<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): January 3, 2000 (November 4,
1999)
CCPC HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-57099 16-1403318
(State or other jurisdiction (Commission file number) (IRS Employer
of of incorporation) Identification No.)
</TABLE>
<TABLE>
<S> <C>
ONE PYREX PLACE, ELMIRA, NEW YORK 14902
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 607-377-8605
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
ACQUISITION OF GENERAL HOUSEWARES CORP.
On October 21, 1999 CCPC Holding Company, Inc. (the Company or CCPC)
completed the acquisition of General Housewares Corp. (GHC). The transaction is
valued at approximately $159 million, which includes a price of $28.75 per share
of General Housewares common stock, the repayment of debt and transaction fees.
The Company financed the acquisition through the issuance of $50 million in
Junior Cumulative Preferred Stock ("Junior Preferred Stock") to an affiliate of
the Company and borrowings under the Company's existing credit facility. The
Junior Preferred Stock consists of two million shares with each share having a
liquidation preference of $25.00. The Junior Preferred Stock provides for the
payment of cash dividends of $1.00 per share per quarter if declared by the
Company and certain financial ratios are satisfied. If dividends are not
declared on the Junior Preferred Stock, then the liquidation preference of the
Junior Preferred Stock is increased by such amount.
General Housewares Corp. manufactures and markets consumer durable goods
with principal lines of business consisting of kitchen and household tools,
precision cutting tools, kitchen cutlery and cookware. In addition, General
Housewares Corp. sells products through its chain of manufacturer's retail
outlet stores.
ACQUISITION OF EKCO GROUP, INC.
On August 5, 1999 EG Two Acquisition Corp., a subsidiary of our parent CCPC
Acquisition Corp., and EKCO Group, Inc. entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, EG Two
Acquisition Co. commenced and completed a tender offer to purchase all
outstanding common stock and associated preferred stock purchase rights and
preferred stock of EKCO Group, Inc. Upon completion of the tender offer, EG Two
Acquisition Co. merged with and into EKCO Group, Inc. and EKCO Group, Inc.
became a subsidiary of CCPC Acquisition Corp.
On October 25, 1999 the Company completed the acquisition of EKCO
Group, Inc. (EKCO) from, CCPC Acquisition Corp. for approximately $230 million,
including the assumption of $6.0 million of debt and transaction fees. The
Company financed the acquisition through the issuance of $150 million in common
stock to CCPC Acquisition Corp. and a short term borrowing from an affiliate of
the Company's parent. On November 15, 1999 the Company repaid the affiliated
borrowing and its revolving credit facility borrowing with the proceeds of a
$95.0 million traunche of new terms loans.
EKCO is a manufacturer and marketer of branded consumer products. EKCO's
products include household items such as bakeware, kitchenware, pantryware,
brooms, brushes and mops.
The Company's acquisition of EKCO excludes EKCO's Aspen and Woodstream
businesses (pet-related and small-animal-control-related products). These
businesses remain with CCPC Acquisition Corp. and are disclosed in the
Schedule 1 of the condensed consolidated pro forma financial statements as
"Businesses retained by Parent."
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a. Pro forma condensed consolidated financial statements (unaudited)
The following unaudited pro forma condensed consolidated financial
statements are filed with this report:
<TABLE>
<S> <C>
Pro Forma Condensed Consolidated Balance Sheet at June 30,
1999...................................................... 4
Pro Forma Condensed Consolidated Statements of Income:
Year Ended December 31, 1998.............................. 7
Six Months Ended June 30, 1999............................ 8
</TABLE>
<PAGE>
The following unaudited pro forma condensed consolidated balance sheet as of
June 30, 1999 and the unaudited pro forma condensed consolidated statements of
income for the six month period then ended and the year ended December 31, 1998
give effect to the acquisition of the businesses described in Item 2. The
adjustments related to the unaudited pro forma condensed consolidated balance
sheet assumed the transactions were consummated at June 30, 1999, while the
adjustments to the unaudited pro forma condensed consolidated statements of
income assume the transactions were consummated at the beginning of the periods
presented.
The unaudited pro forma condensed consolidated financial statements have been
prepared based upon assumptions deemed proper by the Company. The unaudited pro
forma condensed consolidated financial statements presented herein are shown for
illustrative purposes only and are not necessarily indicative of the future
financial position or future results of operations of the Company, or of the
financial position or results of operations of the Company that would have
actually occurred had the transactions been in effect as of the date or for the
periods presented. A preliminary allocation of the initial purchase price has
been made to major categories of assets and liabilities in the accompanying pro
forma statements based on information currently available which is subject to
change.
The allocation will be completed when CCPC obtains a final appraisal of the net
assets acquired (which includes completing an assessment of the liabilities
assumed), and finalizes the estimates associated with exit and other costs
related to the acquisition. The actual allocation of the finalized purchase
price and the resulting effect on income from operations may differ from the
unaudited pro forma amounts included herein. The pro forma adjustments are
described in the accompanying notes and represent preliminary determination of
purchase accounting adjustments based upon available information and certain
assumptions that CCPC believes are reasonable. The accompanying unaudited pro
forma statements should be read in connection with the separate historical
financial statements and notes thereto of the Company, EKCO, and GHC.
b. Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------- ------------------------------------------------------------
<C> <S>
13.1 General Housewares Corp. 1998 financial statements
13.2 EKCO Group, Inc. 1998 financial statements
23.1 Consent of KPMG LLP, independent certified public
accountants
</TABLE>
2
<PAGE>
SIGNATURE
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.
<TABLE>
<S> <C>
CCPC Holding Company, Inc.
/s/ ANTHONY P. DEASEY
------------------------------------------------
Anthony P. Deasey
SENIOR VICE PRESIDENT--FINANCE
AND CHIEF FINANCIAL OFFICER
Date: January 3, 2000
</TABLE>
3
<PAGE>
CCPC HOLDING COMPANY INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------------------------------------
EKCO GHC Pro
CCPC EKCO OTHER Other forma
CCPC OTHER (SCHEDULE 1) (d) GHC (e) CCPC
(IN THOUSANDS) -------- --------- ------------ ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents... $ 2,974 $ 388,985 (b) $ 611 $(229,384) $ 150 $ (159,601) $ 3,735
Accounts receivable, net of
allowances................ 47,222 -- 29,541 -- 13,508 -- 90,271
Inventories, net............ 142,707 -- 75,312 (6,000) 24,951 (1,087) 235,883
Prepaid expenses and other
current assets............ 14,512 -- 21,384 -- 4,798 (3,016) 37,678
-------- --------- -------- --------- ------- ---------- --------
Total current assets...... 207,415 388,985 126,848 (235,384) 43,407 (163,704) 367,567
-------- --------- -------- --------- ------- ---------- --------
PROPERTY AND EQUIPMENT, NET... 99,379 -- 30,425 (1,200) 9,638 1,912 140,154
DEFERRED TAXES ON INCOME...... 40,848 -- -- -- -- -- 40,848
GOODWILL, NET................. 45,682 -- 78,692 4,772 22,415 45,664 197,225
NET ASSETS RETAINED BY
PARENT...................... -- -- 61,850 (61,850) -- -- --
OTHER ASSETS.................. 36,725 3,098 (a) 6,184 (2,423) 4,420 6,535 54,539
TRADEMARKS.................... -- -- -- 90,100 -- 68,700 158,800
-------- --------- -------- --------- ------- ---------- --------
TOTAL ASSETS.............. $430,049 $ 392,083 $303,999 $(205,985) $79,880 $ (40,893) $959,133
======== ========= ======== ========= ======= ========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES--
Accounts payable and accrued
expenses.................. $ 87,562 $ -- $ 32,822 $ 27,699 $ 8,290 $ 5,762 $162,135
LONG-TERM DEBT................ 470,571 209,097 (b) 152,930 (146,960) 23,143 (23,143) 685,638
OTHER LIABILITIES............. 41,187 -- 12,928 12,966 1,339 23,596 92,016
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred Stock............... 34,778 50,000 (b) -- -- -- -- 84,778
Common Stock.................. 240 429 (b) 192 (192) 1,436 (1,436) 669
Contributed capital........... 453,655 149,571 (b) 110,453 (110,453) 21,389 (21,389) 603,226
Accumulated deficit........... (656,128) (17,014)(c) (2,910) 8,539 24,712 (24,712) (667,513)
Unearned compensation......... -- -- (436) 436 -- -- --
Accumulated other
comprehensive income........ (1,816) -- (1,980) 1,980 (429) 429 (1,816)
-------- --------- -------- --------- ------- ---------- --------
Total stockholders' equity
(deficit)............... (169,271) 182,986 105,319 (99,690) 47,108 (47,108) 19,344
-------- --------- -------- --------- ------- ---------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $430,049 $ 392,083 $303,999 $(205,985) $79,880 $ (40,893) $959,133
======== ========= ======== ========= ======= ========== ========
</TABLE>
See accompanying notes to the condensed consolidated pro forma financial
statements.
4
<PAGE>
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
(NUMBERS IN THOUSANDS, EXCEPT FOR NOTE b, WHICH IS IN MILLIONS)
a. Reflects deferred financing costs, including loan underwriting fees and
associated costs. Amounts are being amortized over eight years, with an
estimated pro forma amortization expense of $387 per year.
b. The acquisitions were financed through the issuance of $50 million in Junior
Cumulative Preferred stock to an affiliate of the Company's parent, issuance
of $150 million in common stock to the Company's parent, and borrowings
under the Company's existing credit facility. The following sources and uses
of funds schedule reflects the financing of the acquisitions.
<TABLE>
<CAPTION>
SOURCES
(IN MILLIONS)
-------------
<S> <C>
Junior Cumulative Preferred stock........................... $ 50
Common stock................................................ 150
Additional borrowings....................................... 95
Existing credit facility borrowings......................... 114
----
Total....................................................... $409
====
</TABLE>
<TABLE>
<CAPTION>
USES
----
<S> <C>
Acquisition of EKCO......................................... $230
Acquisition of GHC.......................................... 159
Debt issuance costs......................................... 3
Transaction fees............................................ 17
----
Total....................................................... $409
====
</TABLE>
c. Reflects expenses relating to the transaction including $10,489 for premiums
and fees paid to retire EKCO's 9.25% Senior Notes and $6,525 in other
transaction fees.
d. Reflects estimated purchase accounting adjustments for the acquisition based
upon a preliminary appraisal of the assets acquired and liabilities assumed.
All adjustments reflect information currently available to the Company and
are subject to change. Purchase accounting adjustments were recorded as
shown below.
<TABLE>
<S> <C> <C>
Reflects cash paid for EKCO................................. $(229,384)
Adjustment of inventory to fair value....................... (6,000)
Adjustment of property and equipment to fair value.......... (1,200)
Net adjustment to goodwill to reflect amount paid in excess
of net assets acquired...................................... 4,772
Net assets of businesses retained by CCPC Acquisition Corp.
(see Schedule 1)............................................ (61,850)
Adjust other assets to fair value, including:
Write off of deferred financing costs related to debt
extinguishment.......................................... $ (2,500)
Recording an asset for favorable lease rights (amortized
over life of lease)..................................... 1,383
Adjustment of note receivable to fair value............... (1,350)
Adjustment of pension asset to fair value................. 44
---------
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
Net adjustment........................................ $ (2,423)
Reflect fair value of trademarks acquired................... 90,100
Adjust current liabilities to fair value, including:
Costs related to exiting certain activities............... $ 23,788
Recording a liability for an unfavorable royalty
agreement............................................... 5,891
Reclassification of note receivable reserve to other
assets.................................................. (1,811)
Other..................................................... (169)
---------
Total adjustment........................................ $ 27,699
=========
Reflects the repayment of all outstanding amounts on the
credit facility and a significant portion of the 9.25%
Senior Notes................................................ (146,960)
Adjust other liabilities to fair value, including the
recording of a deferred tax liability to tax effect the pro
forma adjustments using an effective tax rate of 39%........ 12,966
To eliminate the equity of EKCO............................. (99,690)
</TABLE>
e. Reflects estimated purchase accounting adjustments for the acquisition based
upon a preliminary appraisal of the assets acquired and liabilities assumed.
All adjustments reflect information currently available to the Company and
are subject to change. Purchase accounting adjustments were recorded as
shown below.
<TABLE>
<S> <C> <C>
Reflects cash paid for GHC.................................. $(159,601)
Change in inventory valuation method from the LIFO (last-in,
first-out) method to the FIFO (first-in, first-out)
method...................................................... (1,087)
Reclassification of deferred tax assets to deferred tax
liabilities................................................. (3,016)
Adjustment of property and equipment to fair value.......... 1,912
Net adjustment to goodwill for amount paid in excess of net
assets acquired............................................. 45,664
Adjust pension asset to fair value.......................... 6,535
Reflect fair value of trademarks acquired................... 68,700
Adjust accounts payable and accrued liabilities to fair
value, primarily including recording costs of $7,373 related
to exiting certain activities, offset by repayment of
current portion of long term debt of $1,611................. 5,762
Reflects repayment of long-term debt of GHC................. (23,143)
Reflects the deferred tax liability recorded to tax effect
the pro forma adjustments using an effective tax rate of
39%......................................................... 23,596
To eliminate the equity of GHC.............................. (47,108)
</TABLE>
6
<PAGE>
CCPC HOLDING COMPANY INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
(IN THOUSANDS) ----------------------------------------------------------------
CCPC EKCO EKCO GHC PRO FORMA
CCPC OTHER (SCHEDULE 1) OTHER GHC OTHER CCPC
-------- -------- ------------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Net sales.................. $533,068 $ -- $256,659 $ (7,824)(a) $97,031 $ (2,854)(a) $876,080
DEDUCTIONS
Cost of sales.............. 349,953 -- 176,427 (1,569)(b) 54,518 6,246 (b) 585,575
Selling, general and
administrative
expenses................. 146,927 -- 59,928 (7,478)(c) 39,445 (10,856)(c) 227,966
Loss on sale of business... -- -- 16,245 -- -- -- 16,245
Provision for restructuring
costs.................... 4,772 -- -- -- -- -- 4,772
Transaction related
expenses................. 28,866 -- -- -- -- -- 28,866
Other, net................. 926 -- 3,126 2,702 (d) -- 6,964 (d) 13,718
-------- -------- -------- -------- ------- -------- --------
Operating income (loss)...... 1,624 -- 933 (1,479) 3,068 (5,208) (1,062)
Interest expense (benefit)... 34,290 19,403 (e) 13,956 (13,413)(e) 2,299 (2,299)(e) 54,236
-------- -------- -------- -------- ------- -------- --------
Loss before taxes on
income..................... (32,666) (19,403) (13,023) 11,934 769 (2,909) (55,298)
Income tax expense
(benefit).................. 947 1,460 (5,468)(f) 730 -- (2,331)
-------- -------- -------- -------- ------- -------- --------
Loss before minority
interest................... (33,613) (19,403) (14,483) 17,402 39 (2,909) (52,967)
Minority interest income in
subsidiary................. 301 -- -- -- -- 301
-------- -------- -------- -------- ------- -------- --------
Net (loss) income............ $(33,312) $(19,403) $(14,483) $ 17,402 $ 39 $ (2,909) $(52,666)
======== ======== ======== ======== ======= ======== ========
Basic and diluted loss per
common share............... $ (0.50) $ (0.79)
Weighted average number of
common shares outstanding
during the period.......... 66,857 66,857
</TABLE>
See accompanying notes to the condensed consolidated pro forma financial
statements.
7
<PAGE>
CCPC HOLDING COMPANY INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
(IN THOUSANDS) ---------------------------------------------------------------
CCPC EKCO EKCO GHC PRO FORMA
CCPC OTHER (SCHEDULE 1) OTHER GHC OTHER CCPC
--------- -------- ------------ --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Net sales...................... $ 221,777 $ -- $ 92,375 $ (1,753)(a) $46,705 $(1,043)(a) $ 358,061
DEDUCTIONS
Cost of sales.................. 145,100 -- 68,016 (555)(b) 26,623 3,153 (b) 242,337
Selling, general and
administrative expenses...... 71,929 -- 27,683 (1,580)(c) 20,828 (5,685)(c) 113,175
Provision for restructuring
costs........................ 76,200 -- -- -- -- -- 76,200
Other, net..................... (1,020) -- 1,214 1,470 (d) -- 3,649 (d) 5,313
--------- ------- -------- --------- ------- ------- ---------
Operating loss................... (70,432) -- (4,538) (1,088) (746) (2,160) (78,964)
Interest expense (benefit)....... 19,956 9,701 (e) 6,633 (6,375)(e) 679 (679)(e) 29,915
--------- ------- -------- --------- ------- ------- ---------
Income (loss) before taxes on
income......................... (90,388) (9,701) (11,171) 5,287 (1,425) (1,481) (108,879)
Income tax (benefit) expense..... (377) -- (5,580) 2,497 (f) (599) -- (4,059)
--------- ------- -------- --------- ------- ------- ---------
Loss before minority interest.... (90,011) (9,701) (5,591) 2,790 (826) (1,481) (104,820)
Minority interest (expense) in
subsidiary..................... (108) -- -- -- -- -- (108)
--------- ------- -------- --------- ------- ------- ---------
Net (loss) income................ $ (90,119) $(9,701) $ (5,591) $ 2,790 $ (826) $(1,481) $(104,928)
========= ======= ======== ========= ======= ======= =========
Basic and diluted loss per common
share.......................... $ (1.35) $ (1.57)
Weighted average number of common
shares outstanding during the
period......................... 66,857 66,857
</TABLE>
See accompanying notes to the condensed consolidated pro forma financial
statements.
8
<PAGE>
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT
(NUMBERS IN THOUSANDS)
a. Net sales pro forma adjustment represents a reclassification of cooperative
advertising expense to conform with CCPC's presentation.
b. Cost of sales pro forma adjustments represent:
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
EKCO GHC ECKO GHC
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reclassification of royalty expense to conform
with CCPC presentation....................... $(1,167) $ -- $ (354) $ --
Estimated (decrease) increase in depreciation
expense due to a (decrease) increase in fair
value of property and equipment.............. (402) 302 (201) 151
Decrease in inventory fair value due to the
change in inventory valuation method from the
LIFO (last-in, first-out) method to the FIFO
(first-in, first-out) method................. -- 1,133 111
Reclassification of warehouse distribution
costs to conform with CCPC presentation...... -- 4,811 2,891
------- -------- ------- -------
$(1,569) $ 6,246 $ (555) $ 3,153
======= ======== ======= =======
c. Selling, general and administrative adjustments
represent:
</TABLE>
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
EKCO GHC ECKO GHC
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reclassification of cooperative advertising
expense to conform with CCPC presentation.... $(7,824) $ (2,854) $(1,753) $(1,043)
Adjustment represents the amortization of
favorable lease rights acquired amortized
over the life of the lease................... 346 173
Eliminate previously reported GHC goodwill
amortization................................. (1,364) (671)
Reclassification of royalty expense to conform
with CCPC presentation....................... -- (1,827) (1,080)
Reclassification of warehouse distribution
costs to conform with CCPC presentation...... -- (4,811) (2,891)
------- -------- ------- -------
$(7,478) $(10,856) $(1,580) $(5,685)
======= ======== ======= =======
</TABLE>
9
<PAGE>
<TABLE>
d. Other expense adjustments represent
1998 1999
------------------- -------------------
EKCO GHC ECKO GHC
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Amortization expense based on recorded
trademarks of $90,100 (amortized over 35
years) and $68,700 (amortized over 20 years)
for EKCO and GHC, respectively................ $ 2,574 $ 3,435 $ 1,287 $1,718
Eliminate previously reported EKCO goodwill
amortization.................................. (3,126) (1,214)
Reclassification of royalty expense to conform
with CCPC presentation........................ 1,167 1,827 354 1,080
Amortization expense based on total pro forma
goodwill of $83,464 and $68,079 for EKCO and
GHC, respectively, which are being amortized
using 40 year lives........................... 2,087 1,702 1,043 851
------- -------- ------- ------
$ 2,702 $ 6,964 $ 1,470 $3,649
======= ======== ======= ======
</TABLE>
e. Interest expense adjustments reflect the elimination of interest due to the
repayment of the EKCO credit facility and a significant portion of the 9.25%
Senior Notes and the repayment of all of GHC's outstanding debt offset by
additional expense on borrowings consummated by CCPC to finance the
acquisition and deferred financing cost amortization.
f. Income tax adjustments represent the tax effect at 39% of the pro forma
adjustments.
10
<PAGE>
SCHEDULE 1
EKCO BALANCE SHEET RECONCILIATION
JUNE 30, 1999
The following schedule reconciles the amounts as previously reported for
EKCO to amounts included in the pro forma financial statements.
<TABLE>
<CAPTION>
(1)
7/4/99 BUSINESSES
EKCO RETAINED BY EKCO
AS REPORTED PARENT AS ADJUSTED
(IN THOUSANDS) ----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 611 $ -- $ 611
Accounts receivable, net of allowance.................... 38,597 (9,056) 29,541
Inventories, net......................................... 88,434 (13,122) 75,312
Prepaid expenses and other current assets................ 21,928 (544) 21,384
-------- -------- --------
Total current assets................................... 149,570 (22,722) 126,848
-------- -------- --------
PROPERTY AND EQUIPMENT, NET................................ 40,162 (9,737) 30,425
GOODWILL, NET.............................................. 112,407 (33,715) 78,692
NET ASSETS RETAINED BY PARENT.............................. -- 61,850 61,850
OTHER ASSETS............................................... 7,605 (1,421) 6,184
-------- -------- --------
TOTAL ASSETS......................................... 309,744 (5,745) 303,999
-------- -------- --------
CURRENT LIABILITIES
Accounts payable and accrued expenses...................... $ 39,620 $ (6,798) $ 32,822
LONG-TERM DEBT............................................. 153,005 (75) 152,930
OTHER LIABILITIES.......................................... 11,800 1,128 12,928
STOCKHOLDERS' (DEFICIT) EQUITY
Common Stock............................................... 192 -- 192
Contributed capital........................................ 110,453 -- 110,453
Accumulated deficit........................................ (2,910) -- (2,910)
Unearned compensation...................................... (436) -- (436)
Accumulated other comprehensive income..................... (1,980) -- (1,980)
-------- -------- --------
Total stockholders' (deficit) equity..................... 105,319 -- 105,319
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $309,744 $ (5,745) $303,999
======== ======== ========
</TABLE>
- ------------------------
(1) Reflects adjustment to the EKCO historical financial statements for business
retained by the Company's parent.
11
<PAGE>
SCHEDULE 1
EKCO INCOME STATEMENT RECONCILIATION
DECEMBER 31, 1998
The following schedule reconciles the amounts as previously reported for
EKCO to amounts included in the pro forma financial statements.
<TABLE>
<CAPTION>
(1)
12/31/98 BUSINESSES
EKCO RETAINED BY EKCO
AS REPORTED PARENT AS ADJUSTED
(IN THOUSANDS) ----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Net sales................................................ $328,948 $(72,289) $256,659
DEDUCTIONS
Cost of sales............................................ 222,555 (46,128) 176,427
Selling, general and administrative expenses............. 72,748 (12,820) 59,928
Loss on sale of business................................. 16,245 -- 16,245
Other, net............................................... 4,221 (1,095) 3,126
-------- -------- --------
Operating income (loss).................................... 13,179 (12,246) 933
Interest expense (benefit)................................. 14,084 (128) 13,956
-------- -------- --------
Loss before income taxes................................... (905) (12,118) (13,023)
Income tax expense (benefit)............................... 6,527 (5,067) 1,460
-------- -------- --------
Net loss from continuing operations........................ $ (7,432) $ (7,051) $(14,483)
======== ======== ========
</TABLE>
- ------------------------
(1) Reflects adjustment to the EKCO historical financial statements for
businesses retained by the Company's parent.
12
<PAGE>
SCHEDULE 1
EKCO INCOME STATEMENT RECONCILIATION
JUNE 30, 1999
The following schedule reconciles the amounts as previously reported for
EKCO to amounts included in the pro forma financial statements.
<TABLE>
<CAPTION>
(1)
7/4/99 BUSINESSES
EKCO RETAINED BY EKCO
AS REPORTED PARENT AS ADJUSTED
(IN THOUSANDS) ----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Net sales................................................ $128,133 $(35,758) $ 92,375
DEDUCTIONS
Cost of sales............................................ 91,770 (23,754) 68,016
Selling, general and administrative expense.............. 35,194 (7,511) 27,683
Other, net............................................... 1,776 (562) 1,214
-------- -------- --------
Operating loss........................................... (607) (3,931) (4,538)
Interest expense (benefit)............................... 6,668 (35) 6,633
-------- -------- --------
Loss before income taxes................................. (7,275) (3,896) (11,171)
Income tax benefit....................................... (3,632) (1,948) (5,580)
-------- -------- --------
Net loss from continuing operations...................... $ (3,643) $ (1,948) $ (5,591)
======== ======== ========
</TABLE>
- ------------------------
(1) Reflects adjustment to the EKCO historical financial statements for business
retained by the Company's parent.
13
<PAGE>
Exhibit 13.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of General Housewares Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of comprehensive income (loss), of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of General Housewares Corp., and its subsidiaries, at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 8, 1999
1
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1997 1996
(in thousands except per share amounts)
<S> <C> <C> <C>
Net sales $ 97,031 $ 104,531 $ 105,479
Cost of goods sold 54,518 62,089 68,302
Gross profit 42,513 42,442 37,177
Selling, general and
administrative expenses 39,445 37,966 37,284
Operating income (loss) 3,068 4,476 (107)
Interest expense, net 2,299 2,749 2,751
Income (loss) before income taxes
and extraordinary item 769 1,727 (2,858)
Income tax expense (benefit) 730 1,065 (842)
Income (loss) before
extraordinary item 39 662 (2,016)
Extraordinary item, net
of income tax benefit -- -- (619)
Net income (loss) $ 39 $ 662 $ (2,635)
Earnings (loss) per common share:
Income (loss) before extra-
ordinary item -- basic $ 0.01 $ 0.17 $ (0.54)
Extraordinary item, net
of income tax benefit --
basic -- -- (0.16)
Net income (loss) -- basic $ 0.01 $ 0.17 $ (0.70)
Income (loss) before extra-
ordinary item -- diluted $ 0.01 $ 0.17 $ (0.54)
Extraordinary item, net of
income tax benefit -- diluted -- -- (0.16)
Net income (loss) -- diluted $ 0.01 $ 0.17 $ (0.70)
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Net income (loss) $ 39 $ 662 $(2,635)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (472) (228) (56)
Minimum pension liability
adjustments (net
of taxes of $228 and $45
in 1997 and 1996) -- 382 76
------- ------- -------
Other comprehensive income (loss) (472) 154 20
------- ------- -------
Comprehensive income (loss) $ (433) $ 816 $(2,615)
------- ------- -------
------- ------- -------
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Capital in Cumulative
Stock Stock Excess of Translation
(in thousands) Shares Amount Par Value Adjustment
<S> <C> <C> <C> <C>
December 31, 1995 4,047 $1,347 $23,528 $(39)
Restricted stock activity 15 5 211 --
Shares issued upon exercise
of options 18 5 139 --
Shares issued for employee
stock purchase plan 11 4 84 --
Tax benefit from exercise
of stock options -- -- 14 --
Translation adjustments -- -- -- (56)
Minimum pension liability -- -- -- --
Dividends -- -- -- --
Net loss -- -- -- --
December 31, 1996 4,091 $1,361 $23,976 $(95)
Restricted stock activity 3 1 69 --
Shares issued upon exercise
of options 3 1 45 --
Shares issued for employee
stock purchase plan 9 3 58 --
Tax benefit from exercise
of stock options -- -- 7 --
Translation adjustments -- -- -- (228)
Minimum pension liability -- -- -- --
Dividends -- -- -- --
Net income -- -- -- --
December 31, 1997 4,106 $1,366 $24,155 $(323)
Restricted stock activity 200 66 565 --
Shares issued upon exercise
of options 1 -- 3 --
Shares issued for employee
stock purchase plan 4 2 38 --
Translation adjustments -- -- -- (472)
Dividends -- -- -- --
Net income -- -- -- --
December 31, 1998 4,311 $1,434 $24,761 $(795)
</TABLE>
<TABLE>
<CAPTION>
Minimum
Retained Treasury Pension
Earnings Stock Liability Total
<S> <C> <C> <C> <C>
December 31, 1995 $ 31,119 $ (3,649) $ (458) $ 51,848
Restricted stock activity -- -- -- 216
Shares issued upon exercise
of options -- -- -- 144
Shares issued for employee
stock purchase plan -- -- -- 88
Tax benefit from exercise
of stock options -- -- -- 14
Translation adjustments -- -- -- (56)
Minimum pension liability -- -- 76 76
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Dividends (1,205) -- -- (1,205)
Net loss (2,635) -- -- (2,635)
December 31, 1996 $ 27,279 $ (3,649) $ (382) $ 48,490
Restricted stock activity -- -- -- 70
Shares issued upon exercise
of options -- -- -- 46
Shares issued for employee
stock purchase plan -- -- -- 61
Tax benefit from exercise
of stock options -- -- -- 7
Translation adjustments -- -- -- (228)
Minimum pension liability -- -- 382 382
Dividends (1,219) -- -- (1,219)
Net income 662 -- -- 662
December 31, 1997 $ 26,722 $ (3,649) $ -- $ 48,271
Restricted stock activity -- -- -- 631
Shares issued upon exercise
of options -- -- -- 3
Shares issued for employee
stock purchase plan -- -- -- 40
Translation adjustments -- -- -- (472)
Dividends (1,223) -- -- (1,223)
Net income 39 -- -- 39
December 31, 1998 $ 25,538 $ (3,649) $ -- $ 47,289
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998 1997
(in thousands except for share amounts)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,598 $ 2,363
Accounts receivable, less
allowances of $3,240
($2,782 in 1997) 16,158 15,170
Inventories 19,122 20,859
Deferred tax assets 3,016 2,857
Other current assets 1,453 1,680
Total current assets 41,347 42,929
Notes receivable 2,578 2,364
Property, plant and equipment, net 9,492 12,483
Other assets 1,744 3,581
Patents and other intangible assets 2,307 2,600
Cost in excess of net assets
acquired 22,766 26,807
-------- --------
$ 80,234 $ 90,764
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 600 $ --
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
Current maturities of long-term
debt 1,616 2,793
Accounts payable 2,116 2,717
Salaries, wages and related
benefits 1,696 2,087
Accrued liabilities 3,386 2,838
Income taxes payable 1,122 437
Total current liabilities 10,536 10,872
Long-term debt 21,143 29,761
Deferred liabilities 1,266 1,860
Commitments and contingent liabilities
(Note 12)
Stockholders' Equity:
Preferred stock - $1.00 par value:
Authorized - 1,000,000 shares
Common stock - $.33 1/3 par value:
Authorized - 10,000,000 shares
Outstanding - 1998 - 4,310,967
and 1997 - 4,106,240 shares 1,434 1,366
Capital in excess of par value 24,761 24,155
Treasury stock at cost - 1998
and 1997 - 277,760 shares (3,649) (3,649)
Retained earnings 25,538 26,722
Accumulated other comprehensive
income (795) (323)
Total stockholders' equity 47,289 48,271
-------- --------
$ 80,234 $ 90,764
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1997 1996
(in thousands)
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 39 $ 662 $ (2,635)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 4,933 5,408 4,853
Loss on sale of assets 1,500 -- 2,335
Write-down of note receivable 870 343 --
Foreign exchange (gain) loss -- (5) 21
Compensation related to stock awards 630 77 215
Increase in deferred
income taxes (894) (37) (1,531)
(Increase) decrease in operating assets:
Accounts receivable (988) 669 322
Inventory 485 (2,267) 5,311
Other assets 602 1,841 (476)
(Decrease) increase in operating liabilities:
Accounts payable (601) (1,215) 819
Salaries, wages and related benefits,
accrued and deferred liabilities 129 (1,535) 545
Income taxes payable 685 58 (930)
-------- -------- --------
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net cash provided by
operating activities $ 7,390 $ 3,999 $ 8,849
Investing activities:
Additions to property, plant and
equipment, net $ (3,723) $ (2,649) $ (4,236)
Additions to cost in excess
of assets acquired (10) (989) --
Proceeds from sale of assets 5,375 1,785 1,750
Note receivable activity 883 (364) (370)
-------- -------- --------
Net cash provided by (used for)
investing activities $ 2,525 $ (2,217) $ (2,856)
Financing activities:
Note payable activity $ 600 $- $-
Long-term debt (repayment)
borrowings (8,366) (211) 3,541
Repayment
of senior notes (1,429) -- (10,000)
Proceeds from stock options and
employee stock purchases 44 107 246
Dividends paid (1,223) (1,219) (1,205)
-------- -------- --------
Net cash used for
financing activities $(10,374) $ (1,323) $ (7,418)
Net (decrease) increase in cash
and cash equivalents (459) 459 (1,425)
Cash and cash equivalents at
beginning of year 2,363 1,981 3,414
Effect of exchange rate on cash (306) (77) (8)
-------- -------- --------
Cash and cash equivalents at
end of year $ 1,598 $ 2,363 $ 1,981
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share amounts)
1. Nature of Operations
The Company manufactures and markets consumer durable goods with principal lines
of business consisting of kitchen and household tools, precision cutting tools,
kitchen cutlery and cookware. In addition, the Company sells products through a
chain of manufacturer's retail outlet stores.
2. Accounting Policies
Principles of Consolidation - The Consolidated Financial Statements include
the accounts of General Housewares Corp. and its subsidiaries (the
"Company"), all of which are wholly-owned. All intercompany transactions and
balances are eliminated in consolidation.
6
<PAGE>
Cash Equivalents - The Company considers all highly liquid temporary cash
investments with low interest rate risk to be cash equivalents. Temporary cash
investments are stated at cost, which approximates market value.
Accounts Receivable - Substantially all accounts receivable are uncollateralized
and arise from sales to the retail industry. Accounts receivable allowances
include reserves for doubtful accounts, returns, adjustments and cooperative
advertising allowances to customers.
Inventories - Inventories are stated at the lower of cost or market and at
December 31 were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $2,277 $4,903
Work in process 842 609
Finished goods 15,027 15,504
------ -------
18,146 21,016
LIFO reserve 976 (157)
------ -------
$19,122 $20,859
</TABLE>
Cost, at December 31, 1998 and 1997, is determined on a last-in, first-out
(LIFO) basis for approximately 57% and 76%, respectively, of the Company's
inventories. The remaining inventories are costed on a first-in, first-out
(FIFO) basis.
Property, Plant and Equipment - Property, plant and equipment is recorded at
cost and depreciated using the straight-line method based on useful lives of 20
to 30 years for buildings and improvements and 3 to 15 years for machinery and
equipment. To the extent third parties are utilized in computer software and
hardware implementation efforts, costs related to development and implementation
of new software and hardware are capitalized and depreciated using the
straight-line method based on a useful life of three years. Third- party
training and consulting costs (related to pre-existing computer assets) are
expensed as incurred. All costs specifically associated with modifying internal
software and hardware for Year 2000 compliance are expensed as incurred.
Property, plant and equipment is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $387 $648
Buildings and improvements 3,545 6,944
Machinery and equipment 17,940 24,640
------ -------
21,872 32,232
Accumulated depreciation (12,380) (19,749)
------ -------
$9,492 $12,483
</TABLE>
Other Assets - On January 17, 1996, the Company sold a non-operating facility
located in Hyannis, Massachusetts. The Company received cash of $1.3 million for
the facility. The cash was used for working capital purposes. On December 31,
1997, the Company completed the sale of one of three remaining non-operating
facilities for $1.8 million in cash and used part of the proceeds to prepay $1
million owed under a 12% note payable to the Estate of Ronald J. Gangelhoff
arising from the Company's purchase of Chicago Cutlery,
7
<PAGE>
Inc. (CCI) in 1988, with the remaining proceeds used for working capital
purposes. In January of 1998, the Company completed the sale of a second
non-operating facility for $489 in cash, which was also used for working capital
purposes. On February 17, 1999, the Company sold the third non-operating
facility for approximately $150 in cash. The proceeds received on each of these
sales approximated the net book value of the asset sold. Other assets also
include prepaid pension expense.
Intangible Assets - The cost in excess of net assets acquired is amortized using
the straight-line method over periods ranging from 10 to 40 years. Other
intangible assets arising from acquisitions are included in patents and other
intangible assets and are amortized using the straight-line method over periods
of 5 to 15 years. Amortization of intangible assets was approximately $1,395 in
1998 ($1,781 in 1997 and $1,789 in 1996). In connection with the sale of assets
related to the Company's enamelware cookware business as discussed in Note 3,
the Company wrote off $2.8 million of cost in excess of net assets acquired.
Accumulated amortization was $10,080 and $10,131 at December 31, 1998 and 1997,
respectively. The Company assesses the recoverability of costs in excess of net
assets acquired based on undiscounted future cash flows. Except for the
aforementioned write-off related to the sale of the Company's enamelware
cookware business, no write-downs of such costs were incurred for the periods
ended December 31, 1998, 1997 or 1996.
Deferred Liabilities - Deferred liabilities include deferred income taxes and
deferred compensation.
Financial Instruments - Realized and unrealized gains and losses on foreign
currency contracts used to purchase inventory with no firm purchase commitments
are recognized currently in net income as they do not qualify as hedges for
accounting purposes. Realized and unrealized gains and losses on forward
contracts used to purchase inventories for which the Company has firm purchase
commitments are accounted for as hedges and recognized in income when related
inventory is sold. In cases where firm purchase commitments exist, effects of
recognition are presented with the item being hedged (inventories) for cash flow
purposes.
Earnings per Share - FAS No. 128, "Earnings per Share", was adopted for the year
ended December 31, 1997, and retroactively applied to the prior years presented.
While options to purchase common shares were outstanding during each of the
years presented, the options' exercise price was greater than the average market
price in most cases, resulting in no difference between diluted earnings per
share and basic earnings per share calculations. In addition, restricted stock,
for which vesting periods had not lapsed, were not significant enough to result
in a difference between diluted and basic earnings per share. There were no
other reconciling items between basic and diluted earnings per share.
Currency Translation - The net assets of foreign operations are translated into
U.S. dollars using year-end exchange rates. Revenue and expenses are translated
at average exchange rates during the reporting period.
Advertising - The Company participates in cooperative advertising programs with
certain customers related to products being promoted. In addition, the Company
conducts consumer advertising programs designed to highlight product features
and build brand awareness. Advertising expense related to the programs is
expensed as incurred and was $3,318, $3,603 and $3,644 for the periods ended
December 31, 1998, 1997 and 1996, respectively.
8
<PAGE>
Reclassification - Certain 1996 and 1997 amounts have been reclassified to
conform with the 1998 presentation.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Restructuring Charges
On January 4, 1996, the Company announced its intention to exit its cast iron
and cast aluminum businesses ("Sidney Division"). A purchase agreement to sell
the assets of the Sidney Division, effective August 1, 1996, was executed
whereby the Company received consideration of $4,000 in the form of a cash
payment of $450, a note receivable of $3,000, and the purchaser's assumption of
certain liabilities. The consideration was received in exchange for certain
assets of the Sidney Division, as well as licenses to use associated brand names
and trademarks. The note receivable was discounted to a net present value of
$2,707 with a scheduled principal payment of $1,000 due July 31, 1999, and
subsequent quarterly payments of $125 commencing October 31, 1999, through July
31, 2003. The estimated net realizable value of this note receivable at December
31, 1998 and 1997, was $1.5 million and $2.4 million, respectively. Interest
income related to the note is recorded when cash is received. Related amounts
were not significant for the years ended December 31, 1998, 1997 or 1996. As a
result of this sale agreement, the Company recorded, in 1996, as a component of
selling, general and administrative expenses, a charge against earnings of
$3,198 ($400 of which relates to loss on curtailment of the Sidney Division
defined benefit pension plans). A benefit of $928 was recorded in cost of sales
as a result of the reversal of the Sidney Division LIFO reserve offset by other
inventory loss reserves. Net sales of the Sidney Division were $4,159 in 1996.
The loss from operations (including cooperative advertising, warehousing and
direct marketing expenses, but excluding restructuring charges and allocation of
corporate overhead expenses) of the Sidney Division was $1,496 in 1996.
In addition to the foregoing, the Company closed three manufacturer's retail
outlet stores, sold certain assets associated with its stamped and spun aluminum
cookware product line and incurred a charge related to the write-down of certain
production equipment to net realizable value in 1996. The results of operations
of these stores and the stamped and spun aluminum cookware product line, the
charges incurred as a result of their disposition and the aforementioned
write-down related to production equipment amounted to approximately $530 for
the year ended December 31, 1996 (reflected in selling, general and
administrative expense).
In 1997, the Company initiated cost reduction activities including the
elimination of 32 positions that had supported a variety of selling, general and
administrative functions and the planned first quarter 1998 relocation of its
primary distribution center. Severance related wages and benefits of $826 were
recorded as a charge to selling, general and administrative expense as a result
of the initiatives in 1997. All severance related payments were made in 1997 and
1998.
On March 31, 1998, the Company sold its enamelware cookware business (Enamelware
Division). In exchange for the sale to Columbian Home Products,
9
<PAGE>
LLC (the "Buyer") of certain assets related to the Enamelware Division,
including property, plant and equipment and inventories as well as associated
brand names and trademarks, the Company received consideration consisting of a
cash payment of $4.9 million and a Promissory Note (the "Note") in the principal
amount of $1.3 million. The Note carries an interest rate of 9%, and calls for
principal and interest payments to be offset against the payments due the Buyer
from the Company pursuant to a seven-year lease whereby the Company will
continue to occupy its current headquarters located within the Enamelware
Division facility. As a result of the sale, the Company has recorded, in 1998,
as a component of selling, general and administrative expense, a charge against
earnings of $1,500. This net, non-cash charge consisted of the following
components:
<TABLE>
<S> <C>
Excess of consideration received over net book value
of tangible assets sold $2,100
Non-cash charges:
Goodwill write-off (2,800)
Defined benefit plan pension curtailment (800)
-------
Loss on sale $(1,500)
-------
-------
</TABLE>
The defined benefit plan pension curtailment remains as a reduction to
non-current assets at December 31, 1998.
Net sales of the Enamelware Division were $2,362, $14,145 and $16,508 in the
years ended December 31, 1998, 1997 and 1996, respectively. Income from
operations of the Enamelware Division (including cooperative advertising,
warehousing, goodwill amortization and direct marketing expenses, but excluding
restructuring charges and allocation of corporate overhead charges) was $191,
$2,278 and $3,752 in 1998, 1997 and 1996, respectively.
4. Acquisitions
Effective June 25, 1997, the Company acquired two product lines for $689, in
cash, that became part of the Company's Precision Cutting Tools Segment. The
acquisition was accounted for as a purchase. The net assets purchased, the
purchase price and pro forma results of operations, as if combined throughout
the preceding periods, were not material. Related cost in excess of assets
acquired from the acquisition of $587 is being amortized over 15 years.
Effective October 1, 1994, the Company purchased the assets of Walter Absil
Company Limited and Olfa Products Corp. (collectively referred to as "Olfa
Products Group"). In connection with issuance of restricted common stock related
to the acquisition, the Company agreed, under certain circumstances, to make
payments of up to $600 to the former owners upon sale of the restricted common
stock. Pursuant to this agreement, the Company paid $300 in 1997, the entire
amount being recorded as an increase to cost in excess of net assets acquired.
5. Debt
Long-term and short-term debt includes the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
Long-term bank Credit Agreement $14,000 $21,000
8.41% senior notes payable
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
in equal annual installments
commencing 1998 through 2004 8,572 10,000
12% subordinated note payable
in equal annual installments
commencing 1996 through 2000 187 1,190
Deferred payment obligation due
in quarterly installments of $125
from January, 1995, through September,
1998 (discounted at 6%) - 364
Short-term bank note payable 600 -
------ -------
23,359 32,554
Less current maturities and
short-term debt 2,216 2,793
------ -------
Long-term debt $21,143 $29,761
</TABLE>
At December 31, 1998 and 1997, all of the Company's debt outstanding was
unsecured.
The long-term bank debt outstanding at December 31, 1998, relates to a Credit
Agreement with three banks, dated November 13, 1996, consisting of an aggregate
commitment of $45,000 of which $17 was reserved for letters of credit at
December 31, 1998. This credit agreement, with an original expiration date of
December 31, 1999, was renewed during 1998 for an additional one-year period.
The Credit Agreement, which now expires on December 31, 2000, may be renewed,
under certain circumstances, for an additional one-year period. Drawings under
the Credit Agreement are priced at the banks' Prime or LIBOR with spreads based
on an incentive formula. At December 31, 1998, the Company could borrow under
the Credit Agreement at Prime of 7.75% or LIBOR plus 1.5%. The interest rates on
outstanding amounts at December 31, 1998, ranged from 6.7% to 7.0%. Commitment
fees of .375% of the unused balance on the line of credit are included in
interest expense.
During 1994, the Company sold $20,000 of 8.41% Senior Notes payable to a group
of institutional investors. On November 15, 1996, the Company prepaid $10,000 of
the 8.41% Senior Notes with proceeds from the Credit Agreement. The Company
incurred a prepayment penalty of $799 related to this transaction. In addition,
the Company incurred a write-off of unamortized debt issuance costs of $89
related to this transaction and the replacement of the aforementioned Credit
Agreement. In accordance with FAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", the prepayment penalty and the write-off of unamortized
debt issuance costs have been reflected as an extraordinary item, net of
applicable income tax benefit of $269, in the Consolidated Financial Statements.
Terms of the Credit Agreement and the Senior Notes require, among other things,
that the Company maintain certain minimum financial ratios. In addition, the
agreements provide for limits on dividends, certain investments and lease
commitments. At December 31, 1998, the Company was in compliance with all
covenants contained in the Credit Agreement and Senior Notes.
The 12% subordinated note payable is due the Estate of the former principal
owner of CCI. The Estate is a significant stockholder of the Company. The
principal balance of the note was reduced by $3 and $21 in 1998 and 1997,
respectively, as an offset to payments made with regard to the environmental
remediation program discussed in Note 12. The terms of this note allow the
Company to prepay the note in whole or in part, without penalty.
11
<PAGE>
The Deferred Payment Obligation was incurred in connection with the acquisition,
in 1994, of the assets of the Normandy enamel on steel cookware business of
National Housewares, Inc.
The short-term bank note payable relates to a $1 million revolving line with one
bank. The line is used for short-term working capital requirements, carries an
interest rate at the bank's prime rate (7.75% at December 31, 1998), and expires
on April 30, 1999.
Terms of the Deferred Payment Obligation and the Subordinated Note provide for
the right of offset upon the occurrence of certain events.
Aggregate long-term debt principal payments for the five years subsequent to
December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 2,216
2000 15,427
2001 1,429
2002 1,429
2003 1,429
Later years 1,429
</TABLE>
Cash paid during 1998 for interest, net of cash received, was $2,277 (1997 -
$2,706; 1996 - $2,538). Of this amount, $142, $417 and $579 consisted of amounts
paid to related parties in 1998, 1997 and 1996, respectively.
6. Common Stock and Rights
Common stock, at December 31, 1998, included 226,093 shares reserved for
outstanding stock options.
In November 1998, the Company effected a dividend distribution of one Right for
each outstanding share of common stock. Under certain circumstances, each Right
may be exercised to purchase 1/100th of a share of Series A Junior Participating
Preferred Stock, at a purchase price of $40, subject to adjustment to prevent
dilution. Each preferred share fraction is designed to be equivalent in voting
and dividend rights to one share of common stock. The Rights may only be
exercised after a person acquires, or has the right to acquire, 21% or more of
the common stock or makes an offer for 30% or more of the common stock. Each
Right entitles the holder (other than the acquiree) to purchase common stock of
the Company having a market value equal to twice the exercise price of a Right.
The Rights, which do not have voting rights and do not entitle the holder to
dividends, expire on February 27, 2009, and may be redeemed by the Company prior
to their being exercisable at a price of $.01 per Right.
7. Stock Plans
At December 31, 1998, the Company had two stock plans which are described below.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plan and its stock purchase plan. Had compensation cost for
the Company's stock plans been determined, based on the fair value at the grant
dates for transactions under those plans, consistent with the method of FAS No.
123, "Accounting for Stock Based Compensation", the Company's net loss and net
loss per share for 1996 and net income and net income per share for 1998 and
1997 would have been adjusted to the pro forma amounts indicated below:
12
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income (loss) from continuing operations:
As reported $ 39 $ 662 $(2,016)
Pro forma $ (55) $ 571 $(2,152)
Income (loss) per share (basic and diluted)
from continuing operations:
As reported $ 0.01 $ 0.17 $ (0.54)
Pro forma $(0.01) $ 0.15 $ (0.57)
</TABLE>
The risk-free rate used in pro forma calculations is the yield, on the grant
date, of a U.S. Treasury Strip with a maturity date equal to the expected term
of the option. The expected life of vested stock options used in the calculation
is five years with no assumed forfeiture. The volatility assumption utilized,
(32.81% and 34.28% in 1997 and 1996, respectively), was developed using the
Company's historical stock price with future dividend activity assumed to be
consistent with 1997 activity. No stock options were granted in 1998.
The Company maintains a fixed stock plan for key employees which provides for
the granting of options or awards of restricted stock until February 1, 2007.
All stock options vest within three years of the date of grant with a maximum
option term of ten years. A summary of transactions under the plan follows:
<TABLE>
<CAPTION>
Stock
Options
Restricted Wtd. Avg.
Stock Shares Shares Price
<S> <C> <C> <C>
Outstanding December 31, 1995 17,500 303,770 $ 11.98
Granted during 1996 15,268 44,500 10.39
Canceled during 1996 - (7,550) 13.12
Released or exercised
during 1996 (9,500) (18,434) 7.84
Outstanding December 31, 1996 23,268 322,286 $ 11.97
Granted during 1997 - 77,250 10.50
Canceled during 1997 - (128,739) 11.43
Released or exercised
during 1997 (8,000) (6,667) 7.13
Outstanding December 31, 1997 15,268 264,130 $ 11.88
Granted during 1998 200,750 - -
Canceled during 1998 (4,268) (37,704) 10.94
Released or exercised
during 1998 (4,000) (333) 10.50
Outstanding December 31, 1998 207,750 226,093 $ 12.04
</TABLE>
Options granted under the plan provide for the issuance of common stock at not
less than 100% of the fair market value on the date of grant. When options are
exercised, proceeds received are credited to common stock and capital in excess
of par value. Stock options were exercised at $10.50 per share in 1998. Of the
options outstanding at December 31, 1998, 87,917 were granted at prices ranging
from $9.25 to $10.50 per share, while 138,176 were granted at prices ranging
from $12.00 to $14.00 per share. The weighted average remaining contractual
lives for the ranges are 5.93 years and 3.12 years, respectively. Options for
161,176 shares were exercisable at December 31, 1998. The weighted average price
of these exercisable shares was $12.69.
Restricted stock granted under the plan is subject to restrictions relating
13
<PAGE>
to continuous employment or other relationships. Unearned compensation is
recorded at the date of restricted stock awards based on the market value of
shares at the award date and is amortized over the vesting period of awards.
Related unearned compensation, which is netted with capital in excess of par
value on the Consolidated Balance Sheet and Consolidated Statement of
Stockholders' Equity, was $1,455 as of December 31, 1998. Total amortization of
unearned compensation expense was $630 in 1998. The vesting period for
restricted stock awards outstanding at December 31, 1998, extends through
January 1, 2002. The weighted average price of restricted stock at the date of
grant was $10.19 and $8.57 for 1998 and 1996, respectively.
On July 1, 1992, the Company introduced its Employee Stock Purchase Plan. The
plan, administered by a Committee appointed by the Board of Directors, is
intended to qualify as an "employee stock purchase plan" within the meaning
of Section 423 of the Internal Revenue Code. The Employee Stock Purchase Plan
provides that shares of the Company's Common Stock will be purchased at the
end of each calendar quarter with funds deducted from the payroll of eligible
employees. Employees receive a bargain purchase price equivalent to 90% of
the lower of the opening or closing stock price of each calendar quarter.
Dividends paid to the Employee Stock Purchase Plan fund are reinvested in the
fund to buy additional shares. At December 31, 1998, the balance in the plan
consisted of 19,234 shares of General Housewares Corp. Common Stock (24,343
shares in 1997).
8. Employee Benefit Plans
In 1996 and 1997, the Company sponsored four defined benefit pension plans. Two
of the plans covered union employees at the Sidney Division, and one of the
plans covered union employees at the Enamelware Division. The Sidney Division
was sold in 1996 and the Enamelware Division was sold in 1998. All three of the
plans related to divested operations were retained by the Company but ceased
accruing service cost at the date of sale. Subsequent to the asset sales, assets
and liabilities of the three plans related to divested operations were merged
with an existing plan which historically covered substantially all of the
Company's non-union employees.
As of December 31, 1998, the Company's sponsorship of defined benefit plans was
limited to the one merged plan. Pension benefit formulas remain distinct to the
four previous plans and are related to agreed-upon payment schedules which, in
general, are based on final average pay or fixed amount per year of service. It
is the Company's policy to fund at least the minimum amounts required by
applicable regulations. In 1998, the Company adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". Related
disclosures have been modified accordingly. The standard does not change the
measurement or recognition of employee benefit plans.
The change in benefit obligation for the plan is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Benefit obligation at beginning of year $22,323 $21,356
Service cost 433 709
Interest cost 1,573 1,510
Actuarial loss (gain) 1,098 (104)
Benefits paid (1,425) (1,148)
------- -------
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
Benefit obligation at end of year $24,002 $22,323
------- -------
------- -------
</TABLE>
The change in fair value of assets and funded status for the plan is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Fair value of plan assets at beginning of year $ 25,857 $ 20,639
Actual return on plan assets 5,103 6,366
Benefits paid (1,425) (1,148)
-------- --------
Fair value of plan assets at end of year $ 29,535 $ 25,857
-------- --------
Funded status $ 5,533 $ 3,534
Unrecognized transition asset (411) (548)
Unrecognized actuarial gain (4,165) (1,505)
Unrecognized prior service cost 153 1,080
-------- --------
Prepaid benefit cost $ 1,110 $ 2,561
-------- --------
-------- --------
</TABLE>
The weighted average assumptions as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Discount rate 7.00% 7.25% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
</TABLE>
The components of net periodic benefit cost were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 433 $ 600 $ 544
Interest cost 1,573 1,510 1,302
Expected asset return (1,696) (1,590) (1,435)
Prior service cost amortization 92 163 143
Recognized net actuarial loss 244 367 241
Transition asset amortization (137) (137) (121)
------- ------- -------
Net periodic benefit cost $ 509 $ 913 $ 674
------- ------- -------
------- ------- -------
</TABLE>
In addition to the defined benefit plan described above, the Company also
sponsors a 401(k) plan for all full-time employees. The Company matches a
portion of each employee contribution. The Company's contribution expense was
$195 in 1998 ($275 in 1997 and $297 in 1996).
The Company maintains a non-qualified, unfunded deferred compensation plan for
certain key executives, providing payments upon retirement. The present value of
the deferred compensation is included in deferred liabilities.
15
<PAGE>
9. Income Taxes
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current income tax expense:
Federal $ 588 $ 347 $ 134
State 82 45 90
Foreign 895 718 471
------- ------- -------
Total current income tax
expense 1,565 1,110 695
Deferred income tax
(benefit) expense:
Federal (802) 18 (1,390)
State (89) (51) (141)
Foreign 56 (12) (6)
------- ------- -------
Total income tax expense
(benefit) before
extraordinary item 730 1,065 (842)
Current income tax benefit on
extraordinary item - - (269)
------- ------- -------
Total income tax
expense (benefit) $ 730 $ 1,065 $(1,111)
</TABLE>
A reconciliation between taxes from continuing operations computed at the
federal statutory tax rate and the Company's consolidated effective tax rate
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Computed tax at
federal statutory rate $261 $ 587 $(972)
State income taxes, net of
federal income tax benefit 54 30 (99)
Amortization of excess
purchase price 199 198 199
Tax effects attributable
to foreign operations 144 126 77
Miscellaneous items 72 124 (47)
---- ------ -----
Total income tax expense
(benefit) before
extraordinary item $730 $1,065 $(842)
</TABLE>
Deferred tax assets (liabilities) were comprised of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable allowances $820 $570
Inventory reserves 873 669
Vacation 44 160
Foreign tax credit 280 280
Package design costs 116 211
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
Note receivable reserves 371 17
Reserve for environmental 50 40
Other, miscellaneous 775 958
------- -------
Gross deferred tax assets $ 3,329 $ 2,905
Gross deferred tax liabilities:
Property, plant and equipment $ (323) $ (327)
Pension (31) (521)
Other, miscellaneous (190) (166)
------- -------
Gross deferred tax liabilities $ (544) $(1,014)
Net deferred tax assets $ 2,785 $ 1,891
------- -------
------- -------
</TABLE>
Cash paid for income taxes during 1998 was $987 (1997-$741; 1996-$87).
The Internal Revenue Service is reviewing the Company's tax return for the year
ended December 31, 1996. The Company does not expect this review to have a
significant impact on future results of operations.
10. Operating Leases
The Company leases warehouses, administrative offices, computer equipment and
retail outlet store space. Certain of the retail store leases provide for
contingent rental payments, generally based on the sales volume of the
applicable retail unit. All leases in which the Company is engaged are
classified as operating leases.
Future minimum annual lease payments under these operating leases, the majority
of which have initial or remaining non-cancelable lease terms in excess of one
year, were as follows at December 31, 1998:
<TABLE>
<S> <C>
1999 $2,042
2000 1,581
2001 1,346
2002 1,172
2003 478
Later years 837
</TABLE>
Certain leases require payments of real estate taxes, insurance, repairs and
other charges. Total rental expense was $2,290 in 1998 (1997-$2,018; 1996-
$1,797).
11. Fair Value of Financial Instruments
FAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of information about the fair value of certain financial instruments
for which it is practical to estimate that value. The fair value of the
Company's notes receivable is determined by calculating the present value of
expected future cash receipts associated with these instruments. The fair value
of the Company's long-term debt is determined by calculating the present value
of expected future cash outlays associated with the debt instruments. The
discount rate used for both calculations is equivalent to the estimated current
rate attainable for notes and debt of similar maturities. Based on the
calculations performed, the Company has determined that fair value approximates
carrying value for its financial instruments.
17
<PAGE>
12. Commitments and Contingent Liabilities
The Company is currently involved with private parties and state agencies in the
review and evaluation, or remediation, of four sites posing potential or
identified environmental contamination problems. Based on information currently
available, management's best estimate (based on an undiscounted calculation) of
probable remediation costs, recorded as a liability, is $285 at December 31,
1998 ($480 at December 31, 1997), which aggregate amount management believes
will be paid out during the course of the next five years. Within a range of
reasonably possible environmental cleanup liabilities established on the basis
of current information, the recorded liability represents substantially all of
the currently estimable maximum loss that has been identified by the Company and
its environmental advisors. Based on provisions in the stock purchase agreement
related to the acquisition of Chicago Cutlery, Inc., the Company has recovered
approximately $1,113 previously expended on the mandated remediation of
hazardous wastes generated at the Antrim, New Hampshire, manufacturing site (the
"Antrim Site") previously owned by Chicago Cutlery, Inc., through an offset to
amounts owed to the holders of the 12% subordinated note ($813 related to
principal payments and $300 related to interest payments - see Note 5). Based on
the opinion of legal counsel, the Company considers it probable that it will
retain such amounts. The holders of the 12% subordinated note have not agreed to
such offset. While neither the timing nor the amount of the ultimate costs
associated with environmental matters can be accurately determined, management
does not expect that these matters will have a material effect on the Company's
consolidated financial position, results of operations and cash flow.
13. Segment Information
In 1998, the Company adopted FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". FAS No. 131 supersedes FAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments.
The Company is organized based on product lines which have distinct brand names
and are managed as autonomous marketing units. The Company evaluates performance
and allocates resources to segments based on divisional operating income.
Divisional operating income is calculated by deducting direct operating expenses
from gross profit. Direct operating expenses include certain marketing,
warehousing, cooperative advertising, and administrative charges (intangible
amortization and royalty charges) that are structured for divisional tracking or
are consistently allocated to the divisional level. General marketing overhead
expenses, selling costs and general corporate overhead expenses are allocated to
the divisional level from time to time, but, in general, are not used to make
operating decisions and assess performance. These costs are excluded from
divisional operating income. Assets that are identifiable for segment reporting
purposes include inventories, property, plant and equipment, patents and other
intangible assets and cost in excess of net assets acquired.
The Company has identified the following segments as reportable segments for
purposes of applying FAS No. 131: Kitchen and Household Tools (K&HT), Precision
Cutting Tools (PCT), Kitchen Cutlery (CUT), Cookware (COOK), Retail Outlet
Stores (RET) and Other Housewares-Related Products (OTHER).
18
<PAGE>
The table below presents information about reported segments for the three years
ended December 31:
<TABLE>
<CAPTION>
1998 K&HT PCT CUT COOK
<S> <C> <C> <C> <C>
Net sales $38,445 $18,746 $ 28,049 $ 2,362
Divisional operating income $12,077 $ 7,452 $ 7,418 $ 191
Depreciation and
amortization expense $ 1,127 $ 442 $ 1,888 $ 193
Total identifiable assets $11,037 $10,857 $ 26,166 $ -
Identifiable capital
expenditures $ 2,389 $ 148 $ 795 $ 10
</TABLE>
<TABLE>
<CAPTION>
1998 RET OTHER TOTAL
<S> <C> <C> <C>
Net sales $ 7,139 $ 2,290 $ 97,031
Divisional operating income $ 1,464 $ 169 $ 28,771
Depreciation and
amortization expense $ 283 $ 45 $ 3,978
Total identifiable assets $ 1,713 $ 1,188 $ 50,961
Identifiable capital
expenditures $ 45 $ 131 $ 3,518
</TABLE>
<TABLE>
<CAPTION>
1997 K&HT PCT CUT COOK
<S> <C> <C> <C> <C>
Net sales $30,930 $18,063 $ 29,580 $14,145
Divisional operating income $10,894 $ 6,365 $ 8,403 $ 2,278
Depreciation and
amortization expense $ 991 $ 402 $ 1,885 $ 849
Total identifiable assets $12,125 $10,171 $ 28,078 $ 7,297
Identifiable capital
expenditures $ 715 $ 46 $ 1,028 $ 287
</TABLE>
<TABLE>
<CAPTION>
1997 RET OTHER TOTAL
<S> <C> <C> <C>
Net sales $ 8,830 $ 2,983 $104,531
Divisional operating income $ 995 $ 308 $ 29,243
Depreciation and
amortization expense $ 347 $ 3 $ 4,477
Total identifiable assets $ 1,869 $ 713 $ 60,253
Identifiable capital
expenditures $ 280 $ 15 $ 2,371
</TABLE>
<TABLE>
<CAPTION>
1996 K&HT PCT CUT COOK
<S> <C> <C> <C> <C>
Net sales $21,687 $16,231 $ 34,309 $21,851
Divisional operating income $ 6,818 $ 5,189 $ 7,615 $ 2,314
Depreciation and
amortization expense $ 781 $ 357 $ 1,631 $ 1,088
Total identifiable assets $ 8,363 $ 9,780 $ 30,629 $ 8,215
Identifiable capital
expenditures $ 440 $ 28 $ 656 $ 793
</TABLE>
<TABLE>
<CAPTION>
1996 RET OTHER TOTAL
<S> <C> <C> <C>
Net sales $ 9,445 $ 1,956 $105,479
Divisional operating income $ 2,011 $ 261 $ 24,208
Depreciation and
amortization expense $ 383 $ - $ 4,240
Total identifiable assets $ 2,296 $ 1,717 $ 61,000
Identifiable capital
expenditures $ - $ 15 $ 1,932
</TABLE>
A reconciliation of total segment information to total consolidated financial
19
<PAGE>
information for the three years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Divisional operating income $28,771 $29,243 $ 24,208
Unallocated corporate S,G&A 25,703 24,767 24,315
Income (loss) before interest and taxes 3,068 4,476 (107)
Unallocated interest expense 2,299 2,749 2,751
Income (loss) before income ------- ------- -------
taxes and extraordinary item $ 769 $ 1,727 $ (2,858)
------- ------- --------
------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Identifiable assets $50,961 $60,253 $ 61,000
Accounts receivable 16,158 15,170 15,823
Other unallocated assets 13,115 15,341 18,456
------- ------- --------
Total consolidated assets $80,234 $90,764 $ 95,279
------- ------- --------
------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Segment depreciation and
amortization $ 3,978 $ 4,477 $ 4,240
Unallocated information systems and
corporate facility depreciation 955 931 613
------- ------- --------
Total consolidated depreciation
and amortization $ 4,933 $ 5,408 $ 4,853
------- ------- --------
------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Identifiable capital expenditures $ 3,518 $ 2,371 $ 1,932
Unallocated corporate capital
expenditures 205 278 2,304
------- ------- --------
Total consolidated capital
expenditures $ 3,723 $ 2,649 $ 4,236
------- ------- --------
------- ------- --------
</TABLE>
The Company allocates warehouse expense as well as depreciation related to
warehouse operations to segments based on shipping and storage volume.
Of the total revenues derived by the Precision Cutting Tools Segment, $7,697,
$7,562 and $6,298 relate to an operating division in Canada for the years ended
December 31, 1998, 1997 and 1996, respectively. Divisional operating income from
this operating division was $3,117, $2,846 and $2,224 for the years ended
December 31, 1998, 1997 and 1996, respectively.
14. Financial Instruments
The Company purchases inventory in Japanese yen to support its precision cutting
tool division. During 1998, the Company entered into forward currency exchange
contracts to manage its exposure against the Japanese currency. As of December
31, 1998, the contracts, which are held for purposes other than trading, mature
over the next six months and cover inventory receipts of approximately $3.2
million. The Company is exposed to loss in the event of non-performance by
counter parties on foreign
20
<PAGE>
exchange contracts. The Company does not anticipate non-performance by any of
those counter parties. The amount of this exposure is generally limited to
unrealized (or deferred) gains on the contracts. As of December 31, 1998,
deferred gains and losses related to the instruments were not significant.
Assuming no significant changes in the Company's treasury policies, the
application of recently issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", will not have a material effect on the
Company's financial position or operating income upon its implementation in the
first quarter of 2000.
15. Subsequent Event (Unaudited)
On August 2, 1999, the Company entered a definitive Agreement and Plan of
Merger(the "Merger Agreement") with CCPC Acquisition Corp.("CCPC"). Pursuant
to the terms of the Merger Agreement, the company was merged into a
subsidiary of CCPC. The transaction has been approved by the Board of
Directors of the Company and the Company's shareholders. The merger was
completed on October 21, 1999, and each share of the Company was converted
into $28.75 in cash.
21
<PAGE>
EXHIBIT 13.2
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,179 $ 14,565
Accounts receivable, net of allowance for
doubtful accounts of $643 and $957, respectively 59,773 45,529
Inventories 75,751 74,150
Prepaid expenses and other current assets 13,053 9,021
Deferred income taxes 7,370 6,877
-------- --------
Total current assets 157,126 150,142
Property and equipment, net 38,887 35,678
Other assets 7,960 7,563
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $34,242 and $32,321,
respectively 114,267 107,422
-------- --------
Total assets $318,240 $300,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of debt $ 1,750 $ --
Accounts payable 18,132 14,040
Accrued expenses 33,542 29,290
Income taxes 5,665 6,344
-------- --------
Total current liabilities 59,089 49,674
-------- --------
Long-term obligations, less current portion 136,136 124,270
-------- --------
Other long-term liabilities 10,333 11,974
-------- --------
Series B ESOP Convertible Preferred Stock, net;
outstanding 1,073 shares and
1,315 shares, respectively,
redeemable at $3.61 per share 3,868 4,399
-------- --------
Commitments and contingencies -- --
-------- --------
Minority interest 490 494
-------- --------
Stockholders' equity
Common stock, $.01 par value; outstanding 19,065 shares
and 19,066 shares, respectively 191 191
Capital in excess of par value 110,152 109,462
Retained earnings 733 4,665
Unearned compensation (485) (2,787)
Accumulated other comprehensive income (loss) (2,267) (1,537)
-------- --------
108,324 109,994
-------- --------
Total liabilities and stockholders' equity $318,240 $300,805
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
---------- ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues $328,948 $270,536 $249,870
--------- -------- --------
Costs and expenses
Cost of sales 222,555 181,307 164,505
Selling, general and administrative 72,748 60,915 59,737
Special charge 16,245 783 9,877
Amortization of excess of cost over
fair value 4,221 3,631 3,636
-------- -------- --------
315,769 246,636 237,755
-------- -------- --------
Income before interest and income taxes 13,179 23,900 12,115
-------- -------- --------
Interest (income) expense
Interest expense 14,371 12,446 12,565
Investment income (287) (810) (149)
-------- -------- --------
14,084 11,636 12,416
-------- -------- --------
Income (loss) from continuing operations
before income taxes and extraordinary
charge (905) 12,264 (301)
Income taxes 6,527 6,247 2,370
-------- -------- --------
Income (loss) from continuing operations
before extraordinary charge (7,432) 6,017 (2,671)
Discontinued operations
Income (loss) from discontinued
operations, net of income tax benefit
of $1,928 -- -- (24,720)
Gain (loss) on disposal, net of tax
benefits of $3,500 and $1,925,
respectively 3,500 -- (3,575)
-------- -------- --------
Income (loss) before extraordinary
charge (3,932) 6,017 (30,966)
Extraordinary charge for early retirement
of debt, net of tax benefit of $2,139 -- -- (3,208)
-------- -------- --------
Net income (loss) $ (3,932) $ 6,017 $(34,174)
======== ======== ========
</TABLE>
2
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
---------- ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Earnings (loss) per common share
Basic:
Income (loss) from continuing operations
before extraordinary charge $ (.38) $ .32 $ (.14)
Income (loss) from discontinued operations -- -- (1.34)
Gain (loss) on disposal of business .18 -- (.19)
-------- -------- --------
Income (loss) before extraordinary charge (.20) .32 (1.67)
Extraordinary charge -- -- (.18)
-------- -------- --------
Earnings (loss) per common share $ (.20) $ .32 $ (1.85)
======== ======== ========
Diluted:
Income (loss) from continuing operations
before extraordinary charge $ (.38) $ .29 $ (.14)
Income (loss) from discontinued operations -- -- (1.34)
Gain (loss) on disposal of business .18 -- (.19)
-------- -------- --------
Income (loss) before extraordinary charge (.20) .29 (1.67)
Extraordinary charge -- -- (.18)
-------- -------- --------
Earnings (loss) per common share $ (.20) $ .29 $ (1.85)
======== ======== ========
Weighted average number of shares
used in computation of per share data
Basic 19,359 18,907 18,489
======== ======== ========
Diluted 19,359 20,849 18,489
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON CAPITAL IN RETAINED OTHER
STOCK, PAR EXCESS OF EARNINGS UNEARNED COMPREHENSIVE
SHARES VALUE $.01 PAR VALUE (DEFICIT) COMPENSATION INCOME (LOSS) TOTAL
------ ---------- ---------- -------- ------------ ------------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 18,414 $ 184 $106,916 $33,614 $(3,970) $(819) $135,925
Comprehensive loss:
Net loss for the year -- -- -- (34,174) -- -- (34,174)
Other comprehensive loss:
Foreign currency translation -- -- -- -- -- -- (60)
Pension liability -- -- -- -- -- -- (99)
Other comprehensive loss -- -- -- -- -- (159) (159)
Comprehensive loss -- -- -- -- -- -- (34,333)
Shares issued under employee
common stock purchase and
option plans and dividend
reinvestment plan 90 1 360 -- -- -- 361
Net shares issued under
restricted common stock
purchase plans 27 -- 171 -- (168) -- 3
Shares issued upon preferred
stock conversion 49 1 175 -- -- -- 176
Dividends paid -- -- -- (792) -- -- (792)
Amortization of unearned
compensation -- -- -- -- 1,175 -- 1,175
------ ----- -------- ------- ------- ----- --------
Balance, December 29, 1996 18,580 186 107,622 (1,352) (2,963) (978) 102,515
Comprehensive income:
Net income for the year -- -- -- 6,017 -- -- 6,017
Other comprehensive loss:
Foreign currency translation -- -- -- -- -- -- (233)
Pension liability -- -- -- -- -- -- (326)
Other comprehensive loss -- -- -- -- -- (559) (559)
Comprehensive income -- -- -- -- -- -- 5,458
Shares issued under common
stock purchase and option
plans and dividend
reinvestment plan 372 4 1,005 -- -- -- 1,009
Net shares issued under
restricted common stock
purchase plans 3 -- 19 -- (18) -- 1
Shares issued upon preferred
stock conversion 111 1 400 -- -- -- 401
</TABLE>
4
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON CAPITAL IN RETAINED OTHER
STOCK, PAR EXCESS OF EARNINGS UNEARNED COMPREHENSIVE
SHARES VALUE $.01 PAR VALUE (DEFICIT) COMPENSATION LOSS TOTAL
------ ---------- ---------- -------- ------------ ------------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Compensatory options issued -- -- 50 -- (50) -- --
Income tax reductions
relating to stock plans -- -- 366 -- -- -- 366
Amortization of unearned
compensation -- -- -- -- 244 -- 244
------ ----- -------- ------- ------- ------- --------
Balance, December 28, 1997 19,066 191 109,462 4,665 (2,787) (1,537) 109,994
Comprehensive loss:
Net loss for the year -- -- -- (3,932) -- -- (3,932)
Other comprehensive loss:
Foreign currency
translation -- -- -- -- -- -- (288)
Pension liability -- -- -- -- -- -- (442)
Other comprehensive loss -- -- -- -- -- (730) (730)
Comprehensive loss -- -- -- -- -- -- (4,662)
Shares issued under common
stock purchase and option
plans and dividend re
investment plan 476 5 1,458 -- -- -- 1,463
Shares purchased under
restricted common stock
purchase plans (1) -- (3) -- 3 -- --
Income tax reductions
relating to stock plans -- -- 768 -- -- -- 768
Shares issued upon
preferred stock conversion 117 1 420 -- -- -- 421
Repurchase of common stock
from ESOP (593) (6) (1,953) -- 1,959 -- --
Amortization of unearned
compensation -- -- -- -- 340 -- 340
------ ----- -------- ------- ------- ------- --------
Balance, January 3, 1999 19,065 $ 191 $110,152 $ 733 $ (485) $(2,267) $108,324
====== ===== ======== ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
49
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
--------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(3,932) $ 6,017 $(34,174)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Depreciation 7,783 7,197 7,374
Amortization of excess of cost over fair value 4,221 3,631 3,636
Amortization of deferred finance costs 666 578 517
Other amortization 4,303 5,364 6,607
Special charges 16,245 783 9,877
(Income) loss from discontinued operations, net (3,500) -- 28,295
Extraordinary charges, net -- -- 3,208
Deferred income taxes (1,050) 5,666 (5,837)
Other (100) 651 82
Change in certain assets and liabilities,
net of effects from acquisition and
dispositions of businesses, affecting
cash provided by (used in) operating
activities
Accounts receivable (9,794) (3,612) (3,704)
Inventories (1,304) (26,853) (6,364)
Prepaid marketing costs (3,981) (5,548) (4,413)
Other assets 3,007 (725) 506
Accounts payable and accrued expenses 3,588 (7,622) 7,636
Income taxes payable (677) 3,686 2,114
------- ------- --------
Net cash provided by (used in) operating activities
Continuing operations 15,475 (10,787) 15,360
Discontinued operations 3,500 (570) 4,823
------- ------- --------
Net cash provided by (used in) operating activities 18,975 (11,357) 20,183
------- ------- --------
Cash flows from investing activities
Proceeds from sale of property and equipment 104 148 3,306
Capital expenditures for continuing operations (11,362) (8,567) (8,320)
Acquisition of businesses, net of cash acquired (26,630) -- --
Proceeds from sale of discontinued operations -- 17,600
Capital expenditures for discontinued operations -- -- (1,490)
------- ------- --------
Net cash provided by (used in) investing
activities (37,888) 9,181 (6,504)
------- ------- --------
Cash flows from financing activities
Proceeds from issuance of note payable and long-
term obligations 30,074 -- 125,101
Proceeds from stock options including related
tax benefits 1,946 1,115 59
Payments of dividends -- -- (792)
Payments of note and long-term obligations (26,816) -- (122,781)
Other 275 (73) 302
------- ------- --------
Net cash provided by financing activities 5,479 1,042 1,889
Effect of exchange rate changes on cash 48 (7) (4)
------- ------- --------
Net increase (decrease) in cash and cash equivalents (13,386) (1,141) 15,564
Cash and cash equivalents at beginning of year 14,565 15,706 142
------- ------- --------
Cash and cash equivalents at end of year $ 1,179 $14,565 $ 15,706
======= ======= ========
Cash paid during the year for
Interest $13,664 $11,724 $ 9,851
Income taxes (refunds) 3,861 (3,479) 184
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EKCO Group,
Inc. and its subsidiaries (together, the "Company"). The Company's principal
operating subsidiaries are wholly-owned EKCO Housewares, Inc. ("Housewares"),
wholly-owned EKCO Cleaning, Inc. and subsidiaries ("Cleaning"), wholly-owned
Aspen Pet Products, Inc. ("Aspen"), and majority-owned Woodstream Corporation
("Woodstream"). All significant intercompany accounts and transactions have been
eliminated.
BASIS OF PRESENTATION
The Company uses a 52-53 week fiscal year ending on the Sunday nearest
December 31. Accordingly, the accompanying consolidated financial statements
include the 53 weeks ended January 3, 1999 ("Fiscal 1998") and the 52 weeks
ended December 28, 1997 ("Fiscal 1997"), and December 29, 1996 ("Fiscal 1996").
CASH, CASH EQUIVALENTS AND CASH FLOW INFORMATION
The Company considers all short-term investments which have an original
maturity of 90 days or less to be cash equivalents.
The Company recorded the following non-cash transactions in Fiscal 1998 due
to the repurchase of all the unallocated shares of the Series B ESOP Convertible
Preferred Stock and common stock, held by the Company's Employees' Stock
Ownership Plan in exchange for forgiveness of the outstanding loan from the
Company (amounts in thousands).
<TABLE>
<CAPTION>
<S> <C>
Series B ESOP Convertible Preferred Stock $(321)
Unearned compensation 321
Common stock (6)
Capital in excess of par value (1,953)
Unearned compensation 1,959
</TABLE>
In addition, the following is a reconciliation of net cash paid for the
acquisitions of Aspen and the North American rights to sell cutlery and flatware
products under the Regent Sheffield(R) and Wiltshire(R) brands during Fiscal
1998. (Amounts in thousands)
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $40,576
Liabilities assumed (12,130)
Additional purchase price accrued but not yet paid (1,047)
-------
Cash paid 27,399
Cash acquired (769)
-------
Net cash paid for acquisitions $26,630
=======
</TABLE>
MARKET EXPANSION PROGRAMS AND ADVERTISING COSTS
The Company incurs certain costs in connection with maintaining and
expanding its market position. These costs are deferred and amortized using the
straight-line method over the shorter of the period of benefit or the program
period. Program periods currently range from one to three years. It is the
7
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARKET EXPANSION PROGRAMS AND ADVERTISING COSTS (CONTINUED)
Company's policy to periodically review and evaluate whether the expected
benefits will be realized and whether continued deferral and amortization of
these costs is justified. Approximately $4.1 million of these costs are included
in prepaid expenses at January 3, 1999 and December 28, 1997.
The Company expenses all advertising costs as incurred.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out ("FIFO") basis for all subsidiaries except for
Cleaning, whose costs are determined on a last-in, first-out ("LIFO") basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation and amortization on a straight-line basis over the estimated useful
lives of the assets; 25 to 45 years for buildings and 3 to 10 years for
furniture, fixtures and equipment. Leased property and equipment under capital
leases and improvements to leased premises are amortized on a straight-line
basis over the shorter of the life of the asset or the remaining term of the
lease. Improvements are capitalized, while repair and maintenance costs are
charged to operations. When assets are retired or disposed of, the cost and
related accumulated depreciation are removed from the accounts, and gains or
losses, if any, are included in operations.
INTANGIBLE ASSETS
The excess of cost over fair value of net assets acquired ("goodwill") is
being amortized over 30 to 40 year periods. It is the Company's policy to
periodically review and evaluate the recoverability of goodwill by assessing
long-term trends of profitability and undiscounted cash flows and to determine
whether the amortization of goodwill over its remaining life can be recovered
through expected future results of operations and cash flows.
Favorable lease rights included in other assets are being amortized over
the life of the lease. Deferred financing costs included in other assets relate
to debt issuance costs which have been deferred and are being amortized over the
terms of the respective financing arrangements.
INCOME RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped. Investment income is accrued as earned.
TRANSLATION OF FOREIGN CURRENCY
The assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates. Income and expenses are translated at
exchange rates prevailing during the year. The resulting net translation
adjustment for each year is included as a separate component of stockholders'
equity.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
8
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES (CONTINUED)
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect, if any, on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Provision for U.S. income
taxes on the undistributed earnings of foreign subsidiaries is made only on
those amounts in excess of the funds considered to be permanently reinvested.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No.25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations in
accounting for its stock-based compensation. The Financial Accounting Standards
Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), which was effective in 1996. FAS 123 provides the option either to
continue the Company's current method of accounting for stock-based compensation
or to adopt the fair value method of accounting. The Company elected to continue
accounting for stock-based compensation using APB 25.
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 reported 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.
COMPREHENSIVE INCOME (LOSS)
In Fiscal 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" ("FAS 130"). This statement
establishes rules for reporting comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or stockholders' equity. FAS 130 requires that changes in pension
liability adjustments and foreign currency adjustments be included in other
comprehensive income. Prior years' financial statements have been reclassified
to conform to these requirements.
(2) ACQUISITION OF ASPEN PET PRODUCTS, INC.
In January 1998, the Company completed the acquisition (the "Acquisition")
of all of the outstanding equity securities of APP Holding Corporation ("APP"),
the parent corporation and sole stockholder of Aspen, a marketer of dog and cat
supplies and accessories, as well as other pet products. Pursuant to the Stock
Purchase and Sale Agreement, the Company paid approximately $25.0 million in
cash (including $450,000 of expenses incurred in connection with the
acquisition) and refinanced APP's outstanding bank debt of approximately $9.1
million. In addition, if Aspen achieves certain predetermined financial results
during fiscal 1998, 1999, 2000, 2001, and 2002, the Company will make additional
annual payments to certain former APP stockholders equal, in the aggregate, to
25% of the amount by which Aspen's Gross Profit (as defined) for each such year
exceeds the Base Profit Amount (as defined). For Fiscal 1998 the additional
consideration payment was approximately $1.0 million, which was included in
9
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITION OF ASPEN PET PRODUCTS, INC. (CONTINUED)
goodwill at January 3, 1999. This amount which was accrued at January 3, 1999
will be paid in 1999. The Acquisition has been accounted for under the purchase
method of accounting and goodwill of approximately $24.7 million is being
amortized over 40 years. In connection with the Acquisition, goodwill was
determined as follows (amounts in thousands):
<TABLE>
<S> <C>
Cash paid, net of cash acquired $24,159
Additional purchase price accrued but not yet paid 1,047
Liabilities assumed 12,130
Fair value of tangible assets acquired, net of cash acquired (12,643)
-------
Goodwill $24,693
=======
</TABLE>
The following unaudited pro forma combined results of operations for Fiscal
1997 have been prepared assuming that the Acquisition occurred at the beginning
of such period. In preparing the pro forma data, adjustments have been made for:
(i) the amortization of goodwill; (ii) interest expense related to borrowings
under the Company's credit facility to finance a portion of the purchase price;
(iii) reduction in investment income due to the utilization of the Company's
cash and investments to finance a portion of the purchase price; (iv) the
elimination of Aspen's costs associated with shareholder transactions; and (v)
the effect on income taxes of the foregoing pro forma adjustments.
The following unaudited pro forma financial information for Fiscal 1997 is
not necessarily indicative of results of operations that would have occurred had
the Acquisition been effected at the beginning of such fiscal period or of
future results of the combined companies. (Amounts in thousands, except per
share)
<TABLE>
<S> <C>
Net revenues $300,303
Income from continuing operations before income taxes 13,501
Net income from continuing operations 6,767
Earnings from continuing operations per common share:
Basic .36
Diluted .32
</TABLE>
(3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials $11,279 $12,984
Work in process 3,465 3,811
Finished goods 61,007 57,355
------- ------
$75,751 $74,150
======= =======
</TABLE>
At January 3, 1999 and December 28, 1997, inventories carried under the
LIFO method represented approximately 6.9% and 22.2%, respectively, of total
year-end inventories. The effect of using LIFO for these inventories for Fiscal
1998 and Fiscal 1997 was immaterial to the financial position and results of
operations of the Company.
10
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment, at cost
Land, buildings and
improvements $17,489 $14,598
Equipment, furniture
and fixtures 66,483 60,624
------- -------
83,972 75,222
Less accumulated depreciation
and amortization 45,085 39,544
------- -------
$38,887 $35,678
======= =======
</TABLE>
(5) LONG-TERM OBLIGATIONS AND OTHER LONG-TERM LIABILITIES
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Term Loan $ 8,571 $ --
Credit Facility 2,750 --
9.25% Senior Notes, due
2006 (net of unamortized
discount of $641 and $730,
respectively) 124,359 124,270
Other 2,206 --
-------- --------
137,886 124,270
Less current portion 1,750 --
-------- --------
$136,136 $124,270
======== ========
</TABLE>
Other long-term liabilities consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accrued pension cost $ 2,224 $ 2,553
Deferred income taxes 2,548 3,710
Other long-term liabilities 5,561 5,711
------- -------
$10,333 $11,974
======= =======
</TABLE>
On March 25, 1996, the Company sold $125.0 million of its 9.25% Senior
Notes due 2006 ("Senior Notes") at a price of 99.291% of face value in a private
offering to institutional investors. Interest on the Senior Notes is payable
semi-annually on April 1 and October 1 of each year. The Company used the net
proceeds of the Senior Note offering to (i) repurchase its outstanding 12.70%
Notes due 1998 and 7.0% Convertible Subordinated Note due 2002 and (ii) to repay
substantially all amounts then outstanding under its revolving credit facility.
The early extinguishment of the 12.70% Notes and 7.0% Convertible Subordinated
Note resulted in an extraordinary charge in Fiscal 1996 of $3.2 million
consisting of the following (amounts in thousands):
11
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LONG-TERM OBLIGATIONS AND OTHER LONG-TERM LIABILITIES (CONTINUED)
<TABLE>
<S> <C>
Premium on 12.70% Notes, due 1998 $6,511
Discount on prepayment of 7.0% Convertible
Subordinated Note, due 2002 (3,218)
Write-off of related unamortized financing
costs 2,054
------
Extraordinary charge before income tax benefit 5,347
Income tax benefit 2,139
------
Net extraordinary charge $3,208
======
</TABLE>
The Company's bank financing includes a $55 million revolving credit line
("Credit Facility") and a term loan credit facility ("Term Loan") in the
original amount of $10 million. The principal of the Term Loan is required to be
repaid at the rate of approximately $357,000 on the last day of each quarter,
which commenced March 31, 1998. The maximum outstanding balance of the Credit
Facility may not exceed 80% of eligible accounts receivable and 50% of eligible
inventory, provided that the amount attributable to eligible inventory may not
exceed $35 million, as determined at the end of each calendar month. At January
3, 1999, $38.3 million was available for general corporate purposes under the
Credit Facility, net of approximately $11.8 million in outstanding letters of
credit. The Credit Facility provides for a commitment fee of three-eighths of
one percent on the unused portion of the Credit Facility. Borrowings under the
Credit Facility and Term Loan bear interest at the bank's prime rate, or at
LIBOR plus 1.25% or 1.5%, depending on the Company's borrowing strategy and the
ratio of total debt to cash flow, as defined. Borrowings under the Credit
Facility mature in November 2002 and are collateralized by substantially all of
the assets of the Company. The Credit Facility contains certain financial and
operating covenants, of which the most restrictive requires the Company to
maintain a minimum level of cash flow. The Senior Notes, as well as the Credit
Facility, contain certain financial covenants that may restrict the sale of
assets, payment of dividends, the incurrence of additional indebtedness and
certain investments and acquisitions by the Company.
The Company has suspended the payment of quarterly dividends and does not
anticipate paying cash dividends for the foreseeable future. In order for the
Company to pay a dividend, its arrangements with holders of its Senior Notes
would need to be amended and the payment of the dividend would have to be
permitted under certain covenants of the Credit Facility.
Certain information with respect to the Credit Facility and Term Loan
follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Average interest rate of borrowings
outstanding at end of year 7.75% N/A N/A
Maximum amount of borrowings
outstanding at any month-end $28,696 $1,242 $31,909
Average aggregate borrowings during
the year $21,550 $ 176 $ 9,390
Weighted average interest rate
during the year 7.24% 8.5% 7.68%
</TABLE>
12
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LONG-TERM OBLIGATIONS AND OTHER LONG-TERM LIABILITIES (CONTINUED)
Maturities of long-term obligations (amounts in thousands) for the five
fiscal years ending December 2003 are as follows: 1999 - $1,750; 2000 - $1,662;
2001 - $1,480; 2002 - $7,095; 2003 - $60 and thereafter $125,839.
(6) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Payroll $ 1,790 $ 2,464
Compensated absences 1,702 1,651
Sales and promotional allowances 11,014 9,470
Additional purchase price liability for Aspen 1,046 -
Interest and non-income taxes 4,096 4,168
Insurance 2,912 3,241
Professional fees 952 575
Provision for environmental matters 1,732 1,738
Other 8,298 5,983
------- -------
$33,542 $29,290
======= =======
</TABLE>
(7) INCOME TAXES
Total income tax expense (benefit) for Fiscal 1998, Fiscal 1997 and
Fiscal 1996 was allocated as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations $6,527 $6,247 $ 2,370
Discontinued operations -- -- (1,928)
Disposal of discontinued operations (3,500) -- (1,925)
Extraordinary charge for early retirement
of debt -- -- (2,139)
Stockholders' equity, for compensation
expense for tax purposes in excess of
amounts recognized for financial reporting
purposes (768) (366) --
------ ------ -------
$2,259 $5,881 $(3,622)
====== ====== =======
</TABLE>
A reconciliation of the provision for income taxes from continuing
operations to the statutory income tax rate applied to combined domestic and
foreign income before income taxes for Fiscal 1998, Fiscal 1997 and Fiscal 1996
was as follows:
13
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
$ % $ % $ %
- - - - - -
Income (loss) from continuing operations
before income taxes and extraordinary charge
Domestic $ (664) $13,704 $ (19)
Foreign (241) (1,440) (282)
----- ------- -----
$ (905) $12,264 $(301)
==== ====== ====
Federal income tax (credit) at normal rates $ (317) (35%) $4,292 35% $ (105) (35%)
State income taxes, net of federal benefit 828 92% 915 7% 426 141%
Difference between foreign and
federal effective rates (62) (7%) (5) - 90 30%
Amortization of excess of cost over fair
value 1,478 163% 1,272 10% 1,272 423%
Special charges 4,795 530% - - 685 227%
Other (195) (22%) (227) (1%) 2 1%
----- --- ----- -- ----- ---
$6,527 721% $6,247 51% $2,370 787%
===== === ===== == ===== ===
</TABLE>
The components of the provision for income taxes (benefit) for
continuing operations were as follows:
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ----- ------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
FISCAL 1998
- -----------
Current $ 6,292 $1,250 $ 39 $ 7,581
Deferred (1,095) 15 26 (1,054)
------ ----- ---- ------
$ 5,197 $1,265 $ 65 $ 6,527
====== ===== ==== ======
FISCAL 1997
- -----------
Current $ 550 $ 165 $(130) $ 585
Deferred 4,565 1,243 (146) 5,662
----- ----- ---- ------
$ 5,115 $1,408 $(276) $ 6,247
====== ===== ==== ======
FISCAL 1996
- -----------
Current $ 4,189 $1,688 $ (8) $ 5,869
Deferred (2,608) (891) - (3,499)
----- ----- ---- ------
$ 1,581 $ 797 $ (8) $ 2,370
====== ===== ==== ======
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations for Fiscal 1998, Fiscal 1997
and Fiscal 1996 were as follows:
14
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Depreciation $ (234) $(1,078) $ (644)
Inventory (1,370) (1,594) 516
Benefit plans 1,657 406 (167)
Accruals, provisions and other liabilities (1,243) 8,520 (4,461)
Other 136 (592) 1,257
------ ------ ------
$(1,054) $ 5,662 $(3,499)
====== ====== ======
</TABLE>
The tax effects of temporary differences and carry forwards that give
rise to significant portions of net deferred tax asset (liability) consisted of
the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Receivables $ 927 $ 962
Inventory 4,014 2,440
Benefit plans 1,509 3,166
Accruals, provisions and other liabilities 3,018 1,526
------ ------
Gross deferred asset 9,468 8,094
------ ------
Depreciation (3,646) (3,927)
Other (1,000) (1,000)
------ ------
Gross deferred liability (4,646) (4,927)
------ ------
Net deferred asset $ 4,822 $ 3,167
====== ======
</TABLE>
The Company's federal income tax returns for all years subsequent to
December 1987 are subject to review by the Internal Revenue Service.
(8) RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Effective January 3, 1999, the Company adopted Financial Accounting
Standards Board Statement No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" ("FAS 132"). The provisions of FAS 132 revise
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of these plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable.
The Company provides defined benefit pension and postretirement benefit
plans to employees. The following provides a reconciliation of benefit
obligations, plan assets, and funded status of the plans.
15
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning
of year $ 9,029 $9,350 $ 2,325 $ 2,449
Service cost 221 205 27 30
Interest cost 526 561 128 158
Plan amendments - - - 53
Settlement (gain) or loss 55 78 - -
Benefits paid (465) (756) (95) (127)
Settlement payments (161) (953) - -
Actuarial (gain) or loss 640 544 (358) (238)
------ ------ ------ ------
Benefit obligation at end of year $ 9,845 $ 9,029 $ 2,027 $ 2,325
====== ====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning
of year $ 6,693 $ 7,511 $ - $ -
Actual return on plan assets 442 683 - -
Acquisitions/divestitures - (543) - -
Employer contributions 1,020 285 - -
Benefits paid (465) (291) - -
Settlement payments (161) (952) - -
------ ------ ------ ------
Fair value of plan assets at end of
year $ 7,529 $ 6,693 $ - $ -
====== ====== ====== ======
Reconciliation of funded status:
Funded status $(2,316) $(2,336) $(2,027) $(2,325)
Unrecognized actuarial (gain) or
loss 2,514 1,905 (645) (350)
Unrecognized prior service cost 92 51 45 49
------ ------ ------ ------
Net amount recognized at year-end $ 290 $ (380) $(2,627) $(2,626)
====== ====== ====== ======
</TABLE>
The following table provides the amounts recognized in the consolidated
balance sheets:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Accrued benefit liability $(2,325) $(2,553) $(2,627) $(2,626)
Accumulated other comprehensive
income 2,615 2,173 - -
------ ------ ------ ------
Net amount recognized at year-end $ 290 $ (380) $(2,627) $(2,626)
====== ====== ====== ======
</TABLE>
16
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The assumptions used in the measurement of the Company's benefit
obligation are shown in the following table:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average assumptions as of
year end
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected return on plan assets 9.0% 9.0% 9.0% 9.0%
Rate of compensation increase N/A N/A N/A N/A
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate is
assumed to decrease gradually to 5.0% for 2001 and remain at that level
thereafter.
Assumed health care cost trend rates have an effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects (amounts in
thousands):
<TABLE>
<CAPTION>
ONE-PERCENTAGE ONE-PERCENTAGE
POINT POINT
INCREASE DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest
cost components for 1998 $ 80 $ (176)
Effect on year-end 1998 postretirement
benefit obligation 1,251 (2,738)
</TABLE>
The projected benefit obligation and accumulated benefit obligation for
the pension plans with accumulated benefit obligations in excess of plan assets
were $9,845,000 and $9,029,000 respectively, as of January 3, 1999 and December
28, 1997. The fair value of plan assets for these plans was $7,529,000 and
$6,693,000, as of January 3, 1999 and December 28, 1997, respectively.
17
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The following table provides the components of net periodic benefit cost
for the plans for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 221 $ 205 $ 232 $ 27 $ 30 $ 51
Interest cost 526 561 607 128 159 172
Expected return of plan assets (582) (562) (609) - - -
Amortization of prior
service cost 10 25 390 4 4 -
Recognized actuarial (gain)
or loss 94 115 63 (63) (26) -
---- ---- ---- --- --- ---
Net periodic benefit cost $ 269 $ 344 $ 683 $ 96 $167 $223
==== ==== ==== === === ===
</TABLE>
RETIREMENT PLANS
The Company and certain of its subsidiaries have various pension plans
which cover certain of their employees and provide for periodic payments to
eligible employees upon retirement. Benefits for non-union employees are
generally based upon earnings and years of service prior to 1989 and certain
non-union employees receive benefits from allocated accounts under a defined
contribution plan. Benefits for certain union employees are based upon dollar
amounts attributed to each year of credited service; certain other union
employees receive benefits from allocated accounts under a defined contribution
plan and from prior contributions to a multi employer plan. The Company's policy
is to make contributions to these plans sufficient to meet the minimum funding
requirements of applicable laws and regulations, plus such amounts, if any, as
the Company's actuarial consultants determine to be appropriate. The Company
also provides supplemental retirement benefits for certain management personnel
based on earnings and years of service.
POSTRETIREMENT BENEFITS
The Company sponsors defined benefit postretirement health and life
insurance plans that cover certain retired and active employees. The Company
expects to continue these benefits indefinitely, but reserves the right to amend
or discontinue all or any part of the plans at any time.
In accordance with Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions" ("FAS
106"), the cost of these benefits are recognized in the financial statements
during the employees' active working lives. The Company's funding policy for
these plans is on a pay-as-you-go basis. Pay-as-you-go expenditures for
postretirement benefits were $95,000, $127,000, and $147,000 for Fiscal 1998,
Fiscal 1997 and Fiscal 1996, respectively.
POSTEMPLOYMENT BENEFITS
In accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Post-employment Benefits" ("FAS 112"), the Company
accrues benefits provided to former or inactive employees after employment but
before retirement. The ongoing impact of FAS 112 will not have a material effect
on earnings.
18
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) EMPLOYEE STOCK OWNERSHIP PLAN
On February 23, 1989, the Company's Board of Directors adopted the EKCO
Group, Inc. Employees' Stock Ownership Plan (the "ESOP") for non-union United
States employees of the Company and subsidiaries designated by the Company's
Board of Directors as participants in the ESOP. The ESOP holds Company preferred
and common stock.
SERIES B ESOP CONVERTIBLE PREFERRED STOCK
The Company sold 1.8 million shares of the Series B ESOP Convertible
Preferred Stock at a price of $3.61 per share to the ESOP trust in 1989. At
January 3, 1999, approximately 1.3 million shares of the Company's common stock
were reserved for conversion of Series B ESOP Convertible Preferred Stock.
During December 1998, the Company repurchased all of the unallocated
shares of Series B ESOP Convertible Preferred Stock (127,109 shares) and common
stock (593,360 shares) held by the ESOP in exchange for forgiveness of the
outstanding loan from the Company. Prior to the occurrence of this transaction,
an unearned ESOP compensation amount was reported as an offset to the Series B
ESOP Convertible Preferred Stock amount in the consolidated balance sheets. The
unearned compensation was amortized as shares in the Series B ESOP Convertible
Preferred Stock were allocated to employees. Shares were allocated ratably over
the life of the ESOP Loan (as defined below) or, if less, the actual period of
time over which the indebtedness was repaid. The allocation of shares was based
upon a formula equal to a percentage of the Company's payroll costs. The
percentage was determined by the Company's Board of Directors annually and
required principal prepayments. The Company's Board of Directors approved
principal prepayments of $494,000 and $522,000 for Fiscal 1997 and Fiscal 1996
to be paid in Fiscal 1998 and Fiscal 1997, respectively. For Fiscal 1998, Fiscal
1997 and Fiscal 1996, $37,000, $740,000, and $816,000, respectively, has been
charged to operations. The actual cash contributions, excluding the above
mentioned prepayments, to the ESOP by the Company during Fiscal 1998, Fiscal
1997 and Fiscal 1996 were $302,000, $402,000, and $402,000, respectively.
Upon retirement or termination from the Company, each employee has the
option to either convert the vested Series B ESOP Convertible Preferred Stock
into common stock of the Company or redeem the Series B ESOP Convertible
Preferred Stock for cash at a price of $3.61 per share. The change in the
principal amount of the Series B ESOP Convertible Preferred Stock from year to
year is solely due to redemptions and conversions by vested employees retiring
or leaving the Company. The Series B ESOP Convertible Preferred Stock pays a
dividend equal to any dividend on the Company's common stock.
Series B ESOP Convertible Preferred Stock, net, consisted of the
following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Series B ESOP Convertible Preferred Stock,
par value $.01 $3,868 $4,757
Unearned compensation - (358)
----- -----
$3,868 $4,399
===== =====
</TABLE>
ESOP COMMON STOCK
In October 1990, the Company's Board of Directors authorized the Trustee
of the ESOP to purchase up to 1.0 million shares of the Company's common stock.
The Company financed the purchase through a 20-year 10% loan from the Company to
the ESOP (the "ESOP Loan"). The ESOP purchased, in open market transactions, a
total of 1.0 million shares of the
19
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESOP COMMON STOCK (CONTINUED)
Company's common stock at a total cost of approximately $3.3 million. Unearned
compensation equal to such cost (previously included as a component of
stockholders' equity) was amortized as shares of the Company's common stock were
allocated to employee accounts. Shares were allocated ratably over the life of
the ESOP Loan or, if less, the actual period of time over which the indebtedness
was repaid, subject to a minimum allocation of 50,000 shares each year. For each
of Fiscal 1997 and Fiscal 1996, 50,000 shares were allocated to employees'
accounts. For each of Fiscal 1997 and Fiscal 1996, $165,000 was charged to
operations. During Fiscal 1998, 35,000 shares were allocated to
employees' accounts and $112,000 was charged to operations. As noted above, the
Company repurchased all of the unallocated shares in exchange for forgiveness of
the ESOP Loan in December 1998. The unallocated shares of common stock held by
the ESOP were returned to the Company to be held as treasury stock. The value of
these shares was equal to approximately $2.0 million in unearned compensation
previously reflected as a component of stockholders equity.
For Fiscal 1998, the Company's Board of Directors approved an
additional cash contribution of $610,000 to the ESOP. This contribution, along
with the Series B ESOP Convertible Preferred Stock and common stock held by the
ESOP will be merged into a single 401(k) plan during fiscal 1999. The additional
cash contribution was charged to results of operations for Fiscal 1998.
(10) MINORITY INTEREST
Minority interest consists of 5% cumulative preferred stock of
Woodstream $50 par value (redeemable at Woodstream's option at $52 per share).
Dividends on the 5% cumulative preferred stock are included in interest expense.
(11) STOCKHOLDERS' EQUITY
PREFERRED STOCK, $.01 PAR VALUE
On February 12, 1987, the Company's stockholders authorized a class of 20
million shares of preferred stock which may be divided and issued in one or more
series having such relative rights and preferences as may be determined by the
Company's Board of Directors.
PREFERRED STOCK RIGHTS
In 1987, the Board of Directors of the Company declared a dividend
payable to stockholders of record as of April 9, 1987, of one preferred share
purchase right ("Right") for each outstanding share of common stock. In 1988,
1989 and 1992, the Company's Board of Directors amended the preferred share
purchase rights plan and in March 1997 amended and restated the plan. The
amended and restated plan provides that each Right, when exercisable, will
entitle the holder thereof until April 9, 2007, to purchase one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $.01 per
share, at an exercise price of $30, subject to certain anti-dilution
adjustments. The Rights will not be exercisable or transferable apart from
shares of common stock until the earlier of (i) the day on which there is a
public announcement that a person or group has acquired beneficial ownership of
15% or more of the outstanding shares of common stock (an "Acquiring Person") or
(ii) the tenth business day after a person commences, or announces an intention
to commence, a tender or exchange offer for 15% or more of the outstanding
shares of common stock. The Rights are redeemable by the Company at $.01 per
Right at any time prior to the time that a person or group becomes an Acquiring
Person. At any time after a person becomes an Acquiring
20
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK RIGHTS
Person, the Company's Board of Directors may exchange all or any part of the
Rights for common shares at an exchange ratio of one common share per Right.
This option is extinguished when any person becomes the beneficial owner of 50%
or more of the common shares outstanding.
In the event that the Company is a party to a merger or other business
combination transaction in which the Company is not the surviving entity, each
Right will entitle the holder to purchase, at the exercise price of the Right,
that number of shares of the common stock of the acquiring company which, at the
time of such transaction, would have a market value of two times the exercise
price of the Right. In addition, if a person or group becomes an Acquiring
Person, each Right not owned by such person or group would become exercisable
for the number of shares of common stock which, at that time, would have a
market value of two times the exercise price of the Right.
COMMON STOCK, $.01 PAR VALUE
Share information regarding common stock consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
<S> <C> <C>
Authorized shares 60,000,000 60,000,000
========== ==========
Shares issued 29,071,982 28,481,788
Shares held in treasury 10,006,907 9,415,361
---------- ----------
Shares outstanding 19,065,075 19,066,427
========== ==========
</TABLE>
TREASURY STOCK
As previously noted, during Fiscal 1998 the Company repurchased 593,360
shares of common stock, which represented all of the unallocated shares of the
Company's common stock held by the ESOP. The value of the shares was equal to
approximately $2.0 million in unearned compensation expense recorded on the
Company's consolidated balance sheet at the time of repurchase.
STOCK COMPENSATION PLANS
At January 3, 1999, the Company had five stock based compensation plans
which are described below. The Company applies APB 25 and related
interpretations in accounting for its employee stock compensation plans.
Accordingly, no compensation has been recognized for its stock option plans and
its employee stock purchase plan for options issued to employees. Compensation
costs for its restricted stock purchase plans and 1996 Performance Unit Rights
Award Plan are described below. Since the Company accounts for compensation
plans under APB 25, certain pro forma information regarding net income (loss)
and earnings (loss) per share is required by FAS 123 as if the Company had
accounted for its compensation plans under the fair value approach of this
statement. For the purposes of the pro forma disclosures, the estimated fair
value of the compensation plans is amortized to expense over the option vesting
period. The Company's pro forma information is as follows:
21
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK COMPENSATION PLANS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)
As reported $(3,932) $6,017 $(34,174)
Pro forma $(4,501) $4,961 $(35,891)
Basic earnings (loss)
per share
As reported $ (.20) $ .32 $ (1.85)
Pro forma $ (.23) $ .26 $ (1.94)
Diluted earnings
(loss) per share
As reported $ (.20) $ .29 $ (1.85)
Pro forma $ (.23) $ .24 $ (1.94)
</TABLE>
The fair value of the Company's stock option plans and 1996 Performance
Unit Rights Award Plan was estimated at the grant date using a Black-Scholes
option pricing model. The following table provides the estimated weighted
average assumptions under that model:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
<S> <C> <C> <C>
Volatility factor of the
expected market price of
the Company's stock .58 .40 .45
Future dividend yield 0% 0% 0%
Risk free interest rates of
U.S. Treasury Securities:
One-year strip yield 4.53% 5.64% 5.60%
Two-year strip yield 4.54% 5.66% 5.89%
Three-year strip yield 4.55% 5.71% 6.05%
Five-year strip yield 4.56% N/A N/A
Six-year strip yield N/A 5.80% 6.22%
Expected life of stock options 6.98 years 6.93 years 5.75 years
Expected life of performance
unit rights awards N/A N/A N/A
</TABLE>
STOCK OPTION PLANS
At January 3, 1999, approximately 1.8 million shares of the Company's
stock were available for grants of options to employees, directors and
consultants under the Company's stock option plans. Options granted under the
plans are granted at prices not less than 100% of the fair market value (as
defined) on the dates the options are granted. Accordingly, under APB 25 no
compensation cost is recognized for options issued to employees. During Fiscal
1997 an option to purchase 15,000 shares of the Company's common stock was
granted to a consultant for services rendered. Total compensation to be expensed
over a five year period will be $50,000. The pro forma net income impact under
FAS 123 included in the table above is $569,000 for Fiscal 1998, $1,029,000 for
Fiscal 1997, and $1,183,000 for Fiscal 1996. Options must be exercised within
the period described by the respective stock option plan agreements, but not
later than 10 years for certain options.
On December 14, 1998, the Company granted to all employees (other than the
Company's Chief Executive Officer ("CEO")) holding unexercised stock options
with an exercise price equal to or greater than $5.00 per share replacement
stock options to
22
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLANS(CONTINUED)
purchase at the current market price that number of shares of common stock
determined by multiplying the number of shares subject to the eligible option by
a fraction, the numerator of which was $3.875 (the December 14, 1998 market
price) and the denominator of which was the exercise price of the applicable
eligible option. No changes were made to the vesting schedule of the options as
originally granted other than precluding the employees from exercising such
options for a period of six months from December 14, 1998, except in the event
of death, permanent and total disability, retirement or, if the employee's
option agreement or employment agreement or other agreement so specified, change
of control (as defined). During Fiscal 1998 pursuant to this repricing, options
to purchase 1,170,713 shares of common stock were exchanged for options to
purchase 592,236 shares of common stock.
23
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity, and related
information for Fiscal 1998, Fiscal 1997 and Fiscal 1996 follows (Amounts in
thousands, except per share information):
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------------------------------------- -----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION NUMBER OPTION OPTION NUMBER OPTION
PRICE OF PRICE PRICE OF PRICE
PER SHARE SHARES PER SHARE PER SHARE SHARES PER SHARE
--------- ------ --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year $2.13-$11.31 3,251 $5.12 $2.13-$11.31 2,810 $5.04
Options granted 3.88- 8.25 966 5.45 4.13- 8.19 869 4.86
Options exercised 2.13- 7.56 (412) 2.86 2.13- 6.31 (308) 2.43
Options canceled 5.78- 11.31 (1,300) 8.12 5.94- 11.31 (120) 8.21
------ -----
Options outstanding,
end of year 2.56- 11.31 2,505 4.06 2.13- 11.31 3,251 5.12
====== =====
Options exercisable,
end of year 2.56- 11.31 1,880 4.08 2.13- 11.31 2,987 4.96
====== =====
Shares reserved for
future grants 1,780 447
====== =====
Weighted-average fair
value of options granted
during the year. $ 3.43 $2.46
====== =====
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
------------------------------------------
WEIGHTED
AVERAGE
OPTION NUMBER OPTION
PRICE OF PRICE
PER SHARE SHARES PER SHARE
--------- ------ ---------
<S> <C> <C> <C>
Options outstanding,
beginning of year $2.13-$11.31 2,551 $6.36
Options granted 3.38- 5.94 1,208 4.02
Options exercised 2.25- 2.63 (25) 2.38
Options canceled 3.69- 11.31 (924) 7.42
-----
Options outstanding,
end of year 2.13- 11.31 2,810 5.04
=====
Options exercisable,
end of year 2.13- 11.31 1,840 5.11
=====
Shares reserved for
future grants 1,196
=====
Weighted-average fair
value of options granted
during the year. $2.02
====
</TABLE>
Exercise prices for options outstanding as of January 3, 1999 ranged
from $2.56 to $11.31. The weighted-average remaining contractual life of those
options is 7.4 years. Included in the options granted and canceled for Fiscal
1998 were 592,236 shares granted and 1,170,713 shares cancelled, in connection
with the December 14, 1998 repricing.
24
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OPTION PRICE AND MARKET VALUE AT DATE OF GRANT
----------------------------------------------
NUMBER
OF SHARES PER SHARE AMOUNT
--------- --------- ------
Options outstanding at January 3, 1999,
which were granted during fiscal years:
(Amounts in thousands, except per share)
<S> <C> <C> <C>
1989 31 $ 3.19 $100
1990 51 2.56 131
1991 32 2.63 83
1992 3 10.06 30
1993 2 11.31 23
1994 3 7.56 19
1995 27 $6.19- 6.31 169
1996 907 3.38- 5.94 3,079
1997 733 4.13- 6.47 3,281
1998 716 3.88- 8.06 3,266
----- ------
2,505 $10,181
===== ======
</TABLE>
Of the options outstanding at January 3, 1999, options to acquire
906,766 shares became exercisable on the grant date at a weighted average
exercise price of $4.79 per share. Under certain circumstances, a portion of the
shares purchased pursuant to the exercise of such options are subject to
repurchase by the Company within three years of the date of grant of the option
at the option exercise price. At January 3, 1999, 225,288 of such shares were
subject to such repurchase. Additionally, options to acquire 900,000 shares at
an exercise price of $3.38 per share were outstanding and exercisable at January
3, 1999. As previously noted, 592,236 shares of the options outstanding at
January 3, 1999 resulted from the Company's offer to re-price on December 14,
1998. On June 14, 1999, 461,617 of these shares will become exercisable at a
price of $3.88; 63,379 of such shares are subject to repurchase by the Company.
The remaining options outstanding at January 3, 1999, which cover the
acquisition of 105,900 shares at a weighted average exercise price of $4.74 per
share, become exercisable in five equal annual installments beginning on the
first anniversary of the date of grant.
RESTRICTED STOCK PURCHASE PLANS
Under the Company's restricted stock purchase plans, the Company may
offer to sell shares of common stock to employees of the Company and its
subsidiaries at a price per share of not less than par value ($.01) and not more
than 10% of market value on the date the offer is approved, and on such other
terms as deemed appropriate. Shares are awarded in the name of the employee, who
has all rights of a stockholder, subject to certain repurchase provisions.
Restrictions on the disposition of shares purchased expire annually, over a
period not to exceed five years, if certain performance targets are achieved;
otherwise they lapse on the tenth anniversary. Common stock reserved for future
grants under these plans aggregated approximately 680,000 shares at January 3,
1999. The following table summarizes the activity of the restricted stock
purchase plans during the respective fiscal years (fair market value determined
at date of purchase).
25
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
NUMBER FAIR NUMBER FAIR NUMBER FAIR
OF MARKET OF MARKET OF MARKET
SHARES VALUE SHARES VALUE SHARES VALUE
------ ----- ------ ----- ------ -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Unvested shares outstanding,
beginning of year 128 $785 132 $827 257 $ 1,660
Shares issued - - 3 19 40 232
Shares repurchased (1) (5) - - (13) (61)
Shares vested (3) (17) (7) (61) (152) (1,004)
--- --- --- --- ---- ------
Unvested shares outstanding,
end of year 124 $763 128 $785 132 $ 827
=== === === === === =====
</TABLE>
The difference between the issue price and the fair market value of the
shares at the date of issuance is accounted for as unearned compensation and
amortized to expense over the lapsing of restrictions. During Fiscal 1998,
Fiscal 1997, and Fiscal 1996, unearned compensation charged to operations was
$77,000, $78,000, and $1.0 million (including a special charge of $482,000
pursuant to a severance arrangement with the Company's former chief executive
officer), respectively. To the extent the amount deductible for income taxes
exceeds the amount charged to operations for financial statement purposes, the
related tax benefits are credited to additional paid-in-capital when realized.
The pro forma net income impact under FAS 123 is not material.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (the "Plan") that
permits employees to purchase up to a maximum of 500 shares per quarter of the
Company's common stock at a 15% discount from market value. During Fiscal 1998,
Fiscal 1997, and Fiscal 1996, employees purchased 61,990 shares, 62,015 shares,
and 56,983 shares, respectively, for a total of approximately $275,000,
$248,000, and $255,000, respectively. At January 3, 1999, approximately 960,000
shares were reserved for future issuances under the Plan. Under APB 25, there
have been no charges to income in connection with the Plan other than incidental
expenses. The pro forma net income impact under FAS 123 is not material.
1996 PERFORMANCE UNIT RIGHTS AWARD PLAN
In September 1996, the Company's Board of Directors approved the 1996
Performance Unit Rights Award Plan whereby selected key employees and directors
may receive performance unit rights ("Rights") which are rights to receive an
amount based on the appreciated value of the Company's common stock over an
established base price. The maximum number of Rights that may be granted under
the plan as amended is 2,000,000. On December 4, 1996 the Company issued 525,718
Rights under a severance arrangement with the Company's former CEO, at a
weighted average base price of $4.26 per Right with a cap on the value of the
common stock underlying the Rights on the exercise date of $6.63 per Right. A
provision of $256,000 for Fiscal 1996 was included in special charges for these
Rights. The pro forma net income impact under FAS 123 for Fiscal 1996 was
estimated to be $507,000 in additional compensation expense. During Fiscal 1997
the Rights were fully exercised and a provision of $783,000 was included in
special charges.
26
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAX BENEFITS
Income tax benefits relating to stock option plans, restricted stock
plans and employee stock purchase plan credited to capital in excess of par
value as realized in Fiscal 1998 and Fiscal 1997 were $768,000 and $366,000,
respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consisted of the
following:
<TABLE>
<CAPTION>
ACCUMULATED
CUMULATIVE PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT INCOME (LOSS)
---------- ---------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance, December 31, 1995 $ 929 $(1,748) $ (819)
Net change for the year (60) (99) (159)
---- ------ ------
Balance, December 29, 1996 869 (1,847) (978)
Net change for the year (233) (326) (559)
---- ------ ------
Balance, December 28, 1997 636 (2,173) (1,537)
Net change for the year (288) (442) (730)
---- ------ ------
Balance, January 3, 1999 $ 348 $(2,615) $(2,267)
==== ====== ======
</TABLE>
(12) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is based upon the weighted
average common stock outstanding during each period. Diluted earnings (loss) per
common share is based upon the weighted average of common stock and dilutive
common stock equivalent shares, including Series B ESOP Convertible Preferred
Stock, outstanding during each period. The weighted average number of shares
used in computation of diluted earnings (loss) per share consisted of the
following for the periods presented:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1998 1997 1996
------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average shares of common stock
outstanding during the year 19,359 18,907 18,489
Weighted average common equivalent anti- anti-
shares due to stock options dilutive 558 dilutive
Series B ESOP Convertible anti- anti-
Preferred Stock dilutive 1,384 dilutive
-------- ------ --------
19,359 20,849 18,489
====== ====== ======
</TABLE>
The income (loss) from continuing operations before extraordinary charge used in
determining basic and diluted earnings from continuing operations before
extraordinary charge per share was ($7,432,000), $6,017,000 and ($2,671,000) for
Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.
27
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has employment agreements and arrangements with its
executive officers and certain management personnel. The agreements generally
continue until terminated by the executive or the Company, and provide for
severance payments under certain circumstances. The majority of the agreements
and arrangements provide the employees with certain additional rights after a
Change of Control (as defined) of the Company occurs. A portion of the Company's
obligations under certain agreements are secured by letters of credit. Some of
the agreements include a covenant against competition with the Company, which
extends for a period of time after termination for any reason. As of January 3,
1999, if all of the employees under contract were to be terminated by the
Company without good cause (as defined) under these contracts, the Company's
liability would be approximately $6.4 million ($9.5 million following a Change
of Control).
SEVERANCE POLICY
The Board of Directors of the Company has adopted a severance policy
for all exempt employees of the Company. In the event of a Change of Control (as
defined), each exempt employee of the Company whose employment is terminated,
whose duties or responsibilities are substantially diminished, or who is
directed to relocate within 12 months after such Change of Control, will
receive, in addition to all other severance benefits accorded to similarly
situated employees, salary continuation benefits for a period of months
determined by dividing his or her then yearly salary by $10,000, limited to not
more than 12 months. This policy does not apply to any exempt employee of the
Company who is a party to a contractual commitment with the Company which
provides him or her with greater than 12 months salary, severance payment or
salary continuation upon his or her termination in the event of a Change of
Control. This policy may be rescinded at any time by the Company's Board of
Directors prior to a Change of Control.
LEASES
The Company leases offices, warehouse facilities, vehicles and
equipment under operating and capital leases. The terms of certain leases
provide for payment of minimum rent, real estate taxes, insurance and
maintenance. Rents of approximately $3.2 million, $3.0 million and $2.6 million,
were charged to operations for Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively. The Company received rental income from properties held for sale
in Fiscal 1998 and Fiscal 1996. Rental income included in selling, general and
administrative expenses was approximately $63,000, and $96,000, for Fiscal 1998
and Fiscal 1996, respectively.
Minimum rental payments required under leases that had initial or
remaining noncancellable lease terms in excess of one year as of January 3,
1999, were as follows (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C> <C>
1999 $3,290
2000 2,601
2001 2,580
2002 1,908
2003 504
</TABLE>
28
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEGAL PROCEEDINGS
The Company is a party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined with
certainty, the Company's management, after consultation with outside legal
counsel, is of the opinion that the expected final outcome should not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ENVIRONMENTAL MATTERS
From time to time, the Company has had claims asserted against it by
regulatory agencies or private parties for environmental matters relating to the
generation or handling of hazardous substances by the Company or its
predecessors and has incurred obligations for investigations or remedial actions
with respect to certain of such matters. While the Company does not believe that
any such claims asserted or obligations incurred to date will result in a
material adverse effect upon the Company's financial position, results of
operations or liquidity, the Company is aware that at its facilities at
Massillon and Hamilton, Ohio; Easthampton, Massachusetts; Chicago, Illinois;
Lititz, Pennsylvania and at the previously owned facility in Hudson, New
Hampshire hazardous substances and oil have been detected and that additional
investigation will be, and remedial action will or may be, required. Operations
at these and other facilities currently or previously owned or leased by the
Company utilize, or in the past have utilized, hazardous substances. There can
be no assurance that activities at these or any other facilities owned or
operated by the Company or future facilities may not result in additional
environmental claims being asserted against the Company or additional
investigations or remedial actions being required.
In connection with the acquisition of Cleaning by the Company in 1993,
the Company engaged environmental engineering consultants ("Consultants") to
review potential environmental liabilities at all of Cleaning's properties. Such
investigation and testing resulted in the identification of likely environmental
remedial actions, operation, maintenance and ground water monitoring and the
estimated costs thereof. Management, based upon the engineering studies,
originally estimated the total remediation and ongoing ground water monitoring
costs to be approximately $6.0 million, including the effects of inflation, and
accordingly at that time, recorded a liability of approximately $3.8 million,
representing the undiscounted costs of remediation and the net present value of
future costs discounted at 6%. Based upon the most recent cost estimates
provided by the Consultants, the Company believes the total remaining
remediation and compliance costs will be approximately $1.1 million and the
expense for the ongoing operation, maintenance and ground water monitoring will
be approximately $20,000 for fiscal 1999 and for each of the thirty years
thereafter. As of January 3, 1999, the liability recorded by the Company was
approximately $2.5 million. Although the current estimated costs of remediation
are less than the liability recorded at January 3, 1999, the Company does not
consider any further adjustment to be prudent at this time given the inherent
uncertainties involved in completing the remediation processes. The Company
expects to pay approximately $600,000 of the remediation costs in fiscal 1999
with the balance being paid out in fiscal 2000. During Fiscal 1998, the Company
paid approximately $87,000 of such costs. The estimates may subsequently change
should additional sites be identified or further remediation measures be
required or undertaken or interpretation of current laws or regulations be
modified. The Company has not anticipated any insurance proceeds or third-party
payments in arriving at the above estimates.
29
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of trade receivables. Mass merchandisers comprise
a significant portion of the Company's customer base. The Company had trade
receivables of approximately $21.7 million and $17.7 million from mass
merchandisers at January 3, 1999 and December 28, 1997, respectively. Although
the Company's exposure to credit risk associated with non-payment by mass
merchandisers is affected by conditions or occurrences within the retail
industry, trade receivables from mass merchandisers were current at January 3,
1999 and two mass merchandisers accounted for 16.4% and 10.5%, respectively, of
the Company's receivables at that date while no other retailer accounted for
more than 10% of receivables.
(14) INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company is a manufacturer and marketer of branded consumer
products, whose principal business segments are Housewares Products, Pest
Control and Small Animal Care and Control Products and Pet Products. The
Company's products are broadly marketed primarily through major mass merchant,
supermarket, home, hardware, specialty and department stores. The Company's
products include household items such as bakeware, kitchenware, pantryware,
brooms, brushes and mops, as well as nonpoisonous and low-toxic household pest
control products, such as rodent and insect traps, and small animal care and
control products, such as pet cages and live animal cage traps. In addition, the
Company also markets pet supplies and accessories, such as ropes, chews, collars
and leashes. The following table summarizes the Company's net revenues from
continuing operations by product category over the last three fiscal years:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Bakeware $ 94,916 $89,957 $ 86,709
Kitchenware 105,988 88,972 74,296
Cleaning products 53,873 56,043 54,248
Pest control and small animal care
and control products 41,327 35,564 34,617
Pet products 32,844 - -
------- ------- -------
Total net revenues $328,948 $270,536 $249,870
======= ======= =======
</TABLE>
During Fiscal 1998, two customers accounted for $42.6 million (13.0%)
and $33.6 million (10.2%) of net revenues, respectively. One such customer
accounted for net revenues from continuing operations of approximately $35.9
million (13.3%) and $27.5 million (11.0%) for Fiscal 1997 and Fiscal 1996,
respectively.
The Company adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), during the fourth quarter of Fiscal 1998. FAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and assessing performance. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers different products and serves different markets.
30
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's reportable segments include (i) Housewares Products, (ii)
Pest Control and Small Animal Care and Control Products and (iii) Pet Products.
The Housewares Products segment is engaged in the manufacturing and marketing
within the United States of branded housewares products principally bakeware,
kitchen tools and gadgets, cutlery, cookware and cleaning products for everyday
home use. The Pest Control and Small Animal Care and Control segment is engaged
in the manufacturing and marketing principally within the United States of
non-toxic pest control products, rodent traps, live animal cage traps, dog
crates and rabbit hutches. The Pet Products segment is engaged in the
manufacturing and marketing of a broad line of pet products including leashes,
collars, toys and accessories. Sales and marketing operations outside the United
States are conducted principally through subsidiaries in Canada and the United
Kingdom and by direct sales.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The Company
generally evaluates performance of its operating segments based on income before
goodwill, amortization, interest expense, income taxes, special charges, and
inter-segment profit ("segment profit").
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "other" column includes the
Company's International Operations, which do not meet quantitative thresholds or
aggregation criteria, as well as corporate expenses and elimination of
inter-segment transactions.
<TABLE>
<CAPTION>
PEST CONTROL
& SMALL ANIMAL
HOUSEWARES CARE CONTROL PET
PRODUCTS PRODUCTS PRODUCTS OTHER CONSOLIDATED
---------- -------------- -------- ----- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fiscal 1998
External net revenues $216,144 $39,445 $32,844 $40,515 $328,948
Segment profit 18,876 5,601 7,740 1,428 33,645
Total assets 222,103 31,701 36,334 28,102 318,240
Capital expenditures 6,713 1,412 550 2,687 11,362
Depreciation and amortization 5,066 1,884 381 452 7,783
Fiscal 1997
External net revenues 208,304 33,920 - 28,312 270,536
Segment profit 22,732 4,927 - 655 28,314
Total assets 235,702 30,496 - 34,607 300,805
Capital expenditures 7,311 973 - 283 8,567
Depreciation and amortization 5,038 1,905 - 254 7,197
FISCAL 1996
External net revenues 192,162 33,127 - 24,581 249,870
Segment profit 20,228 4,359 - 1,041 25,628
Total assets 214,473 32,899 - 44,704(1) 292,076
Capital expenditures 5,032 1,747 - 1,541 8,320
Depreciation and amortization 5,215 1,938 - 221 7,374
</TABLE>
(1) Includes $17,030 of net assets of discontinued operations
31
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues by country based on location of customer.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
United States $286,268 $241,677 $224,604
Canada 20,520 13,679 13,085
United Kingdom 9,013 3,053 1,271
All other (over 80) 13,147 12,127 10,910
------- ------- -------
$328,948 $270,536 $249,870
======= ======= =======
</TABLE>
The following table presents long-lived assets by country based on location of
the asset.
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1998 DECEMBER 29, 1996
--------------- ----------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
United States $155,762 $147,217 $148,455
Canada 4,703 3,286 3,455
Other 649 160 789
------- ------- --------
Consolidated $161,114 $150,663 $152,699
======= ======= =======
</TABLE>
(15) SUPPLEMENTARY INFORMATION
The following amounts were charged to costs and expenses:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Advertising $9,862 $6,784 $6,971
===== ===== =====
Provision for doubtful accounts $ (54) $ 183 $ 130
===== ===== =====
Amortization of excess of cost over
fair value $4,221 $3,631 $3,636
===== ===== =====
Amortization of deferred finance costs $ 666 $ 578 $ 517
===== ===== =====
Other amortization
Prepaid marketing costs $3,994 $4,308 $5,025
Unearned compensation 236 983 1,509
Favorable lease rights 73 73 73
----- ----- -----
$4,303 $5,364 $6,607
===== ===== =====
</TABLE>
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the unaudited quarterly results of
operations for Fiscal 1998 and Fiscal 1997:
32
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1998
- -----------
CONTINUING OPERATIONS
Net revenues $67,416 $70,955 $89,052 $101,525 $328,948
Gross profit 20,294 21,936 30,394 33,769 106,393
Special charges - - - (16,245) (16,245)
Income (loss) before taxes (1,255) 773 7,149 (7,572) (905)
Income (loss) (645) 396 3,648 (10,831) (7,432)
Basic earnings (loss) per share (.03) .02 .19 (.56) (.38)
Diluted earnings (loss) per share (.03) .02 .17 (.56) (.38)
DISCONTINUED OPERATIONS
Income - - - 3,500 3,500
Income per share - - - .18 .18
NET INCOME (LOSS) (645) 396 3,648 (7,331) (3,932)
Basic net income (loss) per share (.03) .02 .19 (.38) (.20)
Diluted net income (loss) per
share (.03) .02 .17 (.38) (.20)
FISCAL 1997
CONTINUING OPERATIONS
Net revenues $53,888 $57,510 $81,818 $77,320 $270,536
Gross profit 17,018 18,352 29,184 24,675 89,229
Special charges (294) (320) (169) - (783)
Income (loss) before taxes (1,950) (578) 8,986 5,806 12,264
Net income (loss) (1,008) (297) 4,536 2,786 6,017
Basic earnings (loss) per share (.05) (.02) .24 .15 .32
Diluted earnings (loss) per share (.05) (.02) .22 .13 .29
</TABLE>
33
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) SPECIAL CHARGES
During the fourth quarter of Fiscal 1998, the Company decided to sell
the business and assets of Wright-Bernet and Cleaning Specialty divisions
(collectively, "WB") of the Housewares Products segment's cleaning business. The
Company completed the sale in January 1999 effective December 31, 1998. The
expected proceeds consist of a $747,000 note due in July 1999, a $500,000
January 1999 cash payment and additional cash payments to be received during
fiscal 1999 totaling $4.5 million. The $5.8 million of expected proceeds have
been recorded as other current assets at January 3, 1999. The sales agreement
also provided for royalty payments over a five year period with minimum annual
payments of $200,000. The Company recorded a special charge of $16.2 million in
the fourth quarter of Fiscal 1998 in connection with this transaction.
The special charge consisted of the following (amounts in thousands):
<TABLE>
<S> <C> <C>
Proceeds
Expected cash proceeds $ 5,033
Note due July 1999 747
Present value of minimum royalty payments 800 $ 6,580
-----
Costs and expenses
Net unamortized goodwill associated with business sold 13,700
Assets sold, primarily inventory and equipment 8,805
Severance, professional fees and other
costs of the transaction 320 22,825
-------
$(16,245)
=======
</TABLE>
The special charge for Fiscal 1997 relates to the exercise of stock
appreciation rights granted to the Company's former chief executive officer
("CEO") pursuant to a December 1996 severance arrangement.
The special charges in Fiscal 1996 consisted of the following (amounts
in thousands):
<TABLE>
<S> <C>
Writedown of the carrying value of
certain real property to fair market value $2,000
Severance arrangement of the Company's former CEO 2,956
Consolidation of the Company's cleaning products
manufacturing activities 4,921
-----
$9,877
=====
</TABLE>
The components of the Fiscal 1996 pre-tax charge set out above for
consolidation of the Company's cleaning products manufacturing activities are as
follows (amounts in thousands):
<TABLE>
<S> <C>
Severance and other personnel related costs $1,806
Write-off of equipment 499
Write-down of real property to fair market value 2,424
Other 192
-----
$4,921
======
</TABLE>
34
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) DISCONTINUED OPERATIONS
On January 31, 1997, the Company's Board of Directors approved
management's plan to dispose of the Company's molded plastic products business.
Accordingly, the Company reported the results of the operations of the molded
plastic products business and the loss on disposal as discontinued operations.
During Fiscal 1997, the Company sold all of the assets of its molded plastics
products business for cash proceeds of approximately $17.6 million and a $2.0
million promissory note, which is included in other assets in the Company's
consolidated balance sheet.
Certain information with respect to discontinued operations is
summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1996
-----------
(Amounts in thousands)
<S> <C>
Net revenues $ 26,764
-------
Cost of sales 26,758
Selling, general and administrative 3,325
Special charges 22,728
Goodwill amortization 601
-------
Cost and expenses 53,412
-------
Loss before income taxes (26,648)
Income tax benefit (1,928)
-------
Loss from discontinued operations $(24,720)
=======
</TABLE>
The special charge of $22.7 million (principally goodwill) was a
reduction in the third quarter of Fiscal 1996 of the carrying value of the
molded plastic products business. Under the provisions of Statement of Financial
Accounting Standards No. 121, which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets, the Company determined in the third quarter of Fiscal
1996 that an adjustment to the carrying value of the molded plastic products
business was required.
The charge in Fiscal 1996 for loss on disposal of the molded plastic
business includes the following: (Amounts in thousands)
<TABLE>
<S> <C>
Carrying value of net assets in excess of
anticipated proceeds $3,300
Expenses of asset disposal and anticipated
operating loss for the period December 29, 1996
through the estimated date of disposal 2,200
-----
Loss on disposal before taxes 5,500
Income tax benefit 1,925
-----
Loss on disposal $3,575
=====
</TABLE>
During Fiscal 1998, the Company recorded a $3.5 million income tax
benefit associated with the 1997 disposal of its molded plastic products
business.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable,
and accrued expenses approximate fair value because of the short maturity of
these items.
35
<PAGE>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount of the debt issued pursuant to the Company's bank
credit agreement approximates fair value because the interest rates change with
market interest rates.
The Senior Notes are not actively traded and there was no quoted market
price at January 3, 1999. The estimated per note market price is $101.75
resulting in an aggregate fair value of $127.2 million at January 3, 1999.
There are no quoted market prices for the Series B ESOP Preferred
Stock. Each share of Series B ESOP Preferred Stock is redeemable at a price of
$3.61 per share or convertible into one share of the Company's common stock.
Assuming all shares were allocated and all employees were fully vested, the
redemption value of the ESOP Preferred Stock would be $3.9 million. Given these
same assumptions, the shares could be converted into common stock having a
market value of $4.0 million at January 3, 1999.
These fair value estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates.
The Company does not hold or issue derivative financial or derivative
commodity instruments for any purpose.
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
EKCO Group, Inc.
We have audited the accompanying consolidated balance sheets of EKCO
Group, Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the fiscal years in the three-year period ended January 3,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EKCO Group,
Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended January 3, 1999, in conformity with generally
accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 12, 1999
37
<PAGE>
EXHIBIT 23.1
The Board of Directors
EKCO Group, Inc.:
We consent to the inclusion of our report dated February 12, 1999, with respect
to the consolidated balance sheets of EKCO Group, Inc. and subsidiaries as of
January 3, 1999 and December 28, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended January 3, 1999, which report appears in the Form 8-K/A
of CCPC Holding Co. Inc. dated January 3, 2000.
/s/ KPMG LLP
Boston Massachusetts
January 3, 2000
