ITEM 1. Business
Parker & Parsley 86-A, Ltd. (the "Partnership") is a limited partnership organized in 1986 under the laws of the State of Texas. The managing general partner is Parker & Parsley Development L.P. ("PPDLP"). PPDLP's general partner is Parker & Parsley Petroleum USA, Inc. ("PPUSA").
A Registration Statement, as amended, filed pursuant to the Securities Act of 1933, registering limited partnership interests aggregating $50,000,000 in a series of Texas limited partnerships formed under the Parker & Parsley 86 Development Drilling Program, was declared effective by the Securities and Exchange Commission on April 7, 1986. On July 23, 1986, the offering of limited partnership interests in the Partnership, the first partnership formed under such statement, was closed, with interests aggregating $10,131,000 being sold to 952 subscribers.
The Partnership engages primarily in oil and gas development and production and is not involved in any industry segment other than oil and gas. See "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data" of this report for a summary of the Partnership's revenue, income and identifiable assets.
The principal markets during 1996 for the oil produced by the Partnership were refineries and oil transmission companies that have facilities near the Partnership's oil producing properties. The principal markets for the Partnership's gas were companies that have pipelines located near the Partnership's gas producing properties. Of the Partnership's total oil and gas revenues for 1996, approximately 60% and 22% were attributable to sales made to Genesis Crude Oil, L.P. and Western Gas Resources, Inc.
The Partnership's revenues, profitability, cash flow and future rate of growth are highly dependent on the prevailing prices of oil and gas, which are affected by numerous factors beyond the Partnership's control. Oil and gas prices historically have been very volatile. A substantial or extended decline in the prices of oil or gas could have a material adverse effect on the Partnership's revenues, profitability and cash flow and could, under certain circumstances, result in a reduction in the carrying value of the Partnership's oil and gas properties.
Because of the demand for oil and gas, the Partnership does not believe that the termination of the sales of its products to any one customer would have a material adverse impact on its operations. The loss of a particular customer for gas may have an effect if that particular customer has the only gas pipeline
only gas pipeline located in the areas of the Partnership's gas producing properties. The Partnership believes, however, that the effect would be temporary, until alternative arrangements could be made.
Federal and state regulation of oil and gas operations generally includes the fixing of maximum prices for regulated categories of natural gas, the imposition of maximum allowable production rates, the taxation of income and other items, and the protection of the environment. Although the Partnership believes that its business operations do not impair environmental quality and that its costs of complying with any applicable environmental regulations are not currently significant, the Partnership cannot predict what, if any, effect these environmental regulations may have on its current or future operations.
The Partnership does not have any employees of its own. PPUSA employs 659 persons, many of whom dedicated a part of their time to the conduct of the Partnership's business during the period for which this report is filed. The Partnership's managing general partner, PPDLP through PPUSA, supplies all management functions.
Numerous uncertainties exist in estimating quantities of proved reserves and future net revenues therefrom. The estimates of proved reserves and related future net revenues set forth in this report are based on various assumptions, which may ultimately prove to be inaccurate. Therefore, such estimates should not be construed as estimates of the current market value of the Partnership's proved reserves.
No material part of the Partnership's business is seasonal and the Partnership conducts no foreign operations.
ITEM 2.

ITEM 2. Properties
The Partnership's properties consist primarily of leasehold interests in properties on which oil and gas wells are located. Such property interests are often subject to landowner royalties, overriding royalties and other oil and gas leasehold interests.
Fractional working interests in developmental oil and gas prospects located primarily in the Spraberry Trend area of West Texas were acquired by the Partnership, resulting in the Partnership's participation in the drilling of 32 oil and gas wells. Four wells were sold in 1996, one well was abandoned in 1992 and one well was sold during 1990. At December 31, 1996, 26 wells were producing.
For information relating to the Partnership's estimated proved oil and gas reserves at December 31, 1996, 1995 and 1994 and changes in such quantities for the years then ended, see Item 8, Note 7. Such reserves have been estimated by the engineering staff of PPUSA with a review by an independent petroleum consultant.
ITEM 3.

ITEM 3. Legal Proceedings
The Partnership was a party to material litigation which is described in Note 9 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below.
ITEM 4.

ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
ITEM 5.

ITEM 5. Market for Partnership's Common Equity and Related Stockholder Matters
At March 8, 1997, the Partnership had 10,131 outstanding limited partnership interests held of record by 959 subscribers. There is no established public trading market for the limited partner ship interests. Under the limited partnership agreement, PPDLP has made certain commitments to purchase partnership interests at a computed value.
Revenues which, in the sole judgement of the managing general partner, are not required to meet the Partnership's obligations are distributed to the partners at least quarterly in accordance with the limited partnership agreement. During the years ended December 31, 1996 and 1995, distributions of $957,779 and $254,727, respectively, were made to the limited partners.
ITEM 6.

ITEM 6. Selected Financial Data
The following table sets forth selected financial data for the years ended December 31:
- --------------- (a) Including litigation settlement per limited partnership interest of $28.41 in 1996 and $284.51 in 1993.
ITEM 7.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of operations
1996 compared to 1995
The Partnership's 1996 oil and gas revenues increased to $843,204 from $791,896 in 1995. The increase in revenues resulted from a 27% increase in the average price received per barrel of oil and a 55% increase in the average price received per mcf of gas, offset by an 18% decrease in barrels of oil produced and sold and a 27% decrease in mcf of gas produced and sold. In 1996, 26,605 barrels of oil were sold compared to 32,534 in 1995, a decrease of 5,929 barrels. Of the decrease, 4,802 barrels, or 15%, was attributable to the sale of four oil and gas wells. The additional decrease of 3%, or 1,127 barrels, was due to the decline characteristics of the Partnership's oil and gas properties. In 1996, 109,185 mcf of gas were sold compared to 148,708 in 1995, a decrease of 39,523 mcf. Of the decrease, 22,976 mcf, or 15%, was attributable to the sale of four oil and gas wells. The additional decrease of 16,574 mcf, or 12%, was due to the decline characteristics of the Partnership's oil and gas properties. Due to these characteristics, management expects a certain amount of decline in production to continue in the future until the Partnership's economically recoverable reserves are fully depleted.
The average price received per barrel of oil increased $4.58 from $17.14 in 1995 to $21.72 in 1996. The average price received per mcf of gas increased from $1.57 in 1995 to $2.43 in 1996. The market price for oil and gas has been extremely volatile in the past decade, and management expects a certain amount of volatility to continue in the foreseeable future. The Partnership may therefore sell its future oil and gas production at average prices lower or higher than that received in 1996.
Salvage income of $14,605 from equipment disposals during 1996 was derived from equipment credits received on one fully depleted well, compared to $11,463 received during 1995 from equipment disposals derived from equipment credits received on two fully depleted wells.
A gain of $161,057 from the sale of four oil and gas wells and four saltwater disposal wells was recognized during 1996, attributable to proceeds received of $399,838 less the write-off of remaining capitalized well costs of $238,781.
On April 29, 1996, Southmark, PPDLP and the Partnership entered into a final $7.4 million settlement agreement with Jack N. Price resolving all outstanding litigation between the parties. As a result, all of the pending lawsuits and judgments have been dismissed, the supersedeas bond released, and the Reserve released as collateral. On June 28, 1996, a final distribution was made to the working interest owners, including $287,784, or $28.41 per limited partnership interest, to the Partnership and its partners. See Note 9 of Notes to Financial Statements included in "Item 8.

ITEM 8. Financial Statements and Supplementary Data
The Partnership's audited financial statements are included elsewhere herein.
ITEM 9.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.

ITEM 10. Directors and Executive Officers of the Partnership
The Partnership does not have any officers or directors. Under the limited partnership agreement, the Partnership's managing general partner, PPDLP, is granted the exclusive right and full authority to manage, control and administer the Partnership's business. PPUSA, the sole general partner of PPDLP, is a wholly-owned subsidiary of Parker & Parsley Petroleum Company (the "Company"), a publicly-traded corporation on the New York Stock Exchange.
Set forth below are the names, ages and positions of the directors and executive officers of PPUSA. Directors of PPUSA are elected to serve until the next annual meeting of stockholders or until their successors are elected and qualified.
Age at December 31, Name 1996 Position ---- ------------ --------
Scott D. Sheffield 44 President, Chairman of the Board, Chief Executive Officer and Director
Timothy A. Leach 37 Executive Vice President and Director
Steven L. Beal 37 Senior Vice President, Chief Financial Officer and Director
Mark L. Withrow 49 Senior Vice President, Secretary and Director
David A. Chroback 41 Senior Vice President and Director
Scott D. Sheffield. Mr. Sheffield, a graduate of The University of Texas with a Bachelor of Science degree in Petroleum Engineering, has been the President and a Director of the Company since May 1990 and has been the Chairman of the Board and Chief Executive Officer since October 1990. Mr. Sheffield joined the Company as a petroleum engineer in 1979. Mr. Sheffield served as Vice President - Engineering of the Company from September 1981 until April 1985 when he was elected President and a Director of the Company. In March 1989, Mr. Sheffield was elected Chairman of the Board and Chief Executive Officer of the Company. On January 1, 1995, Mr. Sheffield resigned as President and Chief Executive Officer of PPUSA, but remained Chairman of the Board and a Director of PPUSA. On January 1, 1996, Mr. Sheffield reassumed the positions of President and Chief Executive Officer of PPUSA. Before joining the Company, Mr. Sheffield was principally occupied for more than three years as a production and reservoir engineer for Amoco Production Company.
Timothy A. Leach. Mr. Leach, a graduate of Texas A&M University with a Bachelor of Science degree in Petroleum Engineering and the University of Texas of the Permian Basin with a Master of Business Administration degree, was elected Executive Vice President - Engineering of the Company on March 21, 1995. Mr. Leach had been serving as Senior Vice President Engineering since March 1993 and served as Vice President - Engineering of the Company from October 1990 to March 1993. Mr. Leach was elected Executive Vice President and Director of PPUSA on December 1, 1995. He had joined the Company as Vice President - Engineering in September 1989. Prior to joining the Company, Mr. Leach was employed as Senior Vice President and Director of First City Texas - Midland, N.A.
Steven L. Beal. Mr. Beal, a graduate of the University of Texas with a Bachelor of Business Administration degree in Accounting and a certified public accountant, was elected Senior Vice President - Finance of the Company in January 1995 and Chief Financial Officer of the Company on March 21, 1995. Mr. Beal was elected Senior Vice President and Chief Financial Officer of PPUSA on January 1, 1995 and was elected a Director of PPUSA on January 2, 1996. He served as Treasurer of PPUSA from January 1, 1995 to June 12, 1996. Mr. Beal joined the Company as Treasurer in March 1988 and was elected Vice President - Finance in October 1991. Prior to joining the Company, Mr. Beal was employed as an audit manager for Price Waterhouse.
Mark L. Withrow. Mr. Withrow, a graduate of Abilene Christian University with a Bachelor of Science degree in Accounting and Texas Tech University with a Juris Doctorate degree, was Vice President - General Counsel of the Company from February 1991 to January 1995, when he was appointed Senior Vice President - General Counsel, and has been the Company's Secretary since August 1992. On January 1, 1995, Mr. Withrow was elected Senior Vice President and Secretary of PPUSA and was elected a Director of PPUSA on January 2, 1996. Mr. Withrow joined the Company in January 1991. Prior to joining the Company, Mr. Withrow was the managing partner of the law firm of Turpin, Smith, Dyer, Saxe & MacDonald, Midland, Texas.
David A. Chroback. Mr. Chroback, a graduate of Hanover College with a Bachelor of Science degree in Geology, and a graduate of Southern Illinois University at Carbondale with a Master of Science degree in Geology, was elected Senior Vice President of the Company and PPUSA on October 7, 1996. On January 2, 1996, Mr. Chroback was elected Director of PPUSA. He had served as Vice President - Geology of the Company since February 1993. Mr. Chroback has been the Geological Manager since June 1992, and prior to that has been a Senior Geologist with the Company since January 1988. Before joining the Company, he was a project geologist with Indian Wells Oil Company. Mr. Chroback was previously employed by Amoco Production Company as a petroleum geologist from 1980 through 1984.
ITEM 11.

ITEM 11. Executive Compensation
The Partnership does not have any directors or officers. Management of the Partnership is vested in PPDLP, the managing general partner. The Partnership participates in oil and gas activities through an income tax partnership (the "Program") pursuant to the Program agreement. Under the Program agreement, PPDLP pays approximately 10% of the Partnership's acquisition, drilling and completion
costs and approximately 25% of its operating and general and administrative expenses. In return, PPDLP is allocated approximately 25% of the Partnership's revenues. See Notes 6 and 10 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below for information regarding fees and reimbursements paid to the managing general partner or its affiliates by the Partnership.
The Partnership does not directly pay any salaries of the executive officers of PPUSA, but does pay a portion of PPUSA's general and administrative expenses of which these salaries are a part. See Note 6 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below.
ITEM 12.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Beneficial owners of more than five percent
The Partnership is not aware of any person who beneficially owns 5% or more of the outstanding limited partnership interests of the Partnership. PPDLP owned 35 limited partner interests at January 1, 1997.
(b) Security ownership of management
The Partnership does not have any officers or directors. The managing general partner of the Partnership, PPDLP, has the exclusive right and full authority to manage, control and administer the Partnership's business. Under the limited partnership agreement, limited partners holding a majority of the outstanding limited partnership interests have the right to take certain actions, including the removal of the managing general partner or any other general partner. The Partnership is not aware of any current arrangement or activity which may lead to such removal. The Partnership is not aware of any officer or director of PPUSA who beneficially owns limited partnership interests in the Partnership.
ITEM 13.

ITEM 13. Certain Relationships and Related Transactions
Transactions with the managing general partner or its affiliates
Pursuant to the limited partnership agreement, the Partnership had the following related party transactions with the managing general partner or its affiliates during the years ended December 31: 1996 1995 1994 -------- -------- -------- Payment of lease operating and supervision charges in accordance with standard industry operating agreements $166,605 $194,298 $195,989
Reimbursement of general and administrative expenses $ 20,949 $ 19,583 $ 17,754
Purchase of oil and gas properties and related equipment, at predecessor cost $ - $ 3,309 $ 4,664
Receipt of proceeds for the salvage value of retired oil and gas equipment $ 12,828 $ - $ -
Under the limited partnership agreement, the managing general partner pays 1% of the Partnership's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, it is allocated 1% of the Partnership's revenues. Also, see Notes 6 and 10 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below, regarding the Partnership's participation with the managing general partner in oil and gas activities of the Program.
PART IV
ITEM 14.

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements
The following are filed as part of this annual report:
Independent Auditors' Report
Balance sheets as of December 31, 1996 and 1995
Statements of operations for the years ended December 31, 1996, 1995 and 1994
Statements of partners' capital for the years ended December 31, 1996, 1995 and 1994
Statements of cash flows for the years ended December 31, 1996, 1995 and 1994
Notes to financial statements
2. Financial statement schedules
All financial statement schedules have been omitted since the required information is in the financial statements or notes thereto, or is not applicable nor required.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference as part of this annual report.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARKER & PARSLEY 86-A, LTD.
Dated: March 24, 1997 By: Parker & Parsley Development L.P., Managing General Partner
By: Parker & Parsley Petroleum USA, Inc. ("PPUSA"), General Partner
By: /s/ Scott D. Sheffield ----------------------------- Scott D. Sheffield, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ Scott D. Sheffield President, Chairman of the Board, March 24, 1997 - ----------------------- Chief Executive Officer and Scott D. Sheffield Director of PPUSA
/s/ Timothy A. Leach Executive Vice President and March 24, 1997 - ----------------------- Director of PPUSA Timothy A. Leach
/s/ Steven L. Beal Senior Vice President, Chief March 24, 1997 - ----------------------- Financial officer and Director Steven L. Beal of PPUSA
/s/ Mark L. Withrow Senior Vice President, Secretary March 24, 1997 - ----------------------- and Director of PPUSA Mark L. Withrow
/s/ David A. Chroback Senior Vice President and March 24, 1997 - ----------------------- Director of PPUSA David A. Chroback
INDEPENDENT AUDITORS' REPORT
The Partners Parker & Parsley 86-A, Ltd. (A Texas Limited Partnership):
We have audited the financial statements of Parker & Parsley 86-A, Ltd. as listed in the accompa nying index under Item 14(a). These financial statements are the responsibility of the Partnership'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 Parker & Parsley 86-A, Ltd. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Notes 2 and 3 to the financial statements, the Partnership adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in 1995.
KPMG Peat Marwick LLP
Midland, Texas March 21, 1997
PARKER & PARSLEY 86-A, LTD. (A Texas Limited Partnership)
BALANCE SHEETS December 31
1996 1995 ----------- ----------- ASSETS
Current assets: Cash and cash equivalents, including interest bearing deposits of $231,863 in 1996 and $66,392 in 1995 $ 232,139 $ 66,625 Accounts receivable - oil and gas sales 121,894 106,785 ---------- ---------- Total current assets 354,033 173,410 ---------- ---------- Oil and gas properties - at cost, based on the successful efforts accounting method 7,084,599 8,008,245 Accumulated depletion (5,634,266) (6,165,170) ---------- ---------- Net oil and gas properties 1,450,333 1,843,075 ---------- ---------- $ 1,804,366 $ 2,016,485 ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities: Accounts payable - affiliate $ 76,557 $ 62,993
Partners' capital: Limited partners (10,131 interests) 1,711,837 1,935,262 Managing general partner 15,972 18,230 ---------- ---------- 1,727,809 1,953,492 ---------- ---------- $ 1,804,366 $ 2,016,485 ========== ==========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 86-A, LTD. (A Texas Limited Partnership)
STATEMENTS OF OPERATIONS For the years ended December 31
1996 1995 1994 ---------- ---------- --------- Revenues: Oil and gas $ 843,204 $ 791,896 $ 793,615 Interest 15,409 4,199 2,385 Litigation settlement 290,690 - - Salvage income from equipment disposals 14,605 11,463 223 Gain on sale of assets 161,057 - - --------- --------- -------- 1,324,965 807,558 796,223 --------- --------- -------- Costs and expenses: Oil and gas production 401,388 472,456 471,702 General and administrative 25,296 23,757 23,809 Depletion 156,510 295,420 316,829 Impairment of oil and gas properties - 548,293 - --------- --------- -------- 583,194 1,339,926 812,340 --------- --------- -------- Net income (loss) $ 741,771 $ (532,368) $ (16,117) ========= ========= ======== Allocation of net income (loss): Managing general partner $ 7,417 $ (5,323) $ (161) ========= ========= ======== Limited partners $ 734,354 $ (527,045) $ (15,956) ========= ========= ======== Net income (loss) per limited partnership interest $ 72.49 $ (52.02) $ (1.57) ========= ========= ========
The accompanying notes are an integral part of these inancial statements.
PARKER & PARSLEY 86-A, LTD. (A Texas Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Managing general Limited partner partners Total -------- ---------- ----------
Partners' capital at January 1, 1994 $ 29,203 $3,021,366 $3,050,569
Distributions (2,913) (288,376) (291,289)
Net loss (161) (15,956) (16,117) ------- --------- ---------
Partners' capital at December 31, 1994 26,129 2,717,034 2,743,163
Distributions (2,576) (254,727) (257,303)
Net loss (5,323) (527,045) (532,368) ------- --------- ---------
Partners' capital at December 31, 1995 18,230 1,935,262 1,953,492
Distributions (9,675) (957,779) (967,454)
Net income 7,417 734,354 741,771 ------- --------- ---------
Partners' capital at December 31, 1996 $ 15,972 $1,711,837 $1,727,809 ======= ========= =========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 86-A, LTD. (A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS For the years ended December 31
1996 1995 1994 --------- --------- ---------- Cash flows from operating activities: Net income (loss) $ 741,771 $(532,368) $ (16,117) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Impairment of oil and gas properties - 548,293 - Depletion 156,510 295,420 316,829 Salvage income from equipment disposals (14,605) (11,463) (223) Gain on sale of assets (161,057) - - Changes in assets and liabilities: Increase in accounts receivable (15,109) (11,485) (5,502) Increase (decrease) in accounts payable 13,835 16,682 (21,820) -------- -------- -------- Net cash provided by operating activities 721,345 305,079 273,167 -------- -------- -------- Cash flows from investing activities: Additions to oil and gas properties (2,820) (17,619) (2,310) Proceeds from salvage income on equipment disposals 14,605 11,463 223 Proceeds from sale of assets 399,838 - - -------- -------- -------- Net cash provided by (used in) investing activities 411,623 (6,156) (2,087) -------- -------- -------- Cash flows from financing activities: Cash distributions to partners (967,454) (257,303) (291,289) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 165,514 41,620 (20,209) Cash and cash equivalents at beginning of year 66,625 25,005 45,214 -------- --------- --------- Cash and cash equivalents at end of year $ 232,139 $ 66,625 $ 25,005 ======== ========= =========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 86-A, LTD. (A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Note 1. Organization and nature of operations
Parker & Parsley 86-A, Ltd. (the "Partnership") is a limited partnership organized in 1986 under the laws of the State of Texas.
The Partnership engages primarily in oil and gas development and production in Texas and is not involved in any industry segment other than oil and gas.
Note 2. Summary of significant accounting policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Impairment of long-lived assets - Commencing in 1995, in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Partnership reviews its long-lived assets to be held and used on an individual property basis, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In this circumstance, the Partnership recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Partnership accounts for long-lived assets to be disposed of at the lower of their carrying amount or fair value less costs to sell once management has committed to a plan to dispose of the assets.
Prior to the adoption of SFAS 121 in the fourth quarter of 1995, the Partnership's aggregate oil and gas properties were stated at cost not in excess of total estimated future net revenues and the estimated fair value of oil and gas assets not being depleted.
Oil and gas properties - The Partnership utilizes the successful efforts method of accounting for its oil and gas properties and equipment. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method on a property-by-property basis based on proved oil (dominant mineral) reserves as determined by the engineering staff of Parker & Parsley Petroleum USA, Inc. ("PPUSA"), the sole general partner of Parker & Parsley Development L.P. ("PPDLP"), the Partnership's managing general partner, and reviewed by independent petroleum consultants. The carrying amounts of properties sold or otherwise disposed of and the related allowances for
depletion are eliminated from the accounts and any gain or loss is included in operations.
Use of estimates in the preparation of financial statements - Preparation of the accompanying financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net income (loss) per limited partnership interest - The net income (loss) per limited partnership interest is calculated by using the number of outstanding limited partnership interests.
Income taxes - A Federal income tax provision has not been included in the financial statements as the income (loss) of the Partnership is included in the individual Federal income tax returns of the respective partners.
Statements of cash flows - For purposes of reporting cash flows, cash and cash equivalents include depository accounts held by banks.
General and administrative expenses - General and administrative expenses are allocated in part to the Partnership by the managing general partner or its affiliates. Such allocated expenses are determined by the managing general partner based upon its judgement of the level of activity of the Partnership relative to the managing general partner's activities and other entities it manages. The method of allocation has varied in certain years and may do so again depending on the activities of the managed entities.
Environmental - The Partnership is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Partnership to remove or mitigate the environ mental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.
Note 3. Impairment of long-lived assets
The Partnership adopted SFAS 121 effective October 1, 1995. In order to determine whether an impairment had occurred, the Partnership estimated the expected future cash flows of its oil and gas properties and compared such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount was recoverable. For those oil and gas properties for which the carrying amount exceeded the estimated future cash flows, an impairment was determined to exist; therefore, the Partnership adjusted the carrying amount of those oil and gas properties to their fair value as determined by discounting their expected future cash flows at a discount rate commensurate with the risks involved in the industry. As a result of the review
and evaluation of its long-lived assets for impairment, the Partnership recognized a non-cash charge of $548,293 related to its oil and gas properties during the fourth quarter of 1995.
Note 4. Income taxes
The financial statement basis of the Partnership's net assets and liabilities was $422,565 greater than the tax basis at December 31, 1996.
The following is a reconciliation of net income (loss) per statements of operations with the net income per Federal income tax returns for the years ended December 31: 1996 1995 1994 ---------- --------- --------- Net income (loss) per statements of operations $ 741,771 $(532,368) $ (16,117) Depletion and depreciation provisions for tax reporting purposes under amounts for financial reporting purposes 151,416 281,353 280,776 Impairment of oil and gas properties for financial reporting purposes - 548,293 - Gain on sale of assets for tax reporting purposes over amounts for financial reporting purposes 220,623 - - Other, net 2,176 202 1,708 --------- -------- -------- Net income per Federal income tax returns $1,115,986 $ 297,480 $ 266,367 ========= ======== ========
Note 5. Oil and gas producing activities
The following is a summary of the costs incurred, whether capitalized or expensed, related to the Partnership's oil and gas producing activities for the years ended December 31: 1996 1995 1994 -------- -------- -------- Development costs $ 12,057 $ 3,904 $ 4,887 ======= ======= =======
Capitalized oil and gas properties consist of the following:
1996 1995 1994 ----------- ----------- ----------- Proved properties: Property acquisition costs $ 264,211 $ 334,265 $ 334,265 Completed wells and equipment 6,820,388 7,673,980 7,658,613 ---------- ---------- ---------- 7,084,599 8,008,245 7,992,878 Accumulated depletion (5,634,266) (6,165,170) (5,321,457) ---------- ---------- ---------- Net capitalized costs $ 1,450,333 $ 1,843,075 $ 2,671,421 ========== ========== ==========
During 1995, the Partnership recognized a non-cash charge of $548,293 associated with the adoption of SFAS 121. See Note 3.
Note 6. Related party transactions
Pursuant to the limited partnership agreement, the Partnership had the following related party transactions with the managing general partner or its affiliates during the years ended December 31: 1996 1995 1994 -------- -------- -------- Payment of lease operating and supervision charges in accordance with standard industry operating agreements $166,605 $194,298 $195,989
Reimbursement of general and administrative expenses $ 20,949 $ 19,583 $ 17,754
Purchase of oil and gas properties and related equipment, at predecessor cost $ - $ 3,309 $ 4,664
Receipt of proceeds for the salvage value of retired oil and gas equipment $ 12,828 $ - $ -
The Partnership participates in oil and gas activities through an income tax partnership (the "Program") pursuant to the Program agreement. PPDLP and the Partnership are parties to the Program agreement.
The costs and revenues of the Program are allocated to PPDLP and the Partnership as follows:
PPDLP (1) Partnership ----------- ----------- Revenues: Proceeds from disposition of depreciable properties 9.09091% 90.90909% All other revenues 24.242425% 75.757575%
Costs and expenses: Lease acquisition costs, drilling and completion costs and all other costs 9.09091% 90.90909% Operating costs, direct costs and general and administrative expenses 24.242425% 75.757575%
(1) Excludes PPDLP's 1% general partner ownership which is allocated at the Partnership level and 35 limited partner interests owned by PPDLP.
Note 7. Oil and gas information (unaudited)
The following table presents information relating to the Partnership's estimated proved oil and gas reserves at December 31, 1996, 1995 and 1994 and changes in such quantities during the years then ended. All of the Partnership's reserves are proved and located within the United States. The Partnership's
reserves are based on an evaluation prepared by the engineering staff of PPUSA and reviewed by an independent petroleum consultant, using criteria established by the Securities and Exchange Commission. Reserve value information is available to limited partners pursuant to the Partnership agreement and, therefore, is not presented. Oil (bbls) Gas (mcf) ---------- --------- Net proved reserves at January 1, 1994 382,357 1,800,809 Revisions (9,722) (185,475) Production (35,844) (139,653) ------- -------- Net proved reserves at December 31, 1994 336,791 1,475,681 Revisions 17,716 128,050 Production (32,534) (148,708) ------- -------- Net proved reserves at December 31, 1995 321,973 1,455,023 Revisions 88,303 476,274 Sale of reserves (60,350) (281,449) Production (26,605) (109,185) ------- -------- Net proved reserves at December 31, 1996 323,321 1,540,663 ======= =========
The estimated present value of future net revenues of proved reserves, calculated using December 31, 1996 prices of $24.86 per barrel of oil and $3.71 per mcf of gas, discounted at 10% was approximately $3,130,000 and undiscounted was $5,962,000 at December 31, 1996.
The Partnership emphasizes that reserve estimates are inherently imprecise and, accordingly, the estimates are expected to change as future information becomes available.
Note 8. Major customers
The following table reflects the major customers of the Partnership's oil and gas sales (a major customer is defined as a customer whose sales exceed 10% of total sales) during the years ended December 31:
1996 1995 1994 ------ ------ ------
Genesis Crude Oil, L.P. 60% 52% 54% Western Gas Resources, Inc. 22% 16% - GPM Gas Corporation - 11% 23% Texaco Trading & Transportation - 15% 15%
The above customers represent 89% of total accounts receivable at December 31, 1996.
PPDLP is party to a long-term agreement pursuant to which PPDLP and affiliates are to sell to Basis Petroleum, Inc. (formerly Phibro Energy, Inc.) substantially all crude oil (including condensate) which any of such entities
have the right to market from time to time. On September 23, 1996, PPDLP and Basis Petroleum, Inc. entered into an agreement that supersedes the prior crude oil purchase agreement between the parties and provides for adjusted terms effective December 1, 1995. On November 25, 1996, the Company consented to the assignment of the agreement to Genesis Crude Oil, L.P. ("Genesis"), a limited partnership formed by Basis Petroleum, Inc. and Howell Corporation. The price to be paid by Genesis for oil purchased under the agreement ("Genesis Agreement") is to be competitive with prices paid by other substantial purchasers in the same areas who are significant competitors of Genesis. The price to be paid for oil purchased under the Genesis Agreement includes a market-related bonus that may vary from month to month based upon spot oil prices at various commodity trade points. The term of the Genesis Agreement is through June 30, 1998, and it may continue thereafter subject to termination rights afforded each party. Salomon, Inc., the parent company of Basis Petroleum, Inc. and a subordinated limited partner in Genesis, secures the payment obligations under the Genesis Agreement with a $25 million payment guarantee. Accounts receivable-oil and gas sales included $63,617 due from Genesis at December 31, 1996.
Note 9. Contingencies
On May 25, 1993, a final settlement agreement was negotiated, drafted and finally executed, ending litigation which had begun on September 5, 1989, when the Partnership filed suit along with other parties against Dresser Industries, Inc.; Titan Services, Inc.; BJ-Titan Services Company; BJ-Hughes Holding Company; Hughes Tool Company; Baker Hughes Production Tools, Inc.; and Baker Hughes Incorporated alleging that the defendants had intentionally failed to provide the materials and services ordered and paid for by the Partnership and other parties in connection with the fracturing and acidizing of 523 wells, and then fraudulently concealed the shorting practice from Parker & Parsley Development L.P. ("PPDLP"). The May 25, 1993 settlement agreement called for a payment of $115 million in cash by the defendants, and Southmark, the Partnership, and the other plaintiffs indemnified the defendants against the claims of Jack N. Price. The managing general partner received the funds, deducted incurred legal expenses, calculated accrued interest, determined the general partner's portion of the funds and calculated any inter-partnership allocations.
On May 3, 1993, Jack N. Price, the attorney who represented Gary G. "Zeke" Lancaster in the Federal Court lawsuit, filed suit in State Court in Beaumont against all of the plaintiff partnerships, including the Partnership and others, alleging his entitlement to 12% of the settlement proceeds. Price's lawsuit claim for approximately $13.8 million was predicated on a purported contract entered into with Southmark Corporation in August 1988 in which he allegedly bound the Partnership and the other defendants, as well as Southmark. Although PPDLP believed the lawsuit to be without merit and vigorously defended it, PPDLP held in reserve approximately 12.5% of the total settlement (the "Reserve") pending final resolution of the litigation.
A distribution of $91,000,000 was made to the working interest owners, including the Partnership, on July 30, 1993. The limited partners received their distribution of $2,882,376, or $284.51 per limited partnership interest, in September 1993. The allocation of the lawsuit settlement amount was based on the
original verdict entered on October 26, 1990. The allocation to the working interest owners in each well (including the Partnership) was based on a ratio of the relative amount of damages due to overcharges for services and materials ("Materials") and damages for loss of past and future production ("Production"), each as determined in that initial judgment. Within the Partnership, damages for Materials were allocated between the partners based on their original sharing percentages for costs of acquiring and/or drilling of wells. Similarly, damages related to Production were allocated to the partners in the Partnership based on their respective share of revenues from the subject wells.
As a condition of the purchase by Parker & Parsley Petroleum Company of Parker & Parsley Development Company ("PPDC"), which was merged into PPDLP on January 1, 1995, from its former parent in May 1989, PPDC's interest in the lawsuit and subsequent settlement was retained by the former parent. Consequently, all of PPDC's share of the settlement related to its separately held interests in the wells and its partnership interests in the sponsored partnerships (except that portion allocable to interests acquired by PPDC after May 1989) was paid to the former parent.
On September 20, 1995, the Beaumont trial judge entered a summary judgment against Southmark for the $13,790,000 contingent fee sought by Price, together with prejudgment interest, and also awarded Price an additional $5,498,525 in attorneys' fees. On January 22, 1996, the trial judge entered an interlocutory summary judgment against Dresser Industries and Baker Hughes for an amount to be determined. Pursuant to their indemnity obligations, the Partnership, Southmark, PPDLP and other original plaintiffs vigorously protected the rights of both Dresser and Baker Hughes. Southmark vigorously pursued its appeal of the judgment, and posted a supersedeas bond using the Reserve as collateral. On April 29, 1996, all of the parties, including the Partnership and Southmark, entered into a $7.4 million settlement with Price which fully and finally resolved all of the litigation and disputes between the parties, including the Partnership's indemnity obligations to Dresser and Baker Hughes.
Pursuant to the settlement agreement, all of the pending lawsuits and judgments have been dismissed, the supersedeas bond released, and the Reserve released as collateral. On June 28, 1996, a final distribution was made to the working interest owners, including $287,784, or $28.41 per limited partnership interest to the Partnership and its partners.
Note 10. Organization and operations
The Partnership was organized July 23, 1986 as a limited partnership under the Texas Uniform Limited Partnership Act for the purpose of acquiring and developing oil and gas properties. The following is a brief summary of the more significant provisions of the limited partnership agreement:
Managing general partner - The managing general partner of the Partnership is PPDLP. PPDLP has the power and authority to manage, control and administer all Partnership affairs. Under the limited partnership agreement, the managing general partner pays 1% of the Partnership's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, it is allocated 1% of the Partnership's revenues.
Limited partner liability - The maximum amount of liability of any limited partner is the total contributions of such partner plus his share of any undistributed profits.
Initial capital contributions - The limited partners entered into subscription agreements for aggregate capital contributions of $10,131,000. PPDLP is required to contribute amounts equal to 1% of initial Partnership capital less commission and offering expenses allocated to the limited partners and to contribute amounts necessary to pay costs and expenses allocated to it under the Partnership agreement to the extent its share of revenues does not cover such costs.
Note 11. Disposition of Assets
A gain of $161,057 from the sale of four oil and gas wells and four saltwater disposal wells to Costilla Energy, L.L.C. was recognized during the year ended December 31, 1996, attributable to proceeds received of $399,838 less the write-off of remaining capitalized well costs of $238,781.
PARKER & PARSLEY 86-A, LTD.
INDEX TO EXHIBITS
The following documents are incorporated by reference in response to Item 14(c):
Exhibit No. Description Page ----------- ----------- ----
3(a) Amended and Restated Certificate of - Limited Partnership of Parker & Parsley 86-A, Ltd.
4(a) Agreement of Limited Partnership of - Parker & Parsley 86-A, Ltd.
4(b) Form of Subscription Agreement and - Power of Attorney
4(c) Specimen Certificate of Limited - Partnership Interest
10(a) Operating Agreement -
10(b) Exploration and Development Program - Agreement
99.1 Mutual Release and Indemnity Agreement dated May 25, 1993 -


Item 1. Business
Registrant'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 Registrant 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 sales to retail stores.
Manufacture and Sale of Fabrics
Woven Fabrics
Woven fabrics accounted for 60% of fabric sales in fiscal 1996, compared with 69% in fiscal 1995 and 70% in fiscal 1994. The significant decline in the percentage of woven fabric sales to total sales resulted from reduced sales of woven goods to the apparel trade. All of Registrant's supply of unfinished woven fabrics ("greige goods") are made from natural and/or synthetic fibers by unaffiliated companies, who frequently produce the greige goods to Registrant's specifications. In fiscal 1996, Registrant
was able to obtain adequate supplies of greige goods at competitive prices. Registrant purchased substantially all of its greige goods from about 55 suppliers; the five largest suppliers accounted for 51% of Registrant's purchases of greige goods and the largest supplied 14%. In fiscal 1995, Registrant purchased substantially all of its greige goods from about 85 suppliers; the five largest suppliers accounted for 36% of Registrant's purchases of greige goods and the single largest supplied 13%. In fiscal 1994, Registrant purchased its greige goods from about 100 suppliers of which the single largest supplied 11% of Registrant's needs. Registrant's greige cloth purchases derive from domestic and imported sources.
Greige goods purchased by Registrant are printed or dyed and finished by unaffiliated finishers in accordance with Registrant's designs and specifications. In fiscal 1996, Registrant contracted with about 13 finishers for the finishing or printing of woven fabrics; the largest contract finisher accounted for 46% of Registrant's woven finishing requirements; no other contract finisher accounts for more than 19%. In fiscal 1995, Registrant's Washington, Georgia plant, accounted for 18% of Registrant's finishing requirements. That plant closed in October 1995 and therefore did not account for a significant portion of Registrant's 1996 finishing requirements.
Registrant'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.
In April, 1994, Registrant acquired 100% of the capital stock of Kat-Em International, Inc., an importer of finished printed and dyed woven fabrics (see Note N to Financial Statements). Kat-Em merchandised and sold these fabrics to apparel manufacturers headquartered in the United States; some of the fabric was shipped into the United States and some was shipped to its customer's offshore manufacturing locations. Kat-Em International, Inc.'s sales, from the date of its acquisition, represented less than 6% of Registrant's consolidated sales in fiscal, 1994. In fiscal 1995 and 1996 Kat-Em's sales were approximately 13% of Registrant's consolidated sales. During fiscal 1996 Registrant began to wind down the Kat-Em operation and in August 1996 that subsidiary was merged into Concord. The decision to terminate the Kat-Em operation was a component of the deemphasis of sales to apparel manufacturers and elimination of unprofitable lines.
Registrant exports printed and to a lesser extent solid woven fabrics for sale abroad. In fiscal 1995 and 1996 exports approximated 8% of sales. In fiscal 1994 exports were almost 7% of sales and in fiscal 1993 exports were almost 6% of Registrant's total sales.
Prior to each "season" (i.e., spring-summer, fall-winter), Registrant's woven fabrics are designed by Registrant's design staff to meet current and developing styles that Registrant believes will be fashionable. Thus, the demand for Registrant's woven fabrics during any season depends in part upon Registrant's ability to forecast changes in styles and fashion and react thereto. Registrant 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 40% of fabric sales in fiscal 1996, compared with 31% in fiscal 1995 and 30% in fiscal 1994. Registrant purchases yarn for knitting from unaffiliated suppliers; in fiscal 1996, Registrant purchased yarn from 14 suppliers, the three largest suppliers accounted for 91% of Registrant's purchases of yarn; the largest of which accounted for 65% of yarn purchases. In fiscal 1995 Registrant purchased yarn from 13 suppliers; the three largest of which supplied 76% of Registrant's needs. Registrant 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 1996, 77% of the yarn purchased by Registrant was knitted into fabric at Registrant's Milledgeville, Georgia facility. The balance of the yarn purchased by Registrant in 1996 was knitted by unaffiliated contractors. In fiscal 1995, 88% of yarn purchased by Registrant was knitted at Milledgeville. In fiscal 1994, 72% of the yarn purchased by Registrant was knitted into fabric in Registrant's Milledgeville, Georgia plant. In the past three years, all of the knitted fabric was dyed and finished in Registrant's Milledgeville or Washington facilities (see Item 2.

Item 2. Properties
Registrant owns a 24 1/2-year-old knitting and finishing plant, consisting of approximately 130,000 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 Registrant's finishing requirements.
Registrant, in fiscal 1986, purchased a 140,000-square foot building on approximately 55 acres of land in Washington, Georgia. On October 6, 1995 Registrant closed this facility and it is currently being offered for sale.
Registrant, in fiscal 1987, purchased a 93,000-square foot building on approximately three acres of land in Chino, California. In February, 1994 Registrant 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.
Registrant's Washington facility was closed because Registrant could not secure sufficient business at acceptable margins to adequately fill its capacity.
Registrant believes that its Milledgeville, Georgia facility will provide substantially all of its knitting and dyeing and finishing of knitted fabrics requirements.
Registrant has entered into leases expiring in 2003 for two floors at 1359 Broadway, New York, New York, consisting of approximately 40,000 square feet which it uses for its executive offices and showrooms. The Kat-Em Division of Registrant has a lease for office and warehouse space in Los Angeles, California comprised of 40,000 square feet; the lease expires in 1999. Registrant is offering the property for sublease as a consequence of the winding down of the Kat-Em operation. (See Note H of Notes to Financial Statements).
Item 3.

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 Registrant, their respective ages, and all positions presently held with Registrant by each such person.
Alvin Weinstein has been Chairman of the Board of Registrant since 1969.
Mr. Kramer joined Registrant in June 1972 as President of its Knit Division, with responsibility for supervising and coordinating the various aspects of Registrant's knit operations. In March 1976, Mr. Kramer was elected a Vice President of Registrant and was given the additional executive responsibility of supervising the operation of Registrant's dyeing and finishing plant in Washington, Georgia. Mr. Kramer has served as President of Registrant 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 Registrant since 1973. Formerly he had served as Controller of Registrant. He served as Secretary of Registrant from January 1973 to October 1981. Mr. Wolfson is the principal financial officer of Registrant.
In January 1985, Mr. Neugeboren was elected Vice President in Charge of Production. Mr. Neugeboren joined Registrant 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 Registrant. She has been Registrant's Fashion Director since joining Registrant in 1973.
All of Registrant's officers hold office until the next annual meeting of Registrant's Board of Directors (scheduled for January 14, 1997) and the election of their successors.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
On May 27, 1988 Registrant exchanged one share each of Class A and Class B stock of Concord Fabrics Inc. (a Delaware Corporation) for each share of stock previously issued of Concord Fabrics Inc. (a New York Corporation). As of September 1, 1996, the number of record holders of the Registrant's Class A Common Stock was 367 and the number of record holders of Registrant's Class B Common Stock was 351. Both classes of Registrant'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 1996 and 1995.
Registrant has not paid cash dividends for many years.
The payment of dividends by Registrant 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; $2,617,000 was available for such payments as of September 1, 1996.
ITEM 6

ITEM 6 CONCORD FABRICS INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The year ended September 3, 1995 comprised 53 weeks; the other years presented each comprised 52 weeks.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal 1996 v. Fiscal 1995
Fiscal 1996 comprised 52 weeks; fiscal 1995 comprised 53 weeks. Net sales decreased 19% from $180,152,779 to $146,561,416. This resulted from a decline in unit sales of 17% and a 1% decline in average selling price. The decrease in sales reflected the cessation in October 1995, of Registrant's operations at its Washington, Georgia woven dyeing and finishing plant and the further deemphasis in June 1996 of the production of woven fabrics for the apparel trade.
Gross margins rose to 25.8% in fiscal 1996 from 20.1% in fiscal 1995. The improvement was due to better performance at Registrant's Milledgeville, Georgia knitted fabrics manufacturing facility and the discontinuance of operations at the less productive Washington, Georgia plant.
Merchandising expenses decreased by approximately $575,000 or 6% primarily due to a reduction in personnel associated with the production of solid woven fabric.
Selling and shipping expense declined about 12% as a result of the decrease in Registrant's sales. The decrease was less than the actual sales decrease because some of Registrant's selling and shipping expenses do not vary directly with sales but represent sales management costs which are more fixed in nature.
General and administrative expenses declined about 6% primarily due to a decrease in the number of corporate officers, the completion of Registrant's computer software development project and a reduction in travelling expense.
Registrant's provision for doubtful accounts increased to $1,070,000 in fiscal 1996 from $633,000 in fiscal 1995 because of an increase in customer failures in contrast with fiscal 1995. Registrant is continuously exposed to bad debt risk with respect to its wholesale customers when such customers may have significant concentration of business with retailers who may become financially unstable. Registrant attempts to monitor this situation and adjust its credit policies accordingly.
Interest expense decreased by almost 26% due to a reduction in short term borrowing reflective of lower working capital requirements associated with reduced business activity which stemmed from the elimination of unprofitable product ranges. As a result at fiscal year end Registrant was free of short term debt and in the course of the year increased its cash position by more than $7,000,000.
In fiscal 1996 Registrant earned $938,000 net of a tax provision of $776,000.
In fiscal 1995 Registrant incurred a loss of $2,686,000 (net of an income tax credit of $1,414,000) before an extraordinary item. The loss principally reflected weak demand for Registrant's imported and domestic woven fabrics marketed to apparel manufacturers. The loss included $660,000 (net of tax credit) provision for the shut down of the Washington, Georgia plant. An extraordinary loss of $297,000 (net of income tax credit of $198,000) in connection with a penalty incurred on Registrant's early repayment of a term loan brought the net loss to $2,984,000.
Although Registrant's sales in fiscal 1997 are expected to decline, operating results should improve as Registrant's recently implemented
strategy focuses on the more profitable aspects of its business, (Concord House and knitted fabrics), and de-emphasizes those areas that involve greater risk.
Fiscal 1995 v. Fiscal 1994
Fiscal 1995 comprised 53 weeks; fiscal 1994 comprised 52 weeks. Fiscal 1995 results include the operations of Kat-Em International Inc. For a full year. Fiscal 1994 results include the operations of Kat-Em from April 18, 1994, the date it was acquired by Registrant, through August 28, 1994.
Net sales decreased 9% from $197,804,544 to $180,152,779. This resulted from a decline in unit sales of 8% and a 1% decline in average selling price. Registrant believes that the decrease in sales reflected decreased consumer spending on domestically manufactured apparel.
Gross margins fell from 24.7% in fiscal 1994 to 20.1% in fiscal 1995. This resulted from price competition stemming from reduced consumer demand, inefficiencies and lack of productivity in Registrant's Washington, Georgia manufacturing facility (the plant was closed in October, 1995), higher raw material costs, and inventory mark-downs predominantly in the Kat-Em subsidiary. Registrant expects that the closing of the Washington plant will lead to lower sales but higher gross margins in fiscal 1996.
Merchandising expenses increased by approximately $945,000 or 11%. About $700,000 of this was due to the inclusion of the Kat-Em operation for a full year in fiscal 1995 versus a four and one half month period in fiscal
1994. The balance resulted from higher engraving costs associated with the production of more intricate designs on Registrant's printed fabrics.
Selling and shipping expense declined about 2% as a result of the decrease in Registrant's sales. The decrease was less than the actual sales decrease because some of Registrant's selling and shipping expenses do not vary directly with sales but represent sales management costs which are more fixed in nature.
General and administrative expenses declined almost 7% primarily due to a decrease in performance related compensation and profit sharing.
Registrant's provision for doubtful accounts declined from $1,321,000 in fiscal 1994 to $633,000 in fiscal 1995 because there were no significant customer failures in contrast with fiscal 1994. However, Registrant is continuously exposed to bad debt risk with respect to its wholesale customers when such customers may have significant concentration of business with retailers who may become financially unstable. Registrant attempts to monitor this situation and adjust its credit policies accordingly.
Interest expense increased by 36%. In November, 1994 Registrant secured $20,000,000 of long term financing which replaced $9,000,000 of long term debt and added to working capital. The additional $11,000,000 of long term borrowing, although at a lower fixed rate than the debt it replaced, in part accounted for substantially all of the increase in interest cost for the year. Average short term debt declined by almost $2,000,000 but average short term borrowing rates were higher in fiscal 1995 so that interest cost on short term debt was marginally higher.
In fiscal 1995 Registrant incurred a loss of $2,686,000 (net of an income tax credit of $1,414,000) before an extraordinary item. The loss principally reflected weak demand for Registrant's imported and domestic woven fabrics marketed to apparel manufacturers. The loss included $660,000 (net of tax credit) provision for the shut down of the Washington, Georgia plant. An extraordinary loss of $297,000 (net of income tax credit of $198,000) in connection with a penalty incurred on Registrant's early repayment of a term loan brought the net loss to $2,984,000.
In fiscal 1994 Registrant earned $6,444,000 (net of $4,332,000 income taxes). The results included an $860,000 after tax gain from the sale of machinery and equipment.
Liquidity and Capital Resources
During fiscal 1996, Registrant met its cash needs from cash flow from operations ($10,052,000), sale of equipment at its Washington, Georgia facility ($901,000) and the sale of capital stock ($124,000), which it used to invest in plant and equipment ($1,696,000) and reduce short term debt ($2,000,000). Cash increased by $7,381,000. Working capital increased by $2,470,000.
Under individual credit line arrangements with several New York banks, Registrant may borrow up to $20,000,000 at the prime lending rate. The credit lines are unsecured. Registrant is generally expected to maintain compensating bank balances. The banks have advised that Registrant has been in substantial compliance with its compensating balance arrangements, and that withdrawal of bank balances is not legally restricted. Amounts
borrowed are generally due in 30 to 90 days. Although the lending arrangements are informal and are cancelable at each bank's option, Registrant has no reason to believe that the lines of credit will not be available if needed during fiscal 1997. Registrant's actual borrowing fluctuates from month to month. The average outstanding debt during fiscal 1996 was $1,464,000 and the maximum outstanding at any time during the year was $2,000,000. Nothing was outstanding at September 1, 1996. Registrant expects its lines of credit, together with cash management and cash flow from operations, to be adequate to finance operations for fiscal 1997.
Registrant's long-term lending agreement with an insurance company which is unsecured, prohibits pledging of assets, and requires (among other things - see Note G to Financial Statements) maintenance of minimum working capital, tangible net worth of $36,167,000 and maintenance of a minimum working capital ratio of 1.5 to 1. The unpaid principal balance is $20,000,000. At September 1, 1996, tangible net worth approximated $40,550,000 and Registrant's working capital ratio was 5.2 to 1. Registrant 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
Registrant's operating costs are subject to the general inflationary trends of the rest of the economy; in fiscal 1996 such trends were modest; inflation has not been a significant factor in Registrant's costs for the last three fiscal years.
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. The considerations indicated under the heading "Certain Factors Affecting Registrants Business", as well as risks and uncertainties indicated elsewhere in this report represent certain important factors the Registrant believes could cause such results to differ.
ITEM 8

ITEM 8 CONCORD FABRICS INC. AND SUBSIDIARIES
- I N D E X -
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 1, 1996 AND SEPTEMBER 3, 1995
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED SEPTEMBER 1, 1996, SEPTEMBER 3, 1995 AND AUGUST 28, 1994
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 1, 1996, SEPTEMBER 3, 1995 AND AUGUST 28, 1994
NOTES TO 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 filing are not present or the information has been presented elsewhere in the financial statements.
[EISNER & LUBIN LETTERHEAD]
Independent Auditors' Report
To the Board of Directors and Stockholders Concord Fabrics Inc.
We have audited the accompanying consolidated balance sheets of Concord Fabrics Inc. and Subsidiaries as at September 1, 1996 and September 3, 1995, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended September 1, 1996. 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 at September 1, 1996 and September 3, 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 1, 1996 in conformity with generally accepted accounting principles.
[LOGO]
The audits of the financial statements were 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. This schedule has been subjected to the auditing procedures applied in the audits 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 SHEET
The notes to financial statements are made a part hereof.
CONCORD FABRICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
The notes to financial statements are made a part hereof.
CONCORD FABRICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
The notes to financial statements are made a part hereof.
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Note A) - Summary of Significant Accounting Policies:
(1) Principles of Consolidation - The financial statements include the accounts of Concord Fabrics Inc. and its wholly-owned subsidiaries (the Company); intercompany investments, advances and transactions have been eliminated.
(2) Inventories - Inventories are stated at lower of cost or market, first-in, first-out; obsolete inventory items are carried at net realizable value. Inventory costs comprise material, direct labor and overhead (Note B).
(3) Property and Depreciation - Property, plant and equipment is recorded at cost. Profits and losses on dispositions are reflected in current operations. Fully depreciated assets are written off against accumulated depreciation.
Depreciation for financial accounting purposes is computed substantially by the straight-line method to amortize the cost of various classes of assets over their estimated useful lives. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease.
For income tax purposes, accelerated methods of depreciation are generally used; deferred income taxes are provided for the difference between depreciation expense for financial accounting purposes and for income tax purposes.
(4) Earnings (Loss) Per Share - Earnings (loss) per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the year. Outstanding options to purchase common shares (Note K) did not have a material dilutive effect on earnings per share.
(5) Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents include commercial paper aggregating $9,000,000 as at September 1, 1996.
(6) Fiscal Year - The Company operates on a 52-53 week year ending on the Sunday closest to August 31. The year ended September 1, 1995 comprised fifty-three weeks; the other two years in the period ended September 1, 1996 each comprised fifty-two weeks.
(7) 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 reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 2 -
(Note B) - Inventories:
Inventories are summarized by categories as follows:
At September 1, 1996, the Company had outstanding commitments to purchase greige goods aggregating approximately $9,351,000.
(Note C) - Property, Plant and Equipment:
Property, plant and equipment is summarized as follows:
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 3 -
(Note D) - Income Taxes:
(1) Income tax provision (credit) on the consolidated statement of operations and retained earnings is analyzed as follows:
(2) Income taxes computed at the statutory federal income tax rate are reconciled to income tax provision (credit) on the consolidated statement of operations and retained earnings as follows:
*The tax benefit related to the extraordinary item on retirement of debt was $198,000 in the year ended September 1, 1995.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 4 -
(Note D) - Income Taxes (Continued):
(3) Deferred tax assets and liabilities are comprised of the following elements:
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 5 -
(Note E) - 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. The Company is generally expected to maintain average annual compensating bank balances in consideration of average annual bank borrowings. The banks have advised that the Company has been in substantial compliance with its compensating balance arrangements and that withdrawals of bank balances are not legally restricted. The average interest rate on amounts outstanding was 8.75% at September 3, 1995.
(Note F) - Profit-Sharing Plan:
The Company's noncontributory profit-sharing plan, approved by the Treasury Department, for the benefit of eligible full time employees, provides for a minimum annual contribution to a trust fund based on percentages of pre-tax profits (as defined); the Board of Directors may increase such minimum annual contribution at its sole discretion but all contributions are limited to the max imum amount deductible for federal income tax purposes. Contributions of $150,000 and $500,000 were made for the years ended September 1, 1996 and August 28, 1994, respectively; no contribution was made for the year ended September 3, 1995.
(Note G) - Notes Payable - Insurance Company:
On November 30, 1994, the Company borrowed $20,000,000 from an insurance company. The unsecured loan bears interest at 9.31% a year and is repayable in seven equal annual installments commencing November 30, 1998. A portion of the loan proceeds was used to prepay the $9,000,000 loan outstanding to The Prudential Insurance Company of America. A prepayment penalty of $495,266 was also paid; this amount has been reflected as an extraordinary item (net of $198,000 income tax benefit) on the statement of operations and retained earnings for the year ended September 1, 1995.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 6 -
(Note G) - Notes Payable - Insurance Company (Continued):
The new loan agreement requires maintenance of tangible net worth of approximately $36,000,000. 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 September 1, 1996, $2,617,000 was available for such payments.
(Note H) - 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 September 1, 1996 are as follows:
Rent expense aggregated $1,925,000 in 1996, $2,300,000 in 1995 and $2,200,000 in 1994.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 7 -
(Note I) - Interest Expense:
Interest expense (net) on the consolidated statement of operations and retained earnings comprises the following:
(Note J) - Common Stock:
The Class A and Class B shares principally differ as follows:
(1) The Class A shares have a 15% dividend preference and a 10% liquidation preference with respect to the Class B shares.
(2) 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.
(3) 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.
(4) 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 September 1, 1996 and August 28, 1994, 50 and 11,650 Class B shares, respectively, were converted to an equal number of Class A shares; no conversions took place during the year ended September 3, 1995.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 8 -
(Note K) - Stock Options:
Pursuant to an Incentive Program adopted on January 10, 1989, awards (as defined) may be granted to key employees 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 four 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 cancelled 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 four annual installments com mencing January 9, 1997 and expire ten years from the date of the grant.
During 1996, the Company adopted a Director Stock Option Plan under which awards may be granted to outside directors of the Company up to a maximum of 75,000 shares of the Company's Class A common stock. The plan provides for the granting of 2,500 options for each outside director annually. The options become exercisable one year from the date of grant and terminate the sooner of five years or two years after a director termination. On January 9, 1996, options to purchase 5,000 shares of the Company's Class A common stock at $4.625 (fair market value at such date) were granted to two outside directors.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 9 -
(Note K) - Stock Options (Continued):
Option activity is summarized as follows:
(1) The $103,238, $31,250 and $93,750 excess of the exercise price over the par value of the Class A common stock issued has been credited to additional paid-in capital in the years ending September 1, 1996, September 3, 1995 and August 28, 1994, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Statements (SFAS) No. 123, "Accounting for Stock-Based Compensation." This standard requires either the recognition or disclosure of compensation expense based on the fair value of equity instruments granted to employees. As permitted by SFAS 123, the Company has elected to adopt the disclosure provisions of the standard in 1997.
(Note L) - Business of the Company:
The Company's principal business is the manufacturing and purchasing 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.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 10 -
(Note M) - Chino, California Facility:
In February 1994, the Company sold its Chino, California machinery and equipment for $2,000,000 cash and recognized a gain before income taxes of $1,420,606 on its statement of operations for the year ended August 28, 1994. The Company also 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.
(Note N) - 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, for $1,150,482 cash, which includes acquisition costs.
The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the acquisition date and the operations of Kat-Em are included in the consolidated statement of operations and retained earnings from April 18, 1994.
During 1996, the Company decided to wind down the Kat-Em operations and in August 1996, Kat-Em was merged into Concord Fabrics Inc.
(Note O) - Plant Shut-Down Costs:
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. The loss of $1,100,000 (before income tax benefit of $440,000) reflected on the statement of operations and retained earnings for the fiscal year ended September 3, 1995 comprises estimated expenses during the disposition period. The Company estimates that the net proceeds of sale will approximate the facility's depreciated cost.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 11 -
(Note P) - Supplemental Information to Consolidated Statement of Cash Flows:
Noncash investing activity: During the year ended August 28, 1994, the Company purchased all of the capital stock of Kat-Em International, Inc. for $1,150,482. In conjunction with the acquisition, liabilities were assumed as follows:
(Note Q) - Concentration of Credit Risk:
(1) Cash in banks, based on bank statement balances, exceeded federally insured limits by approximately $1,600,000 and $3,800,000 at September 1, 1996 and September 3, 1995, respectively. The Company's investment in commercial paper at September 1, 1996 was with a financial institution.
(2) Accounts receivable from manufacturers and retailers aggregated approximately $17,303,000 and $9,611,000 at September 1, 1996 and $19,368,000 and $6,447,000 at September 3, 1995, respectively. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers.
(3) Accounts receivable at September 1, 1996 and September 3, 1995 also includes $1,793,000 and $3,320,000, respectively, of due from factors.
(4) Five customers accounted for approximately 14% and 11% of sales for the year ended September 1, 1996 and September 3, 1995, respectively.
(Continued)
CONCORD FABRICS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Sheet 12 -
(Note R) - 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 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 September 1, 1996 approximates fair value based on their future cash flows discounted at a current rate for debt with similar terms and maturity.
SCHEDULE II
CONCORD FABRICS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
*Deductions from estimated doubtful accounts represent accounts written off, net of recoveries of accounts written off in prior years.
The notes to financial statements are made a part hereof.
Item 9.

Item 9. Disagreements on Accounting and Financial Disclosure. Not applicable.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant.
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 14, 1997, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of Registrant's 1996 fiscal year.
Item 11.

Item 11. Executive Compensation.
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 14, 1997, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of Registrant's 1996 fiscal year.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners of Management.
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 14, 1997, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of Registrant's 1996 fiscal year.
Item 13.

Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 14, 1997, to be filed pursuant to Section 14 of the Exchange Act within 120 days after the end of Registrant's 1996 fiscal year.
PART IV
Item 14.

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 Registrant incorporated by reference from Appendix B to Registrant's Proxy Statement dated January 26, 1988.
*3.2 Delaware bylaws of the Registrant incorporated by reference from Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended August 28, 1988.
*4.1 Note Agreement between Registrant and John Hancock Mutual Life Insurance Company dated November 30, 1994 (the "Note Agreement"), incorporated by reference from exhibit 4.1 to Registrant's Report on Form 8-K dated December 15, 1994.
*10.1 Employment Agreement dated August 27, 1992 between Registrant and George Gleitman incorporated by reference from exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended August 30, 1992.
*10.2 Employment Agreement dated as of March 2, 1994 between Registrant and Earl Kramer, incorporated by reference from exhibit 10.2 to Registrant's annual report on form 10-K for the year ended August 28, 1994.
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*10.3 Deferred Compensation Agreement dated June 14, 1977, as amended on February 5, 1986 between Registrant and Martin Wolfson incorporated by reference to exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1986.
*10.4 Lease Agreement dated August 1, 1994 between 1359 Broadway Associates and Concord Fabrics Inc., incorporated by reference from exhibit 10.4 to Registrant's Annual Report on form 10-K for the year ended August 29, 1994.
*10.5 Lease Agreement dated October 1, 1994 between 1359 Broadway Associates and Concord Fabrics Inc., incorporated by reference from exhibit 10.5 to Registrant's Annual Report on form 10-K for the year ended August 28,1994.
*10.8 Employment Agreement dated December 6, 1993 between Registrant and Mark Neugeboren incorporated by reference from exhibit 10.8 to Registrant's Annual Report on form 10-K for the year ended August 28, 1994.
22 Subsidiaries of the Registrant: Concord FSC Inc.and Trilogy Fabrics Inc.
(b) No report on Form 8-K was filed by Registrant in fiscal 1996.
- ------------------------ *Document is available at Public Reference Section of the Securities and Exchange Commission, Commission File No. 1-5960.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 19, 1996 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 the Registrant and in the capacities and on the dates indicated.