<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 29, 1998
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Commission File Number 1-7484
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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
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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 7, 1998, there were issued and outstanding 19,314,517 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)
MARCH 29, DECEMBER 28,
1998 1997
--------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 1,372 $ 14,565
Accounts receivable, net 43,289 45,529
Inventories 83,854 74,150
Other current assets 8,632 9,021
Deferred income taxes 7,181 6,877
-------- --------
Total current assets 144,328 150,142
Property and equipment, net 37,141 35,678
Other assets 7,607 7,563
Excess of cost over fair value of net assets
acquired, net 130,031 107,422
-------- --------
Total assets $319,107 $300,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion long-term obligations $ 1,705 $ -
Accounts payable 15,329 14,040
Accrued expenses 29,495 29,290
Income taxes 5,835 6,344
-------- --------
Total current liabilities 52,364 49,674
-------- --------
Long-term obligations, less current portion 140,145 124,270
-------- --------
Other long-term liabilities 11,811 11,974
-------- --------
Series B ESOP Convertible Preferred Stock, net;
outstanding 1,019 shares and 1,315 shares,
respectively, redeemable at $3.61 per share 4,457 4,399
-------- --------
Commitments and contingencies
Minority interest 494 494
-------- --------
Stockholders' equity
Common stock, $.01 par value; outstanding
19,194 shares and 19,066 shares,
respectively 192 191
Capital in excess of par value 109,845 109,462
Retained earnings 4,020 4,665
Unearned compensation (2,721) (2,787)
Accumulated other comprehensive income (1,500) (1,537)
-------- --------
109,836 109,994
-------- --------
Total liabilities and stockholders' equity $319,107 $300,805
======== ========
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 29, 1998 AND MARCH 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1998 1997
------- -------
Net revenues $67,416 $53,888
------- -------
Costs and expenses
Cost of sales 47,122 36,870
Selling, general and administrative 17,114 14,900
Special charge - 294
Amortization of excess of cost over fair value 1,054 909
------- -------
65,290 52,973
------- -------
Income before interest and income taxes 2,126 915
------- -------
Net interest
Interest expense 3,436 3,135
Investment income (55) (270)
------- -------
3,381 2,865
------- -------
Loss from operations before income taxes (1,255) (1,950)
Income taxes benefit (610) (942)
------- -------
Net loss $ (645) $(1,008)
======= =======
Loss per common share:
Basic $ (0.03) $ (0.05)
======= =======
Diluted $ (0.03) $ (0.05)
======= =======
Weighted average number of shares used in
computation of per share data:
Basic 19,116 18,687
======= =======
Diluted 19,116 18,687
======= =======
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 29, 1998 AND MARCH 30, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (645) $(1,008)
Adjustments to reconcile net income to net cash
provided by (used in) operations
Depreciation 1,912 1,871
Amortization of excess of cost over fair value 1,054 909
Amortization of deferred finance costs 153 136
Other amortization 1,214 1,152
Special charges - 294
Other 122 36
Changes in certain assets and liabilities, net of effects
from the acquisition of a business, affecting
cash provided by (used in)operations
Accounts receivable 6,564 7,269
Inventories (3,210) (8,003)
Prepaid marketing costs (1,117) (1,167)
Other assets 780 (39)
Accounts payable and accrued expenses (652) (4,216)
Income taxes payable (509) 2,325
-------- -------
Net cash provided by (used in) operating activities:
Continuing operations 5,666 (441)
Discontinued operations - (87)
-------- -------
Net cash provided by (used in)operating activities 5,666 (528)
-------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 28 100
Capital expenditures (2,326) (1,240)
Proceeds from sale of discontinued operations - 14,351
Acquisition of business (24,464) -
-------- -------
Net cash provided by (used in) investing activities (26,762) 13,211
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 16,925 -
Payment of long-term obligations (9,259) -
Other 238 283
-------- -------
Net cash provided by financing activities 7,904 283
Effect of exchange rate changes on cash (1) (15)
-------- -------
Net increase (decrease) in cash and cash equivalents (13,193) 12,951
Cash and cash equivalents at beginning of year 14,565 15,706
-------- -------
Cash and cash equivalents at end of period $ 1,372 $28,657
======== =======
Cash paid during the period for
Interest $ 358 $ 32
Income taxes 101 (3,179)
</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.
During the three months ended March 29, 1998, the Company adopted
Financial Accounting Standards Board Statement No.130 "Reporting Comprehensive
Income".
Comprehensive loss for the three months ended March 29, 1998 and the three
months ended March 30, 1997 was as follows:
MARCH 29, 1998 MARCH 30, 1997
-------------- --------------
(AMOUNTS IN THOUSANDS)
Net loss $(645) $(1,008)
----- -------
Other comprehensive income (loss)
Foreign currency translation adjustments 36 (25)
Pension liability adjustment 1 -
----- -------
37 (25)
----- -------
Comprehensive loss $(608) $(1,033)
===== =======
(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 Pet Products, Inc.
("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 $24.5 million in cash 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
5
<PAGE> 6
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(2) ACQUISITION OF ASPEN PET PRODUCTS, INC. (CONTINUED)
(as defined)of each such year exceeds the Base Profit Amount (as defined). The
Acquisition has been accounted for under the purchase method of accounting and
goodwill of approximately $24 million is being amortized over 40 years. In
connection with the acquisition, liabilities were assumed as follows (amounts in
thousands):
Fair value of assets acquired $ 37,067
Cash paid for stock of Aspen (24,478)
Expenses incurred in connection with the acquisition (450)
--------
Liabilities assumed $ 12,139
========
The following unaudited pro forma combined results of operations for the three
months ended March 30, 1997 have been prepared assuming that the acquisition of
Aspen occurred at the beginning of such period. In preparing the pro forma data,
adjustments have been made for: (i) the amortization of goodwill; (ii) the
interest expense related to the borrowings under the Company's credit facility
to finance a portion of the purchase price; (iii) reduction in investment income
for 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 for the pro forma
adjustments.
The following unaudited pro forma financial information is not necessarily
indicative of results of operations that would have occurred had the transaction
been effected at the beginning of such fiscal period or of future results of the
combined companies.
THREE MONTHS ENDED
MARCH 30, 1997
------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net revenues $60,180
Loss before income taxes (1,786)
Net loss (911)
Loss per common share
Basic (.05)
Diluted (.05)
(3) ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
(AMOUNTS IN THOUSANDS)
Accounts receivable $44,439 $46,486
Allowance for doubtful accounts (1,150) (957)
------- -------
$43,289 $45,529
======= =======
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:
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
(AMOUNTS IN THOUSANDS)
Raw materials $14,766 $12,984
Work in process 4,100 3,811
Finished goods 64,988 57,355
------- -------
$83,854 $74,150
======= =======
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
(AMOUNTS IN THOUSANDS)
Property and equipment at cost
Land, buildings and improvements $15,220 $14,598
Equipment, factory and other 62,831 60,624
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78,051 75,222
Less accumulated depreciation 40,910 39,544
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$37,141 $35,678
======= =======
(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 $33,375 and $32,321 as of March 29, 1998 and
December 28, 1997, respectively.
(7) LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
(AMOUNTS IN THOUSANDS)
Term loan $ 10,000 $ -
Credit facility 6,925 -
9.25% Senior Notes, due 2006
(net of unamortized discount of
$708 and $730, respectively) 124,292 124,270
Other 633 -
-------- --------
141,850 124,270
Less current portion 1,705 -
-------- --------
$140,145 $124,270
======== ========
The principal of the term loan is payable in quarterly installments of
approximately $357,000 commencing on March 31, 1998.
7
<PAGE> 8
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Borrowings under the term loan can be prepaid in whole or in part at any
time with no premium or penalty, and bear interest at the same rates as
available under the credit facility.
Borrowings under both the term loan and the credit facility mature in
November 2002.
(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 51% for the year ended December 28, 1997. The anticipated effective
rate for fiscal 1998 is 49%.
(9) SERIES B ESOP CONVERTIBLE PREFERRED STOCK, NET
Series B ESOP Convertible Preferred Stock, net, consisted of the
following:
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
(AMOUNTS IN THOUSANDS)
Series B ESOP Convertible Preferred
Stock, par value $.01, redeemable at
$3.61 per share $ 4,610 $ 4,757
Unearned compensation (153) (358)
------- -------
$ 4,457 $ 4,399
======= =======
(10) COMMON STOCK, $.01 PAR VALUE
Share information regarding common stock consisted of the following:
MARCH 29, 1998 DECEMBER 28, 1997
-------------- -----------------
(AMOUNTS IN THOUSANDS)
Authorized shares 60,000 60,000
====== ======
Shares issued 28,610 28,481
Shares held in treasury 9,416 9,415
------ ------
19,194 19,066
====== ======
(11) LOSS PER COMMON SHARE
Basic loss per common share is based upon the weighted average common
stock outstanding during each period. Diluted loss per common share is based
upon the weighted average of common stock and dilutive common stock equivalent
shares outstanding during each period, including Series B ESOP Convertible
Preferred Stock. The weighted average number of shares used in computation of
diluted loss 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 29, 1998 MARCH 30, 1997
-------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Weighted average shares of common
stock outstanding during the period 19,116 18,687
Series B ESOP Convertible Preferred
Stock anti-dilutive anti-dilutive
Weighted average common equivalent
shares due to stock options anti-dilutive anti-dilutive
------------- -------------
19,116 18,687
====== ======
</TABLE>
Net loss used in determining basic and diluted loss per share consisted of
$645,000 for the three months ended March 29, 1998 and $1,008,000 for the three
months ended March 30, 1997.
(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 the Company 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; Chicago, Illinois;
Lititz, Pennsylvania; and at its previously owned facility in Hudson, New
Hampshire, hazardous substances, oil or both have been detected and that
additional investigation will or may 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
9
<PAGE> 10
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $1.1 million and the
expense for the ongoing operation, maintenance and ground water monitoring will
be approximately $20,500 for Fiscal 1998 and for each of the 30 years
thereafter. As of March 29, 1998, the liability recorded by the Company was
approximately $2.8 million. Although the current estimated costs of remediation
are less than the liability recorded at March 29, 1998, 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 $145,500 of the remediation costs in the current
year ("Fiscal 1998") with the balance being paid out in fiscal 1999 and 2000.
During the first quarter of Fiscal 1998, the Company paid approximately $30,000
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 the three months ended March 30, 1997 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.
10
<PAGE> 11
ITEM 2. 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 29, 1998 (the "First Quarter
of Fiscal 1998") and March 30, 1997 (the "First Quarter of Fiscal 1997") and the
financial condition at March 29, 1998 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 1998, which includes $5.8
million for Aspen Pet Products, Inc. ("Aspen") acquired during January 1998,
increased approximately $13.5 million (25%) from the comparable prior year
period. Excluding the effect of Aspen, net revenues increased $7.7 million (14%)
from the comparable prior year period. All of the Company's product lines had
revenue increases from the prior year, with the largest increase coming from the
sale of the Company's kitchenware products, which includes many new categories
such as cookware, cutlery, and barware. The increase was primarily the result of
new products introduced during recent months and increases in the Company's
international business.
GROSS PROFIT
The Company's gross profit margin declined from 31.6% in the First Quarter
of Fiscal 1997 to 30.1% for the First Quarter of Fiscal 1998. The decline in
gross profit from the prior year level was primarily due to inefficiencies
within the manufacturing of the Company's cleaning products and a change in
product mix with increased sales of lower margin products. During the second
half of Fiscal 1997, the Company consolidated its cleaning products
manufacturing facilities into one facility. The targeted productivity was not
achieved during the early part of the First Quarter of Fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the First Quarter of 1998,
which includes $1.0 million for Aspen, increased approximately $2.2 million
(15%) from the comparable prior year period. Excluding the effect of Aspen, the
increase was $1.2 million. This increase was primarily due to costs associated
with the increase in revenues and expansion of the Company's international
operations.
SPECIAL CHARGE
The special charge for the First Quarter of Fiscal 1997 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.
11
<PAGE> 12
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS CONTINUED
NET INTEREST EXPENSE
Net interest expense increased from $2.9 million for the First Quarter of
Fiscal 1997 to $3.4 million for the First Quarter of Fiscal 1998. The increase
was primarily due to higher borrowings in the First Quarter of Fiscal 1998 due
to the acquisition of Aspen in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
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 $24.5 million in
cash 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) of each such year exceeds
the Base Profit Amount (as defined). The Acquisition has been accounted for
under the purchase method of accounting and goodwill of approximately $24
million is being amortized over 40 years.
During the First Quarter of Fiscal 1998, the Company generated $5.7
million from operations. These funds, along with cash on hand at December 28,
1997, proceeds from a $10 million term loan and borrowings of approximately $6.9
million under the Company's credit facility were used to fund the acquisition of
Aspen and capital expenditures of approximately $2.3 million.
At March 29, 1998, $35.0 million was available for general corporate
purposes under the Company's credit facility, less approximately $13.1 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.
Inventories increased from $74 million at December 28, 1997 to $84 million
at March 29, 1998. The increase was primarily due to the acquisition of Aspen
and build up of new products. Seasonality was also a factor in the increased
inventory levels. Accounts receivable declined from $45 million at December 28,
1997 to $43 million at March 29, 1998 despite the inclusion of Aspen. This
decline was due to the seasonality of the Company's business.
The Company has provided approximately $2.8 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 should
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)
YEAR 2000 DATE CONVERSION
The Company's management has initiated a company-wide program to prepare
the Company's computer systems for the year 2000. A comprehensive review of the
Company's computer systems has been conducted to identify the systems that could
be affected by this issue. An implementation plan to resolve this issue has been
developed and is being implemented. The Company presently believes that with
modifications to existing software and the conversion to new software, the year
2000 problem will not pose a significant operational problem to the Company. The
Company expects the year 2000 modifications and conversions to be completed on a
timely basis and to cost approximately $50,000 to $100,000, which will be
expensed in 1998. However, there can be no assurance that the systems of other
parties upon which the Company's business also relies, including, but not
limited to, the Company's customers and suppliers, will be converted on a timely
basis. The Company's business, financial condition, or results of operations
could be materially adversely affected by the failure of the systems and
applications operated by other parties.
INFLATION
Inflation in general was not considered to be a significant factor in the
Company's operations during the periods discussed above.
BUSINESS OUTLOOK
This Quarterly Report, including "Management's Discussion and Analysis of
Results of Operations and Financial Condition," contains forward-looking
statements within the meaning of 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; the timely
implementation by the Company of its plan to prepare its computer systems for
the year 2000 and timely conversion by other parties on which the Company's
business relies; 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.
13
<PAGE> 14
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to several pending legal proceedings and claims.
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 operations or liquidity.
In March 1998, the U.S. Court of Appeals for the Federal Circuit ruled
that certain insulated bakeware products manufactured by the Company prior to
1996 do not infringe a patent held by a third-party plaintiff. This decision
reversed the April 1996 finding of the U.S. District Court for the Northern
District of Ohio. The third-party plaintiff has not filed an appeal with respect
to this ruling.
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 the
Company 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 hereinabove); Chicago,
Illinois and Lititz, Pennsylvania; and at the previously owned facility in
Hudson, New Hampshire, hazardous substances, oil or both 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.
14
<PAGE> 15
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:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K: On January 21, 1998, the registrant filed a report on
Form 8-K as of January 16, 1998 to report under "Item 2. Acquisition or
Disposition of Assets" the acquisition of the outstanding equity
securities of APP Holding Corporation, the parent and sole stockholder of
Aspen Pet Products, Inc. On March 18, 1998, the registrant filed Amendment
No. 1 on Form 8-K/A to the foregoing Form 8-K to report that the financial
statements and information of Items 7(a) and (b) were not applicable.
15
<PAGE> 16
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 11, 1998 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
16
<PAGE> 17
INDEX TO EXHIBIT FILED WITH FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1998
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<RESTATED>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-28-1997 JAN-03-1999
<PERIOD-START> DEC-30-1996 DEC-29-1998
<PERIOD-END> MAR-30-1997 MAR-29-1998
<CASH> 28,657 1,372
<SECURITIES> 0 0
<RECEIVABLES> 35,636 44,439
<ALLOWANCES> 857 1,150
<INVENTORY> 55,354 83,854
<CURRENT-ASSETS> 139,000 144,328
<PP&E> 74,345 78,051
<DEPRECIATION> 40,103 40,910
<TOTAL-ASSETS> 291,909 319,107
<CURRENT-LIABILITIES> 49,734 52,364
<BONDS> 124,204 140,145
4,156 4,457
0 0
<COMMON> 187 192
<OTHER-SE> 101,787 109,644
<TOTAL-LIABILITY-AND-EQUITY> 291,909 319,107
<SALES> 53,888 67,416
<TOTAL-REVENUES> 53,888 67,416
<CGS> 36,870 47,122
<TOTAL-COSTS> 52,064 64,236
<OTHER-EXPENSES> 909 1,054
<LOSS-PROVISION> 153 134
<INTEREST-EXPENSE> 3,135 3,436
<INCOME-PRETAX> (1,950) (1,255)
<INCOME-TAX> (942) (610)
<INCOME-CONTINUING> (1,008) (645)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,008) (645)
<EPS-PRIMARY> (0.05) (0.03)
<EPS-DILUTED> (0.05) (0.03)
</TABLE>
