-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwbWM+8LGfOxmx4BrwkRgj7E+gyXQI81ywfdTcNSGGVS9ZtF9ufSljszAjRqYy74 at+yclGizXs2LRLu/Flnbw== 0000950146-98-002011.txt : 19981126 0000950146-98-002011.hdr.sgml : 19981126 ACCESSION NUMBER: 0000950146-98-002011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980830 FILED AS OF DATE: 19981125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD FABRICS INC CENTRAL INDEX KEY: 0000023249 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 135673758 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05960 FILM NUMBER: 98759116 BUSINESS ADDRESS: STREET 1: 1359 BROADWAY STREET 2: 4TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127600300 MAIL ADDRESS: STREET 1: 1359 BROADWAY 4TH FLOOR STREET 2: 1359 BROADWAY 4TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 Exhibit index appears on page 41 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File Number August 30, 1998 I-5960 - -------------------------------- ------------------------------------ CONCORD FABRICS INC. (Exact name of registrant as specified in its charter) Delaware 13-5673758 - --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1359 Broadway, New York, New York 10018 - --------------------------------- ------------------------------------ (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (212) 760-0300 --------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered - ---------------------------------- ------------------- Class A Common Stock, par value $.50 per Share American Stock Exchange Class B Common Stock, par value $.50 per Share American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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. Yes No X --- --- As of November 5, 1998, 2,232,979 Shares of Registrant's Class A Common Stock and 1,446,451 Shares of Registrant's Class B Common Stock were outstanding, and the aggregate market value of the voting stock held by non-affiliates of Registrant was $3,049,302. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 12, 1999, filed pursuant to Section 14 of the Securities Exchange Act of 1934, incorporated by reference into Part III hereof. PART I Item 1. Business Concord Fabrics Inc.'s principal business is developing, designing and producing, in its own facility and through unaffiliated contractors, woven and knitted fabrics of natural and synthetic fibers in a wide variety of colors and patterns, for sale to manufacturers (primarily of home furnishings and apparel) and to retailers (including chains, department stores and independently owned fabric stores) for resale to the home sewing market. In the fiscal year ended September 1, 1996, Concord deemphasized the merchandising of woven goods to apparel manufacturers and focused more heavily on merchandising knitted fabric for apparel and other end uses and concentrated its efforts on the Concord House Division which designs and markets fabrics principally for the home furnishing trade and for sale to retail stores. Manufacture and Sale of Fabrics Woven Fabrics Woven fabrics accounted for 47% of fabric sales in fiscal 1998, compared with 54% in fiscal 1997 and 60% in fiscal 1996. The significant decline in the percentage of woven fabric sales to total sales resulted from reduced sales of woven goods to the apparel trade, Concord's deemphasis of producing product for that market, and in fiscal 1998, reduced demand for Concord's printed fabrics. All of the Company's supply of unfinished woven fabrics ("greige goods") are made from natural and/or 2 synthetic fibers by unaffiliated companies, who frequently produce the greige goods to Concord's specifications. In fiscal 1998, Concord was able to obtain adequate supplies of greige goods at competitive prices. The Company purchased substantially all of its greige goods from about 35 suppliers; the five largest suppliers accounted for 65% of Concord's purchases of greige goods and the largest supplied 17%. In fiscal 1997, Concord purchased substantially all of its greige goods from about 50 suppliers; the five largest suppliers accounted for 60% of the Company's purchases of greige goods and the single largest supplied 15%. In fiscal 1996, Concord purchased its greige goods from about 55 suppliers of which the single largest supplied 14% of the Company's needs. Concord's greige cloth purchases derive from domestic and imported sources. Woven greige goods purchased by Concord are printed or dyed and finished by unaffiliated contract finishers in accordance with the Company's designs and specifications. In fiscal 1998 the Company's production of printed fabric was disrupted by the permanent closing of its major contract print finisher. The Company believes it has replaced the production of that contractor with alternative sources, principally offshore, but there are no assurances that the new sources of supply will deliver product of the same quality and quantity at acceptable prices. In fiscal 1998 and 1997, Concord contracted with about 10 finishers for the finishing or printing of woven fabrics; in fiscal 1998 the largest contract finisher accounted for 41% of Concord's woven finishing requirements; no other contract finisher accounted for more than 24%. In fiscal 1997, the largest contract finisher accounted for 54% of the Company's woven finishing requirement. In fiscal 1998 3 Concord imported some finished fabric printed overseas in accordance with the Company's design specifications. The Company expects to continue to import finished fabric from overseas. Concord's woven fabrics are sold primarily by its own sales staff and to a lesser extent by independent sales agents. Sales are made to manufacturers of furniture and home furnishing products, children's apparel and women's accessories, and to retailers for resale to the home sewing market. Approximately 44% of Concord's woven fabric sales were made to retailers and 56% were made to other markets. Concord exports finished woven fabrics for sale abroad. In fiscal 1998 exports were 10% of sales. In fiscal 1997 exports approximated 11% of sales. Exports declined as a result of the economic crises prevalent in Asian markets. Prior to each "season" (i.e., spring-summer, fall-winter), Concord's woven fabrics are designed by the Company's design staff to meet current and developing styles that Concord believes will be fashionable. Thus, the demand for Concord's woven fabrics during any season depends in part upon the Company's ability to forecast changes in styles and fashion and react thereto. Concord often maintains a variety of greige and finished goods at necessary inventory levels to meet changing demand for its woven fabrics. Knitted Fabrics Knitted fabrics accounted for 53% of fabric sales in fiscal 1998, compared with 46% in fiscal 1997 and 40% in fiscal 1996. The increase in percent was due primarily to the year to year decline in revenues resulting 4 from the deemphasis of woven fabric sales to apparel manufacturers. In fiscal 1998 Concord experienced reduced demand for printed woven fabrics. Concord purchases yarn for knitting from unaffiliated suppliers; in fiscal 1998, Concord purchased yarn from 15 suppliers, the three largest suppliers accounted for 77% of the Company's purchases of yarn; the largest of which accounted for 68% of yarn purchases. In fiscal 1997 Concord purchased yarn from 15 suppliers; the three largest of which supplied 85% of Concord's needs and the largest 73%. The Company is presently able to obtain adequate supplies of yarn at competitive prices and does not believe it is dependent on any single supplier. In fiscal 1998, 80% of the yarn purchased by Concord was knitted into fabric at the Company's Milledgeville, Georgia facility. The balance of the yarn purchased by Concord in 1998 was knitted by unaffiliated contractors. In fiscal 1997, 83% of yarn purchased by the Company was knitted at Milledgeville. In fiscal 1996, 77% of the yarn purchased by Concord was knitted into fabric in the Company's Milledgeville, Georgia plant. In the past three years, substantially all of the knitted fabric was dyed and finished in Concord's owned facilities (see Item 2. Properties). The Company generally produces knitted fabrics against orders received in advance of production. As a result, Concord's knitted fabrics are generally not styled with a view to anticipating fashion trends. Knitted fabrics are sold by Concord's salesmen and by independent sales agents, to manufacturers of budget and moderately priced women's apparel, team sports apparel manufacturers, infant's sleepwear manufacturers and to a lesser extent to makers of non apparel related products. 5 Certain Factors Affecting The Company's Business General The Company's sales and earnings in any fiscal year are strongly influenced by various factors -- the public's acceptance of and demand for Concord's fabrics and designs and the general state of economic conditions in the textile and apparel industry. In periods of rising raw material prices Concord may encounter difficulty in passing such increases on to its customers; in periods of falling prices the Company's inventory and commitment positions can result in significant reductions in gross margins. In addition, Concord's earnings may be adversely affected by price changes in the greige goods market in the event and to the extent that management does not anticipate the direction and timing of such price changes. Concord's management attempts to balance spot market purchases with forward commitments so as to minimize this risk. In fiscal 1996, Concord decided to deemphasize its merchandising effort with respect to woven fabrics marketed to the apparel manufacturing trade as such efforts adversely effected earnings. Accordingly, sales declined by more than 18% but significantly better gross margins were obtained, which along with reductions in expenses, produced moderately profitable results. In fiscal 1995 Concord sustained a loss. In fiscal 1997, the Company increased its gross margins and further reduced its operating expenses as part of its strategic plan to deemphasize merchandising and marketing woven fabrics to the apparel trade. As expected, sales declined 26% from fiscal 1996 levels but a significant improvement in profitability resulted. 6 In fiscal 1998 the Company experienced reduced demand for its printed fabrics. As a result sales declined about 7% from fiscal 1997 levels and profitability declined slightly. The Company believes its strategy has significantly insulated it from the effects of the increasing quantities of imported apparel flowing into the United States and that future operating results will for the most part depend on how well it designs, manufactures, merchandises and markets its products. See Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information concerning Concord's sales and results of operations in fiscal 1998 and 1997. Seasonal Fluctuations Although Concord's business is somewhat seasonal, much of the seasonality has been mitigated due to the Company's deemphasis of marketing woven fabrics to the apparel trade. Typically, sales decline during the first two weeks of July due to plant vacations and in late December due to the holidays. Customers, Employees and Competition In fiscal 1998, Concord sold its fabric products to approximately 2,800 customers, the 20 largest of which accounted for 43% of sales; the largest customer, accounted for almost 9% of sales. The Company sells on credit terms standard in the industry. Concord sells its fabrics throughout the United States, but its principal sales markets for apparel fabrics are the 7 New York metropolitan area and to a lesser extent California and its neighboring states. Concord's home sewing fabric sales are not concentrated in any regional market. Concord employs approximately 380 persons. The Company's employees are not represented by a union. In fiscal 1998, approximately 20 of Concord's employees were engaged in activities relating to development of new or improved fabrics and designs; in fiscal 1997 about 15 were so engaged. Concord spent approximately $4,700,000 on such activities in fiscal 1998; approximately $4,300,000 was spent on such activities in fiscal 1997. Concord does not hold any significant patents or licenses, but recently applied for a patent for the production of knitted fabric with unique moisture release properties. Concord does have copyrights on print patterns that it develops. The Company protects its copyrights and actively pursues infringers. The Company licenses the rights to use certain of its patterns and receives royalty payments thereon. The Company also purchases designs for its printed fabrics from independent designers and design companies. Many firms, no one of which is dominant, are in competition with Concord; competition is based primarily on price, product, quality and service. The Company is in competition both with converters -- whose function is limited to the conversion of greige goods and yarn into finished fabrics -- and with integrated textile companies which manufacture, as well as convert, greige goods and yarns. Since Concord operates its knitting and finishing plant in Milledgeville, Georgia, it is not solely a converter. However, it is not a fully integrated producer since it does not weave 8 greige goods or spin yarn, does not print woven or knit greige goods and does not dye and finish its woven greige goods. Concord contracts out all its print requirements with unaffiliated producers. There are a number of integrated firms with which the Company competes that have significantly larger sales, financial, and other resources than Concord Fabrics Inc. Item 2. Properties Concord owns a 26 1/2-year-old knitting and finishing plant, consisting of approximately 148,000 square feet on one floor, situated on approximately 60 acres of land in Milledgeville, Georgia. The plant generally operates at full productive capacity, which is adequate for all of the Company's finishing requirements. Concord recently expanded this facility from 130,000 square feet so as to increase its capacity. On October 6, 1995, Concord closed its 140,000-square foot building on approximately 55 acres of land in Washington, Georgia. The land and building are currently being offered for sale. The Company, owns a 93,000-square foot building on approximately three acres of land in Chino, California. In February, 1994 Concord sold the machinery and equipment in that facility, and leased the building to a non-affiliated contract dyeing and finishing company for a five year term. The lessee was granted an option to purchase the real estate through the end of its lease (See Note 14 of Notes to Financial Statements). The Company believes that its Milledgeville, Georgia facility will continue to provide substantially all of its knitting and dyeing and finishing of knitted fabrics requirements. 9 Concord has entered into leases expiring in 2003 for two floors at 1359 Broadway, New York, New York, consisting of approximately 40,000 square feet 34,000 of which it uses for its executive offices and showrooms. It is currently attempting to sublease 6,000 square feet which it no longer requires for its own use. A division of Concord leased space comprised of 40,000 square feet for its office and warehouse in Los Angeles, California; the lease expires in 1999. Concord has sublet a substantial part of this property but maintains some space for its Los Angeles sales office. (See Note 10 of Notes to Financial Statements). Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of Registrant The following table shows the executive officers of Concord, their respective ages, and all positions presently held with the Company by each such person.
Name Age Position - ---- --- -------- Alvin Weinstein 73 Chairman of the Board and Director Earl Kramer 65 President and Director Martin Wolfson 62 Sr. Vice President, Treasurer and Director Mark Neugeboren 48 Vice President Joan Weinstein 66 Secretary David Weinstein 36 President, Concord House Division
10 Alvin Weinstein has been Chairman of the Board of Concord since 1969. Mr. Kramer joined the Company in June 1972 as President of its Knit Division, with responsibility for supervising and coordinating the various aspects of Concord's knit operations. In March 1976, Mr. Kramer was elected a Vice President of Concord and was given the additional executive responsibility of supervising the operation of the Company's dyeing and finishing plant in Washington, Georgia. Mr. Kramer has served as President of Concord since August 1979. Mr. Wolfson was elected Senior Vice President in 1995 after having been Vice President since 1981 and Treasurer and a Director of Concord since 1973. Formerly he had served as Controller of the Company. He served as Secretary of Concord from January 1973 to October 1981. Mr. Wolfson is the principal financial officer of Concord Fabrics Inc. In January 1985, Mr. Neugeboren was elected Vice President in Charge of Production. Mr. Neugeboren joined the Company in 1972 and has held various positions in its production departments. In October 1982, Joan Weinstein (the wife of Alvin Weinstein) was elected Secretary of the Corporation. She has been Concord's Fashion Director since joining Concord in 1973. David Weinstein has been employed by Concord for more than eight years and serves as President of its Concord House Division. He has been a Director since 1996. All of Concord's officers hold office until the next annual meeting of the Company's Board of Directors (scheduled for January 12, 1999) and the election of their successors. 11 PART II Item 5. Market for the Concord Fabrics Inc. Common Stock and Related Security Holder Matters As of August 30, 1998, the number of record holders of the Concord's Class A Common Stock was 166 and the number of record holders of Concord's Class B Common Stock was 151. Both classes of the Company's Common Stock are listed on the American Stock Exchange. The table below sets forth information on the high and low sales prices for such Common Stock for each quarter of fiscal 1998 and 1997.
1998 1997 ---------------------------------------------- ---------------------------------------------- Fiscal Quarters Class A Class B Class A Class B ------------------ ------------------- ------------------ ------------------- Ending On or About High Low High Low High Low High Low - ------------------ ---- --- ---- --- ---- --- ---- --- November 30 9-5/8 6-3/4 9 6-5/8 6-15/16 6 6-5/8 5-3/4 February 28 9-5/8 8-3/16 9 8-5/8 6-3/4 5-7/8 6-1/8 5-5/8 May 31 10-7/8 9 10-5/8 8-13/16 6-7/8 5-7/8 6-1/2 6 August 31 9-5/8 6-1/8 9-1/2 6-7/8 7-1/2 6-1/4 7 6-1/8
Concord has not paid cash dividends for many years. The payment of dividends by Concord is subject to restrictions under the terms of the Note Agreement between Registrant and John Hancock Mutual Life Insurance Company (the "Note Agreement"). Under the Note Agreement, cumulative payments for cash dividends and redemption of capital stock are limited to $3,000,000 plus 50% of Consolidated Net Income (as defined) subsequent to August 28, 1994 plus net cash proceeds from the sale of stock; $5,843,000 was available for such payments as of August 30, 1998. 12 CONCORD FABRICS INC. AND SUBSIDIARIES ITEM 6 ------ SELECTED FINANCIAL DATA YEAR ENDED ----------
August 30, 1998 August 31, 1997 September 1, 1996 September 3, 1995 September 1, 1994 ------------------------------------------------------------------------------------------- Net Sales $101,296,721 $108,820,287 $146,561,416 $180,152,779 $197,804,544 ------------------------------------------------------------------------------------------- Cost of Sales 70,644,721 76,302,759 108,814,265 143,950,238 148,920,930 Merchandising Expenses 7,520,710 6,933,616 9,070,758 9,644,429 8,698,897 Selling and Shipping Expenses 7,706,088 8,979,360 12,189,783 13,852,770 14,169,565 General and administrative expenses 9,067,241 9,143,052 11,890,945 12,640,139 13,551,493 Provision for doubtful accounts 298,000 901,000 1,070,000 633,000 1,321,000 Interest expense (net) 777,133 1,101,775 1,811,747 2,432,438 1,787,311 Other* 500,000 1,100,000 Gain on sale of equipment (1,420,606) ------------------------------------------------------------------------------------------- Total $96,513,893 $103,361,562 $144,847,498 $184,253,014 $187,028,590 ------------------------------------------------------------------------------------------- Earnings (loss) before income taxes and extraordinary item 4,782,828 5,458,725 1,713,918 (4,100,235) 10,775,954 Income tax provision (benefit) 2,030,000 2,100,000 776,000 (1,414,000) 4,332,000 ------------------------------------------------------------------------------------------- Net earnings (loss) before extraordinary item 2,752,828 3,358,725 937,918 (2,686,235) 6,443,954 Extraordinary item (net of income tax benefit) (297,266) ------------------------------------------------------------------------------------------- NET EARNINGS (LOSS) $2,752,828 $3,358,725 $937,918 ($2,983,501) $6,443,954 ------------------------------------------------------------------------------------------- Earnings (loss) per share: Basic $.75 $.92 $.26 ($.83) $1.80 ------------------------------------------------------------------------------------------- Diluted $.72 $.90 $.26 ($.81) $1.76 ------------------------------------------------------------------------------------------- Average number of shares used in computing earnings (loss) per share: Basic 3,673,788 3,661,591 3,630,329 3,606,976 3,574,780 ------------------------------------------------------------------------------------------- Diluted 3,820,285 3,749,718 3,675,364 3,668,474 3,663,926 ------------------------------------------------------------------------------------------- Dividends paid None None None None None Working capital $49,699,041 $50,792,826 $47,095,320 $44,625,140 $37,845,803 ------------------------------------------------------------------------------------------- Long-term debt (less current portion) $17,150,000 $20,000,000 $20,000,000 $20,000,000 $7,500,000 ------------------------------------------------------------------------------------------- Total assets $75,884,130 $73,034,106 $73,164,882 $76,645,925 $84,895,505 ------------------------------------------------------------------------------------------- Stockholders' equity $47,073,491 $44,228,163 $40,839,125 $39,777,321 $42,723,322 ------------------------------------------------------------------------------------------- Stockholders' equity per share $12.77 $12.07 $11.17 $11.00 $11.86 -------------------------------------------------------------------------------------------
*Consists of plant shut down costs in fiscal 1995 and provision for impairment of property held for sale in fiscal 1998. The year ended September 3, 1995 comprised 53 weeks; the other years presented each comprised 52 weeks. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 1998 v. Fiscal 1997 Fiscal 1998 and 1997 comprised 52 weeks. Net sales decreased 7% from $108,820,287 in fiscal 1997 to $101,296,721 in fiscal 1998. The decline resulted primarily from a decline in unit sales; selling price remained unchanged. Reduced demand for printed fabrics and difficulties in their production and distribution caused the decline in unit sales. The difficulties have since been overcome. Gross margins improved slightly from 29.9% in fiscal 1997 to 30.3% in fiscal 1998. Merchandising expenses increased by approximately 8% due to higher design costs some of which were associated with the closing of a major contract print facility during the year. Many patterns had to be re-colored and re-engraved to enable their printing at other contract facilities. As a percentage of sales merchandising expenses were 7.4% in fiscal 1998 and 6.4% of sales in fiscal 1997. Selling and shipping expense declined 14%. About one half of the decline resulted from reduced sales related compensation and distribution costs associated with the decline in sales of product lines which continued to be offered in each of the last two fiscal years. The remaining portion of the decline resulted from the elimination of selling and travel costs incurred in fiscal 1997 associated with product lines which are no longer offered by the Company. As a percentage of sales, selling and shipping expenses were 7.6% of sales in fiscal 1998 and 8.3% in fiscal 1997. 14 General administrative expenses declined less than 1%. As a percentage of sales, general and administrative expenses were 9.0% of sales in fiscal 1998 and 8.4% of sales in 1997. The provision for doubtful accounts declined significantly (67%) as a result of better collection experience and reduced insolvencies among the Company's customers. Interest expense declined by 29.5% as the Company generated cash flow from operations and earned interest on its short term investments which, in part offset the carrying cost of its long term debt. The Company was free of short term debt for the entire year. The Company's fiscal 1998 results were negatively impacted by a $500,000 charge against earnings which reflected the Company's estimate of the impairment in value of its Washington, Georgia facility. This estimate was supported by an appraisal obtained from an independent consultant. The Company has been actively seeking a buyer for this property since late 1995. Although the Company's sales declined 7%, pre-tax earnings, before the $500,000 charge for the reduction in value of the Washington, Georgia property, declined $176,000 or 3%. This reflected stability in the Company's gross margin and ability to control expenses. In fiscal 1998 the Company earned $2,753,000 net of a tax provision of $2,030,000. In fiscal 1997 the Company earned $3,359,000 net of a tax provision of $2,100,000. The decline in net income reflected the decline in net sales. Fiscal 1997 v. Fiscal 1996 Fiscal 1997 and 1996 comprised 52 weeks. 15 Net sales decreased 26% from $146,561,416 to $108,820,287. This resulted from a decline in unit sales of 20% and a 7% decline in average selling price. The decrease in sales reflected the Company's deemphasis in June 1996 of the production of woven fabrics for the apparel trade. Gross margins rose to 29.9% in fiscal 1997 from 25.8% in fiscal 1996. The improvement was due to the Company's deemphasis of less profitable fabric lines marketed to the women's apparel trade. Merchandising expenses decreased by approximately 24% primarily due to a reduction in personnel associated with the production of fabric designed for and marketed to the women's apparel trade. As a percentage of sales merchandising expenses were 6.4% of sales in fiscal 1997 and 6.2% of sales in fiscal 1996. Selling and shipping expense declined about 26% as a result of the decrease in the Company's sales. The decrease resulted primarily from a reduction in sales salaries, commissions and related travel and selling expenses. As a percentage of sales selling and shipping expenses were 8.3% of sales in fiscal 1997 and in fiscal 1996. General and administrative expenses declined about 23%. About 60% of the decline stemmed from reduced salary and related costs which resulted from the reduction in force associated with the Company's deemphasis of its marketing effort directed at the women's apparel trade. Telephone, stationery and printing, professional fees and credit and collection expenses were reduced in relationship to the reduction in sales and the number of people employed by the Company. As a percent of sales general and 16 administrative expenses were 8.4% of sales in fiscal 1997 and 8.1% of sales in fiscal 1996. The provision for doubtful accounts declined by about 16% as the Company's reduced sales volume resulted in lower accounts receivable and therefore a lower exposure to potential bad debts. Interest expense declined by 39% as the Company generated cash flow from its planned reduction in business activity which stemmed from the elimination of unprofitable product lines. Short term debt was eliminated and the Company generated interest income from cash invested in marketable securities. Although the Company's sales in fiscal 1997 declined, as expected, operating results improved as the Company's recently implemented strategy focuses on the more profitable aspects of its business. In fiscal 1997 the Company earned $3,359,000 net of a tax provision of $2,100,000. In fiscal 1996 the Company earned $938,000 net of a tax provision of $776,000. Liquidity and Capital Resources During fiscal 1998, the Company met its cash needs from cash flow from operations ($5,602,000), sale of equipment ($85,000) and the sale of capital stock as a result of the exercise of stock options ($92,000). These funds were used to purchase property and equipment ($3,412,000) and to invest in financial instruments with a maturity of 270 days or less ($1,070,000). Cash increased by $1,297,000. Working capital declined $1,094,000 as the 17 first installment ($2,850,000) of the Company's long term debt became current. Under individual credit line arrangements with several New York banks, the Company may borrow up to $20,000,000 at the prime lending rate. The credit lines are unsecured. Amounts borrowed are generally due in 30 to 90 days. Although the lending arrangements are informal and are cancelable at each bank's option, the Company has no reason to believe that the lines of credit will not be available if needed during fiscal 1999. The Company did not borrow under these arrangements in fiscal 1998. The Company's cash position and cash flow from operations are expected to finance operations for fiscal 1999. The Company's long-term lending agreement with an insurance company which is unsecured, prohibits pledging of assets, and requires (among other things - see Note 9 to Financial Statements) maintenance of minimum working capital, tangible net worth of $39,700,000 and maintenance of a minimum working capital ratio of 1.5 to 1. The unpaid principal balance was $20,000,000 at August 30, 1998. At August 30, 1998, tangible net worth approximated $46,800,000 and the Company's working capital ratio was 5.6 to 1. The Company has met all of the requirements specified in the loan agreement. The loan bears interest at 9.31% a year, and is repayable in seven equal annual installments beginning November, 1998. Inflation The Company's operating costs are subject to the general inflationary trends of the rest of the economy; in fiscal 1998 such trends were modest; 18 inflation has not been a significant factor in the Company's costs for the last three fiscal years. Year 2000 Compliance The Company believes it has taken reasonable steps in developing its Year 2000 Program. Its computer systems provide for four digits in the year field so that data processing and reporting should not be disrupted at the millennium. Notwithstanding this, the Company cannot be certain whether microprocessors embedded in other equipment or Year 2000 problems of its customers, key suppliers or service providers will be discovered and or resolved satisfactorily before the Year 2000. The Company is requesting information on Year 2000 issues from third parties significant to its business. If the Company's key suppliers, service providers, customers and other third parties fail to adequately address their Year 2000 Problems, and there are no alternates available to the Company, then the Company's usual channels of supply and distribution could be disrupted with a resulting adverse impact on its business. The Company does not believe that the cost of its Year 2000 program will be material to its financial position or its results of operations. Forward Looking Statements This report contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and actual results could differ materially from those contemplated by such statements. Such forward looking statements include references to expected future results of operations and Year 2000 issues. 19 Item 8. Concord Fabrics Inc. And Subsidiaries Index Financial Statements Report of Independent Public Accounts Consolidated Balance Sheets as at August 30, 1998 and August 31, 1997 Consolidated Statements of Income for the years ended August 30, 1998, August 31, 1997 and September 1, 1996 Consolidated Statements of Changes in Stockholders' Equity for the years ended August 30, 1998, August 31, 1997, and September 1, 1996 Consolidated Statements of Cash Flows for the years ended August 30, 1998, August 31, 1997 and September 1, 1996. Notes to Consolidated Financial Statements Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts Schedules other than those referred to above have been omitted as the conditions requiring their filings are not present or the information has been presented elsewhere in the financial statements. 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Concord Fabrics Inc.: We have audited the accompanying consolidated balance sheets of Concord Fabrics Inc. (a Delaware corporation) and subsidiaries as of August 30, 1998 and August 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Concord Fabrics Inc. and subsidiaries as of August 30, 1998 and August 31, 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule Valuation and Qualifying Accounts-Schedule II of this Form 10-K for the years ended August 31, 1998 and August 30, 1997 is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP New York, New York October 23, 1998 21 [LETTERHEAD OF EISNER & LUBIN LLP] Independent Auditors' Report To the Board of Directors and Stockholders Concord Fabrics Inc. We have audited the accompanying consolidated balance sheet of Concord Fabrics Inc. and Subsidiaries as at September 1, 1996, and the related consolidated statements of stockholders' equity, operations and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Concord Fabrics Inc. and Subsidiaries as at September 1, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The audit of the financial statements was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of financial statement schedules is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The information in this schedule for the year ended September 1, 1996 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Eisner & Lubin LLP ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS New York, New York November 13, 1996 CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AUGUST 30, 1998 AND AUGUST 31, 1997
August 30, August 31, ASSETS 1998 1997 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 8,678,053 $ 7,381,044 Investments in held-to-maturity securities (Note 1) 14,593,225 13,522,758 Accounts receivable (less doubtful accounts of $1,350,000 in 1998 and 1997) 18,003,495 21,311,977 Inventories (Notes 1 and 2) 16,015,819 12,903,902 Prepaid and refundable income taxes -- 255,000 Prepaid expenses and other current assets 1,289,839 1,416,839 Deferred income taxes (Note 5) 1,935,000 1,773,000 ----------- ----------- Total current assets 60,515,431 58,564,520 PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 3) 9,159,596 7,438,260 PROPERTY, PLANT AND EQUIPMENT HELD FOR SALE, at estimated disposal value (Note 16) 1,352,319 1,936,969 PROPERTY AND PLANT LEASED TO OTHERS (Note 14) 1,737,052 1,889,212 OTHER ASSETS (Note 4) 3,119,732 3,205,145 ----------- ----------- Total assets $75,884,130 $73,034,106 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of notes payable $ 2,850,000 $ -- Accounts payable 4,608,507 4,293,207 Accrued expenses (Note 7) 3,298,883 3,478,487 Income taxes payable 59,000 -- ----------- ----------- Total current liabilities 10,816,390 7,771,694 NOTES PAYABLE (Note 9) 17,150,000 20,000,000 DEFERRED INCOME TAXES (Note 5) 288,000 550,000 OTHER LIABILITIES 556,249 484,249 ----------- ----------- Total liabilities 28,810,639 28,805,943 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock- Class A - $.50 par value, authorized $4,000,000 shares, issued 2,237,656 shares in 1998 and 2,209,006 shares in 1997 1,118,828 1,104,503 Class B - $.50 par value, authorized 4,000,000 shares, issued 1,447,451 shares in 1998 and 1,456,101 shares in 1997 723,726 728,051 Additional paid-in capital 9,274,561 9,192,061 Retained earnings 35,956,376 33,203,548 ----------- ----------- Total stockholders' equity 47,073,491 44,228,163 ----------- ----------- Total liabilities and stockholders' equity $75,884,130 $73,034,106 =========== ===========
The accompanying notes are an integral part of these balance sheets. 23 CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 30, 1998, AUGUST 31, 1997 AND SEPTEMBER 1, 1996
August 30, August 31, September 1, 1998 1997 1996 ------------ ------------ ------------ NET SALES $101,296,721 $108,820,287 $146,561,416 ------------ ------------ ------------ EXPENSES: Cost of sales 70,644,721 76,302,759 108,814,265 Merchandising expenses 7,520,710 6,933,616 9,070,758 Selling and shipping expenses 7,706,088 8,979,360 12,189,783 General and administrative expenses 9,067,241 9,143,052 11,890,945 Provision for doubtful accounts 298,000 901,000 1,070,000 Interest expense, net (Note 11) 777,133 1,101,775 1,811,747 Provision for impairment in value of property held for sale (Note 16) 500,000 -- -- ------------ ------------ ------------ Total expenses 96,513,893 103,361,562 144,847,498 ------------ ------------ ------------ Earnings before income tax provision 4,782,828 5,458,725 1,713,918 INCOME TAX PROVISION (Note 5) 2,030,000 2,100,000 776,000 ------------ ------------ ------------ Net earnings $ 2,752,828 $ 3,358,725 $ 937,918 ============ ============ ============ BASIC EARNINGS PER SHARE (Notes 1 and 13) $ 0.75 $ 0.92 $ 0.26 ------------ ------------ ------------ DILUTED EARNINGS PER SHARE $ 0.72 $ 0.90 $ 0.26 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTING BASIC EARNINGS PER SHARE 3,673,788 3,661,591 3,630,329 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS PER SHARE 3,820,285 3,749,718 3,675,364 ============ ============ ============
The accompanying notes are an integral part of these statements. 24 CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 30, 1998, AUGUST 31, 1997 AND SEPTEMBER 1, 1996
Class A Common Stock Class B Common Stock ------------------------------------------------ Number Dollar Number Dollar of Shares Value of Shares Value --------- ---------- ---------- --------- BALANCE, September 3, 1995 2,105,611 $1,052,805 1,509,451 $ 754,726 Net earnings -- -- -- -- Conversion from Class B shares to Class A shares 50 25 (50) (25) Exercise of stock options (Note 13) 41,295 20,648 -- -- --------- ---------- ---------- --------- BALANCE, September 1, 1996 2,146,956 1,073,478 1,509,401 754,701 Net earnings -- -- -- -- Conversion from Class B shares to Class A shares 53,300 26,650 (53,300) (26,650) Exercise of stock options (Note 13) 8,750 4,375 -- -- --------- ---------- ---------- --------- BALANCE, August 31, 1997 2,209,006 1,104,503 1,456,101 728,051 Net earnings -- -- -- -- Conversion from Class B shares to Class A shares 8,650 4,325 (8,650) (4,325) Exercise of stock options (Note 13) 20,000 10,000 -- -- --------- ---------- ---------- --------- BALANCE, August 30, 1998 2,237,656 $1,118,828 1,447,451 $ 723,726 ========= ========== ========== ========= Additional Total Paid-in Retained Stockholders' Capital Earnings Equity ---------- ----------- ----------- BALANCE, September 3, 1995 $9,062,885 $28,906,905 $39,777,321 Net earnings -- 937,918 937,918 Conversion from Class B shares to Class A shares -- -- -- Exercise of stock options (Note 13) 103,238 -- 123,886 ---------- ----------- ----------- BALANCE, September 1, 1996 9,166,123 29,844,823 40,839,125 Net earnings -- 3,358,725 3,358,725 Conversion from Class B shares to Class A shares -- -- -- Exercise of stock options (Note 13) 25,938 -- 30,313 ---------- ----------- ----------- BALANCE, August 31, 1997 9,192,061 33,203,548 44,228,163 Net earnings -- 2,752,828 2,752,828 Conversion from Class B shares to Class A shares -- -- -- Exercise of stock options (Note 13) 82,500 -- 92,500 ---------- ----------- ----------- BALANCE, August 30, 1998 $9,274,561 $35,956,376 $47,073,491 ========== =========== ===========
The accompanying notes are an integral part of these statements. 25 CONCORD FABRICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 30, 1998, AUGUST 31, 1997 AND SEPTEMBER 1, 1996
August 30, 1998 August 31, September 1, 1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,752,828 $ 3,358,725 $ 937,918 Adjustments to reconcile net earnings to net cash provided by operating activities- Depreciation and amortization 1,865,161 1,724,099 1,813,123 Deferred income taxes (424,000) 365,000 370,000 Provision for doubtful accounts 298,000 901,000 1,070,000 Loss on sale of equipment -- -- 52,569 Loss on disposal of equipment 12,820 -- -- Loss on disposal of leasehold improvements -- 51,000 -- Provision for impairment in value of property held for sale 500,000 -- -- Change in assets and liabilities- Decrease (increase) in- Accounts receivable 3,010,482 4,884,129 (257,400) Inventories (3,111,917) 4,419,277 6,748,247 Prepaid and refundable income taxes 255,000 168,200 1,627,800 Prepaid expenses and other current assets 127,000 203,480 732,084 Other assets 50,109 (783,691) (112,236) Increase (decrease) in- Accounts payable 315,300 (2,639,270) (1,990,962) Accrued expenses (179,604) (889,544) (1,002,044) Income taxes payable 59,000 -- -- Other liabilities 72,000 60,000 63,159 ------------ ------------ ------------ Net cash provided by operating activities 5,602,179 11,822,405 10,052,258 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of held-to-maturity securities (21,507,767) (45,193,998) -- Proceeds from sales of held-to-maturity securities 20,437,300 31,671,240 -- Purchases of property, plant and equipment (3,411,853) (942,328) (1,695,758) Proceeds from sale of equipment 84,650 250,390 900,520 ------------ ------------ ------------ Net cash used in investing activities (4,397,670) (14,214,696) (795,238) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of notes payable - banks, net -- -- (2,000,000) Issuance of Class A common stock pursuant to stock options exercised 92,500 30,311 123,885 ------------ ------------ ------------ Net cash provided by (used in) financing activities 92,500 30,311 (1,876,115) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,297,009 (2,361,980) 7,380,905 CASH AND CASH EQUIVALENTS, beginning of year 7,381,044 9,743,024 2,362,119 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 8,678,053 $ 7,381,044 $ 9,743,024 ============ ============ ============
The accompanying notes are an integral part of these statements. 26 CONCORD FABRICS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 30, 1998, AUGUST 31, 1997 AND SEPTEMBER 1, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business of the Company The Company's principal business is the manufacture and distribution of woven and knitted fabrics for sale to manufacturers (primarily of home furnishing and apparel), and to retailers (including chains, department stores and independently owned fabric stores) for resale to the home sewing market. Principles of Consolidation The financial statements include the accounts of Concord Fabrics Inc. and its wholly owned subsidiaries (the "Company"). All intercompany investments, advances and transactions have been eliminated. Inventories Inventories are stated at lower of cost or market using the first-in, first-out method. Inventory costs comprise material, direct labor and overhead. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Deferred income taxes are provided for the difference between depreciation expense for financial reporting purposes and for income tax purposes. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease. Investments The Company's investments are in debt securities and stated at amortized cost. The Company has the positive intent and ability to hold the securities to maturity. 27 Cash Equivalents For reporting purposes, the Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents including commercial paper aggregate $5,700,000 at August 30, 1998 and $5,600,000 at August 31, 1997. Stock Options In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." This statement establishes a fair market value based method of accounting for an employee stock option or similar equity instrument but allows companies to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Companies electing to continue using the accounting under APB Opinion No. 25 must, however, make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied (Note 13). The Company has elected to continue accounting for its stock-based compensation awards to employees and directors under the accounting prescribed by APB Opinion No. 25 and to provide the disclosures required by SFAS No. 123. Earnings Per Share In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share gives effect to all potentially dilutive common shares that were outstanding during the period under the Company stock option Incentive Program (Note 13). All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the SFAS No. 128 requirements. Fiscal Year The Company operated on a 52-53 week year ending on the Sunday closest to August 31. The years ended August 30, 1998, August 31, 1997 and September 1, 1996 were comprised of fifty-two weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures 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. 28 2. INVENTORIES Inventories consist of the following:
August 30, August 31, 1998 1997 ----------- ----------- Finished goods $ 8,844,722 $ 8,164,772 Work-in-process 2,596,291 2,527,339 Greige goods and yarn 4,574,806 2,211,791 ----------- ----------- $16,015,819 $12,903,902 =========== ===========
At August 30, 1998, the Company had outstanding commitments to purchase greige goods aggregating approximately $4,500,000. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
Estimated August 30, August 31, Useful Life 1998 1997 (in years) ----------- ----------- ------------- Land $ 78,503 $ 78,503 -- Buildings 2,568,195 2,568,195 19 to 40 Machinery and equipment 9,442,309 7,414,592 5 to 9 Furniture and fixtures 2,021,457 1,650,269 3 to 8 Leasehold improvements 2,587,301 2,126,870 Term of lease or life of asset ----------- ----------- 16,697,765 13,838,429 Less- Accumulated depreciation and amortization 7,538,169 6,400,169 ----------- ----------- Net $ 9,159,596 $ 7,438,260 =========== ===========
4. OTHER ASSETS The Company maintains several insurance policies on the lives of its officers and directors with a total face value of $9,843,000. At August 30, 1998 and August 31, 1997, the cash surrender value on these policies aggregated $2,641,000 and $2,456,000, respectively, and are included in other assets in the accompanying consolidated balance sheets. 29 5. INCOME TAXES Income tax provision (benefit) on the consolidated statements of income consists of the following:
August 30, August 31, September 1, 1998 1997 1996 ---------- ---------- ----------- Current: Federal $1,970,000 $1,480,000 $346,000 State and local 484,000 255,000 60,000 Deferred: Federal (361,000) 216,000 284,000 State and local (63,000) 149,000 86,000 ---------- ---------- -------- $2,030,000 $2,100,000 $776,000 ========== ========== ========
Income taxes computed at the statutory Federal income tax rate are reconciled to income tax provision (benefit) on the consolidated statements of income as follows:
August 30, August 31, September 1, 1998 1997 1996 ---------- ---------- ------------ Income taxes at statutory Federal income tax rate $1,630,000 $1,856,000 $583,000 Effect of: State and local income taxes (net of Federal income taxes) 278,000 270,000 96,000 Nondeductible expenses 122,000 (12,000) 107,000 Foreign sales corporation -- (14,000) (10,000) ---------- ---------- ---------- $2,030,000 $2,100,000 $776,000 ========== ========== ========
30 Deferred tax assets and liabilities are comprised of the following elements:
August 30, August 31, 1998 1997 ----------- ----------- Gross deferred assets: Excess of tax over financial statement basis of property and plant leased to others $ 171,500 $ 173,000 Estimated doubtful accounts 540,000 540,000 Excess of tax over financial statement basis of inventory 1,051,700 941,000 Accruals deductible for tax purposes when paid 427,500 421,000 ----------- ----------- Gross deferred assets 2,190,700 2,075,000 ----------- ----------- Excess of financial statement over tax basis of property, plant and equipment 325,700 431,000 Excess of financial statement over tax basis of property, plant and equipment held for sale 218,000 421,000 ----------- ----------- Gross deferred liabilities 543,700 852,000 ----------- ----------- Net deferred taxes $ 1,647,000 $ 1,223,000 =========== =========== Reflected on consolidated balance sheets: Current deferred asset, net $ 1,935,000 $ 1,773,000 Noncurrent deferred (liability), net (288,000) (550,000) ----------- ----------- Net deferred taxes $ 1,647,000 $ 1,223,000 =========== ===========
6. NOTES PAYABLE - BANKS The Company has total bank lines of credit aggregating $20,000,000. Amounts borrowed are generally due in 30 to 90 days. The line of credit arrangements are informal and are cancelable at the banks' option and provide for borrowings at the prime lending rate. There were no borrowings under these arrangements at August 30, 1998 and August 31, 1997. 7. ACCRUED EXPENSES
August 30, August 31, 1998 1997 ---------- ---------- Interest $ 474,425 $ 474,425 Salaries, commissions and other performance- related compensation 1,484,085 1,685,795 Profit sharing (Note 8) 335,000 345,000 Miscellaneous expenses 1,005,373 973,267 ---------- ---------- $3,298,883 $3,478,487 ========== ==========
31 8. PROFIT SHARING PLAN The Company has a noncontributory profit sharing plan, for the benefit of eligible full-time employees, which provides for a minimum annual contribution to a trust fund based on percentages of pretax profits (as defined). The Board of Directors may increase such minimum annual contribution at its sole discretion, but all contributions are limited to the maximum amount deductible for federal income tax purposes. Contributions of $335,000, $345,000 and $150,000 were made for the years ended August 30, 1998, August 31, 1997 and September 1, 1996, respectively. 9. NOTES PAYABLE On November 30, 1994, the Company borrowed $20,000,000 from an insurance company. In December 1996, the insurance company sold $10,000,000 of the above amount to a financial institution. The unsecured loans bear interest at 9.31% a year and are repayable in seven equal annual installments commencing November 30, 1998. A portion of the loan proceeds was used to prepay a previous outstanding loan. The loan agreement requires maintenance of tangible net worth of approximately $39,700,000 at August 30, 1998. The Company must also maintain, at each fiscal quarter end, ratios of current assets to current liabilities and current assets to total liabilities of not less than 1.5 to 1 and 1.4 to 1, respectively, and may not permit debt for borrowed money to exceed 55% of capitalization (as defined). The agreement also prohibits the pledging of assets and restricts dividends and redemptions of capital stock to $3,000,000 plus 50% of consolidated net income (as defined) subsequent to August 28, 1994. At August 30, 1998, $5,843,000 was available for such payments. The Company was in compliance with these covenants as of August 30, 1998. 10. LEASES The Company leases showroom and office space and various equipment under leases expiring at various dates to 2003. Minimum rental payments under long-term leases in effect at August 30, 1998 are as follows:
Year ending: 1999 $ 835,000 2000 701,000 2001 651,000 2002 651,000 2003 271,000 ---------- $3,109,000 ==========
Rent expense aggregated $1,396,000 in 1998, $1,467,000 in 1997 and $1,925,000 in 1996. 32 11. INTEREST EXPENSE Interest expense, net on the consolidated statements of income, consists of the following:
August 30, August 31, September 1, 1998 1997 1996 ----------- ---------- ---------- Interest expense $ 1,862,000 $1,856,896 $1,950,121 Interest income (1,084,867) (755,121) (138,374) ----------- ---------- ---------- Net $ 777,133 $1,101,775 $1,811,747 =========== ========== ==========
12. COMMON STOCK The Class A and Class B shares principally differ as follows: a. The Class A shares have a 15% dividend preference and a 10% liquidation preference with respect to the Class B shares. b. Holders of Class A shares are entitled to one vote a share whereas holders of Class B shares are entitled to ten votes a share. c. Holders of Class A shares, voting as a separate class, are entitled to elect 25% of the Company's directors and holders of Class B shares, voting as a separate class, are entitled to elect the remaining directors. d. Class B shares are convertible into Class A shares on the basis of one share of Class A shares for each share of Class B shares; Class A shares have no conversion rights. During the years ended August 30, 1998, August 31, 1997 and September 1, 1996, 8,650, 53,300 and 50 Class B shares, respectively, were converted to an equal number of Class A shares. 13. STOCK OPTIONS Pursuant to an Incentive Program adopted on January 10, 1989, and amended on December 4, 1996, awards (as defined) may be granted to key employees and directors of the Company up to a maximum of 500,000 shares of the Company's Class A common stock. On January 10, 1989, options to purchase an aggregate of 150,000 shares of the Company's Class A common stock at $3 a share (fair market value at such date) were granted to three employees. The options are exercisable in five annual installments commencing January 10, 1995, and expire ten years from the date of grant. On March 1, 1994, an option to purchase 10,000 shares of the Company's Class A common stock at $9.50 a share (fair market value at such date) was granted to an employee. The option was canceled upon the employee's termination of employment during the year ended September 3, 1995. On January 9, 1996, options to purchase an aggregate of 200,000 shares of the Company's Class A common stock at $4.625 a share (fair market value at such date), were granted to two employees. The options are exercisable in five annual installments commencing January 9, 1997 and expire ten years from the date of the grant. 33 On January 9, 1996, options to purchase 5,000 shares of the Company's Class A stock at $4.625 (fair market value at such date) were granted to two outside directors. The options became exercisable one year from the date of grant and terminate the sooner of five years, or two years after a director's termination. On September 2, 1996, additional options to purchase 5,000 shares of the Company's Class A common stock at $6.625 (fair market value at such date) were granted to the above outside directors. On January 14, 1997, the Company granted an option to the Chairman of the Board of Directors to purchase an aggregate of 70,000 shares of the Company's Class A common stock at $7.0125 a share (110% of the fair market value on such date). This option is exercisable in five annual installments commencing January 14, 1998, and expires five years from the date of grant. The Chairman was also granted an option to purchase 30,000 shares of the Company's Class A common stock at $6.375 (fair market at such date). The option is exercisable in five annual installments commencing January 14, 1998 and expires ten years from the date of grant. On January 13, 1998, options to purchase 7,500 shares of the Company's Class A stock at $8.875 (fair market value at such date) were granted to three outside directors. The options are exercisable January 13, 1999 and expire five years from the date of grant. The following table reflects activity under the plan:
Options Outstanding ------------------------------------------------ Weighted Average Shares Available Exercise for Grant Shares Amount Price ---------------- ------------- ------------- --------- At September 3, 1995 350,000 100,000 $ 300,000 $ 3.00 Granted (205,000) 205,000 948,125 4.63 Exercised (1) -- (41,295) (123,886) (3.00) Canceled 2,455 (2,455) (7,365) (3.00) ---------------- ------------- ------------- --------- At September 1, 1996 147,455 261,250 1,116,874 4.28 Granted (105,000) 105,000 715,250 6.81 Exercised (1) -- (8,750) (30,313) (3.46) ---------------- ------------- ------------- --------- At August 31, 1997 42,455 357,500 1,801,811 5.04 Granted (7,500) 7,500 66,563 8.88 Exercised (1) -- (20,000) (92,500) (4.63) ---------------- ------------- ------------- --------- At August 30, 1998 34,955 345,000 $ 1,775,874 $ 5.15 ================ ============= ============ =========
(1) The excess of the exercise price over the par value of the Class A common stock issued has been credited to additional paid-in capital as follows:
Year-End Amount -------- -------- August 30, 1998 $ 82,500 August 31, 1997 25,938 September 1, 1996 103,238
34 The Company accounts for equity-based awards granted to employees and directors under APB Opinion No. 25 under which no compensation cost has been recognized for stock options granted at fair market value. Had compensation cost for these stock options been determined consistent with SFAS No. 123, the Company's net earnings and basic earnings per share would have decreased to the following pro forma amounts:
Year Ended August 30, 1998 August 31, 1997 September 1, 1996 --------------- --------------- ----------------- Net earnings: As Reported $ 2,752,828 $ 3,358,725 $ 937,918 Pro Forma 2,675,716 3,285,025 890,718 Basic EPS: As Reported $ 0.75 $ 0.92 $ 0.26 Pro Forma 0.73 0.90 0.25
The SFAS No. 123 method of accounting has not been applied to options granted prior to September 3, 1995. The resulting pro forma compensation expense may not be indicative of pro forma expense in future years. The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1998 1997 1996 ---- ---- ---- Risk-free interest rates 6.00% 6.00% 6.00% Expected lives 5 years 6 years 5 years Expected volatility 39.00% 38.00% 40.00% Expected dividend yields 0.00% 0.00% 0.00%
For options granted at an exercise price equal to fair market value, the weighted average fair value of such options is $4.99 and the weighted average of the exercise price of such options is $3.67. For an option granted during fiscal 1997 at an exercise price greater than fair market value, the fair value of such option is $6.38 and the exercise price is $4.92. The following table summarizes information about stock options outstanding at August 30, 1998:
Outstanding Options Exercisable - -------------------------------------------------------------------------- ------------------------------------ Number Weighted Average Weighted Average Number Weighted Average Exercise Outstanding at Remaining Exercise Exercisable at Exercise Price August 30, 1998 Contractual Life Price August 30, 1998 Price - ---------- --------------- ----------------- ---------------- --------------- ---------------- $ 3.0000 50,000 1.0 $ 3.0000 50,000 $ 3.0000 4.6250 182,500 8.0 4.6250 62,500 4.6250 6.6250 5,000 3.0 6.6250 5,000 6.6250 6.3750 30,000 8.0 6.3750 6,000 6.3750 7.0125 70,000 3.0 7.0125 14,000 7.0125 8.8750 7,500 5.0 8.8750 -- 8.8750 ------------- ------------ 345,000 137,500 ============= ============
35 14. PROPERTY AND PLANT LEASED TO OTHERS In February 1994, the Company sold its Chino, California machinery and equipment and leased the land and building for a five-year period at an annual net rental of $297,000. The lessee was also granted the option to purchase the land and building during the lease period for $2,900,000. If the lessee does not exercise its purchase option, the Company intends to put the property up for sale. 15. ACQUISITION OF KAT-EM INTERNATIONAL, INC. On April 18, 1994, the Company purchased all of the capital stock of Kat-Em International, Inc. (Kat-Em), an importer of printed and solid finished fabrics used in the apparel industry. During 1996, the Company decided to wind down the Kat-Em operations and in August 1996, Kat-Em was merged into Concord Fabrics Inc. 16. PROPERTY, PLANT AND EQUIPMENT HELD FOR SALE The Company decided to dispose of its Washington, Georgia dyeing and finishing plant and is actively searching for a buyer; manufacturing operations ceased October 6, 1995. At such time, the Company estimated the net realizable value of the facility and accrued expenses for an estimated disposition period. In fiscal 1998, the Company reevaluated the facility and, accordingly, recorded a charge of $500,000 reflecting the estimated impairment in value. During fiscal 1997, the Company repaired the facility's roof at a cost of $130,000 which was charged to operations. 17. SUPPLEMENTAL INFORMATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
August 30, August 31, September 1, 1998 1997 1996 ------------ ---------- ------------- Cash paid (refunded) for: Interest $ 1,862,000 $ 1,862,000 $ 1,984,000 Income taxes 2,139,000 1,671,000 (1,229,000)
18. CONCENTRATION OF CREDIT RISK Cash in banks, based on bank statement balances, exceeded federally insured limits by approximately $1,110,000 and $2,675,000 at August 30, 1998 and 1997, respectively. The Company's investment in commercial paper at August 30, 1998 and August 31, 1997 were with financial institutions. 36 Accounts receivable from manufacturers and retailers aggregated approximately $12,585,000 and $6,768,000 at August 30, 1998, and $14,604,000 and $8,059,000 at August 31, 1997, respectively. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. 19. FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, temporary investments and debt. The following summarizes the methods used to estimate the fair market value of these financial instruments. The carrying values of cash and temporary investments approximate their fair values due to their short-term maturities. The carrying value of the $20,000,000 notes payable at August 30, 1998 approximates fair value based on their future cash flows discounted at a current rate for debt with similar terms and maturities. At August 30, 1998 and August 31, 1997, letters of credit amounting to approximately $627,000 and $260,000, respectively, relating to purchase commitments issued to foreign suppliers were outstanding. 37 CONCORD FABRICS INC. AND SUBSIDIARIES VALUATIONS AND QUALIFYING ACCOUNTS SCHEDULE II
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E BALANCE AT ADDITIONS BEGINNING CHARGED TO BALANCE AT DESCRIPTION OF YEAR OPERATIONS DEDUCTIONS* END OF YEAR ----------- ------- ---------- ----------- ----------- Estimated doubtful accounts: Year ended September 1, 1996 $1,225,000 $1,070,000 $685,000 $1,610,000 Year ended August 31, 1997 $1,610,000 $901,000 $1,161,000 $1,350,000 Year ended August 30, 1998 $1,350,000 $298,000 $298,000 $1,350,000
*Deductions from estimated doubtful accounts represent accounts written off, net of recoveries of accounts written off in prior years. The accompanying notes to the consolidated financial statements are an integral part of these statements. 38 Item 9. Disagreements on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of Concord Fabrics Inc. This information is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 12, 1999, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of the Company's 1998 fiscal year. Item 11. Executive Compensation. This information is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 12, 1999, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of the Company's 1998 fiscal year. Item 12. Security Ownership of Certain Beneficial Owners of Management. This information is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 12, 1999, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of the Company's 1998 fiscal year. Item 13. Certain Relationships and Related Transactions. This information is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 12, 1999, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of the Company's 1998 fiscal year. 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) and (2) The following financial statements and schedules are filed as part of this Report. See Item 8 -- Index of Financial Statements and Schedules. (a) (3) Exhibits. *3.1 Delaware Certificate of Incorporation of the Concord Fabrics Inc. incorporated by reference from Appendix B to the Company's Proxy Statement dated January 26, 1988. *3.2 Delaware bylaws of Concord Fabrics Inc. incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended August 28, 1988. *4.1 Note Agreement between Concord Fabrics Inc. and John Hancock Mutual Life Insurance Company dated November 30, 1994 (the "Note Agreement"), incorporated by reference from exhibit 4.1 to Concord's Report on Form 8-K dated December 15, 1994. *10.1 Employment Agreement dated as of March 2, 1994 between the Company and Earl Kramer, incorporated by reference from exhibit 10.2 to Concord's annual report on form 10-K for the year ended August 28, 1994. *10.2 Deferred Compensation Agreement dated June 14, 1977, as amended on February 5, 1986 between the Company and Martin Wolfson incorporated by reference to exhibit 10.5 to Concord's Annual Report on Form 10-K for the fiscal year ended August 31, 1986. 40 *10.3 Lease Agreement dated August 1, 1994 between 1359 Broadway Associates and Concord Fabrics Inc., incorporated by reference from exhibit 10.4 to Concord's Annual Report on form 10-K for the year ended August 29, 1994. *10.4 Lease Agreement dated October 1, 1994 between 1359 Broadway Associates and Concord Fabrics Inc., incorporated by reference from exhibit 10.5 to Concord's Annual Report on form 10-K for the year ended August 28,1994. 22 Subsidiaries of Concord Fabrics Inc.: Concord FSC Inc.and Trilogy Fabrics Inc. (b) No report on Form 8-K was filed by Concord Fabrics Inc. In fiscal 1998. - ------------------------ *Document is available at Public Reference Section of the Securities and Exchange Commission, Commission File No. 1-5960. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Concord Fabrics Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 18, 1998 CONCORD FABRICS INC. By:\s\ Earl Kramer --------------- Earl Kramer President and Director Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of Concord Fabrics Inc. and in the capacities and on the dates indicated. 42
SIGNATURE TITLE DATE - --------- ----- ---- \S\ Earl Kramer Director, President November 18, 1998 - ----------------- (Principal Executive Earl Kramer Officer) \S\ Martin Wolfson Director, Senior Vice November 18, 1998 - ------------------ President, Treasurer Martin Wolfson (Principal Financial Officer) \S\ Jeffrey Cohen Controller (Principal November 18, 1998 - ----------------- Accounting Officer) Jeffrey Cohen \S\ Alvin Weinstein Director, Chairman of November 18, 1998 - ------------------- the Board Alvin Weinstein \S\ David Weinstein Director, President of November 18, 1998 - ------------------- Concord House Division David Weinstein _____________________ Director November 18, 1998 George Gleitman _____________________ Director November 18, 1998 Fred Heller \S\Richard Solar Director November 18, 1998 - --------------------- Richard Solar
43 EX-27 2 FDS 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMRATION EXTRACTED FROM THE YEAR ENDED AUGUST 30, 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO IT 0000023249 Concord Fabrics Inc. 12-MOS AUG-30-1998 SEP-01-1997 AUG-30-1998 8,678,053 0 18,003,495 0 16,015,819 60,515,431 9,159,596 0 75,884,130 10,816,390 0 0 0 1,842,554 0 75,884,130 101,296,721 101,296,721 70,644,721 96,513,893 0 0 777,133 4,782,828 2,030,000 0 0 0 0 2,752,828 0.75 0.72
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