<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended SEPTEMBER 28,1997
-----------------
Commission File Number 1-7484
------
EKCO GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2167167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
98 SPIT BROOK ROAD, NASHUA, NEW HAMPSHIRE 03062
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(603) 888-1212
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 6, 1997, there were issued and outstanding 19,030,390 shares of
common stock of the registrant.
1
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 29,
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 375 $ 15,706
Accounts receivable, net 57,808 42,182
Inventories 78,799 47,422
Other current assets 8,386 6,180
Net assets of discontinued operations -- 17,030
Deferred income tax 9,107 10,857
-------- --------
Total current assets 154,475 139,377
Property and equipment, net 34,422 34,998
Other assets 7,621 6,569
Excess of cost over fair value of net assets
acquired, net 108,380 111,132
-------- --------
Total assets $304,898 $292,076
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 17,468 $ 18,395
Accrued expenses 33,735 28,688
Income taxes 6,894 2,651
-------- --------
Total current liabilities 58,097 49,734
-------- --------
Long-term obligations, less current portion 124,248 124,182
-------- --------
Other long-term liabilities 10,478 11,052
-------- --------
Series B ESOP Convertible Preferred Stock, net;
outstanding 1,369 shares and 1,439 shares,
respectively, redeemable at $3.61 per share 4,401 4,098
-------- --------
Commitments and contingencies -- --
Minority interest 494 495
-------- --------
Stockholders' equity
Common stock, $.01 par value; outstanding
18,984 shares and 18,580 shares,
respectively 189 186
Capital in excess of par value 108,854 107,622
Cumulative translation adjustment 799 869
Retained earnings (deficit) 1,879 (1,352)
Unearned compensation (2,694) (2,963)
Pension liability adjustment (1,847) (1,847)
-------- --------
107,180 102,515
-------- --------
Total liabilities and stockholders' equity $304,898 $292,076
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 28, 1997
AND SEPTEMBER 29, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -----------------------
1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $81,818 $ 73,116 $193,216 $174,812
------- -------- -------- --------
Costs and expenses
Cost of sales 52,634 45,843 128,662 115,867
Selling, general and administrative 16,123 16,066 45,868 41,941
Special charge 169 2,000 783 2,000
Amortization of excess of cost over
fair value 909 909 2,725 2,726
------- -------- -------- --------
69,835 64,818 178,038 162,534
------- -------- -------- --------
Income before interest and income taxes 11,983 8,298 15,178 12,278
------- -------- -------- --------
Net interest
Interest expense 3,072 3,235 9,325 9,422
Investment income (75) (2) (605) (101)
------- -------- -------- --------
2,997 3,233 8,720 9,321
------- -------- -------- --------
Income from continuing operations before
income taxes and extraordinary charge 8,986 5,065 6,458 2,957
Income tax expense 4,450 3,486 3,227 1,738
------- -------- -------- --------
Income from continuing operations before
extraordinary charge 4,536 1,579 3,231 1,219
Loss from discontinued operations, net
of tax benefit of $748 and $1,234 -- (22,909) -- (23,462)
------- -------- -------- --------
Income (loss) before extraordinary charge 4,536 (21,330) 3,231 (22,243)
Extraordinary charge for early retirement
of debt, net of tax benefit of $2,139 -- -- -- (3,208)
------- -------- -------- --------
Net income (loss) $ 4,536 $(21,330) $ 3,231 $(25,451)
======= ======== ======== ========
Earnings (loss) per common share
Earnings (loss) from continuing operations
before extraordinary charge $ 0.22 $ 0.09 $ 0.16 $ 0.07
Loss from discontinued operations -- (1.24) -- (1.27)
------- -------- -------- --------
Loss before extraordinary charge 0.22 (1.15) 0.16 (1.20)
Extraordinary charge -- -- -- (0.18)
------- -------- -------- --------
Earnings (loss) per common share $ 0.22 $ (1.15) $ .16 $ (1.38)
======= ======== ======== ========
Weighted average number of shares used in
computation of per share data 20,983 18,515 20,761 18,462
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 3,231 $ (25,451)
Adjustments to reconcile net income to net cash
provided by (used for) operations
Depreciation 5,475 5,556
Amortization of excess of cost over fair value 2,725 2,726
Amortization of deferred finance costs 426 366
Other amortization 3,941 4,491
Special charges 783 2,000
Loss from discontinued operations -- 23,462
Extraordinary charge -- 3,208
Other 2,464 (1,086)
Changes in certain assets and liabilities, net of
effects from acquisition of business, affecting
cash provided by (used in) operations
Accounts receivable (16,016) (10,747)
Inventories (31,479) (12,084)
Prepaid marketing costs (4,790) (2,184)
Other assets 203 (551)
Accounts payable and accrued expenses 553 8,234
Income taxes payable 4,240 (537)
-------- ---------
Net cash used in operations:
Continuing operations (28,244) (2,597)
Discontinued operations (570) 1,355
-------- ---------
Net cash used in operations (28,814) (1,242)
-------- ---------
Cash flows from investing activities
Proceeds from sale of property and equipment 144 1,789
Capital expenditures for continuing operations (5,078) (5,921)
Proceeds from sale of discontinued operations 17,600 --
Capital expenditures for discontinued operations -- (1,441)
-------- ---------
Net cash provided by (used in)
investing activities 12,666 (5,573)
-------- ---------
Cash flows from financing activities
Proceeds from issuance of notes payable and
long-term obligations -- 125,292
Payment of dividends -- (792)
Payment of notes and long-term obligations -- (118,045)
Other 832 513
-------- ---------
Net cash provided by financing activities 832 6,968
Effect of exchange rate changes on cash (15) (5)
-------- ---------
Net increase (decrease) in cash and cash equivalents (15,331) 148
Cash and cash equivalents at beginning of year 15,706 142
-------- ---------
Cash and cash equivalents at end of period $ 375 $ 290
======== =========
Cash paid during the period for
Interest $ 5,915 $ 3,739
Income taxes (3,218) 52
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND OTHER MATTERS
The consolidated condensed financial statements included herein have
been prepared by Ekco Group, Inc. (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is believed,
however, that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. The consolidated condensed
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated. The
condensed financial statements, in the opinion of management, reflect all
adjustments necessary to fairly state the Company's financial position and the
results of its operations. Such adjustments are of a normal recurring nature.
A large part of the Company's business is seasonal. Historically,
revenues in the last half of the calendar year have been greater than revenues
in the first half of the year. Accordingly, the results for the entire year may
not necessarily be the product of annualizing results for any interim period.
(2) 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, in its latest annual report on Form 10-K the Company reported the
results of the operations of the molded plastics products business and the loss
on disposal as discontinued operations. During the nine months ended September
28, 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 at September 28, 1997.
5
<PAGE> 6
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) DISCONTINUED OPERATIONS CONTINUED
Net assets of discontinued operations classified separately in the
consolidated condensed balance sheets as of December 29, 1996 are as follows:
(Amounts in thousands)
<TABLE>
<S> <C>
Accounts receivable, net $ 4,210
Inventories 6,138
Prepaid expenses and other assets 67
Property and equipment, net 16,743
Accounts payable (2,416)
Accrued expenses (2,212)
Loss on disposal (5,500)
-------
$17,030
=======
</TABLE>
Certain information with respect to the statement of operations from
discontinued operations for the three and nine months ended September 29, 1996
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net revenues $ 10,344 $ 21,489
-------- --------
Cost of sales 10,060 20,469
Selling, general and administrative 1,013 2,387
Adjustment to carrying value 22,728 22,728
Goodwill amortization 200 601
-------- --------
34,001 46,185
-------- --------
Loss before income tax benefit (23,657) (24,696)
Income tax benefit (748) (1,234)
-------- --------
Loss from discontinued operations $(22,909) $(23,462)
======== ========
</TABLE>
(3) ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable $58,924 $42,942
Allowance for doubtful accounts (1,116) (760)
------- -------
$57,808 $42,182
======= =======
</TABLE>
6
<PAGE> 7
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials $12,837 $ 9,628
Work in process 4,188 3,253
Finished goods 61,774 34,541
------- -------
$78,799 $47,422
======= =======
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment at cost
Land, buildings and improvements $14,857 $14,623
Equipment, factory and other 62,567 58,963
------- -------
77,424 73,586
Less accumulated depreciation 43,002 38,588
------- -------
$34,422 $34,998
======= =======
</TABLE>
(6) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET
Excess of cost over fair value of net assets acquired is net of
accumulated amortization of $31,410 and $28,690 as of September 28, 1997 and
December 29, 1996, respectively.
(7) LONG-TERM OBLIGATIONS
On July 8, 1997, the Company amended and restated its revolving
credit facility ("Credit Agreement"). The restated Credit Agreement provides a
maximum credit line of $35 million maturing on April 30, 2000. The maximum
outstanding balance under the Credit Agreement will equate to 80% of eligible
accounts receivable plus 50% of eligible inventory as determined on a monthly
basis. Loans under the Credit Agreement bear interest at either the bank's prime
rate or the LIBOR rate plus 1.25% or 1.50% depending upon the Company's ratio of
Funded Debt to EBITDA (as defined). The Credit Agreement provides for a
commitment fee of three-eighths of one percent on the unused portion of the
commitment amount. Borrowings under the Credit Agreement are collateralized by
substantially all of the assets of the Company not otherwise pledged. The Credit
Agreement includes certain financial and operating covenants of which the most
restrictive requires the Company to maintain a minimum level of cash flow and
net worth.
7
<PAGE> 8
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) INCOME TAXES
The Company's effective tax rate fluctuates significantly due to the
impact of goodwill amortization which is not deductible for tax purposes. The
Company's effective tax rate as reported in its latest annual report on Form
10-K was 787% for the year ended December 29, 1996. The anticipated effective
rate for fiscal 1997 is 50%.
(9) SERIES B ESOP CONVERTIBLE PREFERRED STOCK, NET
Series B ESOP Convertible Preferred Stock, net, consisted of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Series B ESOP Convertible Preferred
Stock, par value $.01, redeemable at
$3.61 per share $4,955 $ 5,196
Unearned compensation (554) (1,098)
------ -------
$4,401 $ 4,098
====== =======
(10) COMMON STOCK, $.01 PAR VALUE
Share information regarding common stock consisted of the following:
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 29, 1996
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Authorized shares 60,000 60,000
====== ======
Shares issued 28,400 27,997
Shares held in treasury 9,416 9,417
------ ------
18,984 18,580
====== ======
</TABLE>
(11) EARNINGS PER COMMON SHARE
Primary earnings per common share are based upon the weighted average of
common stock and dilutive common stock equivalent shares outstanding during each
period. Fully diluted earnings per share have been omitted since they are either
the same as primary earnings per share or anti-dilutive. The weighted average
number of shares used in computation of earnings per share consisted of the
following for the periods presented:
8
<PAGE> 9
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(11) EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1997 1996 1997 1996
------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average shares of
Common stock outstanding
during the period 18,978 18,515 18,867 18,462
Series B ESOP Convertible anti- anti-
Preferred Stock 1,376 dilutive 1,398 dilutive
Weighted average common equivalent anti- anti-
shares due to stock options 629 dilutive 496 dilutive
------ -------- ------ --------
20,983 18,515 20,761 18,462
====== ======== ====== ========
</TABLE>
(12) CONTINGENCIES
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 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 in
Massillon and Hamilton, Ohio; Easthampton, Massachusetts; Lititz, Pennsylvania;
Chicago, Illinois and at its 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 at such
facilities. 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 or future facilities may not result in additional environmental
claims being asserted against the Company or additional investigations or
remedial actions being required.
9
<PAGE> 10
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
ENVIRONMENTAL MATTERS (CONTINUED)
In connection with the acquisition of Kellogg Brush Manufacturing Co.
and subsidiaries ("Kellogg") by the Company in 1993, the Company engaged
environmental engineering consultants ("Consultants") to review potential
environmental liabilities at all of Kellogg'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 remediation and compliance costs
will be approximately $1.8 million and the expense for the ongoing operation,
maintenance and ground water monitoring will be $12,500 for Fiscal 1997 and
$12,500 to $25,000 for each of the 30 years thereafter. As of September 28,
1997, the liability recorded by the Company was approximately $3.3 million.
Although the current estimated costs of remediation are less than the liability
recorded at September 28, 1997, the Company does not consider any adjustment to
be prudent at this time given the inherent uncertainties involved in completing
the remediation processes. The Company expects to pay approximately $110,500 of
the remediation costs in the current year ("Fiscal 1997") with the balance being
paid out in fiscal 1998 and 1999. During the first nine months of Fiscal 1997,
the Company paid approximately $102,000 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.
(13) SPECIAL CHARGE
The special charge for Fiscal 1997 relates to the exercise of stock
appreciation rights granted to the Company's former Chief Executive Officer
pursuant to a December 1996 severance arrangement. The special charge for Fiscal
1996 relates to an adjustment of the carrying value of certain real property to
fair market value.
(14) EXTRAORDINARY CHARGE
On March 25, 1996, the Company sold $125.0 million of its 9.25% Senior
Notes due 2006 at a price of 99.2291% of face value in a private offering to
institutional investors. The Company used the net proceeds of the Senior Notes
to (i) repurchase its outstanding 12.7% Notes due 1998 and 7.0% Convertible
Subordinated Note due 2002 and (ii) repay substantially all amounts outstanding
under its revolving credit facility. The early extinguishment of the 12.7% Notes
and 7% Convertible Subordinated Note resulted in an extraordinary pre-tax charge
of $5.3 million and an after tax charge of $3.2 million.
10
<PAGE> 11
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of
operations for the thirteen week periods ended September 28, 1997 (the "Third
Quarter of Fiscal 1997") and September 29, 1996 (the "Third Quarter of Fiscal
1996") and for the thirty-nine week periods ended September 28, 1997 (the "First
Nine Months of Fiscal 1997") and September 29, 1996 (the "First Nine Months of
Fiscal 1996") and the financial condition at September 28, 1997 should be read
in conjunction with the Company's Consolidated Condensed Financial Statements
and Notes thereto. Because of the seasonality of the Company's revenues, which
have historically been concentrated in the second half of its fiscal year, the
results of operations and the balance sheet for, or as of, the end of any
interim period may not be indicative of either a full year's operations or the
financial condition of the Company at the end of any fiscal year.
NET REVENUES
Net revenues for the Third Quarter and First Nine Months of Fiscal 1997
increased approximately $8.7 million (11.9%) and $18.4 million (10.5%) from the
comparable prior year periods, respectively. The increase in net revenues was
primarily due to higher sales of kitchen tools and gadgets ($8.8 million for the
Third Quarter and $13.9 million for the Nine Months) resulting from the roll-out
of new plan-o-grams at several key customers, and a high level of acceptance of
new products introduced during fiscal 1996. Although Bakeware sales increased
$2.5 million from the First Nine Months of Fiscal 1996 principally due to sales
of the Company's new insulated bakeware, Bakeware sales for the Third Quarter of
Fiscal 1997 declined $1.4 million from the comparable prior year period. The
decline was principally due to a large pallet promotion in fiscal 1996 that the
customer did not offer in Fiscal 1997. The Third Quarter and First Nine Months
of Fiscal 1996 included net revenues of $388,000 and $2.9 million, respectively,
from the Company's wireforming business, which was divested in the fourth
quarter of Fiscal 1996.
GROSS PROFIT
The gross profit margin for the Third Quarter and First Nine Months of
Fiscal 1997 was 35.7% and 33.4%, respectively. For the Third Quarter and First
Nine Months of Fiscal 1996, the gross profit margin was 37.3% and 33.7%,
respectively. The decline in gross margin for the Third Quarter of Fiscal 1997
from the prior year level was primarily due to costs associated with the
consolidation of the Company's cleaning facilities (approximately $400,000 for
the Third Quarter and $550,000 for the First Nine Months), costs associated with
increased levels of inventory, the effect of intensive competition across all of
the Company's product lines and changes in product mix. The effects of these
factors on the gross margin were partially mitigated by successful efforts in
obtaining lower purchase prices for the Company's kitchen tools and gadget
products and improvement in bakeware manufacturing efficiencies.
11
<PAGE> 12
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the Third Quarter of
Fiscal 1997 were essentially unchanged from the prior year's Third Quarter, but
for the First Nine Months of Fiscal 1997 increased approximately $3.9 million
(9.4%) from the comparable prior year period. The increase in selling, general
and administrative expenses was due primarily to increased investment in new
packaging, costs associated with new display fixtures, increased costs of
maintaining current customers and acquiring new distribution in an increasingly
competitive market place and increased expenditures associated with the growth
of the Company's subsidiary in the United Kingdom. In addition, selling expenses
increased as a result of higher year-over-year sales volume.
EXTRAORDINARY CHARGE
On March 25, 1996, the Company sold $125.0 million of its 9.25% Senior
Notes due 2006 at a price of approximately 99.2% of face value in a private
offering to institutional investors. The Company used the net proceeds of the
Senior Notes to (i) repurchase its outstanding 12.7% Notes due 1998 and 7.0%
Convertible Subordinated Note due 2002 and (ii) repay substantially all amounts
outstanding under its revolving credit facility. The early extinguishment of the
12.7% Notes and 7% Convertible Subordinated Note resulted in an extraordinary
pre-tax charge of $5.3 million and an after tax charge of $3.2 million.
LIQUIDITY AND CAPITAL RESOURCES
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, in its latest annual report on Form 10-K, the Company reported the
results of the operations of the molded plastics products business and the loss
on disposal as discontinued operations. During the First Nine Months of Fiscal
1997, the Company sold all of the assets of its molded plastic products
business for cash proceeds of approximately $17.6 million and a $2.0 million
promissory note.
The $17.6 million in cash generated from the sale of the assets of the
Company's molded plastic products business along with $15.7 million of cash on
hand was used to fund capital expenditures of approximately $5.0 million and
operations during the First Nine Months of Fiscal 1997, including a $31.4
million growth in the Company's inventories. The inventory growth was partially
due to seasonality, a planned increase in inventories to facilitate higher
service levels and an accumulation of safety stock relating to the consolidation
of the Company's cleaning products manufacturing facilities. As reported in the
Company's latest report on Form 10-K, the Company is in the process of combining
the manufacturing of cleaning products currently located in Easthampton,
Massachusetts into the existing cleaning products manufacturing facility in
Hamilton, Ohio. The consolidation is expected to be completed during the fourth
quarter of Fiscal 1997. It is expected that there will be additional operating
expenses of approximately $600,000 associated with the orderly transition of
manufacturing activities to the Hamilton, Ohio facility. The increase in
accounts receivable and accrued expenses from the December 29, 1996 levels was
primarily due to the seasonality of the Company's business.
12
<PAGE> 13
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On July 8, 1997, the Company amended and restated its revolving credit
facility ("Credit Agreement"). The Credit Agreement provides a maximum credit
line of $35 million maturing on April 30, 2000. The maximum outstanding balance
under the Credit Agreement will equate to 80% of eligible accounts receivable
plus 50% of eligible inventory as determined on a monthly basis. At September
28, 1997, $23.5 million was available for general corporate purposes under the
Credit Agreement net of $11.5 million in outstanding letters of credit. The
Company believes it has sufficient borrowing capacity to finance its ongoing
operations for the foreseeable future. The Company, however, may require
additional funds to finance acquisitions.
The Company has provided approximately $3.3 million for environmental
remediation and ongoing operation, maintenance and ground water monitoring costs
associated with facilities owned or occupied by the Company's cleaning products
business. The Company believes this provision is adequate, but will continue to
monitor and adjust the provision, as appropriate, should additional sites be
identified or further remediation measures be required or undertaken or
interpretation of current laws or regulations be modified.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (FASB
No. 128). FASB No. 128 supersedes APB No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share. FASB No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 and early application is not permitted. Accordingly, the
Company will apply FASB No. 128 for the quarter and year ended December 31, 1997
and restate prior information as required under the statement. The Company has
determined that if FASB No. 128 had been applied for the nine months ending
September 28, 1997 the impact on earnings per share as currently stated would
have been immaterial.
BUSINESS OUTLOOK
This Quarterly Report, including "Management's Discussion and Analysis
of Results of Operations and Financial Condition," contains forward-looking
statements made pursuant to the safe harbor provision of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements are based on management's current expectations and are subject
to a number of factors and uncertainties which could cause actual results to
differ materially from those described in the forward-looking statements. Such
factors and uncertainties include, but are not limited to: the impact of the
level of the Company's indebtedness; restrictive covenants contained in the
Company's various debt documents; general economic conditions and conditions in
the retail environment; the Company's dependence on a few large customers; price
fluctuations in the raw materials used by the Company; competitive conditions in
the Company's markets; the timely introduction of new products; the impact of
competitive products and pricing; certain assumptions related to consumer
purchasing patterns; the seasonal nature of the Company's business; and the
impact of federal, state and local environmental requirements (including the
impact of current or future environmental claims against the Company). As
13
<PAGE> 14
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
BUSINESS OUTLOOK (CONTINUED)
a result, the Company's results may fluctuate, especially when measured on a
quarterly basis. These forward looking statements represent the Company's best
estimate as of the date of this Form 10-Q. The Company assumes no obligation to
update such estimates except as required by the rules and regulations of the
Securities and Exchange Commission.
14
<PAGE> 15
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to several pending legal proceedings and claims,
including the matters described below. Although the outcome of such proceedings
cannot be determined with certainty, the Company's management, after
consultation with 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 operation or liquidity. In April 1996, the U.S. District
Court for the Northern District of Ohio ruled that certain insulated bakeware
products manufactured by the Company infringed a patent held by a third-party
plaintiff. The Company ceased manufacturing such products in December 1995. In
July 1996, the court enjoined the Company from infringing the patent and awarded
the plaintiff a royalty of 2% of sales, or approximately $88,000. The Company
believes that it is not liable for infringement, and in December 1996, the
Company filed a notice of appeal, and thereafter, the third-party plaintiff
filed a cross-appeal. The Company and its counsel believe that the Company has
meritorious grounds for its appeal of the court's decision. The Company's
management believes that the final outcome will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
ENVIRONMENTAL REGULATION AND CLAIMS
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 in
Massillon and Hamilton, Ohio; Easthampton, Massachusetts (more fully described
in Note 12 of Notes to Consolidated Condensed Financial Statements
herein-above); Lititz, Pennsylvania; Chicago, Illinois 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 at such facilities. 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 or future facilities may not result in
additional environmental claims being asserted against the Company or additional
investigations or remedial actions being required.
15
<PAGE> 16
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
10.22 Amended and Restated Credit Agreement dated as of April 11, 1995
and amended and restated as of July 8, 1997 with Fleet National
Bank (incorporated herein by reference to Exhibit 10.22 to Form
10-Q for the quarter ended June 29, 1997).
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
16
<PAGE> 17
SIGNATURES
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.
EKCO GROUP, INC.
----------------------------------
(Registrant)
Date: NOVEMBER 12, 1997 By: /s/ MALCOLM L. SHERMAN
----------------- ----------------------------------
Malcolm L. Sherman
Chairman and
Chief Executive Officer
By: /s/ DONATO A. DENOVELLIS
----------------------------------
Donato A. DeNovellis
Executive Vice President,
Finance and Administration, and
Chief Financial Officer
17
<PAGE> 18
INDEX TO EXHIBIT FILED WITH FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<EXCHANGE-RATE> 1
<CASH> 375
<SECURITIES> 0
<RECEIVABLES> 58,924
<ALLOWANCES> 1,116
<INVENTORY> 78,799
<CURRENT-ASSETS> 154,475
<PP&E> 77,424
<DEPRECIATION> 43,002
<TOTAL-ASSETS> 304,898
<CURRENT-LIABILITIES> 58,097
<BONDS> 124,248
4,401
0
<COMMON> 189
<OTHER-SE> 106,991
<TOTAL-LIABILITY-AND-EQUITY> 304,898
<SALES> 193,216
<TOTAL-REVENUES> 193,216
<CGS> 128,662
<TOTAL-COSTS> 174,530
<OTHER-EXPENSES> 3,508
<LOSS-PROVISION> 358
<INTEREST-EXPENSE> 9,325
<INCOME-PRETAX> 6,458
<INCOME-TAX> 3,227
<INCOME-CONTINUING> 3,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,231
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
