, and Hickory, North Carolina. Sales representatives are
located in certain major cities in the United States and the United Kingdom.
Conso US also employs an international sales force and has sales
representatives located throughout the world. Independent sales agents sell
some products.
British Trimmings Limited, a wholly-owned English company, is
headquartered in Stockport (England) and has a production and dyehouse facility
and a separate printing operation in Leek (England) and a hand-assembly and
production operation and showroom in London.
Both BT and Conso US manufacture and sell decorative cord and narrow
trimmings, hand-assembled tasseled accessories and sewing supplies. Conso US
also manufactures resin products and markets other decorative window
accoutrements and home furnishing accessories.
Simplicity is one of the leading producers of patterns and
instructional publications for the home sewing industry. Simplicity's main
design office is located in New York City. Its production facility is in Niles,
Michigan. It has subsidiaries with distribution operations in Sydney
(Australia), Auckland (New Zealand), Toronto (Canada), Mexico City (Mexico),
and Blantyre (Scotland). Simplicity also has a design studio in London
(England). Sales personnel service retail customers throughout the US and in
its foreign markets.
Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries: British Trimmings Limited and its subsidiaries (all
operating within the United Kingdom), India Trimmings (Private) Limited, which
operates in Coimbatore, India, Simplicity Capital Corporation and its
subsidiaries, and Conso's majority-owned subsidiary, Val-Mex, S.A. de C.V.,
which operates in Juarez, Mexico. Because the acquisition of Simplicity Capital
Corporation occurred on June 19, 1998, the results of operations of Simplicity
are not included prior to the 1999 fiscal year. The consolidated balance sheet
for Simplicity is included in both fiscal 1998 and 1999.
The results of operations are presented on a 52 or 53 week basis with
the closing on the Saturday nearest to June 30th. Fiscal 1999 has 53 weeks of
operations, while fiscal years 1997 and 1998 included 52 weeks of operations.
All significant intercompany accounts and transactions, and profit and
loss on intercompany transactions, are eliminated.
Foreign Currency Translation and
Transactions
Assets and liabilities of foreign subsidiaries are translated into US
dollars at period-end exchange rates. Income, expenses, and cash flows are
translated at weighted-average rates of exchange for the period. The resulting
currency translation adjustments are accumulated and reported as a separate
component of shareholders' equity.
From time to time, the US parent company loans or is loaned amounts
to/from its foreign subsidiaries. Translation gains or losses on such amounts
due to or from foreign subsidiaries and all exchange gains and losses on
realized foreign currency transactions are included in the consolidated results
of operations. The Company has not entered into any foreign exchange
transactions or any other agreements to manage the risk of foreign exchange
rate fluctuations except to the extent it is able to borrow funds in British
pounds sterling. The Company does not speculate in foreign currencies.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions (e.g. allowance for bad debts, valuation allowance on deferred tax
assets, inventory reserves, and reserve for pattern discards) that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
29
<PAGE> 6
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, current liabilities
and long-term debt approximates their respective fair values based on current
indexes and interest rates. The fair value of the interest rate swap is
approximately $424,000 greater than the carrying value based on interest rates
as of July 2, 1999.
Inventories
Inventories of products (excluding patterns) are stated at the lower
of first-in first-out cost, or market. Cost includes materials, direct
production labor and production-related overhead costs. Inventories of patterns
are generally stated at average cost, not in excess of market value.
Pattern Discards
Retailers' stocks of patterns are kept up-to-date with current
fashions by the periodic issuance of new patterns embodying new styles. When
patterns are discontinued (i.e. discarded), credits are issued to retail
customers for their stock on hand. Accordingly, the balance in the Reserve for
Pattern Discards reflects the estimated dollar value of discontinued patterns
for which credit will be issued to the open account against future purchases by
those retail customers and is included in other accrued liabilities.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation, and depreciation is provided on a straight-line basis over the
estimated useful lives of the related assets as follows:
Buildings 25-40 years
Buildings improvements 10-40 years
Leasehold improvements Term of lease
Machinery and equipment 7-10 years
Mobile and computer equipment 3-5 years
Maintenance and repair costs are charged to expense as incurred; costs
of additions and betterments are capitalized. When property and equipment are
sold or otherwise disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations.
Loan Costs
The costs incurred to obtain loans and credit lines have been deferred
and are being amortized over the term of the loan on a straight-line basis,
which is not materially different from the interest method.
Long-Lived Assets
The Company, in accordance with Statement of Financial Accounting
Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," has determined that no impairment
loss need be recognized for applicable assets for fiscal 1999, 1998, or 1997.
Advertising Costs
The Company's policy is to expense advertising costs upon initial
publication of advertisements. Advertising costs for the fiscal years ended
July 3, 1999, June 27, 1998, and June 28, 1997, were $269,000, $329,000, and
$363,000, respectively.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization of
$715,000. Gross intangible assets are comprised of $15,000,000 for the
Simplicity trade mark and $6,455,000 for Goodwill.
The Company evaluates the recoverability of intangible assets using
the undiscounted cash flow projections for the appropriate entity to which the
intangible relates. Intangible asset balances are being amortized on a
straight-line basis over periods ranging from 15 to 35 years.
Revenue Recognition
Revenue is recognized at the time of shipment of the Company's
products to its customers, except for certain pattern shipments. The initial
base stock of patterns is shipped to most retail customers under a deferred
payment arrangement whereby revenue is recognized upon the shipment of
reordered patterns. Some patterns are sold on a commission basis with revenue
recognized by the Company at the time of sale of the patterns by the retail
customer. Return of products and other discounts and allowances are netted
against sales.
Income Taxes
The Company provides deferred income tax assets and liabilities for
the expected future tax consequences of differences in the financial reporting
basis and income tax basis of certain assets and liabilities.
Undistributed earnings of subsidiaries located outside the US may or
may not be included in the taxable income reported in the US, depending upon
the Company's expectations for remitting such earnings to the parent company.
Currently, the Company has no plans to repatriate these earnings.
Retirement Plans
The Company has defined contribution plans covering substantially all
full-time US employees, a defined contribution plan covering BT personnel,
defined benefit plans covering Simplicity foreign employees, non-qualified
defined contribution plans for key officers and employees, and a stock purchase
30
<PAGE> 7
plan available to all employees after a certain period of employment.
Postretirement Benefits
Other Than Pensions
The Company provides health care benefits for certain eligible active
and retired domestic employees. Some of these plans are covered under
collective bargaining agreements with unions and are unfunded. Part of the
costs for the health care benefits are paid by the employees. The Company
accounts for the retirement benefits in accordance with SFAS 106, "Employers'
Accounting for Postretirement Benefits other than Pensions."
Earnings Per Share
The Company calculates earnings per share in accordance with SFAS 128,
"Earnings Per Share." The calculation of basic earnings per share excludes any
dilutive effects of options, warrants, or convertible securities, while diluted
earnings share includes these effects.
Other Accounting Pronouncements
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information, "which was effective for the Company for
this fiscal year. SFAS 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. 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 reporting is found at Note 12.
In 1998, the FASB issued SFAS 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits." SFAS 132 revises disclosures about
pension and other postretirement benefit plans, but it does not change the
measurement or recognition of those plans. SFAS 132 was effective for the
Company for the fiscal year beginning June 28, 1998.
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/organizational costs capitalized prior to this point be written off
and that future costs be expensed as incurred. The Company will adopt this
standard in fiscal 2000. At July 3, 1999, the Company has approximately
$150,000 of unamortized organizational costs which will be expensed upon
adoption of this standard.
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires companies to record derivatives on the
balance sheet as assets or liabilities, and measure the fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This standard will be effective for fiscal 2001 and the
Company has not determined the extent of the impact of the implementation of
this standard on the financial statements.
Reclassifications
Certain balances in prior years have been reclassified to conform with
the presentation adopted in the current fiscal year.
2. Inventories
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
<S> <C> <C>
Raw materials $ 9,034,000 $ 8,152,000
Work-in-progress 5,131,000 5,178,000
Finished goods 17,973,000 18,163,000
Reserves (1,481,000) (1,135,000)
Total $ 30,657,000 $ 30,358,000
</TABLE>
31
<PAGE> 8
3. Notes Payable and Long-Term Debt
The balances owed under the long-term agreements are as follows:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
<S> <C> <C>
Fixed-rate term loan $18,000,000 $20,000,000
Revolving bank loan 23,908,000 24,508,000
European Coal &
Steel Community
(ECSC) loan -- 104,000
Total 41,908,000 44,612,000
Less current portion 2,000,000 2,104,000
Total long-term debt $39,908,000 $42,508,000
</TABLE>
In June 1998, in conjunction with the acquisition of Simplicity (Note
11), the Company renegotiated its loan agreement. Under the new agreement, the
Company obtained a $20,000,000 term loan repayable quarterly on a ten-year
amortization basis beginning October 1, 1998, with a fixed annual interest rate
of 7.40% and a $10,000,000 balloon payment due at the end of five years.
In November 1998, the Company converted its fixed rate on its term
loan with a bank (at 7.4%) to a floating rate at 90-day LIBOR plus 1.45% (or
6.77% at July 3, 1999). Concurrently, the Company entered into a $19.5 million
interest rate swap with the bank for a 5-year term that 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. Under this
provision, the Company could realize a gain or a loss depending on the interest
rate conditions at the time the swap is terminated. As of July 2, 1999, the
mark-to-market provision was valued at approximately $424,000.
Also in June 1998, the Company's revolving loan was increased from
$15,000,000 to $30,000,000 including advances of up to (pound)7,000,000 (or
$11,190,000 at the July 3, 1999 exchange rate). This revolving loan expires on
December 1, 2000, unless renewed by mutual agreement. Therefore, this revolving
loan is reported as long-term debt.
In addition, in June 1998, the bank committed $3,000,000, which the
Company may use for letters of credit. At July 3, 1999, the Company has
$2,000,000 of letters of credit outstanding.
Advances in US dollars under the revolving loan bear interest at the
annual rate of 1.50% over the floating 30-day LIBOR rate as quoted in the Wall
Street Journal (6.68% as of July 3, 1999). Advances in British pounds sterling
are made under UK LIBOR contracts. These contracts bear interest based on the
adjusted LIBOR rates for specific periods. The effective interest rate as of
July 3, 1999 was 6.66%.
At July 3, 1999, $6,092,000 was available for borrowing under the
revolving loan agreement. Of the available balance at July 3, 1999,
(pound)250,000 ($400,000) of the amount was available for borrowing in British
pounds sterling or US dollars, with the additional $5,692,000 available for
borrowing in US dollars only.
At July 3, 1999, the US dollar borrowings on the revolving loan
amounted to $13,117,000. At July 3, 1999, borrowings in British pounds sterling
by BT totaled (pound)6,750,000 (or $10,791,000 at the July 3, 1999 exchange
rate), under LIBOR contracts in the amounts of (pound)1,250,000,
(pound)750,000, (pound)3,250,000, (pound)1,250,000, and (pound)250,000 at
interest rates of 6.83%, 6.89%, 6.86%, 6.89%, and 6.64%, respectively, for
three month contracts.
The average US dollar borrowings outstanding under line of credit
agreements for the fiscal years ended July 3, 1999, June 27, 1998, and June 28,
1997 were $11,541,000, $499,000, and $1,000 at weighted average interest rates
of 6.87%, 6.98%, and 8.22%, respectively. The maximum outstanding US dollar
borrowings during these periods were $13,987,000, $13,776,000, and $194,000,
respectively.
The average borrowings outstanding in British pounds sterling under
the line of credit agreements for the fiscal years ended July 3, 1999 and June
27, 1998 were (pound)6,681,000 ($10,966,000) and (pound)6,150,000
($10,163,490), at weighted average interest rates of 8.21% and 8.64%,
respectively. The maximum outstanding borrowings during these periods were
(pound)6,750,000 ($10,790,000, at the July 3, 1999 exchange rate) and
(pound)6,500,000 ($10,800,000 at the June 27, 1998 exchange rate),
respectively.
BT has overdraft borrowing facilities (similar to revolving loan
facilities used in the US) available in British pounds sterling with a United
Kingdom branch of a United States based bank, which provides overdraft
facilities totaling (pound)600,000 (or $959,000 at the July 3, 1999 exchange
rate). Overdrafts bear interest at the bank's base rate plus 1.50% (subject to
a minimum rate of 6.00%), which was 6.66% at July 3, 1999. Borrowings under
this facility at July 3, 1999, totaled (pound)241,000 (or $385,000 at the July
3, 1999 exchange rate).
At July 3, 1999, (pound)359,000 ($574,000) was available for
borrowings under this overdraft facility. The average overdraft outstanding
under the overdraft facility was (pound)274,000 ($450,000) and (pound)261,000
($432,000), at the average exchange rates for the fiscal years ended July 3,
1999 and June 27, 1998, at weighted average interest rates of 7.83% and 8.64%,
respectively. The maximum overdraft outstanding during the fiscal years ended
July 3, 1999 and June 27, 1998 was (pound)530,000 ($847,000) and (pound)839,000
($1,387,000), respectively (at the average exchange rates during the periods).
The bank provides BT with
32
<PAGE> 9
other services including letters of credit and bank-guaranteed standby credit
for value-added tax payments of an additional (pound)200,000 ($320,000 at the
July 3, 1999 exchange rate) bearing the same interest rates as in the overdraft
facility.
Maturities of long-term debt at July 3, 1999 are as follows:
<TABLE>
<S> <C> <C>
Fiscal Year: 2000 $ 2,000,000
2001 25,408,000
2002 2,000,000
2003 2,000,000
2004 10,500,000
Total $41,908,000
</TABLE>
Substantially all of the Company's US assets are pledged as collateral
for the Company's US revolver and term loan.
The loan agreement contains various covenants requiring, among other
things, that the Company maintain certain levels of financial ratios such as
Funded Indebtedness to Tangible Net Worth and Fixed Charge Coverage. In the
opinion of management, the Company was in compliance with all such covenants at
July 3, 1999.
Net interest paid (net of amount capitalized) during the fiscal years
ended July 3, 1999, June 27, 1998, and June 28, 1997 was $3,080,000, $474,000,
and $488,000, respectively. During the fiscal year ended July 3, 1999, June 27,
1998, and June 28, 1997, $94,000, $339,000, and $97,000 of interest expense was
capitalized primarily in connection with warehouse and dyehouse expansions in
the US.
4. Leases
The Company's operations utilize property, facilities, equipment, and
vehicles leased from others. Buildings and facilities leased from others
primarily are for design and sales offices, showrooms, distribution centers,
and the Val-Mex and India manufacturing operations. The lease arrangements
generally provide for a fixed base rent, and in some instances adjustments for
inflation. Initial terms of leases generally are not more than fifteen years
exclusive of options to renew. Leases of other equipment primarily consist of
vehicles. Information regarding the Company's leasing activities at July 3,
1999, is as follows:
<TABLE>
<CAPTION>
Minimum Lease Payments
<S> <C> <C>
Year: 2000 $ 1,330,000
2001 1,289,000
2002 1,229,000
2003 1,221,000
2004 1,218,000
Thereafter 7,265,000
Total $13,552,000
</TABLE>
Rent expense under operating leases totalled $1,767,000, $585,000, and
$412,000 during the fiscal years ended July 3, 1999, June 27, 1998, and June
28, 1997, respectively.
5. Accrued Liabilities
<TABLE>
<CAPTION>
Current July 3, 1999 June 27, 1998
<S> <C> <C>
Reserve for pattern discards $ 2,169,000 $ 3,911,000
Acquisition-related liabilities (see below) 677,000 1,500,000
Accrued payroll costs (including bonus) 1,657,000 1,412,000
Vacation accrual 1,194,000 1,265,000
Income taxes payable 1,360,000 1,058,000
Rent payable 1,349,000 734,000
Taxes other than income 1,426,000 1,608,000
Other accrued liabilities 3,256,000 3,914,000
Total current accrued liabilities $13,088,000 $15,402,000
</TABLE>
In connection with the acquisition of Simplicity, the Company recorded
a liability as of June 19, 1998 principally for employee severance of
$1,378,000 and other acquisition-related costs of $122,000. During fiscal 1999,
the Company finalized its plans and recorded an additional $412,000 primarily
for UK shutdown costs.
33
<PAGE> 10
6. Income Taxes
The US and foreign components of the provision for income taxes for
the fiscal years ended July 3, 1999, June 27, 1998, and June 28, 1997 are as
follows:
<TABLE>
<CAPTION>
Current 1999 1998 1997
<S> <C> <C> <C>
Federal $ 2,534,000 $ 3,002,000 $ 3,734,000
State 391,000 243,000 326,000
Foreign 77,000 (194,000) 65,000
Total current 3,002,000 3,051,000 4,125,000
Deferred
Federal 1,545,000 312,000 123,000
State 154,000 117,000 (173,000)
Foreign (243,000) (188,000) (82,000)
Total deferred 1,456,000 241,000 (132,000)
Total provision for income taxes $ 4,458,000 $ 3,292,000 $ 3,993,000
Effective Rate 43.6% 39.5% 36.2%
</TABLE>
Undistributed earnings of BT aggregated $522,000 as of July 3, 1999.
Under existing laws, such earnings will not be subject to US tax until
distributed as dividends. No provision has been made for US federal or state
income taxes to be paid on the undistributed earnings because, at this time, it
is not expected that the undistributed earnings of BT will be remitted to the
parent company. If these amounts were not expected to be reinvested, additional
deferred tax of approximately $178,000 would have to be provided.
A reconciliation of the income tax provision at the statutory tax rate
to the Company's effective tax rate is as follows (shown in percentages):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected provision at statutory US tax rate 34.0% 34.0% 34.0%
Effect of foreign operations on provision 4.3 1.7 0.1
Effective state tax rate 3.3 2.5 3.4
Adjustment for Jobs Tax Credits -- 2.3 (1.3)
Non-deductible goodwill 2.1 -- --
Other differences (0.1) (1.0) --
Total 43.6% 39.5% 36.2%
</TABLE>
In fiscal year 1997, the Company recorded South Carolina Jobs Tax
Credits totalling $225,000, resulting in a net tax benefit (net of applicable
federal income tax effect) of $148,500 for credits earned. Recording these
credits in the year they are earned increases the Deferred Tax Asset. Future
state tax payments are reduced by credits actually taken on the South Carolina
tax return. According to SFAS 109, "Accounting for Income Taxes," such tax
credits are to be recorded as assets to the extent it is more likely than not
that the taxable income in future periods will be sufficient to utilize the
credits and employment levels will not decrease, causing a loss of credits
recorded in prior years. SFAS 109 also requires that, on an on-going basis,
management assess any changes in conditions which may affect the likelihood of
realizing these tax credits and that a valuation allowance be established
should a degree of uncertainty about the likelihood of realizing these credits
become apparent. During fiscal 1998, management wrote-off $405,000 against the
deferred tax asset relating to the South Carolina Jobs Tax Credits as a result
of reductions in its workforce in South Carolina, resulting in a charge against
income (net of applicable federal income tax effect) of $267,300. During fiscal
1999, no additional credits or write-offs were required. Based on management's
review of the Company's historical and current performance and its plans for
future growth, including the Simplicity acquisition and other acquisitions, the
introduction of new products, the expansion of existing products, and expansion
into international markets, management believes, at this time, it is more
likely than not that the Company will be able to fully utilize these tax
credits and no valuation allowance is considered necessary at this time.
34
<PAGE> 11
The Company is uncertain as to the amount of additional credits, if
any, which may be earned in future years, because future credits are contingent
upon regionally specific increases in employment and are contingent upon
additional future taxable income sufficient to fully utilize such credits as
may become available in the future.
The net deferred tax asset and net deferred tax liability are
attributable to the following temporary differences:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Purchase accounting $ (80,000) $ (127,000)
Intercompany inventory 110,000 107,000
Accounts receivable reserve 298,000 337,000
Inventory reserve 250,000 133,000
Discard returns 178,000 358,000
Uniform capitalization costs 261,000 151,000
Prepaid expense (8,000) (55,000)
Accruals 1,601,000 1,812,000
Depreciation (1,175,000) (1,000,000)
Jobs tax credit 1,098,000 1,225,000
Supplemental executive retirement plan 299,000 362,000
Postretirement benefits - other than pensions 785,000 843,000
Tax write-off of intercompany receivables (1,115,000) --
Alternative minimum tax credits 188,000 --
Other temporary differences 45,000 39,000
Net deferred tax asset $ 2,735,000 $ 4,185,000
</TABLE>
Income taxes paid by the Company during the fiscal years ended July 3,
1999, June 27, 1998, and June 28, 1997 were $3,877,000, $2,574,000, and
$3,966,000, respectively.
Simplicity has foreign net operating loss carryforwards of
approximately $4,225,000, which are available to offset future foreign taxable
income. A valuation allowance has been recorded to offset the tax benefit of
these foreign net operating loss carryforwards. Simplicity's current foreign
losses of $702,000 increase the effective tax rate of the Company because they
do not produce any foreign tax benefit and are not deductible on the US tax
return. In addition, Simplicity has foreign tax credit carryforwards of
$481,000, which are available to offset future US income taxes. Because these
credits are due to expire in the near term and are limited as to their usage
under US tax law, a valuation allowance has been recorded to offset the benefit
of these credits.
7. Retirement Benefits
Conso operates a non-qualified deferred compensation plan for certain
of its key officers and employees. As of July 3, 1999 and June 27, 1998, the
unfunded liabilities included in current liabilities and representing the plan
balance are $228,000 and $197,000, respectively.
The BT subsidiary operates a defined benefit plan for the benefit of a
certain executive. The cost for the fiscal years ended July 3, 1999, June
27,1998, and June 28, 1997, amounted to (pound)37,000 ($59,000), (pound)55,000
($91,000), and (pound)44,000 ($71,000), respectively, and these amounts have
been included in general and administrative expenses. Contributions to the plan
ceased in March 1999.
In January 1996, the Company established a defined contribution plan in
the US pursuant to Section 401(k) of the Internal Revenue Code, which covers all
Conso US employees. The Company matches each employee's contribution up to a
maximum of 4% of each employee's compensation beginning in January 1999. Prior
to that time the match was a maximum of 3%. Aggregate Company contributions of
$415,000, $389,000, and $374,000 were made for the fiscal years ended July 3,
1999, June 27, 1998, and June 28, 1997, respectively.
BT's "defined contribution" type (group personal pension) plan was
established in July 1995, pursuant to the United Kingdom's Inland Revenue codes
and covers substantially all UK employees (excluding Simplicity). BT matches
each employee's contribution up to a maximum of 3% of each employee's
compensation. This percentage will rise to 4% in fiscal 2000. Aggregate
contributions by BT
35
<PAGE> 12
of (pound)63,000 ($104,000), (pound)69,000 ($114,000), and (pound)51,000
($82,000) were made for the fiscal years ended July 3, 1999, June 27, 1998, and
June 28, 1997, respectively.
Simplicity has two defined contribution retirement plans, which cover
substantially all full-time domestic employees, and maintains various other
retirement plans covering employees in its foreign subsidiaries, including a
defined benefit plan for employees located in the UK that was discontinued as
of August 1999.
Simplicity's defined contribution plan in the US provides the matching
of up to 4% of each employee's compensation. The Company's contribution to this
plan in fiscal 1999 was $432,000.
The projected pension benefit obligation for Simplicity's UK Plan is
determined using the projected unit value method, an average discount rate of
6% and the average long-term compensation increase of 3.5%. The average
expected rate of return on plan assets is 7%. A summary of this plan is shown
as of July 3, 1999:
<TABLE>
<CAPTION>
Change in benefit obligation
<S> <C>
Projected benefit obligation at 6/27/98 $ 5,752,000
Service cost 118,000
Interest cost 388,000
Plan participants' contributions 48,000
Actuarial loss 752,000
Benefits paid (411,000)
Foreign currency (gain) (205,000)
Projected benefit obligation at 7/3/99 $ 6,442,000
</TABLE>
<TABLE>
<CAPTION>
Funded status
<S> <C>
Funded status at 7/3/99 $ 433,000
Unrecognized transitional asset (227,000)
Unrecognized actuarial loss 200,000
Pension prepayment $ 406,000
</TABLE>
<TABLE>
<CAPTION>
Change in plan assets
<S> <C>
Market value of assets at 6/27/98 $ 6,139,000
Actual return on assets 1,232,000
Contributions received 132,000
Benefits paid (411,000)
Foreign currency (loss) (218,000)
Market value of assets at 7/3/99 $ 6,874,000
Components of net periodic pension cost
Service cost $ 118,000
Interest cost 388,000
Expected return on assets (541,000)
Amortization of prior service cost 3,000
Amortization of transitional asset (58,000)
Net periodic pension cost (90,000)
Curtailment loss 18,000
Net periodic pension cost after curtailment $ (72,000)
</TABLE>
At the time of the acquisition of Simplicity by the Company, it was
decided to discontinue contributions to Simplicity UK's "defined benefit" type
pension plan. The plan is to be replaced with a "defined contribution" type
plan. Based on receipt of recent actuarial advice, an estimated liability of
$290,000 has been recorded in accordance with purchase accounting to reflect
the anticipated costs of the wind-up of the plan.
Simplicity also had a non-qualified defined contribution Supplemental
Executive Retirement Plan for certain key employees. This plan was discontinued
in September 1998. Benefits earned under this plan were generally determined as
a percentage of each participant's annual salary. Simplicity does not fund this
plan, however, the present value of the related liability of $803,000, has been
included in other noncurrent liabilities as
8. Commitments and Contingencies
Royalties
The Company has entered into agreements with several designers
requiring royalty payments, which are accrued currently, based on sales of
specific product styles. Royalty expenses were $1,037,000, $100,000, and
$187,000, for fiscal years ended July 3, 1999, June 27, 1998, and June 28,
1997, respectively.
Litigation
The Company is routinely involved in various disputes and legal
actions related to its business operations. In the opinion of management, the
ultimate resolution of these actions will not have a material effect on the
Company's financial position or future results of operations.
Employment Contracts and Severances
The Company has an employment contract with one key employee and
severance policies relating to termination of employment by the Company.
Provisions have been made for the estimated severance costs, which were
incurred by the Company in connection with the acquisition of Simplicity (See
Note 5).
Proposed Tax Adjustments
From time to time, various regulatory taxing authorities assess the
Company for estimated unpaid taxes. The Company has made provisions for such
taxes, which it believes may be payable. In some cases, the Company does not
believe the assessments will be material if any adverse tax consequence
prevails, and no provisions have been recorded.
36
<PAGE> 13
9. Common Stock
Dividends
Since becoming a publicly traded company in December 1993, the Company
has not paid a cash dividend. The directors periodically review the
advisability of paying a cash dividend.
Stock Repurchase Plan
In November 1997, the Board of Directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock at prices to be
determined, from time to time, by the Executive Committee of the Board of
Directors. In fiscal 1999, the Company repurchased 75,000 shares of common
stock at an average price of $6.71 for a total of $503,000. To date 248,000
shares have been repurchased at a cost of $1,902,000.
Stock Option Plan
In December 1993, the Company established an incentive stock option
plan to issue up to 607,500 shares of the Company's common stock to certain
managers and other key employees. As of July 3, 1999, the Company had
outstanding options to purchase 173,875 shares of common stock with 423,375
options available to be issued under the plan.
The stock options are exercisable with respect to one-third of the
total options after one year, an additional one-third of the total options
after two years, and the final one-third of the options after three years. The
options expire after five years, and are subject to continued employment of the
employee. A summary of the status of the Company's incentive stock option plan
as of July 3, 1999, June 27, 1998, and June 28, 1997, and changes during the
years ended on those dates, is presented below.
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the fiscal year 165,725 $8.93 164,500 $ 8.76 93,600 $ 6.67
Granted 46,000 $7.00 21,000 $10.30 79,500 $11.00
Exercised -- -- (1,650) $ 6.67 (8,600) $ 6.67
Cancellations (37,850) $9.05 (18,125) $ 9.22 -- --
Outstanding at end of
the fiscal year 173,875 $8.39 165,725 $ 8.93 164,500 $ 8.76
Options exercisable at year end 102,047 $8.36 71,450 $ 8.09 22,600 $ 6.67
</TABLE>
In fiscal year 1997, the Company adopted the disclosure-only
provisions of SFAS 123 "Accounting for Stock-Based Compensation." Accordingly,
the Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plans, and does not recognize compensation cost for the
stock options referred to above as the exercise price equals the market price
of the stock on the grant date. If the Company had elected to recognize
compensation cost based on fair value of the options granted at the grant date
as prescribed by SFAS 123, net income and earnings per share would have been
reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income-as reported $ 5,762,000 $ 5,032,000 $ 7,027,000
Less compensation (net of tax effect) per SFAS 123 (96,000) (119,000) (106,000)
Net income - as pro forma $ 5,666,000 $ 4,913,000 $ 6,921,000
Net income per share - as reported $ 0.78 $ 0.68 $ 0.94
Net income per share - as pro forma $ 0.77 $ 0.66 $ 0.92
Net income per share - assuming dilution as reported $ 0.78 $ 0.67 $ 0.93
Net income per share - assuming dilution as pro forma $ 0.77 $ 0.66 $ 0.92
Weighted average number of shares outstanding 7,349,000 7,447,000 7,486,000
Options assumed to be exercised -- 79,000 155,000
Shares assumed to be repurchased -- (56,000) (102,000)
Weighted average number of shares outstanding -
assuming dilution 7,349,000 7,470,000 7,539,000
</TABLE>
37
<PAGE> 14
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>
Fiscal Year 1999 1998 1997
<S> <C> <C> <C>
Expected dividend yield None None None
Expected stock price volatility 56.02% 37.59% 33.92%
Risk-free interest rate 4.59% 5.81% 6.72%
Expected life of options 3.2 years 3.2 years 3.2 years
Weighted average fair values
of options granted $ 3.00 $ 4.36 $ 4.56
</TABLE>
Directors Stock Election Plan
In January 1997, the Company established a Stock Election Plan for
Non-Employee Directors whereby non-employee directors may elect to receive
their director's compensation in the Company's common stock in lieu of cash
payments. The plan permits the award of up to 25,000 shares in total of the
Company's stock in lieu of directors' fees. During the fiscal years ended July
3, 1999 and June 27, 1998, 5,977 and 4,222 shares were issued in accordance
with directors' elections. The directors' fees under this plan are immaterial.
10. Postretirement Benefits Other Than Pensions
Continuing health care benefits are provided to eligible employees who
retire as a member of a collective bargaining unit and have attained age 61. A
20-year minimum service requirement is also required for eligible employees
retiring after December 31, 1993. Eligible employees who retire before age 65
may elect to continue health care benefits provided by health maintenance
organizations or indemnity insurance programs until age 65, with the retiree
paying a portion of the cost.
Employees are eligible for the reimbursement of a defined amount as
payment towards the Medicare Part B premium upon reaching age 65, however, if
they retire before age 65 they are only eligible for the Medicare
reimbursements if they waived continuing coverage of health care benefits from
the date they retired until age 65. Currently, there are approximately 390
active participants in the plan.
The following schedule reconciles benefit obligations and plan assets
to the amounts recorded on the consolidated balance sheets:
<TABLE>
<CAPTION>
Plan Year Ended January 31, 1999 January 31, 1998
<S> <C> <C>
Change in benefit obligation
Expected benefit obligation at beginning of year $ 1,487,000 $ 1,590,000
Actual benefit obligation at beginning of year 1,506,000 --
Actuarial loss due to census change 20,000 --
Service cost 6,000 6,000
Interest cost 98,000 104,000
Benefit payment (gain)/loss 16,000 (6,000)
Actual benefits paid (217,000) (207,000)
Expected benefit obligation at end of year 1,410,000 1,487,000
Change in plan assets
Employer contribution 217,000 207,000
Benefits paid (217,000) (207,000)
Fair value of plan assets at end of year -- --
Funded status
Funded status (1,410,000) (1,487,000)
Unrecognized prior service cost (196,000) (231,000)
Unrecognized net (gain)/loss (502,000) (594,000)
(Accrued)/Prepaid benefit cost (2,108,000) (2,312,000)
</TABLE>
38
<PAGE> 15
For measurement purposes, an 8% annual rate of increase for medical
costs was assumed and was reduced each year to an ultimate level of 6.5% by the
year 2008 and thereafter. The discount rate used was 7%.
The following table highlights the impact on the accumulated
postretirement benefit obligation of a 1% increase/decrease in the trend rates:
<TABLE>
<CAPTION>
Impact of Impact of
1% Increase 1% Decrease
<S> <C> <C>
Change in APBO +6.47% (5.71)%
Change in Interest
and Service Cost +6.75% (5.95)%
</TABLE>
The components of postretirement expense included the following:
<TABLE>
<CAPTION>
Plan Year Ended January 31, 1999 January 31, 1998
<S> <C> <C>
Service cost 6,000 6,000
Interest cost 98,000 104,000
Expected return on plan assets 0 0
Amortization of transition (asset)/obligation 0 0
Amortization of prior service cost (35,000) (35,000)
Amortization of unrecognized gain/loss (57,000) (56,000)
Net periodic postretirement benefit cost 12,000 19,000
</TABLE>
11. Acquisitions
Simplicity Pattern Company
On June 19, 1998, the Company acquired all the outstanding common
stock of Simplicity Capital Corporation, parent company of Simplicity Pattern
Co., Inc. (the operating company). The consideration paid was $31,702,000
(consisting of the cash purchase price and transaction expenses) plus the
assumption of certain liabilities, for a total purchase price of $53,456,000,
in a transaction accounted for in accordance with the purchase method of
accounting. The balance sheet effect of this transaction was recorded on June
19, 1998. These amounts have been adjusted for actual and revised estimates for
the fiscal year ending July 3, 1999.
<TABLE>
<CAPTION>
Purchase price:
<S> <C>
Cash portion $ 33,000,000
Transaction expenses
(professional fees, etc.) 768,000
Less: Simplicity's cash acquired (2,066,000)
Total consideration 31,702,000
Simplicity's liabilities assumed 21,754,000
Total purchase price $ 53,456,000
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Allocations of purchase price:
Current assets $ 19,576,000
Property and equipment, net 8,326,000
Other assets 4,098,000
Intangible assets 21,456,000
Total purchase price $ 53,456,000
</TABLE>
<TABLE>
<CAPTION>
Purchase accounting adjustments:
<S> <C>
Book value of Simplicity's net
assets prior to the acquisition $(42,631,000)
Discharge of subordinated notes and
certain liabilities of Simplicity:
- -Subordinated notes 70,077,000
- -Management benefit plan
(net of deferred tax benefit) 1,735,000
Write-down of plant, property and
equipment to fair market value,
net of taxes (1,559,000)
Adjustments of various other assets
and liabilities to fair market value,
net of taxes (458,000)
Adjustment of intangible assets for
the amount the total consideration
exceeds the fair market value of
net tangible assets 4,538,000
Total consideration $ 31,702,000
</TABLE>
39
<PAGE> 16
The fair value adjustments have been determined by the management of
the Company based on available information, including real estate and equipment
appraisal information prepared by an independent appraiser. The intangible
assets consist of the value of the trademark and goodwill of Simplicity.
The following unaudited pro forma financial information shows the
results of operations for the fiscal years ended June 27, 1998 and June 28,
1997 as though the Simplicity acquisition had occurred at the beginning of each
year.
<TABLE>
<CAPTION>
Unaudited pro forma June 27, 1998 June 28, 1997
<S> <C> <C>
Revenue $ 125,518,000 $ 127,840,000
Net income $ 6,967,000 $ 9,051,000
Earnings per share:
Basic $ .94 $ 1.21
Diluted $ .93 $ 1.20
</TABLE>
The unaudited pro forma results of operations presented above do not purport to
be indicative of either (i) the results of operations had the acquisition
actually occurred at the beginning of fiscal 1998 or fiscal 1997, or (ii) the
future results of operations.
Hwalek Corporation
On April 12, 1999, the Company purchased the assets of the Hwalek
Corporation ("VNI") for $140,000. VNI is a resin manufacturer of decorative
hardware and accessories.
12. Segment Reporting
As discussed in Note 1, the Company adopted SFAS 131, "Disclosure
about Segments of an Enterprise and Related Information." The Company has
viewed the trimmings business as having two main segments of Conso US and BT,
both of which manufacture and distribute trimmings products. Simplicity's
pattern market is viewed as one business, since all production occurs in one
location (Niles, Michigan) and the foreign offices only market and distribute
patterns. All chief operating officers of these segments are considered part of
the Company's executive management. Certain summary information for the
segments is as follows:
<TABLE>
<CAPTION>
Fiscal Year 1999 1998 1997
<S> <C> <C> <C>
Net sales to unaffiliated customers
British Trimmings $ 17,880,000 $ 19,530,000 $ 20,387,000
Conso Products US 53,583,000 52,331,000 53,060,000
Simplicity 48,197,000 -- --
Total $119,660,000 $ 71,861,000 $ 73,447,000
Operating income
British Trimmings $ (152,000) $ (215,000) $ 602,000
Conso Products US 9,108,000 9,148,000 10,916,000
Simplicity 4,168,000 -- --
Total $ 13,124,000 $ 8,933,000 $ 11,518,000
Noncurrent assets
British Trimmings $ 5,706,000 $ 6,933,000 $ 10,335,000
Conso Products US 17,464,000 16,154,000 7,595,000
Simplicity 31,236,000 31,981,000 --
Total $ 54,406,000 $ 55,068,000 $ 17,930,000
Interest expense (income), net
British Trimmings $ 949,000 $ 952,000 $ 699,000
Conso Products US (312,000) (343,000) (201,000)
Simplicity 2,267,000 -- --
Total $ 2,904,000 $ 609,000 $ 498,000
</TABLE>
40
<PAGE> 17
<TABLE>
<CAPTION>
Fiscal Year 1999 1998 1997
<S> <C> <C> <C>
Capital spending
British Trimmings $ 236,000 $ 508,000 $1,044,000
Conso Products US 2,953,000 6,477,000 4,663,000
Simplicity 1,984,000 -- --
Total $5,173,000 $6,985,000 $5,707,000
Depreciation and amortization
British Trimmings $1,094,000 $1,001,000 $ 880,000
Conso Products US 1,424,000 1,282,000 963,000
Simplicity 1,476,000 -- --
Total $3,994,000 $2,283,000 $1,843,000
</TABLE>
Simplicity is the only segment that has customers that account for
more than ten percent of total net revenue. Combined, these customers represent
approximately $23.2 million or 48.1% of net revenue of the pattern segment and
19.4% of the Company's total revenue and have a large impact on earnings of
both the segment and the Company.
Geographical Information
SFAS 131 also requires that geographical information be presented for
net sales and assets. The Company's management monitors the sales to the major
world market areas on a regular basis.
<TABLE>
<CAPTION>
Net Sales 1999 1998 1997
<S> <C> <C> <C>
United States $ 87,718,000 $ 47,818,000 $48,739,000
Other Western Hemisphere 6,617,000 4,138,000 3,986,000
United Kingdom 17,115,000 15,523,000 16,253,000
Other Europe and Mid-East 3,840,000 2,841,000 2,683,000
Pacific Rim 4,370,000 1,541,000 1,786,000
Total $119,660,000 $ 71,861,000 $73,447,000
</TABLE>
<TABLE>
<CAPTION>
Assets 1999 1998 1997
<S> <C> <C> <C>
United States $ 89,354,000 $ 88,945,000 $34,234,000
Other Western Hemisphere 3,830,000 3,693,000 1,361,000
United Kingdom 19,131,000 22,014,000 20,964,000
Other 1,064,000 1,040,000 --
Total $113,379,000 $115,692,000 $56,559,000
</TABLE>
13. Related Party Transaction
On July 1, 1998, the Company purchased real property owned jointly by
Mr. Findlay and Mrs. Findlay for use as a conference center in exchange for
shares of the Company's Common Stock. The Company issued 78,788 shares of
Common Stock to Mr. Findlay and Mrs. Findlay jointly as consideration for the
acquisition of the real property. Such consideration was based upon a closing
price of the Common Stock of $8.25 on July 1, 1998 and a value of $650,000 (the
Findlays' cost basis) for the real property which was less than the fair market
value based on an independent appraisal.
41
<PAGE> 18
Independent Auditors' Report
To the Board of Directors and Shareholders,
Conso International Corporation
Union, South Carolina
We have audited the accompanying consolidated balance sheets of Conso
International Corporation and subsidiaries ("the Company") as of July 3, 1999
and June 27, 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended July 3, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of British Trimmings Limited, a consolidated subsidiary, for the
year ended June 28, 1997, which statements reflect total revenues constituting
28% of consolidated total revenues for the fiscal year ended June 28, 1997.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the 1997 amounts included for
British Trimmings Limited, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, such consolidated financial statements present fairly, in all
material respects, the financial position of Conso International Corporation
and subsidiaries as of July 3, 1999 and June 27, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended July 3, 1999, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche, LLP
Deloitte & Touche LLP
Greenville, South Carolina
August 27, 1999
<PAGE> 19
Selected Financial Data
<TABLE>
<CAPTION>
1999(a) 1998(a) 1997(a)
<S> <C> <C> <C>
Summary of Operations (in thousands)(m)
Net sales $ 119,660 $ 71,861 $ 73,447
Gross margin 47,283 25,270 27,823
Operating income 13,124 8,933 11,518
Income before income taxes 10,220 8,324 11,020
Income taxes 4,458 3,292 3,993
Net income $ 5,762 $ 5,032 $ 7,027
Average Common Stock Outstanding (in thousands)(m) 7,349 7,447 7,486
Per Share of Common Stock:(m)
Net income $ .78 $ .68 $ .94
Shareholders' equity (f) 6.50 5.65 5.13
Common stock price range (g)(m)
High $ 8.56 $ 14.75 $ 16.25
Low 5.25 7.25 10.17
Price at fiscal year end 5.69 8.25 13.70
Statistical Data
Gross margin to net sales 39.5% 35.2% 37.9%
Operating income to net sales 11.0% 12.4% 15.7%
Net income to net sales 4.8% 7.0% 9.6%
Net income to average shareholders' equity 12.7% 12.5% 20.2%
Operating return on assets employed (h) 11.6% 12.8% 22.2%
Inventory turnover (i) 2.4 1.8 2.0
Accounts receivable turnover (j) 5.4 5.3 6.3
Net sales divided by average assets 1.1 1.0 1.4
Current ratio 2.9 2.4 2.2
Long term debt to equity ratio 0.8 1.0 --
Total liabilities to equity ratio 1.4 1.7 0.5
Capital expenditures (in thousands) $ 2,590(k) $ 1,558(k) $ 1,965(k)
Depreciation and amortization (in thousands) $ 3,994 $ 2,283 $ 1,843
EBITDA (in thousands) (l) $ 17,118 $ 11,216 $ 13,361
Approximate number of shareholders 1,950 1,800 1,300
Number of employees and associates at year end 1,816 1,378 1,569
Selected Balance Sheet Data (in thousands)
Working capital $ 38,186 $ 34,998 $ 20,973
Property:
Cost 45,873 40,360 25,049
Accumulated depreciation (13,788) (10,599) (8,486)
Net 32,085 29,761 16,563
Total assets 113,379 115,692 56,559
Long-term debt 39,908 42,508 0
Total liabilities 65,577 73,602 18,191
Shareholders' equity (f) 47,802 42,090 38,368
</TABLE>
(a) Fiscal years 1993 and thereafter are presented on a 52 or 53 week
basis with the closing on the Saturday nearest to June 30th, and
include British Trimmings since its acquisition in December 1993 and
Simplicity since its acquisition in late June 1998.
(b) 1992 and prior years were on a calendar year basis and are presented
as an average for each of the two years combined, as indicated.
(c) Pro forma US income taxes computed at a combined federal and state tax
rate of 37%. Prior to December 18, 1993, the Company was treated as an
S Corporation for income tax purposes.
(d) 1995 net income includes $913,000 or 13 cents per share for a one-time
carryforward of SC Jobs Tax Credits.
(e) Pro forma average common stock outstanding for the years 1992 and
prior have been adjusted for the 38,568 to 1 stock split effected
December 1993 and for the number of shares which would have been
necessary to distribute accumulated retained earnings at an offering
price of $5.00 less issuance expenses.
(f) Shareholders' equity used in this calculation is historical. Net
income used is pro forma using a C Corporation tax provision. The
effect on shareholders' equity is not material since, prior to
December 1993, distributions were made equivalent to the personal
income taxes payable by the Company's shareholders.
(g) Common stock was not publicly traded prior to December 15, 1993.
44
<PAGE> 20
<TABLE>
<CAPTION>
Average Average
1996(a) 1995(a) 1994(a) 1993(a) 1992 / 1991 1990 / 1989
<S> <C> <C> <C> <C> <C>
$ 70,714 $ 59,621 $ 41,559 $ 26,045 $ 22,371 $ 21,746
25,432 20,736 13,215 8,246 7,135 6,728
9,872 7,696 5,102 2,805 2,340 2,184
9,119 6,826 4,414 1,926 1,408 1,039
2,676 1,287(d) 1,638 713(c) 521(c) 384(c)
$ 6,443 5,539(d) 2,776 1,213 887 655
7,457 7,425 6,159 4,787 4,623(e) 4,280(e)
$ .86 $ .75(d) $ .45 $ .25(c) $ .19(c) $ .16(c)
4.13 3.25 2.99 .84 .67 .45
$ 13.17 $ 7.00 $ 7.11
5.78 5.22 5.00
10.83 6.22 6.11
36.0% 34.8% 31.8% 31.7% 31.9% 31.0%
14.0% 12.9% 12.3% 10.8% 10.5% 10.1%
9.1% 9.3%(d) 6.7% 4.7% 3.9% 3.1%
23.6% 26.0%(d) 24.8% 31.3% 31.7% 36.8%
21.6% 18.8% 17.6% 18.8% 17.3% 16.5%
2.3 2.2% 2.5 2.4 2.3 2.6
6.5 6.3 6.0 7.0 7.1 7.8
1.5 1.5 1.7 1.7 1.7 1.7
2.4 1.9 1.9 1.5 1.8 1.6
0.1 0.1 0.2 1.0 1.6 2.8
0.5 0.8 0.9 3.2 3.5 5.9
$ 1,811(k) $ 2,678 $ 1,891(k) $ 1,408 $ 830 $ 383
$ 1,751 $ 1,519 $ 1,010 $ 762 $ 724 $ 708
$ 11,623 $ 9,215 $ 6,111 $ 3,567 $ 1,614 $ 1,346
1,200 1,100 1,000 1 1 2
1,446 1,472 1,177 654 577 593
$ 19,461 $ 14,470 $ 11,944 $ 4,099 $ 4,126 $ 2,999
18,966 17,242 14,637 7,309 6,375 5,305
(6,592) (5,799) (4,518) (3,556) (2,849) (1,576)
12,374 11,443 10,119 3,753 3,518 3,730
47,278 43,699 35,326 16,778 13,752 13,079
2,108 2,598 3,127 3,930 4,686 5,334
16,499 19,575 16,924 12,777 10,659 11,142
30,778 24,124 18,402 4,001 3,093 1,937
</TABLE>
(h) Pre-tax income before interest expense divided by average of month-end
total assets.
(i) Cost of goods sold divided by average of month-end total inventories.
(j) Net sales divided by average of month-end receivables.
(k) Excludes the purchase of British Trimmings' assets, the Leek, England
building, the Conso / Graber Canada assets, and Wendy Cushing Ltd. in
1994, the purchase of the London production facility and the Claesson
assets in 1996, the new Conso US warehouse and dyehouse facilities
begun in 1997 and the purchase of HFDC's assets as well as the
Simplicity design system in 1998.
(l) Represents earnings before deductions for interest, income taxes,
depreciation and amortization ("EBITDA"), a non-GAAP (generally
accepted accounting principles) measurement. EBITDA is not intended to
represent cash flow from operations as defined by GAAP, and should not
be considered as an alternative to net income as an indicator of
operating performance or to cash flows (determined in accordance with
GAAP) as a measure of liquidity. This calculation may not be
comparable to other similarly titled measures reported by other
companies.
(m) Per share amounts and stock prices have been restated to reflect the
3-for-2 stock splits in October 1995 and 1996 effected in the form of
50% share dividends.
45
<PAGE> 21
Quarterly Financial Data - Unaudited
For the fiscal years ended July 3, 1999, June 27, 1998, and June 28, 1997
<TABLE>
<CAPTION>
Dollars in thousands, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
1999
<S> <C> <C> <C> <C> <C>
Net sales $29,387 $30,116 $29,049 $31,108 $119,660
Gross margin 11,476 12,512 11,349 11,946 47,283
Net income 1,441 1,880 1,138 1,303 5,762
Net income per basic share $ .20 $ .26 $ .16 $ .17 $ .78
1998
Net sales $16,735 $18,978 $17,614 $18,534 $ 71,861
Gross margin 6,122 6,488 5,959 6,700 25,269
Net income 1,031 1,285 1,087 1,629 5,032
Net income per basic share $ .14 $ .17 $ .15 $ .22 $ .68
1997
Net sales $17,012 $18,534 $19,427 $18,474 $ 73,447
Gross margin 6,773 7,337 7,428 6,285 27,823
Net income 1,734 2,064 1,989 1,240 7,027
Net income per basic share (a) $ .23 $ .28 $ .27 $ .17(b) $ .94
</TABLE>
(a) Per share amounts have been restated to reflect the 50% stock
dividends issued in the form of 3-for-2 stock splits in October 1996
and 1995. No cash or other dividends have been declared since the
Company became a public company. The Company's Board of Directors
periodically reviews the advisability of paying a cash dividend.
(b) The Fourth Quarter of 1997 includes an estimated $.05 per share
adjustment as a result of the Company's year-end physical inventory.
Stock Price and Shareholders Information
The Company's common stock is traded on the Nasdaq National Market
under the symbol CNSO. The following table presents the high and the low sales
prices of the common stock reported on the Nasdaq National Market for each
quarter in the fiscal years ended June 27, 1998, June 28, 1997, and June 29,
1996, and adjusted for the stock splits described in note (a) above. The price
earnings ratio (P/E) has been calculated on annualized earnings per share by
using trailing four quarters earnings and the average of the high and low stock
prices for the quarter.
<TABLE>
<CAPTION>
1999 1998 1997
High Low P/E High Low P/E High Low P/E
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 8.56 $ 5.63 9.8 $ 14.75 $ 9.75 14.5 $ 13.33 $ 10.00 12.8
Second Quarter $ 7.00 $ 5.50 7.5 $ 11.13 $ 7.25 12.4 $ 14.50 $ 12.25 13.7
Third Quarter $ 8.00 $ 5.81 8.3 $ 8.50 $ 7.38 12.8 $ 15.50 $ 12.25 13.5
Fourth Quarter $ 6.13 $ 5.25 7.3 $ 11.00 $ 8.00 14.1 $ 16.25 $ 11.50 14.8
</TABLE>
Approximate number of shareholders of record on August 31, 1999: 150
46
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------- ---------------------------------------
Name State or other Jurisdiction of
Incorporation of Organization
- -------------------------------------------------------------------- ---------------------------------------
<S> <C>
British Trimmings Limited(1) England
- -------------------------------------------------------------------- ---------------------------------------
Dominion Simplicity Patterns Limited(2) Canada
- -------------------------------------------------------------------- ---------------------------------------
British Trimmings (1997) Limited(3) England
- -------------------------------------------------------------------- ---------------------------------------
British Trimmings (Reddish) Limited(3) England
- -------------------------------------------------------------------- ---------------------------------------
Simplicity Capital Corporation(4) Delaware
- -------------------------------------------------------------------- ---------------------------------------
Simplicity Holdings, Inc.(5) Delaware
- -------------------------------------------------------------------- ---------------------------------------
Simplicity Limited(2) United Kingdom
- -------------------------------------------------------------------- ---------------------------------------
Simplicity Limited(2) New Zealand
- -------------------------------------------------------------------- ---------------------------------------
Simplicity Pattern Co., Inc.(6) Delaware
- -------------------------------------------------------------------- ---------------------------------------
Simplicity PTY Limited(2) Australia
- -------------------------------------------------------------------- ---------------------------------------
Simplicity S.A. de C.V.(2) Mexico
- -------------------------------------------------------------------- ---------------------------------------
Style Patterns (Australia) PTY Limited(2) Australia
- -------------------------------------------------------------------- ---------------------------------------
Style Patterns (N.Z.) Limited(2) New Zealand
- -------------------------------------------------------------------- ---------------------------------------
Val-Mex, S.A. de C.V. Mexico
- -------------------------------------------------------------------- ---------------------------------------
India Trimmings Private Limited India
- -------------------------------------------------------------------- ---------------------------------------
</TABLE>
Each subsidiary does business under its own name.
(1) British Trimmings Limited was acquired by the Registrant on December
22, 1993.
(2) Subsidiary of Simplicity Pattern Co., Inc.
(3) Subsidiary of British Trimmings Limited.
(4) Simplicity Capital Corporation was acquired by the Registrant on June
19, 1998.
(5) Subsidiary of Simplicity Capital Corporation.
(6) Subsidiary of Simplicity Holdings, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Conso International Corporation on Form S-8 (Registration Nos. 333-20671,
33-97146 and 33-85518) of our report dated August 27, 1999, incorporated by
reference in the Annual Report on Form 10-K of Conso International Corporation
for the fiscal year ended July 3, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Greenville, South Carolina
September 28, 1999
<PAGE> 1
EXHIBIT 23.2
[GRANT THORNTON LETTERHEAD]
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We have issued our report dated 5 September 1997, accompanying the
consolidation package expressed in pounds sterling consisting of the
consolidated balance sheet at 28 June 1997 and the related consolidated
statements of income and cashflow of British Trimmings Limited for the year
ended 28 June 1997 for the purpose of inclusion in the consolidated financial
statements of Conso International Corporation (formerly known as Conso Products
Company) for the fiscal year ended 3 July 1999. We hereby consent to the
incorporation by reference of said report on Forms S-8 (file nos 333-20671,
effective 29 January 1997, 33-97146, effective 20 September 1995 and 33-85518,
effective 20 October 1994), incorporated by reference in the Annual Report on
Form 10-K of Conso International Corporation (formerly known as Conso Products
Company) for the fiscal year ended 3 July 1999.
/s/ Grant Thornton
GRANT THORNTON
MANCHESTER
UNITED KINGDOM
30 September 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUL-03-1999
<EXCHANGE-RATE> 1
<CASH> 1,671
<SECURITIES> 0
<RECEIVABLES> 23,199
<ALLOWANCES> 1,190
<INVENTORY> 30,657
<CURRENT-ASSETS> 58,973
<PP&E> 45,873
<DEPRECIATION> 13,788
<TOTAL-ASSETS> 113,379
<CURRENT-LIABILITIES> 20,787
<BONDS> 0
0
0
<COMMON> 16,596
<OTHER-SE> 31,206
<TOTAL-LIABILITY-AND-EQUITY> 113,379
<SALES> 119,660
<TOTAL-REVENUES> 119,923
<CGS> 72,377
<TOTAL-COSTS> 106,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,167
<INCOME-PRETAX> 10,220
<INCOME-TAX> 4,458
<INCOME-CONTINUING> 5,762
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,762
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.78
</TABLE>
