UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 27, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17237
HOME PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its Charter)
Delaware 36-4147027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4501 West 47th Street
Chicago, Illinois 60632
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (773) 890-1010.
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
Common shares, par value $0.01, outstanding as of November 10, 1997 -
6,673,453
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HOME PRODUCTS INTERNATIONAL, INC
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations
and Retained Earnings 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
September December
27, 28,
1997 1996
(unaudited)
<S> Assets <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 3,521 $ 2,879
Accounts receivable, net ....................... 18,263 6,594
Inventories, net ............................... 15,635 4,391
Prepaid expenses and other current assets ...... 432 100
Total current assets ......................... 37,851 13,964
Property, plant and equipment - at cost........... 43,950 22,515
Less accumulated depreciation and amortization.... (18,746) (14,581)
Property, plant and equipment, net................ 25,204 7,934
Intangible and other assets....................... 33,033 2,807
Total assets...................................... $96,088 $24,705
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 3,038 $ 838
Accounts payable ............................... 7,880 1,956
Accrued liabilities ............................ 8,260 4,018
Total current liabilities .................... 19,178 6,812
Long-term obligations - net of current maturities. 36,883 6,184
Stockholders' equity:
Preferred Stock - authorized, 500,000 shares,
$.01 par value; none issued................ - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 6,672,453 shares issued at
September 27, 1997 and 3,881,423 shares
issued at December 28,1996 ................ 67 39
Additional paid-in capital ................... 33,892 10,839
Retained earnings ............................ 6,539 1,296
Common Stock held in treasury - at cost
(58,762 shares)............................... (264) (264)
Currency translation adjustments ............. (207) (201)
Total stockholders' equity ................ 40,027 11,709
Total liabilities and stockholders' equity........ $96,088 $24,705
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
(Dollars in thousands, except per share amounts)
Thirteen Weeks Thirty-nine Weeks
Ended Ended
Sept Sept Sept Sept
27, 28, 27, 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales ............................$32,875 $10,726 $97,636 $29,507
Cost of goods sold ................... 22,498 6,338 68,007 17,950
Gross profit ....................... 10,377 4,388 29,629 11,557
Operating expenses
Selling ............................ 4,877 2,353 13,944 7,140
Administrative ..................... 1,695 1,071 5,486 3,472
Amortization of intangible Assets... 208 52 615 139
6,780 3,476 20,045 10,751
Operating profit .................. 3,597 912 9,584 806
Other income (expense)
Interest income .................... 1 33 49 51
Interest (expense) ................. (1,067) (175) (4,207) (535)
Other net .......................... (42) (6) 88 35
(1,108) (148) (4,070) (449)
Earnings before income taxes ........ 2,489 764 5,514 357
Income tax expense ................... (68) - (271) -
Net earnings ........................ 2,421 764 5,243 357
Retained earnings at beginning of
Period ............................. 4,118 83 1,296 490
Retaining earnings at end of
Period .............................$ 6,539 $ 847 $ 6,539 $ 847
Net earnings per common and
common equivalent share ..........$ .36 $ 0.20 $ 0.99 $ 0.09
Number of weighted common and common
equivalent shares outstanding..... 6,793 3,824 5,275 3,820
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Thirty-nine weeks
Ended
Sept 27, Sept 28,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................... $ 5,243 $ 357
Adjustments to reconcile net earnings to
net cash (used) by operating activities:
Depreciation and amortization .................. 5,205 1,649
Changes in assets and liabilities:
(Increase) in accounts receivable ............ (2,809) (2,611)
(Increase) decrease in inventories ........... (5,119) 1,099
(Increase) in refundable income taxes......... - (71)
(Decrease) in accounts payable ............... (6,477) (19)
Increase (decrease) in accrued liabilities.... 218 (484)
Other operating activities, net ................ (667) (247)
Net cash (used) by operating activities........... (4,406) (327)
Cash flows from investing activities:
Tamor Acquisition, net of cash acquired.......... (27,876) -
Proceeds from sale or maturity of marketable
securities ...................................... - 286
Capital expenditures, net ....................... (5,168) (1,172)
Loss on sale of fixed assets .................... - 11
Net cash (used) for investing activities.......... (33,044) (875)
Cash flows from financing activities:
Payments on borrowings .......................... (33,497) (47)
Net proceeds from borrowings and warrants........ 51,324 -
Net proceeds from secondary stock offering....... 20,171 -
Payment of capital lease obligation ............. (28) (24)
Exercise of common stock options and issuance of
common stock under stock purchase plan.......... 122 74
Net cash provided by financing activities......... 38,092 3
Net increase (decrease) in cash and cash
equivalents .................................... 642 (1,199)
Cash and cash equivalents at beginning of period. 2,879 2,982
Cash and cash equivalents at end of period...... $ 3,521 $ 1,783
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest ....................................... $ 2,787 $ 442
Income taxes, net .............................. 1,255 71
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Home Products International, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Unless the context otherwise requires, references herein to (i)
the "Company" are to Home Products International, Inc., a Delaware
corporation ("HPI"), and its wholly-owned subsidiaries, Selfix, Inc. a
Delaware corporation ("Selfix"), Tamor Corporation, a Massachusetts
corporation ("Tamor"), and Shutters, Inc. an Illinois corporation
("Shutters"), (ii) "Tamor" includes both Tamor and Housewares Sales,
Inc., a Massachusetts corporation and Tamor's affiliated product
distribution company which was merged into Tamor as part of the Tamor
Acquisition (as defined), and (iii) the "Tamor Acquisition" are to the
acquisition by the Company of the business of Tamor and Housewares
Sales, Inc. which was acquired in February, 1997, effective as of
January 1, 1997.
The unaudited condensed financial statements included herein as of and
for the thirteen and thirty-nine weeks ended September 27, 1997 and
September 28, 1996 reflect, in the opinion of the Company, all
adjustments (which include only normal recurring accruals) necessary for
the fair presentation of the financial position, the results of
operations and cash flows. These unaudited financial statements should
be read in conjunction with the audited financial statements and related
notes thereto included in the Company's 1996 Annual Report on Form 10-K.
The results for the interim periods presented are not necessarily
indicative of results to be expected for the full year.
Note 2. Inventories are stated at the lower of cost or net realizable
value with cost determined on a first in first out (FIFO) basis.
Inventories are summarized as follows (in thousands):
Sept 27, Dec 28,
1997 1996
Finished goods ..................... $9,271 $2,604
Work-in-process .................... 3,294 1,003
Raw materials ...................... 3,070 784
$15,635 $ 4,391
Note 3. No provision was made for federal income taxes in 1997 or 1996
due to net operating loss carryforwards and certain tax credit
carryforwards available to the Company. The provision for income taxes
for 1997 reflects state income taxes in states in which the Company has
no tax loss carryforwards.
Note 4. Primary earnings per common and common equivalent share has
been computed based upon the weighted average number of common and
common equivalent shares outstanding in the period. Common equivalent
shares included in the computation of common and common equivalent
shares represent shares issuable upon assumed exercise of stock options
using the treasury stock method. Earnings per common and common
equivalent share, assuming full dilution, is not materially dilutive for
any of the periods presented.
<PAGE>
Note 5. Pursuant to an agreement dated October 29, 1996, the Company,
as of January 1, 1997, took operating and financial control of Tamor,
assumed substantially all of the liabilities of Tamor and retained
substantially all of the earnings from Tamor's operations. Actual
results are combined since the date of effective control although the
purchase transaction did not close until February 28, 1997. The thirty-
nine weeks ended September 27, 1997 includes imputed interest and other
financing related charges resulting from the effective date of the Tamor
Acquisition prior to the closing date.
The pro forma impact of the Tamor Acquisition on the Company's
historical results together with a detailed description of the related
financing is more fully described in Note 15 to the Consolidated
Financial Statements of the Company as included in the Company's 1996
Annual Report on Form 10-K.
Note 6. On June 30, 1997, within the Company's third quarter, the
Company completed a secondary public offering of 2.0 million new shares
of its common stock. Net proceeds in the amount of $18.3 million were
used to repay a subordinated note of $7.0 million, term notes of $11.1
million, and accrued interest of $.2 million. On July 16, 1997, an
additional 280,000 common shares were sold pursuant to an underwriters
over-allotment provision. Net proceeds in the amount of $2.6 million
were used to repay term notes of $2.5 million and accrued interest of
$.1 million. Additional offering expenses of $.7 million were funded
through the Company's revolving line of credit.
Note 7. Effective August 20, 1997 the Company adopted a stockholder
rights plan. A dividend of one preferred stock purchase right for each
share of common stock has been declared and is payable to shareholders
of record on August 20, 1997.
Note 8. In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earning Per Share" (FAS 128) which is
effective for financial statements issued for periods ending after
December 15, 1997. FAS 128 replaces primary earnings per share (EPS)
with a presentation of basic EPS and requires dual presentation of basic
and diluted earnings per share on the face of the income statement.
Additionally, a reconciliation of the numerator and denominator of the
diluted earnings per share computation will also be required. The
adoption of FAS 128 is not expected to result in earnings per share
amounts materially different from the amounts reported.
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
This quarterly report on Form 10-Q, including "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements within the meaning of
the "safe-harbor provisions of the Private Securities Litigation Reform
Act of 1995. 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: (i) the anticipated
effect of the Tamor Acquisition on the Company's sales and earnings;
(ii) the impact of the level of the Company's indebtedness; (iii)
restrictive covenants contained in the Company's various debt documents;
<PAGE>
(iv) general economic conditions and conditions in the retail
environment; (v) the Company's dependence on a few large customers; (vi)
price fluctuations in the raw materials used by the Company,
particularly plastic resin; (vii) competitive conditions in the
Company's markets; (viii) the seasonal nature of the Company's business;
(ix) the Company's ability to execute its acquisition strategy; (x)
fluctuations in the stock market; (xi) the extent to which the Company
is able to retain and attract key personnel; (xii) relationships with
retailers; and (xiii) 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
operating results may fluctuate, especially when measured on a quarterly
basis. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various
disclosures made by the Company which attempt to advise interested
parties of the factors which affect the Company's business, in this
report, as well as the Company's periodic reports on Forms 10-K, 10-Q
and 8-K filed with the Securities and Exchange Commission
In the discussion and analysis that follows, all references to 1997
and 1996 refer to the 13 and 39 week periods ended September 27, 1997
and September 28, 1996, respectively.
Tamor Acquisition. Pursuant to an agreement dated October 29,
1996, the Company, as of January 1, 1997, took operating and financial
control of Tamor, assumed substantially all of the liabilities of Tamor
and retained substantially all of the earnings from Tamor's operations.
Actual results are combined since the date of effective control although
the purchase transaction did not close until February 28, 1997. Tamor
designs, manufactures and markets quality plastic housewares products.
Tamor was acquired for a total purchase price of $41.9 million
consisting of approximately $27.8 million in cash, $2.4 million in
common stock (480,000 shares) and the assumption of $11.7 million in
short and long term debt. On February 27, 1997, the Company entered
into a credit agreement (the "Credit Agreement") with certain lenders
which are parties thereto and General Electric Capital Corporation
("GECC"), as agent, which provided the funds necessary to complete the
acquisition and paydown Tamor's existing short and long term debt.
Thirteen weeks ended September 27, 1997 compared to the thirteen weeks
ended September 28, 1996
General. The Tamor Acquisition and the related financing
significantly impacted the Company's operating results for the third
quarter of 1997. The acquisition of Tamor contributed to the
improvement of the Company's net earnings from $.8 million in the third
quarter of 1996 to net earnings of $2.4 million in the third quarter of
1997. The improved earnings were also the result of significant
improvement in the financial performance of Selfix. Tamor contributed
$1.2 million of pre-tax earnings in the quarter, net of related
financing expenses, transaction costs and goodwill amortization. Selfix
and Shutters had combined pre-tax profits of $1.3 million in the third
quarter of 1997 as compared to $.8 million in the third quarter of 1996.
The improved results were due to higher gross profit margins and reduced
operating expenses consistent with management initiatives implemented in
1996.
<PAGE>
<TABLE>
The following discussion and analysis compares the results for the
third quarter of 1997 to the pro forma results for the third quarter of
1996. Management believes that such a comparison is necessary to
meaningfully analyze the changes occurring in such quarters. The pro
forma financial results give effect to the Tamor Acquisition, and
related financing, as if each of the transactions had occurred on
December 31, 1995. The pro forma operating expenses reflects (i)
additional amortization expense resulting from the recording of goodwill
associated with the Tamor Acquisition, (ii) net estimated cost savings
as a result of the Tamor Acquisition, including a net reduction in
discretionary distributions paid to and on the behalf of related parties
of Tamor and (iii) additional costs associated with the Company's 401(k)
and profit sharing plans and certain other fees. The pro forma interest
expense reflects the estimated net increase in interest expense as if
the Tamor Acquisition and related financing and occurred on December 31,
1995. The pro forma number of weighted average shares assumes the
shares issued as a result of the Tamor Acquisition (480,000 shares) and
a warrant issued in connection with the acquisition financing were
outstanding as of December 31, 1995.
As such, in the discussion that follows, all comparisons are made
on a pro forma basis with reference to the following (in thousands,
except per share amounts):
Pro forma
Thirteen weeks Thirteen weeks
ended ended
September 27, 1997 September 28, 1996
<S> <C> <C> <C> <C>
Net sales $32,875 100.0% $32,123 100.0%
Cost of goods sold 22,498 68.4% 22,648 70.5%
Gross profit 10,377 31.6% 9,475 29.5%
Operating expenses 6,780 20.7% 6,540 20.4%
Operating profit 3,597 10.9% 2,935 9.1%
Interest expense (1,067) (3.2%) (1,553) (4.8%)
Other income (expense) (41) 0.1% 403 1.3%
Earnings before income taxes 2,489 7.6% 1,785 5.6%
Income tax expense (68) (0.2)% (63) ( 0.2%)
Net earnings $ 2,421 7.4% $ 1,722 5.4%
Net earnings per share $0.36 $0.40
Net sales. Net sales of $32.9 million in the third quarter of 1997
increased $.8 million, or 2%, from net sales of $32.1 million in the
third quarter of 1996. Sales increases occurred primarily in bath
shower and home/closet organization product lines. Sales of home/closet
organization products increased 9% ($1.0 million) as a result of new
distribution of hanger products. Sales of bath and shower products
increased 14% ($.6 million) due to new product introductions and
additional distribution of existing products. Sales of Shutters home
improvement products were down $.7 million related to the August UPS
strike and an overall weakness of the shutters category.
</TABLE>
<PAGE>
Gross profit. Gross profit increased 10% from $9.5 million in the
third quarter of 1996 to $10.4 million in the third quarter of 1997, as
a result of the increased sales described above and improved margins.
Gross profit margins increased from 29.5% in the third quarter of 1996
to 31.6% in the third quarter of 1997, due primarily to increased
capacity utilization and a decrease in the cost of plastic resin. The
cost of plastic resin decreased between quarters resulting in a 3%
improvement in gross profit margin. During the quarter, the Company was
able to increase the use of excess capacity at its Selfix and Shutters
manufacturing facilities to mold and package products for Tamor, which
allowed Selfix and Shutters to reduce per unit overhead costs. Adding
to the improvement were inventory reserve reversals relating to physical
inventory losses of $.4 million. Partially offsetting the resin savings
were higher contract molding and labor costs for Tamor to meet their
July and August sales demand. Also reducing the resin savings were
production inefficiencies associated with the delay in completing the
Missouri warehouse expansion.
Operating expenses. Operating expenses in the third quarter of
1997 of $6.8 million increased $.2 million as compared to the third
quarter of 1996. As a percentage of net sales, operating expenses
increased from 20.4% in 1996 to 20.7% in 1997. The primary contributors
to the $.2 million increase were higher freight and warehousing costs
associated with the delay in completing the Missouri warehouse
expansion.
Amortization of intangibles decreased slightly from 0.7% of net
sales in the third quarter of 1996 to .6% in the third quarter of 1997.
The decrease was the result of a higher sales base.
Operating profit. As a result of higher sales and gross margins,
operating profit increased $0.7 million, or 23%, to $3.6 million in the
third quarter of 1997 from $2.9 million in the third quarter of 1996.
In the third quarter of 1997, operating profit was 10.9% of net sales as
compared to 9.1% of net sales in the third quarter of 1996.
Interest expense. Interest expense of $1.1 million in the third
quarter of 1997 decreased $.5 million from the third quarter of 1996 due
to a stock offering of 2.3 million shares completed during the quarter.
The net proceeds of the offering, $20.2 million, were used to pay down
debt in July. Both periods reflect amortization of debt discount
related to the Subordinated Note. The debt discount of $0.4 million was
amortized over the seven month period of time the Subordinated Note was
outstanding. Both periods also reflect approximately $0.1 million of
amortization related to fees and expenses incurred in connection with
the Credit Agreement.
Income tax expense. The income tax expense recorded in the third
quarter of 1997 reflects tax expenses for state income taxes in states
where the Company does not have net operating loss carryforwards. No
carryforwards are available in Massachusetts, Tamor's primary state of
business. The Company does not expect to record a material federal tax
expense during 1997 as a result of utilizing net operating loss
carryforwards and certain tax credit carryforwards. Accordingly, no
federal tax expense was recorded in the third quarter of 1997. The
Company carries a valuation allowance of $1.0 million because although
the Company has restructured its Selfix operations and returned to
profitability in 1996, the Company has not yet been able to conclude
that it is more likely than not that it will be able to realize certain
<PAGE>
deferred tax assets. The Company has based this determination on its
historical results of operations and the uncertainty of several other
factors, including the successful integration of Tamor's operations into
the Company's operations, the maintenance of the Company's existing
customer relationship at current levels of sales volume, the continued
successful implementation of cost control measures and various other
factors beyond the Company's control, such as plastic resin price
increases and the effect of general economic conditions. However, if
the results of operations for the remainder of 1997 remain profitable
the Company expects to be able to reduce or eliminate the $1.0 million
valuation allowance in the fourth quarter of 1997.
Net earnings. Net earnings increased to $2.4 million in the third
quarter of 1997 from $1.7 million in the third quarter of 1996.
Earnings per share increased to $0.36 in the third quarter of 1997 based
on 6,792,850 common and common equivalent shares outstanding as compared
to the third quarter of 1996 earnings per share of $0.40 based on
4,343,527 pro forma common and common equivalent shares outstanding. If
the Company had incurred a tax expense using a tax rate of 40% assuming
no federal or state tax loss carryforwards and assuming the secondary
stock offering occurred on December 29, 1996, net earnings in the third
quarter of 1997 would have been $1.5 million, or $0.23 per share based
on 6,792,850 common and common equivalent shares outstanding.
Operating Results by Industry Segment
Housewares
Third quarter 1997 performance in the housewares segment
significantly improved as compared to the third quarter of 1996 on a pro
forma basis. Net sales increased 5% from $29.2 million in the third
quarter of 1996 to $30.5 million in the third quarter of 1997 as a
result of new product introductions and expanded distribution.
Operating profit increased 33% from $2.5 million, 8.7% of net sales, on
a pro forma basis in the third quarter of 1996 to $3.4 million, 10.5% of
net sales, in the third quarter of 1997. Increased profitability was a
result of the increased sales as well as improved gross margins. Gross
margins improved as a result of lower resin prices and increased
facility utilization.
Home Improvement Products
Third quarter 1997 sales of $2.4 million were down $.7 million from
the third quarter of 1996. Sales in the period were impacted by the UPS
strike and an overall weakness of the shutters category. Gross profit
margins were down slightly but this was recovered through operating
expense reductions and increased absorption through the manufacturing of
Tamor products. As a result, operating profits of $.2 million were down
$.2 from the prior year.
Thirty-nine weeks ended September 27, 1997 compared to the thirty-nine
weeks ended September 28, 1996.
General. The Tamor Acquisition and the related financing
significantly impacted the Company's operating results for 1997. The
acquisition of Tamor was a significant factor in the improvement of the
Company's net earnings from net earnings of $.4 million in 1996 to net
earnings of $5.2 million in 1997. The improved earnings were also the
result of significant improvement in the financial performance of
<PAGE>
<TABLE>
Selfix. Tamor contributed $2.9 million of pre-tax earnings in the
period, net of related financing expenses, transaction costs and
goodwill amortization. Selfix and Shutters had pre-tax profits of $2.6
million in 1997 as compared to a $.4 million profit in 1996. The
improved results were due to higher gross profit margins and reduced
operating expenses consistent with management initiatives implemented in
1996.
The following discussion and analysis compares the results for the
first thirty-nine weeks of 1997 to the pro forma results for the first
thirty-nine weeks of 1996 as if the Tamor Acquisition and related
financing had occurred as of December 31, 1995. Management believes
that such a comparison is necessary to meaningfully analyze the changes
occurring in the thirty-nine week periods. The pro forma financial
results below give effect to the same adjustments as are reflected in
the above pro forma discussion of third quarter results.
In the discussion that follows, all comparisons are made on a pro
forma basis with reference to the following (in thousands, except per
share amounts):
Pro forma
Thirty-nine weeks Thirty-nine weeks
ended ended
September 27, 1997 September 28, 1996
<S> <C> <C> <C> <C>
Net sales $97,636 100.0% $87,739 100.0%
Cost of goods sold 68,007 69.7 % 61,760 70.4%
Gross profit 29,629 30.3% 25,979 29.6%
Operating expenses 20,045 20.5% 19,062 21.7%
Operating profit 9,584 9.8% 6,917 7.9%
Interest expense (4,207) (4.3%) (4,773) (5.4%)
Other income 137 0.1% 545 0.6%
Earnings before income taxes 5,514 5.6% 2,689 3.1%
Income tax expense (271) (0.2%) (148) (0.2%)
Net earnings $ 5,243 5.4% $ 2,541 2.9%
Net earnings per share $0.99 $ 0.59
Net sales. Net sales of $97.6 million in 1997 increased $9.9
million, or 11%, from net sales of $87.7 million in 1996. The increase
was primarily the result of Tamor's increased distribution of
home/closet organization products and the introduction of new plastic
storage products. Sales increases also occurred in bath and shower
products and juvenile products lines. Sales of juvenile products
increased 12% ($1.0 million) primarily as a result of a promotional
shipment to one customer. Sales of home/closet organization products
increased 10% ($3.3 million) as a result of increased distribution of
hanger products. Sales of bath and shower products increased 13% ($1.5
million) and sales of storage containers increased 17% ($5.1 million)
due to new product introductions and additional distribution of existing
products. Sales of Shutters home improvement products decreased 12% due
to the August UPS strike and an overall weakness of the shutters category.
</TABLE>
<PAGE>
Gross profit. Gross profit increased 14% from $26.0 million in
1996 to $29.6 million in 1997, as a result of the increased sales
described above. Gross profit margins were up .7% from 29.6% to 30.3%.
The cost of plastic resin decreased between periods resulting in a 1%
gain in gross profit margin. Increased capacity utilization also had a
positive impact on margins. During 1997, the Company was able to
increase the use of excess capacity at its Selfix and Shutters
manufacturing facilities to mold and package products for Tamor, which
allowed Tamor to reduce outside molding costs and Selfix and Shutters to
reduce per unit overhead costs.
Operating expenses. Operating expenses in 1997 of $20.0 million
increased from $19.1 million in 1996. The increase in operating expense
is primarily due to variable related selling and warehousing costs and
additional personnel to support sales growth. As a percentage of net
sales, operating expenses were 20.5%,down from 21.7% in 1996.
Amortization of intangibles decreased slightly from 0.7% of net
sales in 1996 to .6% in 1997. The decrease was the result of a higher
sales base.
Operating profit. As a result of higher sales, operating profit
increased $2.7 million, or 39%, to $9.6 million in 1997 from $6.9
million in 1996. In 1997, operating profit was 9.8% of net sales as
compared to 7.9% of net sales in 1996.
Interest expense. Interest expense of $4.2 million in 1997
decreased $.6 million from 1996 due to a stock offering of 2.3 million
shares completed during the third quarter of 1997. The net proceeds of
the offering, $20.2 million, were used to pay down debt in July. Both
periods reflect amortization of debt discount related to the
Subordinated Note. The debt discount of $0.4 million was amortized over
the seven month period of time the Subordinated Note was outstanding.
Both periods also reflect approximately $0.4 million of amortization
related to fees and expenses incurred in connection with the Credit
Agreement.
Income tax expense. The income tax expense recorded in 1997
reflects tax expenses for state income taxes in states where the Company
does not have net operating loss carryforwards. No carryforwards are
available in Massachusetts, Tamor's primary state of business. The
Company does not expect to record a material federal tax expense during
1997 as a result of utilizing net operating loss carryforwards and
certain tax credit carryforwards. Accordingly, no federal tax expense
was recorded in the period.
The Company decreased the valuation allowance for net deferred tax
assets by $2.1 million to $1.0 million. The Company carries the
remaining allowance because although the Company has restructured its
Selfix operations and returned to profitability in 1996, there is no
assurance that the Company will be able to conclude that it is more
likely than not that it will be able to realize certain deferred tax
assets. The Company has based this determination on its historical
results of operations and the uncertainty of several other factors,
including the successful integration of Tamor's operations into the
Company's operations, the maintenance of the Company's existing customer
relationships at current levels of sales volume, the continued successful
implementation of cost control measures and various other factors beyond
<PAGE>
the Company's control, such as plastic resin price increases and the
effect of general economic conditions. However, if the results of
operations for the remainder 1997 remain profitable, the Company expects
to be able to reduce or eliminate the $1.0 million valuation allowance
in the fourth quarter of 1997.
Net earnings. Net earnings increased to $5.2 million in 1997 from
$2.5 million in 1996. Earnings per share increased to $0.99 in 1997
based on 5,275,436 common and common equivalent shares outstanding as
compared to 1996 earnings per shares of $0.59 based on 4,340,018 pro
forma common and common equivalent shares outstanding. If the Company
had incurred a tax expense using a tax rate of 40% assuming no federal
or state tax net operating loss carryforwards, net earnings in 1997
would have been $3.3 million, or $0.63 per share based on 5,275,436
common and common equivalent shares outstanding.
Capital Resources and Liquidity
Cash and cash equivalents at September 27, 1997 were $3.5 million
as compared to $2.9 million at December 28, 1996. Cash used by
operating activities during the first thirty-nine weeks of 1997 was $3.3
million. Working capital increased $13.6 million in the thirty-nine
week period as a result of higher accounts receivable and increased
inventory levels, both in support of the 11% growth in sales for the
period, as well as a decrease in accounts payable for the period.
The required borrowings for the Tamor Acquisition have
significantly changed the Company's financial structure. To fund the
Tamor Acquisition, financing facilities were provided by commercial
lenders to replace and augment the financing facilities in place at
December 28, 1996. The financing facilities provided consisted of $40
million of term notes and a $20 million revolving line of credit under
the Credit Agreement and a $7 million Subordinated Note.
On June 30, 1997, within the Company's third quarter, the Company
completed a secondary public offering of 2.0 million new shares of its
common stock. Net proceeds in the amount of $18.3 million were used to
repay a subordinated note of $7.0 million, term notes of $11.1 million,
and accrued interest of $.2 million. On July 16, 1997, an additional
280,000 common shares were sold pursuant to an underwriters over-
allotment provision. Net proceeds in the amount of $2.6 million were
used to repay term notes of $2.5 million and accrued interest of $.1
million. As a result of the offering, the Company's leverage has been
significantly reduced and the Company's ability to obtain financing for
future acquisitions has been improved.
At September 27, 1997, the Company had total short and long term
debt outstanding of $39.9 million and unused availability under the
revolving line of credit of $4.9 million. In the twelve months
following September 27, 1997, $3.6 million of debt will come due.
The Company's capital spending needs in 1997 are expected to be
between $7.5 and $8.0 million. Most of the spending relates to new
injection molding presses and molds to support Tamor's sales growth and
new product development. Also included in the capital spending forecast
is approximately $2.4 million to expand Tamor's Missouri manufacturing
and warehouse facility.
<PAGE>
The Company believes that its existing financing facilities
together with its cash flow from operations will provide sufficient
capital to fund operations, make the required debt repayments and meet
the anticipated capital spending needs.
Outlook
Third quarter earnings were below management's expectations due to
an isolated sales shortfall in September as many retailers cut back on
orders and inventories. Backlog levels entering the fourth quarter are
higher than a year ago.
Tamor continues to experience significant sales growth, up 17%
year-to-date as it drives sales through new product introductions
primarily in the storage category. This rate of growth is expected to
continue through the balance of fiscal 1997. Selfix and Shutters expect
fourth quarter sales and earnings consistent with 1996. Historically
fourth quarter sales and earnings are slightly lower than the second and
third quarters due to seasonality factors.
The Company is a significant user of plastic resin and as such is
exposed to fluctuations in the cost of this primary raw material.
Plastic resin costs are difficult to predict, can move up or down month
to month and cannot be effectively hedged. As the Company continues to
grow primarily in the Tamor product lines, it becomes more susceptible
to swings in resin pricing. Gross margins on these products tend to be
lower due to competitive pressures, and as such, cost increases cannot
be readily passed along to customers. The Company currently expects
resin costs for the remainder of 1997 to stay at or about the same level
as experienced in the third quarter.
As the Company aggressively pursues sales growth in the storage
container category, it has outgrown its current productive capacity. As
a result there is a need to evaluate the most profitable use of the
Company's fully utilized capacity. Such evaluations are in process and
may result in a strategy which reduces SKU's and sales growth. While
still expecting to grow at 10-15% a year, management believes it will be
able to improve overall gross profit margins by reducing the sale of
lower volume and/or gross profit items. In addition, the reduction of
SKU's will allow for a cutback in the levels of outsourced production,
further improving margins.
Management will continue to seek strategic acquisitions of
companies and product lines that fit within the desired categories of
products for the home. Such categories currently include home storage,
home organization and bathwares. Management is very much interested in
product lines and business that would allow for diversification away
from the current susceptibility to plastic resin cost fluctuations.
Management expects continued sales and earnings growth as a result of
future acquisitions but that additional financing may be necessary to
support acquisition activity. Given the success of the Company's third
quarter stock offering, management believes it is now better positioned
to obtain financing through either the debt or equity markets. The
current debt to equity ratio of 1:1 will provide capital stability in
support of efforts to obtain financing for strategic acquisitions.
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company's Registration Statement on Form S-2
(file No. 333-25871) relating to a stock offering
was declared effective by the SEC on June 6, 1997.
The offering by the Company of 2,280,000 shares of
Common Stock (the "Shares") registered under the
Registration Statement commenced on June 6, 1997 and
the sale of the Shares closed on June 30, 1997. All
of the Shares registered were sold in the offering
at an aggregate price of $22.2 million (before
deducting underwriting discounts and commissions).
The managing underwriters of the offering were
Everen Securities, Inc. and Montgomery Securities.
After deducting total underwriting discounts and
commissions in the amount of $1.3 million, the
Company received net proceeds from the offering of
$20.9 million.
The Company funded an additional $.7 million of
additional offering expenses through the revolving
line of credit. No offering expenses or
underwriting discounts and commissions were paid or
are to be paid to directors, officers or their
associates, or to any affiliate of the Company or
any person(s) owning 10% or more of the Company's
Common Stock.
Of the total net proceeds from the offering, the
Company repaid principal on a $7.0 million
subordinated term note, principal on Senior notes in
the amount of $13.6 million and accrued interest in
the amount of $.3 million.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 - Financial Data Schedule
b) On August 18, 1997, Registrant filed Report 8-K,
reporting the adoption of stockholder rights
plan.
SIGNATURE PAGE
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.
HOME PRODUCTS INTERNATIONAL, INC.
By: /s/ James E. Winslow
James E. Winslow
Executive Vice President
Chief Financial Officer
Dated: November 10, 1997
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