<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 27, 1998
------------------
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 2, 1998, there were issued and outstanding 19,639,948 shares of
common stock of the registrant.
1
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 27, DECEMBER 28,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 919 $ 14,565
Accounts receivable, net 60,526 45,529
Inventories 89,112 74,150
Other current assets 7,180 9,021
Deferred income taxes 7,181 6,877
--------- --------
Total current assets 164,918 150,142
Property and equipment, net 39,377 35,678
Other assets 7,494 7,563
Excess of cost over fair value of net assets
acquired, net 127,995 107,422
--------- --------
Total assets $ 339,784 $300,805
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion long-term obligations $ 1,743 $ --
Accounts payable 15,968 14,040
Accrued expenses 32,087 29,290
Income taxes 8,522 6,344
--------- --------
Total current liabilities 58,320 49,674
--------- --------
Long-term obligations, less current portion 150,292 124,270
--------- --------
Other long-term liabilities 11,040 11,974
--------- --------
Series B ESOP Convertible Preferred Stock, net;
outstanding 1,193 shares and 1,315 shares,
respectively, redeemable at $3.61 per share 4,337 4,399
--------- --------
Commitments and contingencies -- --
Minority interest 494 494
--------- --------
Stockholders' equity
Common stock, $.01 par value; outstanding
19,624 shares and 19,066 shares,
respectively 196 191
Capital in excess of par value 111,239 109,462
Retained earnings 8,064 4,665
Unearned compensation (2,403) (2,787)
Accumulated other comprehensive loss (1,795) (1,537)
--------- --------
115,301 109,994
--------- --------
Total liabilities and stockholders' equity $ 339,784 $300,805
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 27, 1998
AND SEPTEMBER 28, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ----------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 89,052 $ 81,818 $ 227,423 $ 193,216
-------- --------- --------- ---------
Costs and expenses
Cost of sales 58,658 52,634 154,799 128,662
Selling, general and administrative 18,585 16,123 52,241 45,868
Special charge -- 169 -- 783
Amortization of excess of cost over
fair value 1,057 909 3,166 2,725
-------- --------- --------- ---------
78,300 69,835 210,206 178,038
-------- --------- --------- ---------
Income before interest and income taxes 10,752 11,983 17,217 15,178
-------- --------- --------- ---------
Net interest
Interest expense 3,660 3,072 10,741 9,325
Investment income (57) (75) (191) (605)
-------- --------- --------- ---------
3,603 2,997 10,550 8,720
-------- --------- --------- ---------
Income from operations before income taxes 7,149 8,986 6,667 6,458
Income tax expense 3,501 4,450 3,268 3,227
-------- --------- --------- ---------
Net income $ 3,648 $ 4,536 $ 3,399 $ 3,231
======== ========= ========= =========
Earnings per common share:
Basic $ 0.19 $ 0.24 $ 0.18 $ 0.17
======== ========= ========= =========
Diluted $ 0.17 $ 0.22 $ 0.16 $ 0.16
======== ========= ========= =========
Weighted average number of shares used in
computation of per share data:
Basic 19,526 18,979 19,309 18,867
======== ========= ========= =========
Diluted 21,348 20,983 21,296 20,761
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ 3,399 $ 3,231
Adjustments to reconcile net income to net cash
provided by (used in) operations
Depreciation 5,805 5,475
Amortization of excess of cost over fair value 3,166 2,725
Amortization of deferred finance costs 497 426
Other amortization 3,446 3,941
Special charges -- 783
Other (71) 2,464
Changes in certain assets and liabilities, net of effects from
acquisition of business, affecting cash provided by (used in)
operations
Accounts receivable (10,891) (16,016)
Inventories (6,388) (31,479)
Prepaid marketing costs (2,816) (4,790)
Other assets 2,366 203
Accounts payable and accrued expenses 2,199 553
Income taxes payable 2,180 4,240
-------- --------
Net cash provided by (used) in operations
Continuing operations 2,892 (28,244)
Discontinued operations -- (570)
-------- --------
Net cash provided by (used in) operations 2,892 (28,814)
-------- --------
Cash flows from investing activities
Proceeds from sale of property and equipment 68 144
Capital expenditures for operations (8,597) (5,078)
Proceeds from sale of discontinued operations -- 17,600
Acquisition of businesses (26,935) --
-------- --------
Net cash provided by (used in) investing activities (35,464) 12,666
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term obligations 30,074 --
Payment of long-term obligations (12,645) --
Other 1,364 832
-------- --------
Net cash provided by financing activities 18,793 832
Effect of exchange rate changes on cash 133 (15)
-------- --------
Net decrease in cash and cash equivalents (13,646) (15,331)
Cash and cash equivalents at beginning of year 14,565 15,706
-------- --------
Cash and cash equivalents at end of period $ 919 $ 375
======== ========
Cash paid (refunded) during the period for
Interest $ 7,241 $ 5,915
Income taxes 1,088 (3,218)
</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.
The Company recently adopted Financial Accounting Standards Board Statement
No.130 "Reporting Comprehensive Income".
Comprehensive income for the three and nine months ended September 27, 1998
and September 28, 1997, respectively, was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 3,648 $ 4,536 $ 3,399 $ 3,231
------- ------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustment (124) 14 (259) (70)
Pension liability adjustment -- -- 1 --
------- ------- ------- -------
(124) 14 (258) (70)
------- ------- ------- -------
Comprehensive income $ 3,524 $ 4,550 $ 3,141 $ 3,161
======= ======= ======= =======
</TABLE>
(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
5
<PAGE> 6
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(2) ACQUISITION OF ASPEN PET PRODUCTS, INC. (CONTINUED)
Profit (as defined) for 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):
<TABLE>
<S> <C>
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
========
</TABLE>
The following unaudited pro forma combined results of operations for the
three and nine months ended September 28, 1997 have been prepared assuming that
the Acquisition occurred at the beginning of such period. In preparing the pro
forma data, adjustments have been made for: (i) the amortization of goodwill;
(ii) the interest expense related to the borrowings under the Company's credit
facility to finance a portion of the purchase price; (iii) the reduction in
investment income due to the utilization of the Company's cash and investments
to finance a portion of the purchase price; (iv) the elimination of Aspen's
costs associated with shareholder transactions; and (v) the effect on income
taxes of the foregoing pro forma adjustments.
The following unaudited pro forma financial information is not necessarily
indicative of results of operations that would have occurred had the Acquisition
been effected at the beginning of such fiscal period or of future results of the
combined companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, 1997 SEPTEMBER 28, 1997
------------------ ------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues $89,882 $214,782
Income before income taxes 9,390 7,538
Net income 4,789 3,898
Earnings per common share
Basic .25 .21
Diluted .23 .19
</TABLE>
(3) ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable $61,614 $46,486
Allowance for doubtful accounts (1,088) (957)
------- -------
$60,526 $45,529
======= =======
</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 27, 1998 DECEMBER 28, 1997
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials $13,002 $12,984
Work in process 4,833 3,811
Finished goods 71,277 57,355
------- -------
$89,112 $74,150
======= =======
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment at cost
Land, buildings and improvements $17,026 $14,598
Equipment, factory and other 67,041 60,624
------- -------
84,067 75,222
Less accumulated depreciation 44,690 39,544
------- -------
$39,377 $35,678
======= =======
</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 $35,487 and $32,321 as of September 27, 1998 and December 28,
1997, respectively.
(7) LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Term loan $ 9,286 $ --
Credit facility 16,149 --
9.25% Senior Notes, due 2006
(net of unamortized discount of
$663 and $730, respectively) 124,337 124,270
Other 2,263 --
-------- --------
152,035 124,270
Less current portion 1,743 --
-------- --------
$150,292 $124,270
======== ========
</TABLE>
The principal of the term loan is payable in quarterly installments of
approximately $357,000, which commenced 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:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Series B ESOP Convertible Preferred
Stock, par value $.01, redeemable at
$3.61 per share $4,337 $4,757
Unearned compensation -- (358)
------ ------
$4,337 $4,399
====== ======
</TABLE>
(10) COMMON STOCK, $.01 PAR VALUE
Share information regarding common stock consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Authorized shares 60,000 60,000
====== ======
Shares issued 29,039 28,481
Shares held in treasury 9,415 9,415
------ ------
19,624 19,066
====== ======
</TABLE>
(11) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings per common share is based upon the weighted average number
of common shares outstanding during each period. Diluted earnings per common
share is based upon the weighted average number of common shares 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 earnings per share consisted of the following for the
periods presented:
8
<PAGE> 9
<TABLE>
<CAPTION>
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding
during the period 19,526 18,979 19,309 18,867
Series B ESOP Convertible
Preferred Stock 1,221 1,376 1,261 1,398
Weighted average common
equivalent shares due to
stock options and warrants 602 628 726 496
------- ------- ------- -------
21,349 20,983 21,296 20,761
======= ======= ======= =======
Net earnings used in determining
per share amount
Basic $ 3,648 $ 4,536 $ 3,399 $ 3,231
======= ======= ======= =======
Diluted $ 3,648 $ 4,536 $ 3,399 $ 3,231
======= ======= ======= =======
</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 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.
9
<PAGE> 10
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In connection with the acquisition of Kellogg Brush Manufacturing Co. (now
known as EKCO Cleaning, Inc. ("Cleaning")) and subsidiaries by the Company in
1993, the Company engaged environmental engineering consultants ("Consultants")
to review potential environmental liabilities at all of Cleaning's properties.
Such investigation and testing resulted in the identification of likely
environmental remedial actions, operation, maintenance and ground water
monitoring and the estimated costs thereof. Management, based upon the
engineering studies, originally estimated the total remediation and ongoing
ground water monitoring costs to be approximately $6.0 million, including the
effects of inflation, and accordingly at that time recorded a liability of
approximately $3.8 million, representing the undiscounted costs of remediation
and the net present value of future costs discounted at 6%. Based upon the most
recent cost estimates provided by the Consultants, the Company believes the
total 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 September 27, 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 September 27, 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 nine months of Fiscal 1998, the Company paid approximately
$60,000 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 and nine months ended September 28, 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.
(14) SUBSEQUENT EVENT
On October 28, 1998 the Company announced that it had signed a Letter of
Intent with Lassen Manufacturing, Inc., Los Angeles, California, with respect to
the proposed sale to Lassen of the Wright-Bernet and Cleaning Specialty
divisions of the Company's cleaning products business. The Company expects to
incur a pre-tax charge of approximately $16.2 million in the fourth quarter
ending January 3, 1999, which equates to $15.2 million or $0.71 per diluted
share, after related income tax benefits. Included in the charge is a $13.7
million write-off of goodwill for which there is no tax benefit. Lassen
Manufacturing intends to continue to manufacture Wright-Bernet products at the
Hamilton, Ohio facility under a lease agreement with the Company, and will
continue to utilize the Cleaning Specialty manufacturing facility in Nashville,
Tennessee. Completion of the transaction is expected by year-end and is subject
to due diligence and the execution of a definitive agreement.
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 September 27, 1998 (the "Third
Quarter of Fiscal 1998") and September 28, 1997 (the "Third Quarter of Fiscal
1997") and for the thirty-nine week period ended September 27, 1998 (the "First
Nine Months of Fiscal 1998") and September 28, 1997 (the "First Nine Months of
Fiscal 1997") and the financial condition at September 27, 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 for and the balance sheet 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 by product category were as follows:
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
------------- -----------------
1998 1997(1) 1998(1) 1997(1)
---- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Bakeware $28,134 $ 28,007 $ 59,845 $ 57,810
Kitchenware 27,046 27,591 75,241 66,359
Cleaning products 13,858 16,630 40,286 42,716
Pest control and small animal
care and control products 10,871 9,590 29,068 26,331
Pet products 9,143 -- 22,983 --
------- -------- -------- --------
$89,052 $ 81,818 $227,423 $193,216
======= ======== ======== ========
</TABLE>
(1) Certain amounts have been reclassified to be consistent with the
classification used for the three months ended September 27, 1998.
Net revenues for the Third Quarter and First Nine Months of Fiscal 1998,
which include $9.1 million and $23.0 million, respectively for Aspen Pet
Products, Inc. ("Aspen"), which was acquired during January 1998, increased
approximately $7.2 million (8.8%) and $34.2 million (17.7%) from the comparable
prior year periods, respectively. Excluding the effect of the acquisition of
Aspen, net revenues for the First Nine Months of Fiscal 1998 increased $11.2
million (5.8%) from the comparable prior year period. The increase in net
revenues was primarily the result of increases in sales of the Company's
kitchenware products in the first six months of fiscal 1998, which include new
categories such as cookware, cutlery and barware. Additionally, kitchenware
revenues benefited from sales of cutlery and flatware under the Regent
Sheffield(R) and Wiltshire(R) brand names. The North American rights to those
brand names were licensed by the Company in May 1998. Sales of the Company's
bakeware benefited from a greater penetration in upscale markets from
Farberware(R) products, while sales of the Company's pest control and small
animal care and control products benefited from a strong rodent season resulting
from warm weather brought on by El Nino and increased distribution of new
products. These increases were partially offset by a decline in sales of the
Company's cleaning products which were adversely affected by the loss of some
major customers and a large pallet and
11
<PAGE> 12
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
NET REVENUES (CONTINUED)
flood relief promotion in Fiscal 1997 that was not repeated in Fiscal 1998. Net
revenues for the Third Quarter of Fiscal 1998, excluding the effect of the
acquisition of Aspen, declined $1.9 million (2.3%) from the comparable prior
year period. The decline was primarily the result of lower sales of the
Company's cleaning products previously mentioned. Additionally, sales of the
Company's kitchenware products in the Third Quarter of Fiscal 1998 were
adversely affected by sluggish retail sales of certain major customers and
intense competitive pricing.
GROSS PROFIT
The gross profit margin for the Third Quarter and First Nine Months of
Fiscal 1998 was 34.1% and 31.9%, respectively. For the Third Quarter and First
Nine Months of Fiscal 1997, the gross profit margin was 35.7% and 33.4%,
respectively. The decline in gross profit margin from the prior year periods was
primarily due to inefficiencies within the manufacturing of the Company's
cleaning products, the effect of intensive competition in the Company's
kitchenware products, and increases in manufacturing and distribution costs
incurred in anticipation of a higher than realized volume of sales. The decline
in gross profit margin was partially offset by the inclusion of Aspen, which had
a gross profit margin higher than the Company's consolidated gross profit
margin.
During the Second Half of Fiscal 1997, the Company consolidated its
cleaning product manufacturing facilities into one facility. The target
productivity was not achieved during the First Nine Months of 1998. See
Liquidity and Capital Resources for information regarding the Company's proposed
sale of a portion of its cleaning products business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the Third Quarter and
First Nine Months of Fiscal 1998, which includes $1.6 million and $3.9 million,
respectively for Aspen, increased approximately $2.5 million (15.3%) and $6.4
million (13.9%), respectively from the comparable prior year periods. Excluding
Aspen, the increase was $900,000 (5.0%) and $2.5 million (5.3%), respectively.
The increase was primarily due to costs associated with sales of cutlery and
flatware under the Regent Sheffield(R) and Wiltshire(R) brand names, expansion
of the Company's international operations, and, for the First Nine Months of
Fiscal 1998, costs associated with increase in revenues.
SPECIAL CHARGE
The special charge for 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.
NET INTEREST EXPENSE
Net interest expense increased from $3.0 million and $8.7 million for the
Third Quarter and First Nine Months of Fiscal 1997, respectively, to $3.6
million and $10.6 million for the Third Quarter and First Nine Months of Fiscal
1998, respectively. The increase was primarily due to higher borrowings in
Fiscal 1998 due to the acquisition of
12
<PAGE> 13
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
NET INTEREST EXPENSE (CONTINUED)
Aspen in January 1998 and the acquisition of exclusive rights to sell cutlery
and flatware under the Regent Sheffield(R) and Wiltshire(R) brand names in May
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) for 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 May 1998, the Company acquired the exclusive North American rights
to sell cutlery and flatware products under the Regent Sheffield(R) and
Wiltshire(R) brands. The Company paid approximately $2.5 million in cash for the
rights and inventory with a value of approximately $2.3 million, and is
obligated to make future royalty payments pursuant to a license agreement.
On October 28, 1998 the Company announced that it had signed a Letter of
Intent with Lassen Manufacturing, Inc., Los Angeles, California, with respect to
the proposed sale to Lassen of the Wright-Bernet and Cleaning Specialty
divisions of the Company's cleaning products business. The Company expects to
incur a pre-tax charge of approximately $16.2 million in the fourth quarter
ending January 3, 1999, which equates to $15.2 million or $0.71 per diluted
share, after related income tax benefits. Included in the charge is a $13.7
million write-off of goodwill for which there is no tax benefit. Lassen
Manufacturing intends to continue to manufacture Wright-Bernet products at the
Hamilton, Ohio facility under a lease agreement with the Company, and will
continue to utilize the Cleaning Specialty manufacturing facility in Nashville,
Tennessee. Completion of the transaction is expected by year-end and is subject
to due diligence and the execution of a definitive agreement.
During the First Nine Months of Fiscal 1998, the Company generated
approximately $2.9 million from operations. The comparable results for the prior
year was a usage of approximately $28.8 million. Such funds, along with a
portion of cash on hand at December 28, 1997, proceeds from a $10 million term
loan and borrowings of approximately $7.4 million under the Company's revolving
credit facility were used to fund (i) the acquisition of Aspen, (ii) the
acquisition of the exclusive North American rights to market products under the
Regent Sheffield(R) and Wiltshire(R) brands, and (iii) capital expenditures of
approximately $8.6 million.
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)
At September 27, 1998, $26.0 million was available for general corporate
purposes under the Company's credit facility, net of approximately $12.9 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 $89 million
at September 27, 1998. The increase was primarily due to the acquisition of
Aspen, the addition of Regent Sheffield(R) and Wiltshire(R) products and the
build up of new products. Seasonality was also a factor in the increased
inventory levels. The increase in accounts receivable and accrued expenses from
the December 28, 1997 levels were primarily 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.
YEAR 2000 DATE CONVERSION
The Year 2000 issue relates to the inability of certain computer software
programs to properly recognize and process date-sensitive information relative
to the year 2000 and beyond. Without corrective measures, this issue could cause
computer applications to fail or to create erroneous results. Incomplete or
untimely resolution of the Year 2000 issue by the Company or by its key vendors,
customers, suppliers or by other third parties could have a materially adverse
impact on the Company's business, operations or financial condition in the
future.
Beginning in September 1997 as part of a larger company-wide enhancement
program (more fully described below), the Company reviewed its infrastructure,
including its computer equipment, software and systems ("IT Systems") which
could be affected by the Year 2000 issue. To date, the Company has completed the
solutions implementation and testing phase for 60% of all critical IT Systems
and anticipates that the solutions implementation and testing for the remaining
40% will be completed by the end of the second quarter of fiscal 1999. All
non-critical IT Systems are currently in the solutions implementation phase,
which, along with testing, is scheduled for completion by the end of the second
quarter of fiscal 1999. The Company's Year 2000 compliance initiatives ("Year
2000 Project") also include a comprehensive review of the embedded chip
technology contained in its non-IT Systems, such as buildings, plant, equipment
and other infrastructure. This review is presently in process, and the Company
anticipates completion of the review during the first quarter of fiscal 1999.
In addition, in the fourth quarter of Fiscal 1998 the Company will commence a
formal communication program with
14
<PAGE> 15
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
YEAR 2000 DATE CONVERSION (CONTINUED)
its key vendors, customers, suppliers and other third parties to determine the
status of their Year 2000 compliance programs and to assess the likelihood and
potential impact on the Company of non-compliance by any such party. Based on
the results of the Company's Year 2000 Project, the Company anticipates that it
will develop contingency plans during the second quarter of fiscal 1999 to
mitigate the major effects of any anticipated disruptions.
The Company's Year 2000 Project is just one component of its larger
company-wide program to enhance its IT Systems and non-IT Systems (the
"Enhancement Program"). The Company engaged a software consulting firm to assist
it with the Enhancement Program and is also utilizing internal and external
resources to implement and test its IT Systems as part of the Year 2000 Project.
Other components of the Company's Enhancement Program have not been delayed due
to the Year 2000 Project and are in the process of being implemented. Based on
currently available information, the Company estimates the cost of the entire
Enhancement Program, including the Year 2000 Project, to be $1.5 million. To
date, the Company has expended $650,000 of the estimated project costs and
projects that an additional $350,000 will be expended in Fiscal 1998 and
$500,000 will be expended in fiscal 1999. The Company's Enhancement Program
costs are funded through cash from operations and borrowings under the Company's
credit facility.
Based on currently available information, the Company expects that all
phases of its Year 2000 Project will be completed by the end of the second
quarter of fiscal 1999. With the completed and planned Year 2000 Project
modifications to its IT Systems and non-IT Systems, the Company currently
believes that the Year 2000 issue should not pose significant operational
problems to the Company. There can be no assurance, however, that the systems of
other parties on which the Company's business relies, including, but not limited
to, the Company's key vendors, customers, suppliers and other third parties,
will be converted on a timely basis. If the Company's Year 2000 Project does not
achieve the desired results or is not completed in a timely manner or if the
systems and applications of key third parties are materially impacted by the
Year 2000 issue, the Company could lose certain of its abilities to efficiently
engage in the normal business activities of purchasing, manufacturing or
delivering its products, which could have a material adverse effect on the
Company's business, financial condition or results of operations. Although some
business disruption in the Company's business may be likely as a result of Year
2000 failures by third parties, the Company is not able at this time to
ascertain the extent of any such disruption.
The dates on which the Company believes it will complete its Year 2000
Project modifications and initiatives and the project costs are based on
management's best estimates. There can be no guarantee, however, that these
estimates will be achieved and actual results could differ materially from those
anticipated. In addition to the Company's reliance on third parties to remediate
their own Year 2000 issues, specific factors that might cause such material
differences include, but are not limited to, the continued availability and cost
of trained personnel and the ability to locate and correct all relevant computer
codes.
15
<PAGE> 16
GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 Year 2000 Project, the future costs
associated with its Year 2000 Project and the timely conversion by key vendors,
customers, suppliers and other third 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.
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.
16
<PAGE> 17
GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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.
ITEM 5. OTHER INFORMATION
To be considered for inclusion in the proxy statement relating to the
Annual Meeting of Stockholders to be held in 1999, stockholder proposals must be
received no later than November 27, 1998. To be considered for presentation at
the Annual Meeting, although not included in the proxy statement, proposals must
be received no later than March 12, 1999. All stockholder proposals should be
marked for the attention of John Jay Althoff, Secretary of the Company, 98 Spit
Brook Road, Suite 102, Nashua, New Hampshire 03062.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K: None
17
<PAGE> 18
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 10, 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
18
<PAGE> 19
INDEX TO EXHIBIT FILED WITH FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 919
<SECURITIES> 0
<RECEIVABLES> 61,614
<ALLOWANCES> 1,088
<INVENTORY> 89,112
<CURRENT-ASSETS> 164,918
<PP&E> 84,067
<DEPRECIATION> 44,690
<TOTAL-ASSETS> 339,784
<CURRENT-LIABILITIES> 58,320
<BONDS> 150,292
4,337
0
<COMMON> 196
<OTHER-SE> 115,105
<TOTAL-LIABILITY-AND-EQUITY> 339,784
<SALES> 227,423
<TOTAL-REVENUES> 227,423
<CGS> 154,799
<TOTAL-COSTS> 207,040
<OTHER-EXPENSES> 3,166
<LOSS-PROVISION> 276
<INTEREST-EXPENSE> 10,741
<INCOME-PRETAX> 6,667
<INCOME-TAX> 3,268
<INCOME-CONTINUING> 3,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,399
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<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> 0.17
<EPS-DILUTED> 0.16
</TABLE>
