SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-7117
General Housewares Corp.
(Exact name of Registrant as specified in its Charter)
Delaware 41-0919772
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1536 Beech Street 47804
Terre Haute, Indiana (Zip Code)
(Address of principal executive offices)
Registrant' telephone number, including area code (812) 232-1000
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at November 11, 1998
$.33-1/3 Par Value 4,103,217
PART I FINANCIAL INFORMATION
GENERAL HOUSEWARES CORP. & SUBSIDIARIES
(Dollars in thousands except per share amounts)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
Net sales $27,447 $29,215 $69,391 $73,505
Cost of goods sold 14,944 16,519 40,225 43,637
------- ------- ------- -------
Gross profit 12,503 12,696 29,166 29,868
Selling, general and
administrative expenses 9,574 10,180 29,358 27,946
------- ------- ------- -------
Operating income (loss) 2,929 2,516 (192) 1,922
Interest expense, net 525 721 1,733 1,967
------- ------- ------- -------
Income (loss) from
operations
before income taxes 2,404 1,795 (1,925) (45)
Income taxes 1,025 863 (402) 208
------- ------- ------- -------
Net income (loss) for
the period 1,379 932 (1,523) (253)
Retained earnings,
beginning of period 23,211 25,485 26,722 27,279
Less: Dividends ($.08
per common share in
1998 and 1997) 305 305 914 914
------- ------- ------- -------
Retained earnings,
end of period $24,285 $26,112 $24,285 $26,112
------- ------- ------- -------
------- ------- ------- -------
Earnings per common share:
Net income (loss) -
basic $0.36 $0.24 ($0.40) ($0.07)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) -
diluted $0.35 $0.24 ($0.40) ($0.07)
See notes to consolidated condensed financial statements
CONSOLIDATED CONDENSED BALANCE SHEET
As of
September 30, December 31,
1998 1997
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash $ 559 2,363
Accounts receivable, less allowances
of $3,205 ($2,782 in 1997) 19,613 15,170
Inventories 19,099 20,859
Deferred tax asset 2,858 2,857
Other current assets 2,137 1,680
Income taxes refundable 681 -
-------- --------
Total current assets 44,947 42,929
Notes receivable 2,462 2,364
Property, plant & equipment, net 9,348 12,483
Other assets 1,860 3,581
Patents and other intangible assets 2,381 2,600
Cost in excess of net assets
acquired 23,035 26,807
-------- --------
$ 84,033 $ 90,764
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt $ 2,551 $ 2,793
Notes payable 600 -
Accounts payable 2,288 2,717
Salaries, wages and related benefits 1,940 2,087
Accrued liabilities 4,165 2,838
Income taxes payable - 437
-------- --------
Total current liabilities 11,544 10,872
Long-term debt 24,758 29,761
Deferred liabilities 1,925 1,860
Stockholders' equity:
Preferred stock - $1.00 par value:
Authorized - 1,000,000 shares
Common stock - $.33-1/3 par value:
Authorized - 10,000,000 shares
Outstanding - 1998 - 4,298,266
and 1997 - 4,095,730 shares 1,367 1,366
Capital in excess of par value 24,524 24,155
Treasury stock at cost - 1998 and
1997 - 277,760 shares (3,649) (3,649)
Retained earnings 24,285 26,722
Cumulative translation adjustment (721) (323)
-------- --------
Total stockholders' equity 45,806 48,271
-------- --------
$84,033 $ 90,764
-------- --------
-------- --------
See notes to consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
For the nine months
ended September 30,
1998 1997
-----------------------
OPERATING ACTIVITIES:
Net loss ($1,523) ($ 253)
Adjustments to reconcile net
loss to net cash provided by
(used for) operating activities -
Depreciation and amortization 3,905 4,452
Loss on sale of assets 1,500 -
Foreign exchange loss - (5)
Compensation related to stock awards 369 52
Increase in deferred taxes - (371)
(Increase) decrease in operating assets:
Accounts receivable (4,426) (909)
Inventory 532 (7,193)
Other assets 805 (3)
(Decrease) increase in operating liabilities:
Accounts payable (429) (219)
Salaries, wages and related benefits,
accrued and deferred liabilities 1,075 487
Income taxes (1,118) (448)
-------- --------
Net cash provided by (used for)
operating activities: 690 (4,410)
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and
equipment, net (2,894) (2,015)
Proceeds from sale of assets 5,375 -
Decrease in notes receivable 913 550
Additions to cost in excess (10) (991)
of net assets acquired -------- ---------
Net cash provided by (used for)
Investing activities 3,384 (2,456)
-------- ---------
FINANCING ACTIVITIES:
Long-term debt (repayment)
borrowing (4,645) 6,912
Stock transaction - 94
Dividends paid (914) (914)
--------- --------
Net cash (used for) provided by
financing activities (5,559) 6,092
--------- --------
Net decrease in cash
and cash equivalents (1,485) (774)
Cash and cash equivalents at
beginning of period 2,363 1,981
Effect of exchange rate on cash (319) (6)
Cash and cash equivalents at end --------- --------
of period $ 559 $ 1,201
--------- --------
--------- --------
See notes to consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 - GENERAL
The accompanying interim Consolidated Condensed Financial Statements have been
prepared by 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.
In the opinion of management, the financial statements included herein reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information for the periods presented. The
Consolidated Condensed Financial Statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
NOTE 2 - INVENTORIES
September 30, December 31,
1998 1997
Raw materials $ 3,307 $ 3,782
Work in process 891 1,730
Finished goods 13,826 15,504
-------- --------
18,024 21,016
LIFO Reserve 1,075 (157)
-------- --------
Total, net $ 19,099 $ 20,859
-------- --------
-------- --------
NOTE 3 - PROPERTIES
September 30, December 31,
1998 1997
---------- -----------
Land $ 387 $ 648
Buildings 3,069 6,944
Equipment 17,828 24,640
-------- --------
Total 21,284 32,232
Accumulated depreciation (11,936) (19,749)
-------- --------
Total, net $ 9,348 $ 12,483
-------- --------
-------- --------
NOTE 4. COMPREHENSIVE INCOME
Comprehensive income for the third quarter of 1998 and 1997 of $1,152 and
$936, respectively, includes reported net income adjusted by the non-cash
effect of changes in the cumulative translation adjustment.
NOTE 5. FINANCIAL INSTRUMENTS
The Company purchases inventory in Japanese Yen to support its precision
cutting tool division. During the third quarter of 1998, the Company entered
into forward currency exchange contracts to manage its exposure against the
Japanese currency. The contracts, which are held for purposes other than
trading, mature over the next six months and cover inventory receipts of
approximately $2.8 million. Realized and unrealized gains and losses on
foreign currency contracts used to purchase inventory with no firm
purchase commitments are recognized currently in net income as they do not
qualify as hedges for accounting purposes. Realized and unrealized gains
and losses on forward contracts used to purchase inventories for which the
Company has firm purchase commitments are accounted for as hedges and
therefore recognized in income when related inventory is sold. The
Company is exposed to loss in the event of non-performance by counter parties
on foreign exchange contracts. The Company does not anticipate non-
performance by any of those counter parties. The amount of this exposure is
generally limited to unrealized (or deferred) gains on the contracts. As of
September 30, 1998, deferred gains and losses related to the instruments were
not significant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(in thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 (A) 1998 (B) 1997 1998 1997
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 58.0% 58.0% 59.4% 54.4% 56.5%
Gross Profit 42.0% 42.0% 40.6% 45.6% 43.5%
Selling, General and
Administrative Expenses 42.3% 40.1% 38.0% 34.9% 34.8%
Operating Income (Loss) (0.3%) 1.9% 2.6% 10.7% 8.7%
Interest Expense 2.5% 2.5% 2.7% 1.9% 2.5%
Income (Loss)
Before Income Taxes (2.8%) (0.6%) (0.1%) 8.8% 6.2%
Income taxes (0.6%) (0.1%) 0.3% 3.7% 3.0%
Net Income (Loss) (2.2%) (0.5%) (0.4%) 5.1% 3.2%
NOTE: Column (A) represents reported results for the nine months ended
September 30, 1998. Column (B) represents reported results for the nine months
ended September 30, 1998 adjusted for the loss on sale of assets related to the
Company's enamelware cookware business (Enamelware Division).
Sale of Assets
On March 31, 1998, the Company completed the sale of certain assets related to
its Enamelware Division. The transaction had a material impact on the
financial position of the Company as of September 30, 1998. The transaction
also materially impacted the results of operations for the nine months ended
September 30, 1998. The impact on operational results was driven by a net, non-
cash charge related primarily to the write-off of goodwill associated with the
Enamelware Division. Cash flows for the first nine months of 1998 reflect the
receipt of approximately $4.9 million related to the transaction. The
following discussion considers those impacts (referring to the Enamelware
Division transaction as the "Divestiture").
Financial Position
Referring to the Company's financial position as of September 30, 1998, as
contrasted with December 31, 1997, current assets increased by $2,018 while
current liabilities increased by $672. The change in current assets reflects
an increase in accounts receivable offset by a reduction in cash and inventory
levels. The increase in receivables is due to the seasonality of the
Company's sales. The reduction in cash is a function of the timing of debt
repayment. The reduction in inventory levels is a result of the Divestiture.
The increase in current liabilities is also due to the seasonality of the
Company's business. Despite the seasonality and related increase in working
capital requirements, long-term debt is $5,003 less than the December 31, 1997
balance due primarily to the Divestiture.
Results of Operations
Net sales for the three-month period ended September 30, 1998 were $27,477 as
compared to net sales of $29,215 for the same period in 1997. Net sales for
the nine-month period ended September 30, 1998 were $69,391 as compared to net
sales of $73,505 for the same period in 1997. The decrease in net sales for
both the three and nine-month periods reflects reduced sales resulting from
the Divestiture partially offset by sales growth in the Company's other
product lines. Excluding the Enamelware business in the second and third
quarters of 1997, net sales increased $1,455 over third-quarter 1997 net
sales and $2,306 over nine-month 1997 net sales, despite significant customer
charges and deductions classified as adjustments between gross and net sales.
These adjustments included returns and allowances and freight costs that
resulted from the first quarter 1998 transition of distribution activities
to a new facility. As a percent of gross sales, the adjustments for the nine
months ended September 30, 1998 were 9.04% as compared to 5.42% for the same
period in 1997. For the three months ended September 30, 1998, the
adjustments represented 9.18% of gross sales as compared to 4.28% in the
same period of 1997. Based on these percentages, net sales were adversely
affected in the first nine months of 1998 by approximately $2.8 million
due to charges and deductions related to the distribution center transition.
Related third quarter net sales were adversely affected approximately $1.5
million when compared to 1997 experience for the same period. Excluding
Enamelware Division sales for the second and third quarters of 1997, gross
sales for the first nine months of 1998 have increased $5,717 when compared
to the first nine months of 1997 while gross sales for the three months
ended September 30, 1998 increased $3,207 when compared to the same period
in 1997. The gross sales increase for the nine month period ended
September 30, 1998 was primarily driven by continued growth in the
Company's kitchen and household tools line ($5,020)and precision cutting
tools line ($1,427). The Company's manufacturer's outlet retail stores
experienced sales reductions ($1,393) due to the closure of several stores
and reduced mall traffic. Other lines were flat when compared to 1997.
The gross sales increase for the three-month period ended September 30, 1998
was also driven primarily by growth in the kitchen and household tools line
($2,416) with increases also generated by the Company's cutlery businesses
($742).
Gross profit for the three-month period ended September 30, 1998 was $12,503
(45.6% of net sales) as compared to $12,696 (43.5% of net sales) for the three
months ended September 30, 1997. Gross profit for the nine-month period ended
September 30, 1998 was $29,166 (42.0% of net sales) as compared to $29,868
(40.6% of net sales). The percentage increase comes despite significant
charges and deductions related to the distribution center transition and
represents a favorable shift in sales mix from lower-margin Enamelware
Division sales to higher-margin kitchen and household tools sales as well as
more favorable exchange rates related to inventory purchased in Japanese Yen.
Selling, general and administrative (S, G & A) expenses for the three-month
period ended September 30, 1998 were $9,574 as compared to $10,180 for the
same period in 1997. The third quarter 1997 S, G & A expense includes
approximately $300 of severance related to the elimination of ten positions in
the period. In addition, third quarter 1997 S, G & A expense included
approximately $109 of amortization expense related to the Enamelware Division.
The comparison with 1997 also benefited from reduced salary and benefit
expense in the third quarter of 1998 related to positions eliminated in
the third and fourth quarters of 1997. S, G & A expenses for the
nine-month period ended September 30, 1998 were $29,358 as compared to
$27,946 for the same period in 1997. Partially offsetting the savings
discussed above was $1,500 of additional 1998 S, G & A representing the
loss on sale related to the Divestiture. In addition, warehouse costs
were approximately $608 higher than those incurred in the first nine
months of 1997 as the Company transitioned U.S. distribution activities
from the two warehouses formally operated by the Company to its new
distribution center in Plainfield, Indiana. During the transition
period, the Company operated all three warehouses and incurred the
duplicative lease expense and equipment depreciation related thereto. The
divestiture and warehouse increases were offset by third quarter savings
discussed above.
Operating income for the three months ended September 30, 1998 was $2,929 as
compared to $2,516 for the three months ended September 30, 1997. The Company
experienced an operating loss of $192 for the first nine months of 1998 as
compared to operating income of $1,922 for the nine months ended September 30,
1997. Net income for the three months ended September 30, 1998 was $1,379 or
$0.35 per diluted common share as compared to $932 or $0.24 per diluted common
share for the comparable period in 1997. The net loss for the nine months
ended September 30, 1998 was $1,523 or $0.40 per diluted common share as
compared to a net loss of $253 or $0.07 per diluted common share for the
comparable period in 1997. Diluted earnings per share for the three month
period ended September 30, 1998 were calculated using 3,942,000 shares as
compared to 3,812,000 shares used in arriving at third quarter 1997 diluted
earnings per share. The increase reflects a restricted stock grant
made in the third quarter of 1998.
Year 2000
The Year 2000 ("Y2K") computer software compliance issues affect the Company
and most companies in the world. Historically, many computer programs were
developed using the last two digits rather than all four to define the
applicable year. Accordingly, these programs, unless modified to perform
otherwise, may recognize a date using the two digits "00" as 1900 rather than
the year 2000. Computer programs that do not recognize the proper date could
generate erroneous data or cause systems to fail.
The Company has developed a program to address the issues resulting from the
year 2000. This program is divided into four major sections -- Business
Administration, Business Applications, Facilities/Information Technology
Infrastructure and the Customer Fulfillment Process. The general phases of the
program common to all sections are (1) inventorying Y2K items; (2) assigning
priorities to identified items; (3) assessing Y2K compliance of items
determined to be material to the Company; (4) remediating material items that
are determined not to be Y2K compliant; (5) testing material items; and (6)
designing and implementing contingency and business continuation plans.
As of September 30, 1998, the Company had completed an inventory
of critical Y2K items and was substantially completed with this process
related to all other Y2K items. The Company had also substantially completed
the prioritizing of Y2K items and assessing Y2K compliance of material items in
all four sections of the Company's program. Remediation efforts were being
performed in the Business Applications and Customer Fulfillment Process
sections. The testing of material items and contingency and business
continuation planning were both in the initial process stages as of September
30, 1998. The Company's program anticipates completion of the inventory
process, the prioritization process and the assessment process for all four
sections by the end of 1998. Remediation and testing is currently planned to
be completed no later than June 30, 1999 for all sections.
The Company is utilizing internal personnel, contract programmers and vendors
to identify Y2K non-compliance problems, modify code and test the
modifications. In some cases, non-compliant software and hardware may be
replaced.
The Company relies on third party suppliers for finished goods, raw materials,
water, utilities, transportation and other key services. Interruption of vendor
and supplier operations due to Y2K issues could affect Company operations in a
material way. The Company has undertaken initiatives to evaluate the status of
vendors' and suppliers' efforts and to determine alternatives and contingency
plan requirements. While approaches to reducing risks of interruption due to
vendor and supplier failures will vary, options include identification of
alternate suppliers and accumulation of inventory where feasible or warranted.
These activities are intended to provide a means of managing risk, but cannot
eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow. Y2K
interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While these
events are possible, the Company believes that its customer base is broad enough
to minimize the consequences of a single occurrence. The Company is, however,
taking steps to monitor the status of customers' compliance as a means of
determining risks and alternatives.
In addition to the Y2K program activities described above, the Company is
developing contingency plans intended to mitigate the possible disruption
in business operations that may result from the Y2K issue, and is developing
cost estimates for such plans. Contingency plans will primarily address issues
surrounding the Company's internal software systems and the reliance it
places on critical vendors and suppliers. Contingency plans may include the
identification of alternative software processing capabilities and the stock-
piling of raw and packaging materials, increasing finished goods inventory
levels, securing alternate sources of supply, and other appropriate measures.
Once developed, contingency plans and related cost estimates will be
continually refined as additional information becomes available.
External and internal costs specifically associated with modifying internal
software for Y2K compliance are expensed as incurred. Total incremental
costs related to the Company's Y2K program incurred as of September
30, 1998 aggregated $685. The future incremental cost of completing
the Company's Y2K program is estimated to be approximately $815. These amounts
do not include any costs associated with the implementation of contingency
plans, which are in the process of being developed. All costs related to the
Company's Y2K program are being funded through operating cash flow.
The failure to correct a material Y2K problem could result in an interruption
in, or failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Y2K failures will have a
material impact on the Company's results of operations, liquidity or financial
condition. The Company's Y2K program is expected to reduce significantly the
Company's level of uncertainty about the Y2K problem and, in particular, about
the Y2K compliance and readiness of its business partners. The Company
believes that, with the completion of its Y2K program, as scheduled, the
possibility of significant interruptions of normal operations should be
reduced.
Readers are cautioned that forward-looking statements contained
in this Year 2000 section of Management's Discussion and Analysis should be
read in conjunction with the Company's disclosures under the heading:
"Forward Looking Information" In Part II - Other Information.
PART II - OTHER INFORMATION
Item 5. Forward Looking Information
From time to time, in written reports and oral statements, the Company
discusses its expectations regarding future performance. These forward looking
statements are based on currently available competitive, financial and economic
data and management's views and assumptions regarding future events. Such
forward-looking statements are inherently uncertain, and investors must
recognize that actual results may differ materially from those expressed or
implied in the forward-looking statements. Among the factors that could impact
the Company's ability to achieve its stated goals are the following: (i)
the Company's ability to realize improvements in productivity and
efficiency, from its ADVANCE logistics program; (ii) significant competitive
activity, including promotional and price competition, and changes in consumer
demand for the Company's products; (iii) inherent risks in the marketplace
associated with new product introductions, including uncertainties about trade
and consumer acceptance; (iv) the Company's ability to successfully
integrate acquisitions into its existing operations; and (v) failure by the
Company or one or more of its significant vendors or customers to correct a
material Y2K problem. In addition, the Company's results may also be
affected by general factors, such as economic conditions in the markets where
the Company competes.
Item 6. Exhibits and Reports on Form 8-K
11a. Earnings Per Share
Reports on Form 8-K - there were no reports on Form 8-K filed for
the three months ended September 30, 1998.
EXHIBITS
EX-11 Computation of Earnings Per Share
EX-27 Financial Data Schedule
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.
GENERAL HOUSEWARES CORP.
Dated: November 12, 1998 By /s/ Mark S. Scales
Mark S. Scales
Vice President
Finance and Treasurer
Chief Financial Officer
By /s/ Brad A. Kelsheimer
Brad A. Kelsheimer
Corporate Controller
Chief Accounting Officer
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
For the nine months ended September 30,
1998 1997
Basic Diluted Basic Diluted
Net loss ($1,523) ($1,523) ($253) ($253)
Shares:
Weighted average number of
shares of common stock
outstanding 3,813,417 3,813,417 3,807,683 3,807,683
Shares assumed issued (less shares
assumed purchased for treasury) on
stock option agreements - - - 992
Rounding (417) (417) 317 325
3,813,000 3,813,000 3,808,000 3,809,000
Net loss per common share ($ 0.40) ($ 0.40) ($ 0.07) ($ 0.07)
For the three months ended September 30,
1998 1997
Basic Diluted Basic Diluted
Net income $1,379 $1,379 $932 $932
Shares:
Weighted average number of
shares of common stock
outstanding 3,817,006 3,817,006 3,811,945 3,811,945
Shares assumed issued (less shares
assumed purchased for treasury) on
stock option agreements - 124,698 - 361
Rounding (6) 296 55 (306)
3,817,000 3,942,000 3,812,000 3,812,000
Net income per common share $ 0.36 $ 0.35 $ 0.24 $ 0.24
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