<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 JUNE 28, 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 July 31, 1998, there were issued and outstanding 19,514,351 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)
JUNE 28, DECEMBER 28,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 824 $ 14,565
Accounts receivable, net 47,713 45,529
Inventories 89,047 74,150
Other current assets 8,465 9,021
Deferred income taxes 7,181 6,877
-------- --------
Total current assets 153,230 150,142
Property and equipment, net 38,001 35,678
Other assets 7,664 7,563
Excess of cost over fair value of net assets
acquired, net 129,092 107,422
-------- --------
Total assets $327,987 $300,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion long-term obligations $ 1,740 $ --
Accounts payable 14,007 14,040
Accrued expenses 26,057 29,290
Income taxes 5,629 6,344
-------- --------
Total current liabilities 47,433 49,674
-------- --------
Long-term obligations, less current portion 153,588 124,270
-------- --------
Other long-term liabilities 11,419 11,974
-------- --------
Series B ESOP Convertible Preferred Stock, net;
outstanding 1,227 shares and 1,315 shares,
respectively, redeemable at $3.61 per share 4,450 4,399
-------- --------
Commitments and contingencies -- --
Minority interest 494 494
-------- --------
Stockholders' equity
Common stock, $.01 par value; outstanding
19,348 shares and 19,066 shares,
respectively 193 191
Capital in excess of par value 110,314 109,462
Retained earnings 4,416 4,665
Unearned compensation (2,649) (2,787)
Accumulated other comprehensive income (loss) (1,671) (1,537)
-------- --------
110,603 109,994
-------- --------
Total liabilities and stockholders' equity $327,987 $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 SIX MONTHS ENDED JUNE 28, 1998 AND JUNE 29, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $70,955 $57,510 $138,371 $111,398
------- ------- -------- --------
Costs and expenses
Cost of sales 49,019 39,158 96,141 76,028
Selling, general and administrative 16,542 14,845 33,656 29,745
Special charge -- 320 -- 614
Amortization of excess of cost over
fair value 1,055 907 2,109 1,816
------- ------- -------- --------
66,616 55,230 131,906 108,203
------- ------- -------- --------
Income before interest and income taxes 4,339 2,280 6,465 3,195
------- ------- -------- --------
Net interest
Interest expense 3,645 3,118 7,081 6,253
Investment income (79) (260) (134) (530)
------- ------- -------- --------
3,566 2,858 6,947 5,723
------- ------- -------- --------
Income (loss) from operations before
income taxes 773 (578) (482) (2,528)
Income tax expense (benefit) 377 (281) (233) (1,223)
------- ------- -------- --------
Net income (loss) $ 396 $ (297) $ (249) $ (1,305)
======= ======= ======== ========
Earnings (loss) per common share:
Basic $ 0.02 $ (0.02) $ (0.01) $ (0.07)
======= ======= ======== ========
Diluted $ 0.02 $ (0.02) $ (0.01) $ (0.07)
======= ======= ======== ========
Weighted average number of shares used in
computation of per share data:
Basic 19,286 18,934 19,201 18,811
======= ======= ======== ========
Diluted 21,259 18,934 19,201 18,811
======= ======= ======== ========
</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 SIX MONTHS ENDED JUNE 28, 1998 AND JUNE 29, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (249) $ (1,305)
Adjustments to reconcile net income to net cash
provided by (used in) operations
Depreciation 3,866 3,720
Amortization of excess of cost over fair value 2,109 1,816
Amortization of deferred finance costs 329 284
Other amortization 2,294 2,211
Special charges -- 614
Other (247) 152
Changes in certain assets and liabilities, net of effects from
acquisition of business, affecting cash provided by (used in)
operations
Accounts receivable 2,131 5,182
Inventories (6,191) (21,328)
Prepaid marketing costs (2,034) (2,151)
Other assets 1,085 934
Accounts payable and accrued expenses (5,430) (7,086)
Income taxes payable (714) 2,686
-------- --------
Net cash used in operations
Continuing operations (3,051) (14,271)
Discontinued operations -- (51)
-------- --------
Net cash used in operations (3,051) (14,322)
-------- --------
Cash flows from investing activities
Proceeds from sale of property and equipment 65 112
Capital expenditures for operations (5,224) (3,482)
Proceeds from sale of discontinued operations -- 14,351
Acquisition of businesses (26,935) --
-------- --------
Net cash provided by (used in) investing activities (32,094) 10,981
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term obligations 30,166 --
Payment of long-term obligations (9,330) --
Other 548 618
-------- --------
Net cash provided by financing activities 21,384 618
Effect of exchange rate changes on cash 20 (15)
-------- --------
Net decrease in cash and cash equivalents (13,741) (2,738)
Cash and cash equivalents at beginning of year 14,565 15,706
-------- --------
Cash and cash equivalents at end of period $ 824 $ 12,968
======== ========
Cash paid (refunded) during the period for
Interest $ 6,657 $ 5,916
Income taxes 481 (3,821)
</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 (loss) for the three and six months ended June 28,
1998 and June 29, 1997, respectively, was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss) $ 396 $(297) $(249) $(1,305)
----- ----- ----- -------
Other comprehensive income (loss):
Foreign currency translation adjustment (171) (59) (135) (84)
Pension liability adjustment -- -- 1 --
----- ----- ----- -------
(171) (59) (134) (84)
----- ----- ----- -------
Comprehensive income (loss) $ 225 $(356) $(383) $(1,389)
===== ===== ===== =======
</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 six months ended June 29, 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 SIX MONTHS ENDED
JUNE 29, 1997 JUNE 29, 1997
------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues $64,720 $124,900
Loss before income taxes (66) (1,852)
Net income (loss) 20 (891)
Loss per common share
Basic - (.05)
Diluted - (.05)
</TABLE>
(3) ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable $48,768 $46,486
Allowance for doubtful accounts (1,055) (957)
------- -------
$47,713 $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>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials $13,889 $12,984
Work in process 5,318 3,811
Finished goods 69,840 57,355
------ ------
$89,047 $74,150
====== ======
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment at cost
Land, buildings and improvements $15,893 $14,598
Equipment, factory and other 64,895 60,624
------- -------
80,788 75,222
Less accumulated depreciation 42,787 39,544
------- -------
$38,001 $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 $34,430 and $32,321 as of June 28, 1998 and December 28, 1997,
respectively.
(7) LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Term loan $ 9,643 $ -
Credit facility 19,053 -
9.25% Senior Notes, due 2006
(net of unamortized discount of
$685 and $730, respectively) 124,315 124,270
Other 2,317 -
-------- --------
155,328 124,270
Less current portion 1,740 -
-------- --------
$153,588 $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>
JUNE 28, 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 $4,450 $4,757
Unearned compensation -- (358)
------ ------
$4,450 $4,399
====== ======
</TABLE>
(10) COMMON STOCK, $.01 PAR VALUE
Share information regarding common stock consisted of the following:
<TABLE>
<CAPTION>
JUNE 28, 1998 DECEMBER 28, 1997
------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Authorized shares 60,000 60,000
====== ======
Shares issued 28,764 28,481
Shares held in treasury 9,416 9,415
------ ------
19,348 19,066
====== ======
</TABLE>
(11) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is based upon the weighted average
number of common shares outstanding during each period. Diluted earnings (loss)
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 (loss) 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 SIX MONTHS ENDED
------------------ ----------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average shares of common
stock outstanding during the
period 19,286 18,934 19,201 18,811
Series B ESOP Convertible Preferred anti- anti- anti-
Stock 1,247 dilutive dilutive dilutive
Weighted average common equivalent
shares due to stock options and anti- anti- anti-
warrants 726 dilutive dilutive dilutive
------ -------- -------- --------
21,259 18,934 19,201 18,811
====== ====== ====== ======
Net earnings (loss) used in determining
per share amount
Basic $396 $(297) $(249) $(1,305)
==== ===== ===== =======
Diluted $396 $(297) $(249) $(1,305)
==== ===== ===== =======
</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 June 28, 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 June 28, 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 half of Fiscal 1998, the Company paid approximately $33,000 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 six months ended June 29, 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
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 June 28, 1998 (the "Second Quarter
of Fiscal 1998") and June 29, 1997 (the "Second Quarter of Fiscal 1997") and for
the twenty six week period ended June 28, 1998 (the "First Half of Fiscal 1998")
and June 29, 1997 (the "First Half of Fiscal 1997") and the financial condition
at June 28, 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 by product category were as follows:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
-------------- ----------
1998 1997 1998 1997
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Bakeware $12,700 $ 13,298 $ 29,485 $ 28,205
Kitchenware 23,878 18,021 44,393 35,130
Cleaning products 13,554 14,545 26,428 26,086
Pest control and small animal
care and control products 9,617 8,930 18,197 16,741
VIA products 3,122 2,716 6,028 5,236
Pet products 8,084 -- 13,840 --
------- -------- -------- --------
$70,955 $ 57,510 $138,371 $111,398
======= ======== ======== ========
</TABLE>
Net revenues for the Second Quarter and First Half of Fiscal 1998, which
include $8.1 million and $13.8 million, respectively for Aspen Pet Products,
Inc. ("Aspen"), which was acquired during January 1998, increased approximately
$13.4 million (23%) and $27.0 million (24%) from the comparable prior year
periods, respectively. Excluding the effect of the acquisition of Aspen, net
revenues increased $5.4 million (9%) and $13.1 million (12%) from the comparable
prior year periods, respectively. The increase in net revenues was primarily the
result of increases in sales of the Company's kitchenware products, which
include many 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.
GROSS PROFIT
The gross profit margin for the Second Quarter and First Half of Fiscal
1998 was 30.9% and 30.5%, respectively. For the Second Quarter and First Half of
Fiscal 1997, the gross profit margin was 31.9% and 31.8%, respectively. The
decline in gross profit margin from the prior year period was primarily due to
inefficiencies within the manufacturing of the Company's cleaning products and a
change in product mix with
11
<PAGE> 12
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
GROSS PROFIT (CONTINUED)
increased sales of lower margin products. 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 Half of 1998. The Company's
management is pursuing several strategic alternatives to address the issues the
Company's cleaning products group is facing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the Second Quarter and
First Half of 1998, which includes $1.3 million and $2.3 million, respectively
for Aspen, increased approximately $1.7 million (11%) and $3.9 million (13%),
respectively from the comparable prior year periods. Excluding Aspen, the
increase was $400,000 (2.8%)and $1.6 million (5.5%), respectively. The 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.
NET INTEREST EXPENSE
Net interest expense increased from $2.9 million and $5.7 million for the
Second Quarter and First Half of Fiscal 1997, respectively, to $3.6 million and
$6.9 million for the Second Quarter and First Half of Fiscal 1998, respectively.
The increase was primarily due to higher borrowings in 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) 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.
12
<PAGE> 13
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
During the First Half of Fiscal 1998, the Company used cash on hand at
December 28, 1997, proceeds from a $10 million term loan and borrowings of
approximately $10.8 million under the Company's revolving credit facility 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, (iii) capital expenditures of approximately $5.2 million
and (iv) ongoing operations, which required expenditures of approximately $3.1
million.
At June 28, 1998, $24.3 million was available for general corporate
purposes under the Company's credit facility, net of approximately $11.7 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 June 28, 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. Accounts receivable increased from $46 million at December 28, 1997 to
$48 million at June 28, 1998, principally due to the increase in net revenues of
approximately $13 million during the Second Quarter.
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 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.
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)
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 or if the Company's modifications to existing software and
conversion to new software does not achieve the desired results or is not
completed in a timely manner.
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.
14
<PAGE> 15
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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders held on May 12, 1998 in Boston,
Massachusetts, each of the persons nominated for election as a director of the
Company was elected by the votes shown below. Each director will hold office
until the next annual meeting of stockholders and until his successor is duly
chosen and qualified or until his earlier resignation or removal.
15
<PAGE> 16
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
<TABLE>
<CAPTION>
NO. OF NO. OF
SHARES VOTED SHARES
FOR WITHHELD
------------ --------
<S> <C> <C>
George W. Carmany, III 16,746,939 181,313
Michael G. Frieze 16,757,790 170,465
Avram J. Goldberg 16,753,540 174,715
Kenneth J. Novack 16,757,290 171,265
Stuart B. Ross 16,757,811 170,443
Malcolm L. Sherman 16,756,165 172,090
Bill W. Sorenson 16,755,361 172,893
Herbert M. Stein 16,622,108 306,145
</TABLE>
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.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EKCO GROUP, INC.
-------------------------------------
(Registrant)
Date: August 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
17
<PAGE> 18
INDEX TO EXHIBIT FILED WITH FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1998
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 12,968
<SECURITIES> 0
<RECEIVABLES> 37,750
<ALLOWANCES> 1,003
<INVENTORY> 68,710
<CURRENT-ASSETS> 138,361
<PP&E> 76,213
<DEPRECIATION> 41,588
<TOTAL-ASSETS> 290,203
<CURRENT-LIABILITIES> 48,556
<BONDS> 124,226
4,298
0
<COMMON> 189
<OTHER-SE> 102,030
<TOTAL-LIABILITY-AND-EQUITY> 290,203
<SALES> 111,398
<TOTAL-REVENUES> 111,398
<CGS> 76,028
<TOTAL-COSTS> 105,773
<OTHER-EXPENSES> 2,430
<LOSS-PROVISION> 238
<INTEREST-EXPENSE> 6,253
<INCOME-PRETAX> (2,528)
<INCOME-TAX> (1,223)
<INCOME-CONTINUING> (1,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,305)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 824
<SECURITIES> 0
<RECEIVABLES> 48,768
<ALLOWANCES> 1,055
<INVENTORY> 89,047
<CURRENT-ASSETS> 153,230
<PP&E> 80,788
<DEPRECIATION> 42,787
<TOTAL-ASSETS> 327,987
<CURRENT-LIABILITIES> 47,433
<BONDS> 153,588
4,450
0
<COMMON> 193
<OTHER-SE> 110,410
<TOTAL-LIABILITY-AND-EQUITY> 327,987
<SALES> 138,371
<TOTAL-REVENUES> 138,371
<CGS> 96,141
<TOTAL-COSTS> 129,797
<OTHER-EXPENSES> 2,109
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 7,081
<INCOME-PRETAX> (482)
<INCOME-TAX> (233)
<INCOME-CONTINUING> (249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (249)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
