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 June 28, 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 August 5, 1997-6,662,184
<PAGE>
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 4
and Retained Earnings
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
Signatures 16
<PAGE>
<TABLE>
PART FINANCIAL INFORMATION
I
ITEM 1. FINANCIAL
STATEMENTS
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
June 28, December 28,
1997 1996
(unaudited)
Assets (in thousands, except share amounts)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 2,563 $ 2,879
Accounts receivable, net ..................... 21,531 6,594
Inventories, net ............................. 13,833 4,391
Prepaid expenses and other current assets .... 486 100
Total current assets ....................... 38,413 13,964
Property, plant and equipment - at cost......... 56,828 22,515
Less accumulated depreciation and amortization.. (33,995) (14,581)
Property, plant and equipment, net.............. 22,833 7,934
Intangible and other assets..................... 32,450 2,807
Total assets.................................... $93,696 $24,705
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations... $ 2,974 $ 838
Accounts payable ............................. 9,324 1,956
Accrued liabilitie ........................... 9,508 4,018
Total current liabilities .................. 21,806 6,812
Long-term obligations - net of current
maturities.................................. 54,524 6,184
Stockholders' equity:
Preferred Stock - authorized, 500,000 shares,
shares $.01 par value; none issued ......... - -
Common Stock - authorized 15,000,000 shares,
$.01 par value;
4,382,184 shares issued at June 28, 1997 and
3,881,423 shares issued at December 28, 1996. 44 39
Additional paid-in capital .................... 13,675 10,839
Retained earnings ............................. 4,118 1,296
Common Stock held in treasury - at cost
(58,762 shares)................................ (264) (264)
Currency translation adjustments .............. (207) (201)
Total stockholders' equity .................. 17,366 11,709
Total liabilities and stockholders' equity....... $93,696 $24,705
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
Thirteen Weeks Twenty-six Weeks
Ended Ended
June 28, June 29, June 28 June 29,
1997 1996 1976 1996
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales ............................ $33,023 $10,155 $64,761 $18,781
Cost of goods sold ................... 22,899 5,844 45,509 11,612
Gross profit ....................... 10,124 4,311 19,252 7,169
Operating expenses
Selling ............................ 4,480 2,305 9,068 4,787
Administrative ..................... 1,982 1,100 3,791 2,401
Amortization of intangible Assets... 202 44 407 87
6,664 3,449 13,266 7,275
Operating profit (loss) ............ 3,460 862 5,986 (106)
Other income (expense)
Interest income .................... 17 7 48 18
Interest (expense) ................. (1,608) (180) (3,139) (360)
Other income, net .................. 6 20 130 41
(1,585) (153) 2,961 (301)
Earnings (loss) before income Taxes... 1,875 709 3,025 (407)
Income tax expense ................... (86) - (203) -
Net earnings (loss) .................. 1,789 709 2,822 (407)
Retained earnings at beginning of
period................................ 2,329 (626) 1,296 490
Retaining earnings at end of period... $ 4,118 $ 83 $ 4,118 $ 83
Net earnings (loss) per common
equivalent share.................... $ .40 $ .19 $ .63 $ (.11)
Number of weighted common and common
common equivalent shares
outstanding........................4,505,771 3,820,147 4,509,727 3,818,664
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Twenty-six Weeks Ended
June 28, June 29,
1997 1996
<S> (in thousands)
Cash flows from operating activities: <C> <C>
Net earnings (loss) ............................... $ 2,822 $(407)
Adjustments to reconcile net earnings (loss)
to net cash (used) provided by operating
activities:
Depreciation and amortization .................... 3,461 1,138
Changes in assets and liabilities:
(Increase) in accounts receivable .............. (6,077) (1,501)
(Increase) decrease in inventories.............. (3,317) 544
(Increase) in refundable income taxes........... - (101)
(Decrease) in accounts payable ................. (5,033) (26)
Increase (decrease) in accrued liabilities...... 2,047 (667)
Other operating activities, net .................. (774) (180)
Net cash (used) by operating activities............. (6,871) (1,200)
Cash flows from investing activities:
Tamor Acquisition, net of cash acquired............ (27,876) -
Proceeds from sale or maturity of marketable
securities...................................... - 28
Capital expenditures, net ......................... (1,087) (801)
Loss on sale of fixed assets ...................... - 9
Net cash (used) for investing activities............ (28,963) (506)
Cash flows from financing activities:
Payments on borrowings ............................ (12,294) (31)
Net proceeds from borrowings and warrant........... 47,777 -
Payment of capital lease obligation ............... (18) (15)
Exercise of common stock options and issuance of
common stock under stock purchase plan.......... 53 59
Net cash provided by financing activities........... 35,518 13
Net (decrease) in cash and cash equivalents........ (316) (1,693)
Cash and cash equivalents at beginning of period... 2,879 2,982
Cash and cash equivalents at end of period......... $ 2,563 $ 1,289
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and swap fees ............................ $1,721 $ 294
Income taxes, net ................................. 1,225 101
</TABLE>
The accompanying notes are an integral part of the financial statements.
<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 twenty-six weeks ended June 28, 1997 and June 29,
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 summarized as follows (in thousands):
June 28, December 28
1997 1996
Finished goods ..................... $8,191 $2,604
Work-in-process .................... 2,406 1,003
Raw materials ...................... 3,236 784
$13,833 $ 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. Earnings per share have been computed by dividing net earnings
for the thirteen weeks ended June, 28, 1997 and June 29, 1996 by the
weighted average common and common equivalent shares of 4,505,771 and
3,820,147, respectively. For the twenty-six weeks ended June 28, 1997
and June 29, 1996, earnings (loss) per share have been computed by
dividing the net income (loss) by 4,509,727, and 3,818,664, the weighted
average common and common equivalent shares outstanding as of the
respective date. 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.
Common share equivalents are not included under the treasury stock
method when their effect is antidulitive.
<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 twenty-
six weeks ended June 28, 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. During the thirteen week period ended June 28, 1997, employees
exercised options to purchase 500 shares of the Company's common stock
at exercise prices ranging from $4.75 to $5.00 per share.
Note 7. 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 subordinated debt of $7.0 million, term debt 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 debt.
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;
(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
<PAGE>
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' 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 26 week periods ended June 28, 1997 and
June 29, 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 June 28, 1997 compared to the thirteen weeks ended
June 29, 1996
General. The Tamor Acquisition and the related financing
significantly impacted the Company's operating results for the second
quarter of 1997. The acquisition of Tamor contributed to the
improvement of the Company's net earnings from $.7 million in the second
quarter of 1996 to net earnings of $1.8 million in the second quarter of
1997. The improved earnings were also the result of significant
improvements in the financial performance of Selfix and Shutters. Tamor
contributed $.6 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
second quarter of 1997 as compared to $.7 million in the second quarter
of 1996. The improved results at Selfix and Shutters 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
second quarter of 1997 to the pro forma results for the second 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.
<PAGE>
<TABLE>
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
June 28, 1997 June 29, 1996
<S> <C> <C> <C> <C>
Net sales $33,023 100.0% $28,227 100.0%
Cost of goods sold 22,899 69.3% 19,958 70.7%
Gross profit 10,124 30.7% 8,269 29.3%
Operating expenses 6,664 20.2% 5,815 20.6%
Operating profit 3,460 10.5% 2,454 8.7%
Other income (expense) 23 0.1% 78 0.3%
Earnings before income taxes 1,875 5.7% 868 3.1%
Income tax expense (86) (0.3%) (27) ( 0.1%)
Net earnings $ 1,789 5.4% $ 841 3.0%
Net earnings per share $0.40 $0.19
</TABLE>
Net sales. Net sales of $33.0 million in the second quarter of
1997 increased $4.8 million, or 17%, from net sales of $28.2 million in
the second quarter of 1996. The increase was primarily the result of
increased distribution and the introduction of new Tamor plastic storage
products. Sales increases occurred primarily in juvenile products,
home/closet organization and storage containers product lines. Sales of
juvenile products increased 45% ($1.1 million) as a result of a large
promotional shipment to one customer. Sales of home/closet organization
products increased 9% as a result of increased distribution of hanger
products. Sales of storage containers increased 34% ($2.8 million) due
to new product introductions and additional distribution of existing
products. Sales of Shutters home improvement products were down $.5
million related to inclement weather in April and May.
Gross profit. Gross profit increased 22% from $8.3 million in the
second quarter of 1996 to $10.1 million in the second quarter of 1997,
as a result of the increased sales described above and improved margins.
Gross profit margins increased from 29.3% in the second quarter of 1996
to 30.7% in the second quarter of 1997, due primarily to increased
capacity utilization and a slight decrease in the cost of plastic resin.
<PAGE>
The cost of plastic resin decreased approximately 3% between quarters
resulting in a .6% 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 for molding and
packaging 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 the second quarter of
1997 of $6.7 million increased $.8 million as compared to the second
quarter of 1996. As a percentage of net sales, operating expenses
declined from 20.6% in 1996 to 20.2% in 1997. The primary contributors
to the $.8 million increase was due to increased variable selling
expenses on the net sales improvement between years and additional
marketing personnel were added at Tamor.
Amortization of intangibles decreased slightly from 0.7% of net
sales in the second quarter of 1996 to .6% in the second 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 $1.0 million, or 41%, to $3.5 million in the
second quarter of 1997 from $2.5 million in the second quarter of 1996.
In the second quarter of 1997, operating profit was 10.5% of net sales
as compared to 8.7% of net sales in the second quarter of 1996.
Interest expense. Interest expense of $1.6 million in the second
quarter of 1997 was essentially unchanged from the second quarter of
1996. Both periods reflect amortization of debt discount related to the
Subordinated Note. The debt discount of $0.4 million is being amortized
over the seven month period of time the Subordinated Note is expected to
be 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 second
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 second quarter of 1997.
The Company decreased the valuation allowance for net deferred tax
assets by $1.7 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, the Company has
not yet been 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
impact of the substantial indebtedness incurred in connection with the
Tamor Acquisition, 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
<PAGE>
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 $1.8 million in the second
quarter of 1997 from $.8 million in the second quarter of 1996.
Earnings per share increased to $0.40 in the second quarter of 1997
based on 4,505,771 weighted average shares outstanding as compared to
the second quarter of 1996 earnings per share of $.19 based on 4,339,749
pro forma weighted average shares outstanding. If the Company had
incurred a tax expense using a tax rate of 40% assuming no federal or
state tax loss carryforwards, net earnings in the second quarter of 1997
would have been $1.1 million, or $0.25 per share based on 4,505,771
weighted average shares outstanding.
Operating Results by Industry Segment
Housewares
Second quarter 1997 performance in the housewares segment
significantly improved as compared to the second quarter of 1996 on a
pro forma basis. Net sales increased 21% from $25.4 million in the
first quarter of 1996 to $30.6 million in the second quarter of 1997 as
a result of new product introductions and expanded distribution.
Operating profit increased 49% from $2.0 million, 7.9% of net sales, on
a pro forma basis in the second quarter of 1996 to $3.0 million, 9.8% of
net sales, in the second 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
Second quarter 1997 sales of $2.4 million were down $.5 million
from the second quarter of 1996. Sales in the period were impacted by
inclement weather in April and May thus reducing sales below
expectations. Gross profit margins were down slightly but this was
recovered through operating expense reductions. As a result, operating
profits of $.5 million were up slightly from the prior year.
Twenty-six weeks ended June 28, 1997 compared to the twenty-six weeks
ended June 29, 1996.
General. The Tamor Acquisition and the related financing
significantly impacted the Company's operating results for the first
half of 1997. The acquisition of Tamor was a significant factor in the
improvement of the Company's net earnings from a net loss of $.4 million
in 1996 to net earnings of $2.8 million in 1997. The improved earnings
were also the result of significant improvements in the financial
performance of Selfix and Shutters. Tamor contributed $1.7 million of
pre-tax earnings in the first half, net of related financing expenses,
transaction costs and goodwill amortization. Selfix and Shutters had
pre-tax profits of $1.3 million in the first half of 1997 as compared to
a $.4 million loss in the first half of 1996. The improved results at
Selfix and Shutters 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
first half of 1997 to the pro forma results for the first half 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 twenty-
six week periods. The pro forma financial results below give effect to
the same adjustments as are reflected in the above pro forma discussion
of second 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
Twenty-six weeks Twenty-six weeks
ended ended
June 28, 1997 June 29, 1996
<S> <C> <C> <C> <C>
Net sales $64,761 100.0% $55,616 100.0%
Cost of goods sold 4 5,509 70.3% 39,112 70.3%
Gross profit 19,252 29.7% $16,504 29.7%
Operating expenses 13,266 20.5% 12,522 22.5%
Operating profit 5,986 9.2% 3,982 7.2%
Interest expense (3,139) (4.8%) (3,220) (5.8%)
Other income 178 0.3% 142 0.2%
Earnings before income taxes 3,025 4.7% 904 1.
Income tax expense (203) (0.3%) (85) (0.1%)
Net earnings $ 2,822 4.4% $ 819 1.5%
Net earnings per share $0.63 $ .19
</TABLE>
Net sales. Net sales of $64.8 million in 1997 increased $9.2
million, or 16%, from net sales of $55.6 million in 1996. The increase
was primarily the result of increased distribution and the introduction
of new Tamor plastic storage products. Sales increases occurred
primarily in juvenile products, home/closet organization and storage
containers product lines. Sales of juvenile products increased 26%
($1.3 million) primarily as a result of a promotional shipment to one
customer. Sales of home/closet organization products increased 11%
($2.1 million) as a result of increased distribution of hanger products.
Sales of storage containers increased 30% ($5.1 million) due to new
product introductions and additional distribution of existing products.
Sales of Shutters home improvement products decreased 4% due to the
inclement weather in the second quarter of 1997.
Gross profit. Gross profit increased 17% from $16.5 million in
1996 to $19.3 million in 1997, as a result of the increased sales
described above. Gross profit margins were 29.7% in both years. The
cost of plastic resin increased approximately 4% between periods
resulting in a .8% drop in gross profit margin. Offsetting the increase
in plastic resin costs were improvements in capacity utilization.
During 1997, the Company was able to increase the use of excess capacity
at its Selfix and Shutters manufacturing facilities for molding and
packaging products for Tamor, which allowed Tamor to reduce outside
molding costs and Selfix and Shutters to reduce per unit overhead costs.
<PAGE>
Operating expenses. Operating expenses in 1997 of $13.3 million
increased from $12.5 million in 1996. The increase in operating expense
is primarily due to variable related selling costs and additional
personnel to support sales growth. As a percentage of net sales,
operating expenses were 20.5% down from 22.5% 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 $2.0 million, or 50%, to $6.0 million in 1997 from $4.0
million in 1996. In 1997, operating profit was 9.2% of net sales as
compared to 7.2% of net sales in 1996.
Interest expense. Interest expense of $3.1 million in 1997 was
essentially unchanged from 1996. Both periods reflect amortization of
debt discount related to the Subordinated Note. The debt discount of
$0.4 million is being amortized over the seven month period of time the
Subordinated Note is expected to be 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 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 impact of the substantial indebtedness
incurred in connection with the Tamor Acquisition, the maintenance of
the Company's existing customer relationships at current levels of sales
volume, the continue 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 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 $2.8 million in 1997 from $.8
million in 1996. Earnings per share increased to $0.63 in 1997 based
on 4,509,727 weighted average shares outstanding as compared to 1996
earnings per shares of $0.19 based on 4,338,266 pro forma weighted
average 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 $1.8 million,
or $0.40 per share based on 4,509,727 weighted average shares
outstanding.
<PAGE>
Capital Resources and Liquidity
Cash and cash equivalents at June 28, 1997 were $2.6 million as
compared to $2.9 million at December 28, 1996. Cash used by operating
activities during the first half of 1997 was $6.9 million. Working
capital increased $12.4 million in the six month period as a result of
higher accounts receivable and increased inventory levels, both in
support of the 16% 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. At June 28,
1997, the Company had total short and long term debt outstanding of
$57.5 million and unused availability under the revolving line of credit
of $10.4 million. In the twelve months following June 28, 1997, $2.5
million of debt will come due.
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 subordinated debt of $7.0 million, term debt 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 debt. 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.
The Company's capital spending needs in 1997 are expected to be
between $7.5 and $10.0 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.
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
The first half of 1997 has been in line with management
expectations. The Tamor acquisition has contributed sales growth and
earnings while Selfix and Shutters are both performing at significantly
more profitable levels. Tamor continues to experience significant sales
growth, up 24% 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 are experiencing the benefits of the operating initiatives and
cost cutting measures taken during 1995 and 1996. On a combined basis,
first half operating profits at these entities are up $1.6 million as
compared to a year ago when a slight operating loss was reported.
Second half profitability is expected to be at similar levels.
<PAGE>
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 first twenty-six weeks of the year.
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 outsource more production. Costs to produce
product at contract molders are slightly higher than the cost of
internal production. As such, margins on incremental sales may be
lower. Management is currently studying the economics of expanded
capacity as well as strategies for making more profitable use of
existing capacity. Such strategies may involve strategic decisions to
grow at a slower but more profitable pace.
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 July
stock offering, management believes it is now better positioned to
obtain financing through either the debt or equity markets. Debt to
equity ratios have been reduced below 50% after the offering thus
providing capital stability in support of efforts to obtain financing
for strategic acquisitions.
<PAGE>
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: August 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> MAR-30-1997
<PERIOD-END> JUN-28-1997
<CASH> 2563
<SECURITIES> 0
<RECEIVABLES> 23294
<ALLOWANCES> 1763
<INVENTORY> 13833
<CURRENT-ASSETS> 38413
<PP&E> 56828
<DEPRECIATION> 33995
<TOTAL-ASSETS> 93696
<CURRENT-LIABILITIES> 21806
<BONDS> 54524
0
0
<COMMON> 44
<OTHER-SE> 17322
<TOTAL-LIABILITY-AND-EQUITY> 93696
<SALES> 64761
<TOTAL-REVENUES> 64761
<CGS> 45509
<TOTAL-COSTS> 45509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 160
<INTEREST-EXPENSE> 3139
<INCOME-PRETAX> 3025
<INCOME-TAX> 203
<INCOME-CONTINUING> 2822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2822
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
