<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended MARCH 30, 1997
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Commission File Number 1-7484
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EKCO GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2167167
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
98 SPIT BROOK ROAD, NASHUA, NEW HAMPSHIRE 03062
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(Address of principal executive offices) (Zip Code)
(603) 888-1212
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(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 May 5, 1997, there were issued and outstanding 18,912,653 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>
MARCH 30, DECEMBER 29,
1997 1996
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 28,657 $ 15,706
Accounts receivable, net 34,779 42,182
Inventories 55,354 47,422
Other current assets 6,497 6,180
Net assets of discontinued operations 2,766 17,030
Deferred income tax 10,947 10,857
-------- --------
Total current assets 139,000 139,377
Property and equipment, net 34,242 34,998
Other assets 8,458 6,569
Excess of cost over fair value of net assets
acquired, net 110,209 111,132
-------- --------
Total assets $291,909 $292,076
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 15,897 $ 18,395
Accrued expenses 28,859 28,688
Income taxes 4,978 2,651
-------- --------
Total current liabilities 49,734 49,734
-------- --------
Long-term obligations, less current portion 124,204 124,182
------- --------
Other long-term liabilities 11,347 11,052
-------- --------
Series B ESOP Convertible Preferred Stock, net;
outstanding 1,391 shares and 1,439 shares,
respectively, redeemable at $3.61 per share 4,156 4,098
-------- --------
Commitments and contingencies - -
Minority interest 494 495
-------- --------
Stockholders' equity
Common stock, $.01 par value; outstanding
18,717 shares and 18,580 shares,
respectively 187 186
Capital in excess of par value 108,051 107,622
Cumulative translation adjustment 844 869
Retained earnings (deficit) (2,360) (1,352)
Unearned compensation (2,901) (2,963)
Pension liability adjustment (1,847) (1,847)
-------- --------
101,974 102,515
-------- --------
Total liabilities and stockholders' equity $291,909 $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 ENDED MARCH 30, 1997 AND MARCH 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net revenues $53,888 $51,090
------- -------
Costs and expenses
Cost of sales 36,870 35,451
Selling, general and administrative 14,900 12,569
Special charge 294 -
Amortization of excess of cost over fair value 909 909
------- -------
52,973 48,929
------- -------
Income before interest and income taxes 915 2,161
------- -------
Net interest
Interest expense 3,135 3,026
Investment income (270) (90)
------- -------
2,865 2,936
------- -------
Loss from continuing operations before income taxes (1,950) (775)
and extraordinary charge
Income taxes (benefit) (942) (744)
------- -------
Loss from continuing operations before extraordinary charge (1,008) (31)
Loss from discontinued operations, net of tax benefit
of $410 - (347)
------- -------
Loss before extraordinary change (1,008) (378)
Extraordinary charge for early retirement of debt,
net of tax benefit of $2,139 - (3,208)
------- -------
Net income (loss) $(1,008) $(3,586)
======= =======
Loss per common share
Loss from continuing operations
before extraordinary charge $ (.05) $ -
Loss from discontinued operations - (.02)
Loss before extraordinary charge (.05) (.17)
------- -------
Loss per common share $ (.05) $ (.19)
======= =======
Weighted average number of shares used in
computation of per share data 18,688 18,410
======= =======
</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 THREE MONTHS ENDED MARCH 30, 1997 AND MARCH 31, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,008) $ (3,586)
Adjustments to reconcile net income to net cash
provided by (used for) operations
Depreciation 1,871 1,877
Amortization of excess of cost over fair value 909 909
Amortization of deferred finance costs 136 106
Other amortization 1,152 1,604
Special charges 294 -
Loss from discontinued operations
Extraordinary charge - 3,208
Other 36 (152)
Changes in certain assets and liabilities, net of
effects from acquisition of business, affecting
cash provided by operations
Accounts receivable 7,269 4,367
Inventories (8,003) (4,074)
Prepaid marketing costs (1,167) (600)
Other assets (39) (2,415)
Accounts payable and accrued expenses (4,216) (4,467)
Income taxes payable 2,325 1,761
------- ---------
Net cash provided by (used in) operating activities
Continuing operations (441) (1,462)
Discontinued operations 14,264 2,039
------- ---------
Net cash provided by operating activities 13,823 577
------- ---------
Cash flows from investing activities
Proceeds from sale of property and equipment 100 6
Capital expenditures for continuing operations (1,240) (1,580)
Capital expenditures for discontinued operations - (545)
------- ---------
Net cash used in investing activities (1,140) (2,119)
------- ---------
Cash flows from financing activities
Proceeds from issuance of notes payable and
long-term obligations - 120,504
Proceeds from sale of investment held as collateral - -
Payment of dividends - (398)
Payment of notes and long-term obligations - (118,005)
Other 283 101
------- ---------
Net cash provided by (used in) financing
activities 283 2,202
Effect of exchange rate changes on cash (15) 1
------- ---------
Net increase in cash and cash equivalents 12,951 661
Cash and cash equivalents at beginning of year 15,706 142
------- ---------
Cash and cash equivalents at end of period $28,657 $ 803
======= =========
Cash paid during the period for
Interest $ 32 $ 3,553
Income taxes (3,179) (1,018)
</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 quarterly period ended March 30, 1997 (the
"First Quarter of Fiscal 1997") the Company sold substantially all of the assets
of its molded plastics products business for cash proceeds of approximately
$14.3 million and a $2.0 million promissory note. The approximately $2.8 million
of net assets of discontinued operations at March 30, 1997 consists principally
of the Company's molded plastic product manufacturing facility in Worcester,
Massachusetts. The Company has leased this facility under a five year lease with
annual lease payments of approximately $500,000. On April 28, 1997, the Company
entered into a purchase and sale agreement to sell the Worcester, Massachusetts
facility for approximately $3 million.
5
<PAGE> 6
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(2) DISCONTINUED OPERATIONS CONTINUED
<TABLE>
Net assets of discontinued operations classified separately in the
consolidated condensed balance sheets as of December 29, 1996 are as follows:
(Amounts in thousands)
<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 of disposal (5,500)
-------
$17,030
=======
</TABLE>
<TABLE>
Certain information with respect to statement of operations from
discontinued operations for the three months ended March 31, 1996 follows:
(Amounts in thousands)
<S> <C>
Net revenues $5,871
------
Cost of sales 5,638
Selling, general and administrative 790
Goodwill amortization 200
------
6,628
------
Loss before income tax benefit (757)
Income tax benefit (410)
------
Loss from discontinued operations $ (347)
======
</TABLE>
(3) ACCOUNTS RECEIVABLE, NET
<TABLE>
Accounts receivable consisted of the following:
<CAPTION>
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable $35,636 $42,942
Allowance for doubtful accounts (857) (760)
------- -------
$34,779 $42,182
======= =======
</TABLE>
6
<PAGE> 7
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(4) INVENTORIES
<TABLE>
The components of inventory were as follows:
<CAPTION>
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials $10,736 $ 9,628
Work in process 3,648 3,253
Finished goods 40,970 34,541
------- -------
$55,354 $47,422
======= =======
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
<TABLE>
Property and equipment consisted of the following:
<CAPTION>
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment at cost
Land, buildings and improvements $14,715 $14,623
Equipment, factory and other 59,630 58,963
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74,345 73,586
Less accumulated depreciation 40,103 38,588
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$34,242 $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 $29,599 and $28,690 as of March 30, 1997 and December 29, 1996,
respectively.
(7) 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 48%.
7
<PAGE> 8
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) SERIES B ESOP CONVERTIBLE PREFERRED STOCK, NET
<TABLE>
Series B ESOP Convertible Preferred Stock, net, consisted of the following:
<CAPTION>
MARCH 30, 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 $ 5,050 $ 5,196
Unearned compensation (894) (1,098)
------- -------
$ 4,156 $ 4,098
======= =======
</TABLE>
(9) COMMON STOCK, $.01 PAR VALUE
<TABLE>
Share information regarding common stock consisted of the following:
<CAPTION>
MARCH 30, 1997 DECEMBER 29, 1996
-------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Authorized shares 60,000 60,000
====== ======
Shares issued 28,134 27,997
Shares held in treasury 9,417 9,417
------ ------
18,717 18,580
====== ======
</TABLE>
(10) LOSS PER COMMON SHARE
<TABLE>
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:
<CAPTION>
THREE MONTHS ENDED
MARCH 30, 1997 MARCH 31, 1996
-------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Weighted average shares of common
stock outstanding during the period 18,688 18,410
Series B ESOP Convertible Preferred
Stock anti-dilutive anti-dilutive
Weighted average common equivalent
shares due to stock options anti-dilutive anti-dilutive
------------- -------------
18,688 18,410
====== ======
</TABLE>
8
<PAGE> 9
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(11) 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.
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 March 30, 1997,
the liability recorded by the Company was approximately $3.5 million. Although
the current estimated costs of remediation are less than the liability recorded
at March 30, 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
9
<PAGE> 10
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
ENVIRONMENTAL MATTERS CONTINUED
("Fiscal 1997") with the balance being paid out in fiscal 1998 and 1999. During
the first quarter of Fiscal 1997, the Company paid approximately $6,000 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.
(12) SPECIAL CHARGE
The special charge relates to the recognition of appreciation in value of
stock appreciation rights granted to the Company's former Chief Executive
Officer pursuant to a December 1996 severance arrangement.
(13) 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 period ended March 30, 1997 (the "First Quarter
of Fiscal 1997") and March 31, 1996 (the "First Quarter of Fiscal 1996") and the
financial condition at March 30, 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 First Quarter of Fiscal 1997 increased approximately
$2.8 million (5.5%) from the comparable prior year period. The increase in net
revenues was primarily due to higher sales of the Company's insulated bakeware
line due to product line expansion introduced in early 1996, increased sales of
kitchen tools and gadgets resulting from the roll-out of new plan-o-grams at
several key customers, a high level of acceptance of new products introduced
during fiscal 1996 and increased sales of the Company's animal care and pest
control products. Net revenues for the First Quarter of Fiscal 1996 included net
revenues of $1.6 million from the Company's wireforming business, which was
divested in the fourth quarter of Fiscal 1996.
GROSS PROFIT
The Company's gross profit margin improved from 30.6% in the First Quarter
of Fiscal 1996 to 31.6% for the First Quarter of Fiscal 1997. The improvement in
gross margin was due primarily to successful efforts in obtaining lower purchase
costs for the Company's kitchen tools and gadgets products and improvement in
bakeware manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses increased approximately $2.3
million (18.5%) from the comparable prior year period. The increase in selling,
general and administrative expenses was due primarily to increased investments
for the development of new products, improved packaging and the development of
selling and marketing materials, as well as the acceleration of the timing of
these expenditures to earlier in the year and increased selling expenses
attributable to higher year-over-year sales.
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.
11
<PAGE> 12
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the First Quarter of Fiscal 1997, the Company generated
approximately $14.3 million in cash from the sale of the assets of its molded
plastic products business. This amount was used to fund operations and capital
expenditures of approximately $1.2 million.
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 quarterly period ended March 30, 1997
(the "First Quarter of Fiscal 1997"), the Company sold substantially all of the
assets of its molded plastics products business for cash proceeds of
approximately $14.3 million and a $2.0 million promissory note. The approximate
$2.8 million of net assets of discontinued operations at March 30, 1997 consists
principally of the Company's molded plastics products manufacturing facility in
Worcester, Massachusetts. The Company has leased this facility under a five year
lease with annual lease payments of approximately $500,000. On April 28, 1997,
the Company entered into a purchase and sale agreement to sell the Worcester,
Massachusetts facility for approximately $3 million.
The $7.4 million decline in accounts receivable from the $42.2 million at
December 29, 1996, was offset by $7.9 million growth in the Company's
inventories. The accounts receivable decline was primarily due to the
seasonality of net revenues. The increase in inventory 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 will combine 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 $1.5 million associated with the orderly transition of
manufacturing activities to the Hamilton, Ohio facility. During the First
Quarter of Fiscal 1997 additional consolidation costs incurred were
insignificant.
At March 30, 1997, the Company was not in compliance with certain covenants
of its revolving credit facility and such noncompliance has been waived. The
Company is currently renegotiating with its lender modifications to certain
covenants and conditions of the revolving credit facility. At March 30, 1997,
$17.0 million was available for general corporate purposes under the revolving
credit facility net of $11.0 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 $3.5 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.
12
<PAGE> 13
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 the FASB No. 128 had been applied for the first quarter
ending March 30, 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 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.
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%
13
<PAGE> 14
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 11 of Notes to Consolidated Condensed Financial Statements hereinabove);
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.
ITEM 2. CHANGES IN SECURITIES
On March 21, 1997, the registrant amended its preferred share purchase
Rights Agreement which was originally adopted by the registrant on March 27,
1987 (the "Rights Plan"). The amendment extended the term of the Rights Plan
from April 9, 1997 to March 21, 2007 and adjusted the exercise price of the
Rights issuable under the Rights Plan from $20 to $30.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
4.1 Amended and Restated Rights Agreement dated as of March 21, 1997
between Ekco Group, Inc. and American Stock Transfer & Trust Company,
including form of Rights Certificate (incorporated herein by reference
to Exhibit 4.1 to Form 8-K as of March 21, 1997).
10.1 Subordinated Promissory Note dated March 28,1997 made by Austin
Products, Inc. to Ekco Consumer Plastics, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
14
<PAGE> 15
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: May 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
15
<PAGE> 16
INDEX TO EXHIBIT FILED WITH FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1997
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 SUBORDINATED PROMISSORY NOTE DATED MARCH 28, 1997 MADE BY AUSTIN
PRODUCTS, INC. TO EKCO CONSUMER PLASTICS, INC.
27 FINANCIAL DATA SCHEDULE
16
<PAGE> 1
EXHIBIT 10.1
------------
SUBORDINATED PROMISSORY NOTE
$2,000,000.00 Date: March 28, 1997
FOR VALUE RECEIVED, AUSTIN PRODUCTS, INC., a Texas corporation (herein
called "Maker"), promises to pay to the order of EKCO CONSUMER PLASTICS, INC., a
Massachusetts corporation (herein together with any successors or assigns
collectively called "Payee"), in Worcester County, Massachusetts, the principal
sum of Two Million and No/100 Dollars ($2,000,000.00), together with interest on
the unpaid principal balance from time to time outstanding at a rate of ten
percent (10%) per annum.
1. PAYMENT. Principal and interest to be paid as follows:
a. INTEREST ONLY PERIOD. Interest only on the outstanding principal
balance shall be due and payable in quarterly installments of $50,000, beginning
on June 30, 1997, and continuing thereafter on the last day of each succeeding
September, December, March and June, through and including March 31, 1999.
b. PRINCIPAL AND INTEREST PAYMENTS. After March 31, 1999, the
outstanding principal balance shall be due and payable in twelve (12) equal
quarterly installments of principal PLUS interest, commencing on June 30, 1999,
and continuing thereafter on the last day of each succeeding September,
December, March and June, with the final payment of all outstanding principal
and accrued interest thereon due on March 31, 2002.
2. PREPAYMENT. Maker shall be entitled to prepay all or any part of the
principal of this Note prior to the date of maturity without premium or penalty.
All payments on this Note shall be applied first to the payment of the Payee's
costs and expenses, if applicable, second to the payment of the accrued and
unpaid interest, and then to the reduction of the principal balance hereof
(applied to the principal installments hereunder in inverse order of maturity).
Any prepayment shall not affect the obligation of Maker to make the scheduled
payments described above, if on each scheduled payment date the unpaid principal
balance thereof plus accrued interest is equal to or greater than the amount of
the scheduled payments.
3. DEFAULT. The occurrence and continuance of any of the following
specified events shall constitute an "Event of Default:"
(a) The failure to make any payment of interest,
SUBORDINATED
PROMISSORY NOTE -1- EKCO
<PAGE> 2
principal or other amounts due pursuant to the terms of this Note on the due
date thereof (other than as a result of the suspension of payments as permitted
under the subordination provisions of Paragraph 5 below).
(b) The Maker shall commence a voluntary case under 11 U.S.C.
[section]101 ET. SEQ. (the "Bankruptcy Code") or any foreign, federal or state
bankruptcy, insolvency or other similar law or hereafter in effect, or shall
consent to the entry of an order for relief in an involuntary bankruptcy or
similar case, or to the conversion of an involuntary case to a voluntary case,
under any such law, or shall consent to the appointment of or the taking of
possession by a receiver, trustee or other custodian for all or a substantial
part of its property, or the making by the Maker of any assignment for the
benefit of creditors, or the admission by the Maker in writing of its inability
to pay its debts as such debts become due.
(c) A court shall enter a decree or order for relief in respect of the
Maker in an involuntary case under the Bankruptcy Code or any applicable
foreign, federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, which decree or order is not stayed or dismissed within 60
days of the entry thereof, or a decree or order of a court for the appointment
of a receiver, liquidator, sequestrator, trustee, custodian or other person
having similar powers over the Maker, or over all or a substantial part of its
property, shall have been entered.
Upon the occurrence and continuance of any Event of Default hereunder, (i)
the principal of and accrued interest on this Note may be declared to be
immediately due and payable, PROVIDED, HOWEVER, in the case of an Event of
Default described in paragraphs (b) or (c) above, the principal of and accrued
interest on this Note shall immediately become due and payable by the Maker
without notice, action or election by the Payee, (ii) any other amounts payable
by the Maker hereunder shall automatically become immediately due and payable by
the Maker, and (iii) the Payee may enforce any of its rights granted pursuant to
applicable law or equity, all of which shall be cumulative and not exclusive,
and may be exercised singly, repetitively, in any combination, and in any order.
4. INTEREST ON PAST DUE FUNDS. All past due principal of, accrued interest
on and other charges due under this Note shall bear interest, from the due date
until paid, at a rate equal to the lesser of: (i) 14% and (ii) the highest rate
Payee is then entitled lawfully to charge under applicable law.
5. UNSECURED NOTE; SUBORDINATION. Payee acknowledges and agrees that the
indebtedness evidenced by this Note is unsecured
SUBORDINATED
PROMISSORY NOTE -2- EKCO
<PAGE> 3
and is subordinate to all "Primary Secured Debt" as provided herein. As used
herein, the term "PRIMARY SECURED DEBT" shall mean the secured indebtedness
described in the following clauses (whether outstanding at the date hereof or
hereafter incurred or created), including unpaid principal and unpaid interest
on such secured indebtedness as well as other obligations arising under the
promissory notes, loan agreements, deeds of trust, and security agreements
securing such secured indebtedness, and costs of collection, reasonable
attorneys' fees, and court costs relating to such secured indebtedness: (i) all
secured indebtedness of Maker to its senior secured lenders, currently COMERICA
BANK-Texas, providing primary financing for Maker's equipment, inventory and
working capital needs (or any successors or assigns of the foregoing); and (ii)
increases, renewals, extensions, refinancing, and refunding of any of the
foregoing with senior secured lenders. If any payments under this Note would
result in Maker being in "Default" (herein so called) under any Primary Secured
Debt instrument (including without limitation, any "Subordination Agreement",
herein so called, executed by Payee) or if Maker is otherwise in "Default"
(either a payment or covenant default) under any Primary Secured Debt
instrument, then payments under this Note shall be suspended for up to 120 days
for a payment Default and 90 days for a covenant Default (in either case, a
"Suspension Period"); provided (i) the suspension shall only apply to that
portion of the payment which would trigger the Default unless the Default is a
covenant Default or the Subordination Agreement executed by Payee bars all
payments during the Suspension Period, and (ii) at the end of the Suspension
Period, or if earlier as soon as payments can be made within the Suspension
Period without Maker being in such Default, such payment(s) shall resume
immediately (with all previously suspended payments being paid as soon as
possible, without triggering additional Defaults under the Primary Secured
Debt). During any Suspension Period, Maker shall provide within fifteen (15)
days of the date of the commencement of the suspension, a written explanation
detailing the reasons for such suspension. Notwithstanding anything contained
herein to the contrary, a new Suspension Period can not commence prior to the
expiration of thirty (30) days after the end of any previous Suspension Period.
Payee promises at any time and from time to time prior to the payment in full of
all amounts due under this Note to execute promptly one or more Subordination
Agreements in favor of any holder of Primary Secured Debt in conformity
herewith. During the term hereof, Maker shall timely deliver to Payee copies of
the unaudited (and audited, if applicable) consolidated, financial statements of
its parent corporation, Alpha Holdings, Inc., as delivered to is primary secured
lenders from time to time.
6. COLLECTION COSTS. The Maker agrees to pay on demand
SUBORDINATED
PROMISSORY NOTE -3- EKCO
<PAGE> 4
all out-of-pocket costs and expenses (including, without limitation, reasonable
attorneys' fees and costs) incurred or paid by the Payee in enforcing this Note.
7. PLACE OF PAYMENT. All payments hereunder shall be made to Payee at ,
or at such other address as Payee may from time to time designate in writing to
Maker.
8. NO WAIVER OF RIGHTS. Payee's partial or complete exercise, delay, or
failure to exercise any of the options, rights, or powers granted to Payee
hereunder shall not constitute a waiver of the right to exercise the same or any
other option, right, or power at any subsequent time. Any rights or options of
Payee hereunder shall not be affected by any renewal or extension in the time of
payment hereof, or by any release or change in any security for the payment of
this Note, or by the acceptance in advance of due date of any payment hereunder,
or by any acceptance of a payment hereunder that is less than payment in full of
all amounts due and payable at the time of such payment regardless of the number
of such renewals, extensions, releases, changes, or acceptances.
9. WAIVER OF NOTICE. Maker, and each surety, endorser, guarantor, and other
party liable for the payment of any sums of money payable on this Note,
severally waive presentment and demand for payment, protest, and notice of
protest, notice of intent to accelerate, notice of acceleration, and nonpayment
and all other notices in connection with this Note.
10. LAWS GOVERNING. This Note shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
11. HEADINGS. The titles and headings of paragraphs are included for
convenience of reference only and are not to be considered in construing the
provisions of this Note.
12. COURSE OF DEALING; ENTIRE AGREEMENT. No course of dealing or other
conduct, no oral agreement or representation made by the Payee, or usage of
trade shall operate as a waiver of any right or remedy by the Payee. This Note
contains the entire agreement between the parties with respect to the subject
matter hereof, and supersedes every course of dealing, other conduct, oral
agreement or representation previously made by the Payee. No waiver, amendment
or forbearance of any of the terms of this Note, or the rights and remedies of
the Payee hereunder, shall be effective unless made specifically in a writing
signed by the Payee.
13. SUCCESSORS AND ASSIGNS. The Note is a binding obligation enforceable
against the Maker and its successors and
SUBORDINATED
PROMISSORY NOTE -4- EKCO
<PAGE> 5
assigns and shall inure to the benefit of the holder hereof and its successors
and assigns. This Note may be assigned by the Payee without the consent of the
Maker.
14. SEVERABILITY. In the event that any court of competent jurisdiction
shall determine that any provision, or any portion thereof, contained in this
Note shall be unenforceable in any respect, than such provision shall be deemed
limited to the extent that such court deems it enforceable, and the remaining
provisions of this Note shall nevertheless remain in full force and effect.
15. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing, shall be addressed to the receiving party's
address set forth below or to such other address as a part may designate by
notice hereunder, and shall be either (i) delivered by hand, (ii) made by telex,
telecopy or facsimile transmission, (iii) sent by recognized overnight courier,
or (iv) sent by registered or certified mail, return receipt requested, postage
prepaid.
If to the Maker: Austin Products, Inc.
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, TX 75240
Attn: President
Fax No.: (972) 701-0530
With a copy to: KRONEY SILVERMAN MINCEY, INC.
1210 Three Forest Plaza
12221 Merit Drive
Dallas, TX 75251
Attn: James M. Mincey, Jr., Esq.
Fax No.: (972) 701-0307
If to the Payee: Ekco Group, Inc.
98 Spit Brook Road, Suite 102
Nashua, NH 03062
Attn: Chief Executive Officer
Fax No.: (603) 888-1427
With a copy to: Ekco Group, Inc.
98 Spit Brook Road, Suite 102
Nashua, NH 03062
Attn: Jeffrey A. Weinstein, Esq.
Fax No.: (603) 888-1427
And to: Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
SUBORDINATED
PROMISSORY NOTE -5- EKCO
<PAGE> 6
Attn: Peter F. Demuth, Esq.
Fax No.: (617) 542-2241
EXECUTED as of the date first above written.
Maker:
AUSTIN PRODUCTS, INC.
By: /s/ Jack R. Rigby
----------------------------
Jack R. Rigby, President
SUBORDINATED
PROMISSORY NOTE -6- EKCO
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