<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 APRIL 4, 1999
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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
----------------------------------------------------
(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 13, 1999, there were issued and outstanding 19,130,144 shares of
common stock of the registrant.
1
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 952 $ 1,179
Accounts receivable, net 43,926 59,773
Inventories 78,912 75,751
Other current assets 14,334 13,053
Deferred income taxes 7,370 7,370
------- -------
Total current assets 145,494 157,126
Property and equipment, net 39,799 38,887
Other assets 7,716 7,960
Excess of cost over fair value of net assets
acquired, net 113,322 114,267
------- -------
Total assets $306,331 $318,240
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion long-term obligations $ 1,047 $ 1,750
Accounts payable 13,784 18,132
Accrued expenses 27,118 33,542
Income taxes 3,218 5,665
------- -------
Total current liabilities 45,167 59,089
------- -------
Long-term obligations, less current portion 140,952 136,136
------- -------
Other long-term liabilities 8,332 10,333
------- -------
Series B ESOP Convertible Preferred Stock, net; outstanding 1,062 shares and
1,073 shares,
respectively, redeemable at $3.61 per share 3,829 3,868
------- -------
Commitments and contingencies - -
Minority interest 490 490
------- -------
Stockholders' equity
Common stock, $.01 par value; outstanding
19,118 shares and 19,065 shares,
respectively 191 191
Capital in excess of par value 110,315 110,152
Retained earnings (deficit) (298) 733
Unearned compensation (456) (485)
Accumulated other comprehensive income (2,191) (2,267)
------- -------
107,561 108,324
------- -------
Total liabilities and stockholders' equity $306,331 $318,240
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 4, 1999 AND MARCH 29, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net revenues $66,929 $67,416
------ ------
Costs and expenses
Cost of sales 47,694 47,122
Selling, general and administrative 17,116 17,114
Amortization of excess of cost over fair value 889 1,054
------ ------
65,699 65,290
------ ------
Income before interest and income taxes 1,230 2,126
------ ------
Net interest
Interest expense 3,267 3,436
Investment income (15) (55)
------ ------
3,252 3,381
------ ------
Loss from operations before income taxes (2,022) (1,255)
Income tax benefit (991) (610)
------ ------
Net loss $(1,031) $ (645)
====== ======
Loss per common share:
Basic $(0.05) $ (0.03)
===== ======
Diluted $(0.05) $ (0.03)
===== ======
Weighted average number of shares used in computation of per share data:
Basic 19,084 19,116
====== ======
Diluted 19,084 19,116
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
EKCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 4, 1999 AND MARCH 29, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,031) $ (645)
Adjustments to reconcile net income to net cash
provided by (used in) operations
Depreciation 1,830 1,912
Amortization of excess of cost over fair value 889 1,054
Amortization of deferred finance costs 155 153
Other amortization 1,328 1,214
Other 103 122
Changes in certain assets and liabilities, net of effects from the
acquisition of a business, affecting cash provided by (used
in)operations
Accounts receivable 15,717 6,564
Inventories (3,332) (3,210)
Prepaid marketing costs (2,731) (1,117)
Other assets 324 780
Accounts payable and accrued expenses (12,373) (652)
Income taxes payable (2,448) (509)
------- -------
Net cash provided by (used in) operating activities (1,569) 5,666
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 336 28
Capital expenditures (2,990) (2,326)
Acquisition of business - (24,464)
------- -------
Net cash used in investing activities (2,654) (26,762)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 11,616 16,925
Payment of long-term obligations (7,925) (9,259)
Other 136 238
------- -------
Net cash provided by financing activities 3,827 7,904
Effect of exchange rate changes on cash 169 (1)
------- -------
Net decrease in cash and cash equivalents (227) (13,193)
Cash and cash equivalents at beginning of year 1,179 14,565
------- -------
Cash and cash equivalents at end of period $ 952 $ 1,372
======= =======
Cash paid during the period for
Interest $ 5,986 $ 358
Income taxes 1,622 101
</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 accompanying notes included in
the Company's latest annual report on Form 10-K. The consolidated condensed
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated. The
condensed financial statements, in the opinion of management, reflect all
adjustments necessary to fairly state the Company's financial position and the
results of its operations. Such adjustments are of a normal recurring nature.
A large part of the Company's business is seasonal. Historically, revenues
in the last half of the calendar year have been greater than revenues in the
first half of the year. Accordingly, the results for the entire year may not
necessarily be the product of annualizing results for any interim period.
(2) ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Accounts receivable $44,639 $60,416
Allowance for doubtful accounts (713) (643)
------ ------
$43,926 $59,773
====== ======
</TABLE>
(3) INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials $7,930 $11,279
Work in process 3,834 3,465
Finished goods 67,148 61,007
------ ------
$78,912 $75,751
====== ======
</TABLE>
5
<PAGE> 6
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Property and equipment at cost
Land, buildings and improvements $ 17,918 $ 17,489
Equipment, factory and other 67,768 66,483
------- -------
85,686 83,972
Less accumulated depreciation (45,887) (45,085)
------- -------
$ 39,799 $ 38,887
======= =======
</TABLE>
(5) 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 $35,131 and $34,242 as of April 4, 1999 and January 3, 1999,
respectively.
(6) LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Term loan $ 726 $ 8,571
Credit Facility 14,366 2,750
9.25% Senior Notes, due 2006
(net of unamortized discount
of $619 and $641, respectively) 124,381 124,359
Other 2,526 2,206
------- -------
141,999 137,886
Less current portion 1,047 1,750
------- -------
$140,952 $136,136
======= =======
</TABLE>
The principal of the term loan is payable in quarterly installments of
approximately $357,000 which commenced on March 31, 1998. During the First
Quarter of Fiscal 1999, the collection by the Company of its year-end accounts
receivable balance provided cash in excess of amounts borrowed under the
Company's Credit Facility. The excess cash was applied to amounts then
outstanding under the Term Loan.
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.
6
<PAGE> 7
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) INCOME TAXES
The Company's effective tax rate fluctuates significantly due to the impact
of goodwill amortization, which is not deductible for tax purposes. The
Company's effective tax rate for the periods presented was 49%.
(8) COMMON STOCK, $.01 PAR VALUE
Share information regarding common stock consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Authorized shares 60,000 60,000
====== ======
Shares issued 29,124 29,072
Shares held in treasury 10,006 10,007
------ ------
19,118 19,065
====== ======
</TABLE>
(9) 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Weighted average shares of common
stock outstanding during the period 19,084 19,116
Series B ESOP Convertible Preferred
Stock anti-dilutive anti-dilutive
Weighted average common equivalent
shares due to stock options ANTI-DILUTIVE ANTI-DILUTIVE
------------- -------------
19,084 19,116
====== ======
Net loss used in determining per share amount
Basic $(1,031) $(645)
====== ====
Diluted $(1,031) $(645)
====== ====
</TABLE>
7
<PAGE> 8
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the three months ended April 4, 1999 and the three
months ended March 29, 1998 was as follows:
<TABLE>
<CAPTION>
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net loss $(1,031) $(645)
Other comprehensive income (loss)
Foreign currency translation adjustments 76 36
Pension liability adjustment - 1
------ ----
76 37
------ ----
Comprehensive loss $ (955) $(608)
====== ====
</TABLE>
(11) INDUSTRY SEGMENT INFORMATION
Selected financial information concerning the Company's reportable segments
is shown in the following table. The Company generally evaluates performance of
its operating segments based on income before goodwill amortization, interest
expense, income taxes and inter-segment profit ("segment profit"). The "other"
column includes the Company's International Operations, which do not meet
quantitative thresholds or aggregation criteria, as well as corporate expenses
and elimination of inter-segment transactions.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) PEST CONTROL
& SMALL ANIMAL
HOUSEWARES CARE CONTROL PET
PRODUCTS PRODUCTS PRODUCTS OTHER TOTAL
---------- -------------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS
ENDED APRIL 4, 1999
- -------------------
External net revenues $ 40,943 $ 9,985 $ 8,055 $ 7,946 $ 66,929
Segment profit (292) 1,049 1,442 (80) 2,119
Total assets 211,560 31,295 36,153 27,323 306,331
THREE MONTHS
ENDED MARCH 29, 1998
- --------------------
External net revenues $ 46,141 $ 8,164 $ 5,756 $ 7,355 $ 67,416
Segment profit 1,649 805 1,128 (402) 3,180
Total assets 233,127 30,740 35,228 20,012 319,107
</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.
8
<PAGE> 9
EKCO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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; Chicago, Illinois; Lititz, Pennsylvania; and at
its previously owned facilities in Hudson, New Hampshire; and Easthampton,
Massachusetts, 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 EKCO Cleaning, Inc. ("Cleaning") 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 of those actions.
Management, based upon the engineering studies, at that time recorded a
liability of approximately $3.8 million.
On April 2, 1999, EKCO Cleaning, Inc. ("EKCO Cleaning") completed the
transfer of ownership of its former manufacturing facility in Easthampton,
Massachusetts to a company which has taken full responsibility for environmental
remediation actions at the facility. As consideration, EKCO Cleaning paid
$500,000 at the April 1999 closing and signed a $400,000 non-interest-bearing
promissory note guaranteed by the Company. These amounts were applied to the
$2.5 million liability the Company had recorded at January 3, 1999 for EKCO
Cleaning properties environmental issues. Consequently, no gain or loss
resulted from the transaction. The liability recorded as of April 4,
1999, was approximately $1.6 million.
9
<PAGE> 10
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 periods ended April 4, 1999 (the "First Quarter
of Fiscal 1999") and March 29, 1998 (the "First Quarter of Fiscal 1998") and the
financial condition at April 4, 1999 should be read in conjunction with the
Company's Consolidated Condensed Financial Statements and accompanying Notes.
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 for the First Quarter of
Fiscal 1999 and the First Quarter of Fiscal 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Bakeware $19,421 $17,833
Kitchenware 21,626 22,373
Cleaning products 7,328 12,874
Pest control and small animal care and control products 10,499 8,580
Pet products 8,055 5,756
------ ------
$66,929 $67,416
====== ======
</TABLE>
Net revenues for the First Quarter of Fiscal 1999, decreased approximately
$.5 million (1%) from the comparable prior year period. Included in net revenues
for the First Quarter of Fiscal 1998 were sales from the Company's former
Wright-Bernet, Cleaning Specialty and leg hold trap businesses, which
contributed approximately $5.8 million in net revenues reported in the First
Quarter of Fiscal 1998. Excluding these businesses, net revenues increased
approximately $5.4 million (8.7%). Included in kitchenware revenues for the
First Quarter of Fiscal 1999 were $2.2 million of cutlery and flatware sold
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. Excluding
these sales, the Company's net revenues for its kitchenware products declined
$3.0 million (13%) from the prior year period. This decline was principally due
to price reduction in low-end commodity products in response to competitive
pressure and the benefit received in the First Quarter of Fiscal 1998 from the
initial stocking shipments to a major customer for a plan-o-gram change. This
decline was partially offset by continued growth of recently introduced cookware
products. The net revenues for the Company's bakeware products increased from
the prior year period primarily due to new products including those sold under
the Farberware(R) brand name and distribution gains. The growth in net revenues
of the Company's pest control and small animal care and control products was due
to the continued strong rodent season resulting from favorable weather patterns.
The increase in sales of the Company's pet products was principally due to new
products and increased distribution with major customers.
10
<PAGE> 11
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS (CONTINUED)
GROSS PROFIT
The Company's gross profit margin for the First Quarter of Fiscal 1999
declined from 30.1% in the comparable prior year period to 28.7%. The decline
was primarily due to reduced selling prices of kitchenware products as
previously noted.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the First Quarter of 1999
were reduced by a $1 million reserve reversal related to post-employment
benefits, but remained unchanged from the prior year's level. Excluding the
effect of the reserve reversal selling, general and administrative expense
increased $1 million from the prior year period. The increase was principally
due to the costs associated with the increase in net revenues of the Company's
pet products, adverse effect of foreign currency rates for the Company's
operations in the United Kingdom and costs associated with the introduction of
premium line of dog food sold under the VITARX(R) brand name.
NET INTEREST EXPENSE
Net interest expense decreased from $3.4 million for the First Quarter of
Fiscal 1998 to $3.3 million for the First Quarter of Fiscal 1999. The decrease
was primarily due to lower average borrowings.
LIQUIDITY AND CAPITAL RESOURCES
During the First Quarter of Fiscal 1999, the Company used a portion of cash
on hand at January 3, 1999, collection by the Company of its year-end accounts
receivable balance and borrowings of approximately $11.6 million under the
Company's revolving credit facility to fund operations, to prepay $7.8 million
on the Term Loan and to fund capital expenditures of approximately $3.0 million.
At April 4, 1999, $29.8 million was available for general corporate
purposes under the Company's credit facility, less approximately $11.6 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 $75.8 million at January 3, 1999 to $78.9
million at April 4, 1999. The seasonal nature of the Company's business was the
primary reason for the increased inventory levels. Accounts receivable declined
from $59.8 million at January 3, 1999 to $43.9 million at April 4, 1999. This
decline was also due to the seasonality of the Company's business.
On April 2, 1999, EKCO Cleaning, Inc. ("EKCO Cleaning") completed the
transfer of ownership of its former manufacturing facility in Easthampton,
Massachusetts to a company which has taken full responsibility for environmental
remediation actions at the
11
<PAGE> 12
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
facility. As consideration, EKCO Cleaning paid $500,000 at the April 1999
closing and signed a $400,000 non-interest-bearing promissory note guaranteed by
the Company. These amounts were applied to the $2.5 million liability the
Company had recorded at January 3, 1999 for EKCO Cleaning properties
environmental issues. Consequently, no gain or loss resulted from the
transaction. The liability recorded as of April 4, 1999, was
approximately $1.6 million.
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 material adverse
effect 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 Third Quarter of Fiscal 1999. Solutions
implementation and testing for all non-critical IT Systems are likewise
scheduled for completion by the end of the Third Quarter of Fiscal 1999. The
Company's Year 2000 compliance initiatives ("Year 2000 Project") also include a
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
Second Quarter of Fiscal 1999. In addition, the Company has commenced a formal
communication program with 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 will develop contingency plans during the Third 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.
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 (CONTINUED)
Based on currently available information, the Company estimates the cost of the
entire Enhancement Program, including the Year 2000 Project, to be $2.5 million.
To date, the Company has expended $1.5 million of the estimated project costs of
which $600,000 was spent during the First Quarter of Fiscal 1999, and estimates
that the remaining $1.0 million will be expended by December 31, 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 Third
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 upon 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 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. However, a more thorough third
party assessment and appropriate contingency planning will be completed by the
end of the Third Quarter of Fiscal 1999.
The Company has not yet completed the evaluation of its most reasonably
likely worst case Year 2000 scenario, nor has the Company completed its
contingency planning with respect to the Year 2000. The Company intends to
complete both its evaluation and contingency planning during fiscal 1999.
The dates on which the Company believes it will complete its Year 2000
Project modifications and initiatives and the anticipated 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.
INFLATION
Inflation in general was not considered to be a significant factor in the
Company's operations during the periods discussed above.
13
<PAGE> 14
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 and the cost
associated with those introductions; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is exposed to market risk inherent in interest rates, foreign
currency exchange rates, and certain commodity prices. The Company does not hold
or issue derivative financial or derivative commodity instruments for any
purposes. In the normal course of business, the Company also faces risks that
are either non-financial or non-quantifiable. Such risks include those risks
inherent in doing business in any country, credit risk and legal risk and are
not included in the following discussion.
In the ordinary course of business, the Company is exposed to interest rate
risk. For fixed rate debt, interest rate changes affect the fair market value of
the debt, but do not impact earnings or cash flow. Conversely, for floating rate
debt, interest rate changes generally do not affect the fair market value, but
do impact future earnings and cash flow. A one percentage point increase in
interest rates may decrease the fair market value of the Company's $125 million,
9.25%, fixed rate Senior Notes by approximately $5.8 million. The pre-tax
earnings and cash flow impact for one year based upon the amounts outstanding at
April 4, 1999 under the Company's variable rate bank credit facilities for a
one-percentage point change in interest rates would be $150,000. The Company
does not undertake any specific actions to cover its exposure to interest rate
risk and the Company is not party to any interest rate risk management
transactions.
14
<PAGE> 15
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
MARKET RISK (CONTINUED)
The Company manufactures products in the United States and also sources
products, principally from third parties in the Far East under U.S. dollar
contracts. The Company has sales subsidiaries in Canada and the United Kingdom.
The Company's earnings and cash flow are subject to fluctuations due to exchange
rate variation. The Company's third party export sales are in the currency of
the Company's selling entity. The Company does not hedge its foreign currency
exposure arising from intercompany receivables and payable transactions with its
foreign subsidiaries. A 10% change in the Canadian and British exchange rates
based upon the U.S. dollar liabilities of the Company's Canadian and United
Kingdom subsidiaries at April 4, 1999 could affect the Company's pre-tax
earnings for a one year period by $700,000 and $1 million, respectively. Due to
the diversity of the Company's product lines, the Company does not have material
sensitivity to any one commodity. The Company manages commodity price exposures
primarily through the duration and terms of its vendor contracts.
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; Chicago, Illinois and Lititz, Pennsylvania; and
at the previously owned facilities in Hudson, New Hampshire; and Easthampton,
Massachusetts, 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.
15
<PAGE> 16
EKCO GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
ENVIRONMENTAL REGULATION AND CLAIMS (CONTINUED)
On April 2, 1999, EKCO Cleaning, Inc. ("EKCO Cleaning") completed the
transfer of ownership of its former manufacturing facility in Easthampton,
Massachusetts to a company which has taken full responsibility for environmental
remediation actions at the facility. As consideration, EKCO Cleaning paid
$500,000 at the April 1999 closing and signed a $400,000 non-interest-bearing
promissory note guaranteed by the Company. These amounts were applied to the
$2.5 million liability the Company had recorded at January 3, 1999 for EKCO
Cleaning properties environmental issues. Consequently, no gain or loss
resulted from the transaction. The liability recorded as of April 4,
1999, was approximately $1.6 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
16
<PAGE> 17
SIGNATURE
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 19, 1999 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 APRIL 4, 1999
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-2000
<PERIOD-END> APR-04-1999
<CASH> 952
<SECURITIES> 0
<RECEIVABLES> 44,639
<ALLOWANCES> 713
<INVENTORY> 78,912
<CURRENT-ASSETS> 145,494
<PP&E> 85,699
<DEPRECIATION> 45,887
<TOTAL-ASSETS> 306,331
<CURRENT-LIABILITIES> 45,167
<BONDS> 140,952
3,829
0
<COMMON> 191
<OTHER-SE> 107,370
<TOTAL-LIABILITY-AND-EQUITY> 306,331
<SALES> 66,929
<TOTAL-REVENUES> 66,929
<CGS> 47,694
<TOTAL-COSTS> 64,810
<OTHER-EXPENSES> 889
<LOSS-PROVISION> 116
<INTEREST-EXPENSE> 3,267
<INCOME-PRETAX> (2,022)
<INCOME-TAX> (991)
<INCOME-CONTINUING> (1,031)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,031)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
