<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number: 0-22942
CONSO INTERNATIONAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0986680
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
513 North Duncan Bypass, P.O. Box 326, Union, South Carolina 29379
- ------------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
864/427-9004
------------
(Registrant's telephone number, including area code)
N/A
---------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 14, 2000:
Common Stock, no par value 7,338,625 shares.
Page 1 of 18 pages
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
January 1, 2000 and July 3, 1999 3
Consolidated Statements of Operations (unaudited) for
the three months and six months ended January 1, 2000
and December 26, 1998 4
Consolidated Statement of Shareholders' Equity
(unaudited) for the three months and six months ended
January 1, 2000 5
Consolidated Statements of Cash Flows (unaudited) for
the six months ended January 1, 2000 and December 26,
1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
Page 2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,135,000 $ 1,671,000
Accounts receivable, net of allowances for
bad debts and customer deductions of
$1,140,000 and $1,190,000 at January 1, 2000
and July 3, 1999, respectively 22,027,000 22,009,000
Inventories (Note 3) 30,402,000 30,657,000
Deferred income taxes - current portion 1,988,000 1,947,000
Prepaid expenses and other 3,554,000 2,689,000
------------- -------------
Total current assets 59,106,000 58,973,000
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 2,410,000 1,539,000
Buildings and improvements 19,949,000 17,338,000
Machinery and equipment 27,184,000 26,996,000
------------- -------------
Total 49,543,000 45,873,000
Accumulated depreciation (14,978,000) (13,788,000)
------------- -------------
Total property and equipment, net 34,565,000 32,085,000
------------- -------------
OTHER ASSETS:
Intangible assets, net 20,414,000 20,740,000
Deferred income taxes 496,000 1,032,000
Deferred costs and other assets 275,000 549,000
------------- -------------
Total other assets 21,185,000 22,321,000
------------- -------------
TOTAL ASSETS $ 114,856,000 $ 113,379,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 23,605,000 $ 385,000
Current maturities of long-term debt 2,000,000 2,000,000
Trade accounts payable 3,787,000 5,314,000
Accrued liabilities 14,210,000 13,088,000
------------- -------------
Total current liabilities 43,602,000 20,787,000
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt - revolving line -- 23,908,000
Long-term debt - note payable 15,500,000 16,000,000
Deferred income taxes -- 244,000
Other noncurrent liabilities 3,974,000 4,638,000
------------- -------------
Total noncurrent liabilities 19,474,000 44,790,000
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock (no par, 10,000,000 shares
authorized, no shares issued) -- --
Common stock (no par, 50,000,000 shares
authorized, 7,339,000 and 7,334,000
shares issued and outstanding January 1, 2000
and July 3, 1999, respectively) 16,624,000 16,596,000
Retained earnings 34,604,000 30,728,000
Accumulated other comprehensive income 552,000 478,000
------------- -------------
Total shareholders' equity 51,780,000 47,802,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 114,856,000 $ 113,379,000
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
Page 3
<PAGE> 4
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
January 1, 2000 December 26, 1998 January 1, 2000 December 26, 1998
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $ 29,786,000 $ 30,116,000 $ 57,127,000 $ 59,504,000
COST OF GOODS SOLD 17,208,000 17,604,000 33,408,000 35,516,000
--------------- ---------------- --------------- ----------------
GROSS MARGIN 12,578,000 12,512,000 23,719,000 23,988,000
--------------- ---------------- --------------- ----------------
OPERATING EXPENSES:
Distribution expense 2,137,000 2,288,000 4,199,000 4,692,000
Selling expense 2,505,000 2,793,000 5,039,000 5,553,000
General and administrative expense 2,886,000 3,193,000 5,973,000 6,430,000
Currency exchange loss (gain) 8,000 33,000 27,000 68,000
Intangibles amortization 226,000 179,000 452,000 358,000
--------------- ---------------- --------------- ----------------
Total 7,762,000 8,486,000 15,690,000 17,101,000
--------------- ---------------- --------------- ----------------
INCOME FROM OPERATIONS 4,816,000 4,026,000 8,029,000 6,887,000
INTEREST EXPENSE, NET 342,000 770,000 998,000 1,525,000
--------------- ---------------- --------------- ----------------
INCOME BEFORE INCOME TAXES 4,474,000 3,256,000 7,031,000 5,362,000
INCOME TAX PROVISION (Note 5) 1,934,000 1,376,000 3,060,000 2,041,000
--------------- ---------------- --------------- ----------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,540,000 1,880,000 3,971,000 3,321,000
--------------- ---------------- --------------- ----------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF TAX) $ (95,000)
---------------
NET INCOME $ 2,540,000 $ 1,880,000 $ 3,876,000 $ 3,321,000
=============== ================ =============== ================
NET INCOME PER SHARE - BASIC AND DILUTED
(Note 6)
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Basic $ 0.35 $ 0.26 $ 0.54 $ 0.45
=============== ================ =============== ================
Diluted $ 0.35 $ 0.26 $ 0.54 $ 0.45
=============== ================ =============== ================
NET INCOME
Basic $ 0.35 $ 0.26 $ 0.53 $ 0.45
=============== ================ =============== ================
Diluted $ 0.35 $ 0.26 $ 0.53 $ 0.45
=============== ================ =============== ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 7,337,000 7,349,000 7,336,000 7,369,000
=============== ================ =============== ================
Diluted 7,355,000 7,349,000 7,338,000 7,369,000
=============== ================ =============== ================
</TABLE>
See notes to unaudited consolidated financial statements
Page 4
<PAGE> 5
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 1, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Accumulated
Stock Common Other
Shares Stock Retained Comprehensive Comprehensive
Issued Amount Earnings Income Total Income (Loss)
--------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance October 2, 1999 7,335,925 $16,606,000 $32,064,000 $ 686,000 $ 49,356,000
Stock options exercised 2,700 18,000 18,000
Net income 2,540,000 2,540,000 2,540,000
Foreign currency translation adjustment (134,000) (134,000) (134,000)
--------- ----------- ----------- ------------- ------------ -------------
Balance at January 1, 2000 7,338,625 $16,624,000 $34,604,000 $ 552,000 $ 51,780,000
Comprehensive income for the quarter ended January 1, 2000 $2,406,000
</TABLE>
SIX MONTHS ENDED JANUARY 1, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Accumulated
Stock Common Other
Shares Stock Retained Comprehensive Comprehensive
Issued Amount Earnings Income Total Income (Loss)
--------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 3, 1999 7,334,177 $16,596,000 $30,728,000 $ 478,000 $ 47,802,000
Shares issued for directors fees 1,748 10,000 10,000
Stock options exercised 2,700 18,000 18,000
Net income 3,876,000 3,876,000 3,876,000
Foreign currency translation adjustment 74,000 74,000 74,000
--------- ----------- ----------- ------------- ------------ -------------
Balance at January 1, 2000 7,338,625 $16,624,000 $34,604,000 $ 552,000 $ 51,780,000
Comprehensive income for the six months ended January 1, 2000 $3,950,000
</TABLE>
See notes to unaudited consolidated financial statements
Page 5
<PAGE> 6
CONSO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
January 1, 2000 December 26, 1998
--------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash received from customers $ 57,139,000 $ 60,474,000
Cash paid to suppliers and employees (48,618,000) (52,062,000)
Interest paid (1,062,000) (1,675,000)
Interest received 515,000 151,000
Income taxes paid (2,501,000) (2,325,000)
--------------- ----------------
Net cash provided by operating activities $ 5,473,000 $ 4,563,000
--------------- ----------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,044,000) (1,369,000)
Construction and equipment purchased for
dyehouse and computer design equipment (36,000) (914,000)
Purchase of building and equipment in Mexico (3,247,000) --
Redemption of certificates of deposit -- 1,350,000
Costs of acquisitions/organization expenses (446,000) (1,246,000)
--------------- ----------------
Net cash used in investing activities (4,773,000) (2,179,000)
--------------- ----------------
FINANCING ACTIVITIES:
Net activity under line of credit (13,000) (376,000)
Principal payments on long-term debt (1,139,000) (3,354,000)
Proceeds from issuance of common stock 28,000 18,000
Net borrowing on short-term debt (152,000) --
Repurchases of stock -- (503,000)
Foreign currency translation 40,000 (96,000)
--------------- ----------------
Net cash provided by (used in) financing activities (1,236,000) (4,311,000)
--------------- ----------------
DECREASE IN CASH (536,000) (1,927,000)
CASH AT:
BEGINNING OF PERIOD 1,671,000 2,333,000
=============== ================
END OF PERIOD $ 1,135,000 $ 406,000
=============== ================
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,876,000 $ 3,321,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,873,000 1,357,000
Amortization of intangibles 452,000 360,000
Cumulative effect of change in accounting principle 95,000 --
Changes in assets and liabilities:
Accounts receivable 12,000 973,000
Inventory 353,000 227,000
Prepaid expenses and other (861,000) 74,000
Income tax receivable (41,000) (144,000)
Other assets 590,000 --
Trade accounts payable (1,537,000) (1,249,000)
Accrued liabilities 661,000 (356,000)
--------------- ----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 5,473,000 $ 4,563,000
=============== ================
</TABLE>
See notes to unaudited consolidated financial statements
Page 6
<PAGE> 7
CONSO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
January 1, 2000
1. CONSOLIDATION AND NEW ACCOUNTING STANDARDS
The financial statements are unaudited and include the accounts of Conso
International Corporation (the "Company"), and its wholly-owned subsidiaries,
Simplicity Capital Corporation and its subsidiaries ("Simplicity"), British
Trimmings Limited and its subsidiaries ("BT"), India Trimmings Limited, and
Conso's majority-owned subsidiary Val-Mex, S.A. de C.V.
The British Trimmings Limited and Simplicity's foreign subsidiaries' balances
included in the consolidation are prepared using United States generally
accepted accounting principles and are translated into US dollars based on
exchange rates as published in the Wall Street Journal. Assets and liabilities
are translated based on the rates in effect on the balance sheet date. Income
statement amounts are translated using the average exchange rates. The resulting
currency translation adjustments are accumulated and included in other
comprehensive income. From time to time the US parent company loans or is loaned
amounts from its foreign subsidiaries. The Company's policy is that such amounts
are repayable in the functional currency of the subsidiary. Translation gains
and losses and all exchange gains and losses on realized foreign currency
transactions are included in the results of operations. The India Trimmings and
Val-Mex subsidiaries' operations are not significant in relation to the
Company's operations. All material inter-company accounts and transactions and
profit and loss on inter-company transactions are eliminated in consolidation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which was effective for the Company for the
fiscal year beginning June 28, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments in its fiscal year
end financial reports. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision-maker to allocate resources
and assess performance. For the Company, the operating segments are Conso US,
Simplicity and BT. Segment information is found in Note 7.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. It requires that entities recognize all derivatives as either assets
or liabilities on the balance sheet and measure those instruments at fair value.
The accounting for changes in fair value of the derivative (i.e., gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company has not yet quantified the impact of implementing this
standard.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1), which gives guidance on accounting for the costs of computer software
developed or purchased for internal use. SOP 98-1 requires external and internal
direct costs of developing or obtaining internal use software to be capitalized
as an asset and also requires training costs and research and development costs
to be expensed. The adoption of this position has not had a material impact on
the Company.
In April 1998 the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-up Activities" (SOP 98-5). SOP 98-5 is effective for fiscal years
beginning after January 1, 1999, and requires that start-up/organization costs
capitalized prior to January 1, 1999 be written off and that future costs be
expensed as incurred. The Company has adopted this standard effective July 4,
1999. The cumulative effect of adopting this resulted in a charge of $95,000,
net of tax, which primarily was attributable to start-up costs to establish
India Trimmings Limited.
2. INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the three months ended
January 1, 2000 and December 26, 1998 reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented, in all material respects. All such adjustments are of
a normal recurring nature, except when disclosed otherwise in the notes below.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Operating results for such interim periods
are not necessarily indicative of results to be expected for the year ending
July 1, 2000. See note 1 to the consolidated financial statements for the year
ended July 3, 1999, for disclosure of significant accounting policies followed
by the Company.
The Company prepares annual financial statements on the basis of a 52 or 53
week fiscal year ending on the Saturday nearest June 30th; interim reporting
periods are based on 13 week quarters. The second quarter of fiscal 2000
includes 13 weeks. Certain previously reported amounts have been reclassified to
conform to the current year presentation.
Page 7
<PAGE> 8
3. INVENTORIES
The composition of inventories at January 1, 2000 and July 3, 1999 was as
follows:
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- ------------
<S> <C> <C>
Raw Materials $ 8,928,000 $ 9,034,000
Work-In-Process 5,714,000 5,131,000
Finished Goods 17,322,000 17,973,000
Reserves (1,562,000) (1,481,000)
--------------- ------------
Totals $ 30,402,000 $ 30,657,000
=============== ============
</TABLE>
4. LONG-TERM DEBT -- NOTE PAYABLE
Effective November 1998, the Company converted its fixed rate on its term
loan with Bank of America (at 7.4%) to a floating rate at 90-day LIBOR plus
1.45%. Concurrently, the Company entered into a $19.5 million interest rate swap
with Bank of America for a 5-year term which effectively fixes the Company's
interest rate on the term loan at 6.75%. The interest rate swap accomplishes
this rate reduction while avoiding the costs of refinancing the term loan. The
interest rate swap includes a "mark-to-market" provision should the Company
elect to terminate the swap prior to maturity.
In December, the Company's $30 million revolver facility (under which $23.2
million was outstanding on January 1, 2000) became a short-term liability since
it is due in December 2001. While the Company is negotiating for new financing
in connection with its proposed merger (see note 8), the Company believes that
it would be able to refinance this revolving line of credit facility prior to
December 2001 if required.
5. INCOME TAXES
The Company wrote off $10,000 of South Carolina Jobs Tax Credit in the
second quarter since employment levels in South Carolina decreased. The effect
on income tax expense was $6,500 (net of the federal tax effect).
6. STOCK OPTIONS
On September 5, 1995, September 5, 1996, September 5, 1997, and August 21,
1998, the Company granted options to certain key employees to purchase an
aggregate of 93,600, 79,500, 21,000, and 46,000 shares, respectively, of the
Company's common stock under its 1993 Stock Option Plan. The options were
granted at $6.67, $11.00, $10.30, and $7.00 per share, respectively, and
originally became exercisable with respect to one-third of the total shares one
year after the grant date, an additional one-third of the total shares two years
after the grant date, and the final one-third of the shares three years after
the grant date. In connection with the proposed transaction described in note 8,
the Compensation Committee of the Company's Board of Directors took action under
the 1993 Stock Option Plan to (a) cause all unvested options to vest and become
fully exercisable as of December 3, 1999 and (b) accelerate the expiration date
of all outstanding stock options so that such options will expire at the earlier
of the effective date of the proposed merger or the date they would otherwise
expire (5 years from the grant date or upon termination of employment). The
Company has also implemented a procedure under which holders of stock options
may elect, in lieu of exercising the options, to surrender options with an
exercise price of less than $9.00 per share in exchange for an option surrender
payment to be made at the effective time of the merger and to be equal to the
excess of $9.00 over the exercise price. All amounts have been adjusted for
stock splits.
Page 8
<PAGE> 9
The Company applies APB Opinion 25 and related interpretations for its stock
option plans, and does not recognize compensation cost for the incentive stock
options referred to above. If the Company had elected to recognize compensation
cost based on fair value of the options granted at the grant date as prescribed
by SFAS No. 123, net income and earnings per share would have been reduced to
the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
January 1, 2000 December 26, 1998 January 1, 2000 December 26, 1998
---------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net income - before change in
Accounting principle $ 2,540,000 $ 1,880,000 $ 3,971,000 $ 3,321,000
Less compensation per SFAS 123 (14,000) (27,000) (26,000) (53,000)
---------------- ----------------- --------------- -----------------
Net income -before change in
accounting principle as proforma $ 2,526,000 $ 1,853,000 $ 3,945,000 $ 3,268,000
================ ================= =============== =================
Net income per share - before change in
accounting principle as reported $ 0.35 $ 0.26 $ 0.54 $ 0.45
================ ================= =============== =================
Net income per share - before change in
accounting principle as proforma $ 0.34 $ 0.25 $ 0.54 $ 0.44
================ ================= =============== =================
Net income per share - before change in
accounting principle assuming dilution -
as reported $ 0.35 $ 0.26 $ 0.54 $ 0.45
================ ================= =============== =================
Net income per share - before change in
accounting principle assuming dilution -
as proforma $ 0.34 $ 0.25 $ 0.54 $ 0.44
================ ================= =============== =================
Weighted average number of shares
outstanding 7,337,000 7,349,000 7,336,000 7,369,000
Options assumed to be exercised 100,000 61,000
Shares assumed to be repurchased (82,000) (59,000)
Weighted average number of shares
outstanding - assuming dilution 7,355,000 7,349,000 7,338,000 7,369,000
================ ================= =============== =================
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
FY 1999 FY 1998
--------- ---------
<S> <C> <C>
Expected dividend yield None None
Expected stock price volatility .56 .38
Risk-free interest rate 4.59% 5.81%
Expected life of options 3.2 years 3.2 years
Weighted average fair values of options granted $3.00 $4.36
</TABLE>
Page 9
<PAGE> 10
7. SEGMENT REPORTING
Segment reporting under SFAS 131, "Disclosure about Segments of an Enterprise
and Related Information," requires that certain segment and geographical
information be disclosed. The Company views Conso US, BT and Simplicity as its
main segments. The segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Three months Six Months
------------ ----------
January 1, 2000 December 26, 1998 January 1, 2000 December 26, 1998
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers
British Trimmings $ 4,152 $ 4,851 $ 7,506 $ 8,986
Conso US 13,878 12,911 27,308 25,658
Simplicity 11,756 12,354 22,313 24,860
-------- -------- -------- --------
$ 29,786 $ 30,116 $ 57,127 $ 59,504
-------- -------- -------- --------
Operating income (loss)
British Trimmings $ (74) $ 124 $ (343) $ (92)
Conso US 2,517 2,169 4,893 4,314
Simplicity 2,373 1,733 3,479 2,665
-------- -------- -------- --------
$ 4,816 $ 4,026 $ 8,029 $ 6,887
-------- -------- -------- --------
Noncurrent assets
British Trimmings $ 5,378 $ 6,594 $ 5,378 $ 6,594
Conso US 20,487 17,039 20,487 17,039
Simplicity 29,885 30,021 29,885 30,021
-------- -------- -------- --------
$ 55,750 $ 53,654 $ 55,750 $ 53,654
-------- -------- -------- --------
Capital spending
British Trimmings $ -- $ 56 $ 2 $ 156
Conso US 3,474 301 4,190 1,439
Simplicity 43 504 135 688
-------- -------- -------- --------
$ 3,517 $ 861 $ 4,327 $ 2,283
-------- -------- -------- --------
Depreciation and Amortization
British Trimmings $ 277 $ 188 $ 550 $ 505
Conso US 391 318 778 643
Simplicity 458 270 997 569
-------- -------- -------- --------
$ 1,126 $ 776 $ 2,325 $ 1,717
-------- -------- -------- --------
Interest expense (income), net
British Trimmings $ 210 $ 272 $ 400 $ 524
Conso US (9) (84) (36) (180)
Simplicity 141 582 634 1,181
-------- -------- -------- --------
$ 342 $ 770 $ 998 $ 1,525
-------- -------- -------- --------
</TABLE>
Two customers account for greater than ten percent of Simplicity's revenue. The
percentage of these customers has not changed significantly since July 3, 1999.
Total assets by geographic area have changed since July 3, 1999, particularly in
the Other Western Hemisphere, due to the purchase of a facility in Mexico. Total
assets by geographical area are as follows (in thousands):
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- ------------
Total Assets By Geographic Area
<S> <C> <C>
US $ 88,467 $ 89,354
Other Western Hemisphere 7,591 3,830
UK 18,218 19,131
Other 580 1,064
--------- ---------
Total $ 114,856 $ 113,379
========= =========
</TABLE>
8. PROPOSED TRANSACTION
On October 5, 1999, the Company entered into a definitive merger agreement
under which an investor group including Conso's senior management and Citicorp
Venture Capital, Ltd. will acquire Conso for $9.00 per share. Under this
proposed transaction, each share of Conso's common stock (other than a portion
of the shares held by Conso's Chairman and CEO) would be converted into a right
to receive $9.00 in cash. This proposed transaction is expected to be completed
by the end of February, subject to approval by Conso's shareholders at the
special meeting called to consider the transaction, which is to be reconvened on
February 24, 2000, and receipt of funding under the financing commitments.
9. DISPOSITION OF BUSINESS
In August 1999 the Company sold the fabric segment of Simplicity's UK
subsidiary to its former managing director. No gain or loss is recognized as the
assets were sold at their net book value. The fabric segment of Simplicity's UK
operation generated approximately $1.2 million in annual revenues and therefore
was not material to the Company as a whole.
Page 10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes, and with the Company's Annual
Report on Form 10-K for the fiscal year ended July 3, 1999, including the
financial information and management's discussion contained or incorporated by
reference therein.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JANUARY 1, 2000 COMPARED TO THE
QUARTER ENDED DECEMBER 26, 1998.
Net sales for the quarter ended January 1, 2000 were $29.8 million and were
relatively flat compared to first quarter of fiscal 1999 sales of $30.1 million.
Conso US' net sales were up $1.0 million or 7.5%. Simplicity's net sales were
down $0.6 million or 4.8%. British Trimmings' ("BT") net sales were down $0.7
million or 14.4%. BT had one less week of shipping this quarter compared to last
year since both weeks of the holiday shutdown fell in the second quarter
compared to one week in the second quarter of last year. BT will have one more
week of shipping in the third quarter this year, since part of the shutdown
occurred in the third quarter last year.
Sales for the second quarter by customer type were as follows (in thousands):
<TABLE>
<CAPTION>
Compared to the Quarter
Amount % of Net Sales Ended December 26, 1998
------- -------------- ------------------------
<S> <C> <C> <C> <C>
Manufacturers - Conso US and BT $ 7,016 23.6% down 2.1%
Distributors - Conso US and BT 7,382 24.8 down 1.5
Retailers - Conso US and BT 3,632 12.2 up 17.2
Manufacturers - Simplicity 450 1.5 up 25.1
Distributors - Simplicity 158 0.5 up 6.1
Retailers - Simplicity 11,148 37.4 down 5.9
------- -----
Total $29,786 100.0% down 1.1%
======= =====
</TABLE>
Sales to manufacturers for Conso US and BT decreased 2.1% in the second
quarter. Conso US' sales to manufacturers were down 1.3% from reductions in
sales of stock items and a lower backlog coming into the second quarter from
improved dyehouse operations in the first quarter of this year compared to last
year. BT's sales to manufacturers were down 5.6% compared to the second quarter
of 1999. BT's sales to manufacturers and other customer groups continue to be
hampered by the strength of the British pound against foreign competitors'
currencies and the timing of the holiday shutdown explained above.
Sales to distributors for Conso US and BT were down 1.5%. Conso US' sales to
distributors were up 4.1%. At BT, sales were down 10.9% due to a decline in
sales to reupholster wholesalers and price pressure from suppliers in Spain and
Belgium due to a strong British Pound.
Sales to retailers for Conso US and BT were up 17.2%. Conso US was up 36.1%
due to the addition of two major customers; one in the fourth quarter of 1999
and one in the first quarter of this year. Both of these customers were already
major customers of Simplicity. BT's sales to retailers were down 43.3% due to
the weak UK economy and foreign competition.
Sales to retailers for Simplicity comprise 95% of its total sales.
Simplicity's sales to retailers were down 5.9% primarily due to the disposition
of the fabric distribution business in the UK, which also resulted in reductions
in cost of goods sold. Simplicity's net sales to retailers were also adversely
impacted by the loss of pattern sales to a large regional retail customer that
went into bankruptcy immediately before the beginning of this fiscal year.
Comparable international sales outside the US and UK (the Company's primary
sales regions) decreased 4.4% for the second quarter of fiscal 2000 compared to
the second quarter of fiscal 1999 as detailed below (in thousands):
<TABLE>
<CAPTION>
Compared to the Quarter
Conso US and British Trimmings Amount % of Net Sales Ended December 26, 1998
-------- -------------- -----------------------
<S> <C> <C> <C> <C>
Western Hemisphere $ 982 3.3% unchanged 0.0%
Europe and Middle East 638 2.2% up 1.4%
Pacific Rim 397 1.3% up 12.1%
-------- ----
Total $ 2,017 6.8% up 2.6%
Simplicity
Western Hemisphere $ 729 2.4% up 13.6%
Europe and Middle East 143 0.5% down 51.2%
Pacific Rim 707 2.4% down 17.9%
-------- ----
Total $ 1,579 5.3% down 12.1%
-------- ----
Company Total $ 3,596 12.1% down 4.4%
======== ====
</TABLE>
Page 11
<PAGE> 12
Conso US and BT's sales to the Western Hemisphere were unchanged this quarter
compared to the second quarter of 1999 due to strength in the Canadian market
offsetting continuing weakness in the Latin American market. Simplicity's
improvement in sales to the Western Hemisphere was mainly related to timing in
shipments between the first and second quarters to Canada compared to last year
and increased sales to Mexico. The European and Middle Eastern markets for
Simplicity were down from the sale of the fabric business in the UK and other
competitive pressures. Conso US and BT's sales improvement in the second quarter
to the Pacific Rim relates to the timing of shipments to our major distributor
in Australia. The reduction in Simplicity sales to the Pacific Rim relate to a
decline in pattern unit sales and a backlog on shipments of fabric from the US
suppliers.
The Company's gross margin as a percentage of net revenues increased to 42.2%
from 41.5%, an increase of 0.7%. Conso US' gross margin decreased from 38.7% in
the second quarter of 1999 to 37.9% in this quarter due to lower margins on
product received from BT. The higher unit cost at BT was caused by lower
overhead absorption due to lower production levels. Simplicity's gross margin
increased from 50.2% to 53.9% of net revenues primarily due to a refund of
$540,000 of Michigan Single Business Tax, a purchase accounting adjustment of
$171,000 that was required during fiscal 1999 to increase purchased inventory
from cost to fair market value in connection with the acquisition of Simplicity,
and the sale in August 1999 of the lower margin UK fabric business. BT's gross
margin declined from 27.1% to 23.8% of net revenues. BT's gross margin declined
due to lower revenues and production levels, which resulted in less absorption
of fixed expenses.
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 15, 2000. Under
the new arrangement, Simplicity will retain ownership of the pattern inventory
in Wal-Mart stores and Wal-Mart will remit payment for the patterns at the time
it sells them to its customers. The Company estimates that on an annualized
basis its net revenues will be reduced as a result of this new arrangement by
approximately $650,000 and its expenses will be increased by approximately
$350,000, resulting in a reduction in its after-tax net income of approximately
$620,000. The Company has taken action and has made plans for future actions at
Simplicity to offset the negative financial effects of this new arrangement,
including cost reductions, new programs to increase unit sales volume and
advertising income, and price increases. The new arrangement and other trade
terms will be subject to renegotiations or termination by either party at any
time under Wal-Mart's normal vendor agreement.
Distribution expenses decreased $151,000 or 6.6% from $2,288,000 to
$2,137,000. The primary reason for the decrease was the timing of the shipments
of Simplicity's new issue patterns and related catalogs, as well as the
disposition of Simplicity's fabric business in the UK. BT's distribution expense
remained flat in dollar terms but increased from 5.5% to 6.4% as a percentage of
net sales because net sales have declined as explained above. Conso US'
distribution expenses increased slightly in dollar terms but fell slightly as a
percentage of sales due to increased sales.
Selling expenses declined $288,000 from $2,793,000 to $2,505,000 or 10.3%.
Overall this reduction is a result of the consolidation efforts since the
acquisition of Simplicity in June 1998. Additionally, Simplicity's selling
expenses were reduced due to the disposition of its UK fabric business. Conso
US' selling expenses were down slightly in dollar terms and were down from 10.4%
to 9.6% due to increased net revenue. BT's selling expenses were down $31,000 or
5.1%, but increased as a percentage of sales from 12.7% to 14.0% due to a
decrease in net sales.
General and administrative expenses (including amortization and currency
exchange loss) decreased $285,000 from $3,405,000 to $3,120,000 and as a
percentage of sales from 11.3% to 10.5%. This decrease resulted from cost
cutting efforts at BT and the consolidation efforts associated with the
acquisition of Simplicity. Conso US' general and administrative cost dropped
$87,000 or 9.3%. Simplicity's general and administrative expenses declined
$121,000 or 6.2%. BT's general and administrative expenses decreased $101,000 or
31.9% due to cost reduction efforts.
Operating income increased $790,000 or 19.6% primarily as a result of
increased volume at Conso US, the refund of the Michigan Single Business Tax at
Simplicity, and the reductions in selling, general, and administrative expenses
with the consolidation of selling and administrative functions at Conso US and
Simplicity. Conso US operating income increased $348,000 or 16.0%, Simplicity's
operating income increased $640,000 or 36.9%. BT's operating income decreased
$198,000.
Net interest expense decreased by $428,000 or 55.6% due to the interest
income received in connection with the Michigan Single Business Tax refund of
$449,000 for the years 1986 to 1989.
Net income increased by $660,000 or 35.1%. Higher income tax expense offset
part of the gains in operating income and net interest expense. The overall
income tax rate was higher due to Simplicity having a historically higher
effective rate and a greater percentage of pre-tax income of the Company in the
second quarter this year compared to last year's second quarter.
Page 12
<PAGE> 13
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 1, 2000 COMPARED TO THE
SIX MONTHS ENDED DECEMBER 26, 1998.
Net sales for the six months ended January 1, 2000 were $57.1 million, a $2.4
million or 4.0% decrease, compared to the first six months of 1999 sales of
$59.5 million. Simplicity's net sales were down $2.5 million or 10.2%. BT's net
sales were down $1.5 million or 16.7%, from $9.0 million to $7.5 million. BT had
one less week of shipping in the first six months compared to last year since
both weeks of the holiday shutdown fell in the second quarter compared to one
week in the second quarter of last year. BT will have one more week of shipping
in the third quarter this year, since part of the shutdown occurred in the third
quarter last year. Conso US' net sales were up $1.6 million or 6.2%, from $25.7
million in the first six months of 1999 to $27.3 million in this year's first
six months.
Sales for the first six months of 2000 by customer type were as follows (in
thousands):
<TABLE>
<CAPTION>
Compared to the Quarter
Amount % of Net Sales Ended December 26, 1998
------- -------------- ------------------------
<S> <C> <C> <C> <C>
Manufacturers - Conso US and BT $14,527 25.4% up 4.8%
Distributors - Conso US and BT 13,979 24.5 down 4.9
Retailers - Conso US and BT 6,308 11.0 up 3.6
Manufacturers - Simplicity 929 1.6 up 17.9
Distributors - Simplicity 220 0.4 down 26.6
Retailers - Simplicity 21,164 37.1 down 11.0
------- -----
Total $57,127 100.0% down 4.0%
======= =====
</TABLE>
Sales to manufacturers for Conso US and BT increased 4.8% in the first half
of 2000 compared to the first half of 1999. Conso US' sales to manufacturers
were up 7.4% due to improvements in the dyehouse allowing for increased
shipments. In addition, Conso US' sales to soft goods manufacturers have
increased because these customers are using more trimmings in their products.
BT's sales to manufacturers were down 8.4% compared to the first half of 1999.
At BT, sales to manufacturers and other customer groups continue to be hampered
by the strength of the British pound against foreign competitors' currencies and
the timing of the holiday shutdown explained above.
Sales to distributors for Conso US and BT were down 4.9%. Conso US' sales to
distributors were up 1.9%. BT's sales were down 16.1% due to a decrease in sales
to reupholster wholesalers, and price pressure from suppliers in Spain and
Belgium due to a strong British Pound.
Sales to retailers for Conso US and BT were up 3.6%. Conso US was up 12.4%
from the addition of two major customers; one in the first quarter of this year
and one in the fourth quarter of 1999. Both of these customers were already
major customers of Simplicity. BT's sales to retailers were down 34.6% due to
the weak UK economy and increased foreign competition. Production of handwork
items is being shifted to India to allow BT to better meet pricing pressure.
Sales to retailers for Simplicity comprise 95% of its total sales.
Simplicity's sales to retailers were down 11.0% primarily due to the disposition
of the fabric distribution business in the UK, which also resulted in reductions
in cost of goods sold. Net sales were also adversely impacted by the loss of
pattern sales to a large regional retail customer that went into bankruptcy
immediately before the beginning of this year.
Page 13
<PAGE> 14
Comparable international sales outside the US and UK (the Company's primary
sales regions) decreased 13.4% for the first six months of fiscal 2000 compared
to the first six months of fiscal 1999 as detailed below (in thousands):
<TABLE>
<CAPTION>
Compared to the Six Months
Conso US and British Trimmings Amount % of Net Sales Ended December 26, 1998
-------- -------------- --------------------------
<S> <C> <C> <C> <C>
Western Hemisphere $ 1, 910 3.4% down 14.6%
Europe and Middle East 1,099 1.9% down 16.7%
Pacific Rim 692 1.2% down 0.7%
-------- ----
Total $ 3,701 6.5% down 13.0%
Simplicity
Western Hemisphere $ 1,221 2.1% up 2.3%
Europe and Middle East 212 0.4% down 64.4%
Pacific Rim 1,448 2.5% down 6.8%
-------- ----
Total $ 2,881 5.0% down 13.8%
-------- ----
Company Total $ 6,582 11.5% down 13.4%
======== ====
</TABLE>
Sales to the Western Hemisphere by Conso US and BT recovered in the second
quarter to 1999 levels with Canada and the Caribbean ahead of last year, however
the first quarter was weak in all areas. Simplicity's improvement in sales to
the Western Hemisphere was mainly related to better sales in Mexico in the
second quarter. Conso and BT's sales to Europe and the Middle East were down due
to increased competition in those areas. The European and Middle Eastern markets
were down for Simplicity due to the sale of the fabric business in the UK and
other competitive pressures. The reduction in Simplicity sales to the Pacific
Rim relate to a decline in pattern unit sales and a backlog on shipments of
fabric from the US suppliers.
The Company's gross margin as a percentage of net revenues increased to 41.5%
from 40.3%, an increase of 1.2%. Conso US' gross margin decreased from 38.8% in
the first six months of 1999 to 38.3% in the first six months of 2000 due to
lower margins on product received from BT. The higher unit cost at BT was caused
by lower overhead absorption due to lower production levels. Simplicity's gross
margin increased from 47.7% to 52.0% of net revenues primarily due to a refund
of the Michigan Single Business Tax, a purchase accounting adjustment that was
required during fiscal 1999 to increase purchased inventory from cost to fair
market value, the cost savings associated with fewer new issue shipments, cost
savings with respect to the Company's design function, and the sale in August
1999 of the lower margin UK fabric business. BT's gross margin declined from
24.2% to 22.0% of net revenues due to lower volume to cover fixed expenses.
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 15, 2000. Under
the new arrangement, Simplicity will retain ownership of the pattern inventory
in Wal-Mart stores and Wal-Mart will remit payment for the patterns at the time
it sells them to its customers. The Company estimates that on an annualized
basis its net revenues will be reduced as a result of this new arrangement by
approximately $650,000 and its expenses will be increased by approximately
$350,000, resulting in a reduction in its after-tax net income of approximately
$620,000. The Company has taken action and has made plans for future actions at
Simplicity to offset the negative financial effects of this new arrangement,
including cost reductions, new programs to increase unit sales volume and
advertising income, and price increases. The new arrangement and other trade
terms will be subject to renegotiations or termination by either party at any
time under Wal-Mart's normal vendor agreement.
Distribution expenses decreased $493,000 or 10.5% from $4,692,000 to
$4,199,000. The primary reason for the decrease was the timing of the shipments
of Simplicity's new issue patterns and related catalogs, and the disposition of
Simplicity's fabric business in the UK. BT's distribution expense dropped
$50,000 in dollar terms but increased from 6.0% to 6.5% as a percentage of net
sales because net sales fell as explained above. Conso US' distribution expenses
increased $62,000 in dollar terms but remained steady as a percentage of sales.
Selling expenses declined $514,000, from $5,553,000 to $5,039,000 or 9.3%.
Overall this reduction is a result of the consolidation efforts since the
acquisition of Simplicity in June 1998. Additionally, Simplicity's selling
expenses were reduced due to the disposition of its UK fabric business. Conso
US' selling expenses were down slightly by $26,000, and dropped as a percentage
of net sales from 10.6% to 9.9% due to increased net revenue. BT's selling
expenses were down $63,000 or 5.6%, but increased as a percentage of net sales
from 12.5% to 14.1% due to a decrease in net sales.
General and administrative expenses (including amortization and currency
exchange loss) decreased $404,000, from $6,856,000 to $6,452,000, and as a
percentage of sales from 11.5% to 11.3%. This decrease resulted from cost
cutting efforts at BT and the consolidation efforts associated with the
acquisition of Simplicity. Conso US' general and administrative cost dropped
$80,000 or 4.5%. Simplicity's general and administrative expenses declined
$212,000 or 5.3%. BT's general and administrative expenses decreased $168,000 or
27.3%, due to cost reduction efforts.
Operating income increased $1,142,000 or 16.6% primarily as a result of
increased volume at Conso US, the refund of the Michigan Single Business Tax at
Simplicity, and the reductions in selling, general, and administrative expenses
with the consolidation of selling and administrative functions at Conso US and
Simplicity. Conso US' operating income increased $579,000 or 13.4%, Simplicity's
operating income increased $814,000 or 30.5%, and BT's operating loss increased
$251,000.
Page 14
<PAGE> 15
Net interest expense decreased by $527,000 or 34.6% primarily due to the
interest income received in connection with the Michigan Single Business Tax
refund of $449,000 for the years 1986 to 1989.
Net income before the cumulative effect of change in accounting principle
increased by $650,000, or 19.6%. Higher income tax expense offset part of the
gains in operating income and net interest expense. The first quarter of 1999
year benefited from an income tax credit associated with the acquisition of
Simplicity, while the first quarter of 2000 did not, resulting in relatively
higher income tax expense. The Company adopted SOP 98-5, causing a write-off in
the first quarter of fiscal 2000 of $95,000, net of tax, for start-up and
organizational costs primarily related to India Trimmings.
LIQUIDITY, CAPITAL RESOURCES, AND YEAR 2000
The Company has generally been able to finance its operations and capital
requirements through internally generated funds and bank borrowings. Bank
borrowings were increased in June 1998 to finance the purchase of Simplicity. As
of the end of the second quarter, credit line availability was approximately
$6.8 million under the Company's revolving loan facility and approximately $0.9
million under the letter of credit facility.
In November 1998, the Company effectively fixed the interest rate under its
term loan at 6.75% until the maturity of the term loan. Borrowings under the
revolving loan facility bear interest at 1.5% over the floating 30-day LIBOR
rate (5.8225% as of January 1, 2000).
Operating cash flow for the first six months of fiscal 2000, compared to the
first six months of fiscal 1999 increased $874,000, from $4,563,000 to
$5,437,000 due to increased net income and non-cash expenses, somewhat offset by
increases in prepaid expenses and accounts payable.
Capital expenditures for the first half of fiscal 2000 were $4,327,000. The
significant expenditures were for the purchase of facilities at Val-Mex of $3.2
million. The Company has budgeted a total of $5.7 million for capital
expenditures for fiscal 2000. Of this $3.2 million is for the acquisition of new
facilities at Val-Mex and $0.5 million for facilities in Coimbatore, India.
The Company believes that cash generated by operations and available for
borrowings under lines of credit will be adequate to fund its working capital
and capital expenditure requirements for the foreseeable future, excluding
possible acquisitions of other businesses.
In 1997, Conso US and BT developed a five-phase program for addressing Y2K
issues and to assure information and other systems compliance. Simplicity
conducted a similar program for addressing Y2K issues. The Company has completed
all phases of its Y2K program, and believes its systems are Y2K compliant in all
material respects. The Company has surveyed its major vendors and customers for
their Y2K readiness. To date the Company has not experienced any material
disruptions due to Y2K issues relating to either its operations or those of its
vendors and customers.
PROPOSED TRANSACTION
On October 5, 1999, the Company entered into a Merger Agreement (the "Merger
Agreement") with CIC Acquisition Co. ("Parent") and CIC Acquisition Sub, Inc.
("Acquisition Sub"). Parent and Acquisition Sub are corporations newly formed by
an investor group that includes J. Cary Findlay, the Company's Chairman and
Chief Executive Officer, other members of the Company's management and Citicorp
Venture Capital, Ltd. Pursuant to the Merger Agreement and the related Plan of
Merger, and subject to shareholder approval and other closing conditions,
Acquisition Sub will be merged with and into the Company with the Company
continuing as the surviving corporation (the "Merger"). In the Merger, each
outstanding share of the Company's Common Stock (except for a portion of J. Cary
Findlay's shares, which would be converted to equity in the surviving
corporation) would be converted into the right to receive $9.00 per share in
cash.
The Company's Board of Directors has approved the Merger Agreement and the
transactions contemplated thereby, in accordance with the recommendation of a
Special Committee of outside directors. The proposed transaction is subject to
various conditions, including approval by the Company's shareholders, regulatory
approvals, receipt of funding under financing commitments, and other customary
closing conditions. The financing commitments obtained by the investor group are
also subject to customary closing conditions. The merger is expected to be
completed by the end of February, subject to approval by Conso's shareholders at
the special meeting called to consider the transaction, which is to be
reconvened on February 24, 2000, and receipt of funding under the financing
commitments.
J. Cary Findlay has entered into a Support Agreement with Acquisition Sub
dated as of October 5, 1999 pursuant to which he has agreed, subject to certain
conditions, to vote all shares of the Company's common stock owned directly by
him, representing approximately 39.1% of the Company's Common Stock in favor of
the Merger.
Page 15
<PAGE> 16
CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for the future operations are
"forward looking" statements, and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such forward
looking statements include, without limitation: adverse results in any
litigation to which the Company is or becomes a party; adverse changes in the
Company's relationships with significant customers; general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, especially in the United States and the United Kingdom
but also including other areas of the world where the Company markets or
manufactures its products; changes in consumer fashion preferences for home
sewing products and finished products in the 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; adverse changes in
the cost and availability of raw materials; adverse changes in governmental
regulations applicable to the Company's businesses; adverse fluctuations in
exchange rates relative to the US dollar for currencies of the United Kingdom
and other nations where the Company does business; casualty to and/or disruption
of the Company's production facilities and equipment; delays and disruptions in
the shipment of the Company's products and raw materials; disruption of
operations due to strikes or other labor unrest; and other factors that
generally affect the business of manufacturing companies with international
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Page 16
<PAGE> 17
PART II OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
On October 18, 1999, a purported class action complaint was filed in the
South Carolina Court of Common Pleas by the Wrape Family Charitable Trust,
alleged to be a shareholder of the Company, against the Company and its
directors. The plaintiff alleges, among other things, that the directors have
breached their fiduciary duties to the Company's public shareholders by
facilitating certain insiders' acquisition of the publicly-held shares of the
Company, to the exclusion of all other potential bidders, for unfair and
inadequate consideration. The complaint seeks preliminary and permanent relief,
including injunctive relief, (a) declaring that the defendants have committed or
participated in a gross abuse of trust and have breached their fiduciary duties
or aided and abetted such breaches, (b) declaring the Merger unlawful, (c)
enjoining the Merger, and if it is consummated, rescinding the Merger, (d)
requiring the directors to abide by and uphold their fiduciary responsibilities
in selling the Company and requiring them to fully insulate themselves from any
conflict of interest that would interfere with their duties and (e) awarding the
plaintiff and the class compensatory damages and/or rescissory damages as well
as awarding the plaintiff attorneys' and experts' fees. The Company believes
that this claim is without merit and will vigorously defend the lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
On October 8, 1999, the Company filed a Current Report on Form 8-K reporting,
pursuant to Item 5 thereof, that it had entered into the Merger Agreement with
CIC Acquisition Co. and CIC Acquisition Sub, Inc.
Page 17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSO INTERNATIONAL CORPORATION
<TABLE>
<S> <C> <C>
By: /s/ Richard A. Zonin Chief Financial Officer and February 11, 2000
-------------------- Senior Vice President of Finance
Richard A. Zonin (Principal Financial Officer)
By: /s/ John M. Davis Chief Accounting Officer and February 11, 2000
------------------ Vice President
John M. Davis
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CONSO INTERNATIONAL CORPORATION FOR THE SIX MONTHS ENDED
JANUARY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000914448
<NAME> CONSO INTERNATIONAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> JAN-01-2000
<CASH> 1,135
<SECURITIES> 0
<RECEIVABLES> 22,027
<ALLOWANCES> 0
<INVENTORY> 30,402
<CURRENT-ASSETS> 59,106
<PP&E> 49,543
<DEPRECIATION> 14,978
<TOTAL-ASSETS> 114,856
<CURRENT-LIABILITIES> 43,602
<BONDS> 0
0
0
<COMMON> 16,624
<OTHER-SE> 35,156
<TOTAL-LIABILITY-AND-EQUITY> 114,856
<SALES> 57,127
<TOTAL-REVENUES> 57,127
<CGS> 33,408
<TOTAL-COSTS> 15,690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 998
<INCOME-PRETAX> 7,031
<INCOME-TAX> 3,060
<INCOME-CONTINUING> 3,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (95)
<NET-INCOME> 3,876
<EPS-BASIC> .53
<EPS-DILUTED> .53
</TABLE>
