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 27, 1998
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 principa (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 July 31, 1998 -
7,948,536
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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 9
Part II. Other Information
Item 4. Submission of matters to a vote of Security 17
Holders
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
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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)
June 27, December 27,
1998 1997
(unaudited)
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Assets
Current assets:
Cash and cash equivalents .................. $ 3,832 $ 583
Accounts receivable, net ................... 36,444 20,802
Inventories, net ........................... 27,554 12,797
Prepaid expenses and other current assets .. 1,377 508
Total current assets ..................... 69,207 34,690
Property, plant and equipment - at cost....... 63,676 47,634
Less accumulated depreciation and amortization (22,957) (19,254)
Property, plant and equipment, net............ 40,719 28,380
Intangible and other assets................... 123,848 36,273
Total assets.................................. $233,774 $99,343
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 991 $ 3,850
Accounts payable ........................... 15,818 9,664
Accrued liabilities ........................ 20,624 12,913
Total current liabilities ................ 37,433 26,427
Long-term obligations - net of current
maturities.................................. 134,314 30,700
Other liabilities............................. 6,273 -
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value;
none issued .............................. - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,007,298 shares issued at
June 27, 1998 and 6,674,271 shares issued
at December 27, 1997 ..................... 80 67
Additional paid-in capital ................. 48,304 33,956
Retained earnings .......................... 7,784 8,616
Common Stock held in treasury - at cost
(58,762 shares)........................... (264) (264)
Currency translation adjustments ........... (150) (159)
Total stockholders' equity ............... 55,754 42,216
Total liabilities and stockholders' equity.... $223,774 $99,343
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)
(in thousands, except per share amounts)
Thirteen Weeks Twenty-six Weeks
Ended Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales ....................... $54,985 $33,023 $107,393 $64,761
Cost of goods sold .............. 36,106 22,899 72,561 45,509
Gross profit ................. 18,879 10,124 34,832 19,252
Operating expenses
Selling ...................... 6,108 4,480 12,537 9,068
Administrative ............... 3,392 1,982 6,896 3,791
Amortization of intangible assets 937 202 1,865 407
10,437 6,664 21,298 13,266
Operating profit ............. 8,442 3,460 13,534 5,986
Other income (expense)
Interest income .............. 10 17 55 48
Interest (expense) ........... (3,382) (1,608) (6,388) (3,139)
Other income, net ............ 39 6 52 130
(3,333) (1,585) (6,281) (2,961)
Earnings before income taxes and
extraordinary charge........... 5,109 1,875 7,253 3,025
Income tax (expense) ............ (2,080) (86) (2,978) (203)
Earnings before extraordinary charge 3,029 1,789 4,275 2,822
Extraordinary charge for early
retirement of debt, net of tax
benefit of $2,440 and $3,698
respectively................... (3,370) - (5,107) -
Net earnings (loss) ............. (341) 1,789 (832) 2,822
Retained earnings at beginning of
period......................... 8,125 2,329 8,616 1,296
Retaining earnings at end of period $ 7,784 $ 4,118 $ 7,784 $ 4,118
Earnings before extraordinary
charge, per common share - basic $ 0.38 $ 0.41 $ 0.54 $ 0.65
Extraordinary charge for early
retirement debt, net of tax.... (0.42) - (0.64) -
Net earnings (loss) per common
share - basic ................. (0.04) 0.41 (0.10) 0.65
Earnings before extraordinary
charge, per common share - diluted 0.37 0.40 0.52 0.63
Extraordinary charge for early
retirement of debt, net of tax (0.41) - (0.62) -
Net earnings (loss) per common
share-diluted.................. $ (0.04) $ 0.40 $ (0.10) $ 0.63
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)
Twenty-six Weeks Ended
June 27, June 28,
1998 1997
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Cash flows from operating activities:
Net earnings (loss) ............................. $ (832) $ 2,822
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization .................. 5,805 3,461
Changes in assets and liabilities:
(Increase) in accounts receivable ............ (3,176) (6,077)
(Increase) in inventories .................... (3,159) (3,317)
Increase (decrease) in accounts payable....... 974 (5,033)
(Decrease) increase in accrued liabilities.... (3,450) 2,047
Other operating activities, net ................ 4,984 (774)
Net cash provided (used) by operating activities... 1,146 (6,871)
Cash flows from investing activities:
Seymour acquisition, net of cash acquired........ (14,882) -
Tamor acquisition, net of cash acquired.......... - (27,876)
Capital expenditures, net ....................... (4,973) (1,087)
Net cash (used) for investing activities........... (19,855) (28,963)
Cash flows from financing activities:
Payments on borrowings .......................... (219,218) (12,294)
Net proceeds from borrowings and warrants........ 237,498 47,777
Net proceeds from borrowings under revolving
line of credit ................................ 3,700 -
Payment of capital lease obligation ............. (103) (18)
Exercise of common stock options and issuance
of common stock under stock purchase plan ..... 81 53
Net cash provided by financing activities.......... 21,958 35,518
Net increase (decrease) in cash and cash
equivalents ................................... 3,249 (316)
Cash and cash equivalents at beginning of period. 583 2,879
Cash and cash equivalents at end of period ...... $ 3,832 $ 2,563
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................ $ 2,024 $ 1,721
Income taxes .................................... 183 1,225
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Home Products International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands except per share amounts)
Note 1. Home Products International, Inc. (the "Company") and its
subsidiary companies design, manufacture and market products in two
industry segments: houseware products and home improvement products.
Houseware products are marketed principally through mass market trade
channels throughout the United States and internationally. Home
improvement products are sold principally through wholesalers that
service the residential construction, repair and remodeling industry
throughout the United States.
The condensed consolidated financial statements include the
accounts of the Company and its subsidiary companies. All
significant intercompany transactions and balances have been
eliminated.
The unaudited condensed financial statements included herein as
of June 27, 1998 and for the thirteen weeks and twenty-six weeks
ended June 27, 1998 and June 28, 1997 reflect, in the opinion of the
Company, all adjustments (which include only normal recurring
adjustments) 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 1997 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:
June 27, December 27,
1998 1997
Finished goods ..................... $15,519 $ 7,335
Work-in-process .................... 4,216 2,225
Raw materials ...................... 7,819 3,237
$27,554 $12,797
Note 3. In May 1998, the Company issued $125,000 of Senior
Subordinated Notes due 2008 (the "Notes"). Interest on the Notes is
payable semi-annually at a rate of 9.625% per annum. Proceeds from
the offering were used (i) to repay approximately $122,000 of
outstanding indebtedness, including the payment of certain fees,
prepayment penalties and expenses related to such repayment and (ii)
to pay certain other fees and expenses incurred in connection with
the issuance of the Notes and the refinancing of the Company's
primary revolving credit facility. Concurrently with the offering of
the Notes, the Company entered into a new bank revolving credit
facility in a maximum principal amount of $100,000 which replaced the
Company's prior $20,000 revolving credit facility.
<PAGE>
Note 3 Cont'd The Company is a holding company with no assets or
operations other than its investment in its subsidiaries. The Notes
are guaranteed by all direct and indirect subsidiaries of the Company
other than inconsequential subsidiaries (the "Subsidiary
Guarantors"). The guarantee obligations of the Subsidiary Guarantors
(which are all wholly owned subsidiaries of the Company) are full,
unconditional and joint and several. Separate financial statements of
the Subsidiary Guarantors are not included in the accompanying
financial statements because management of the Company has determined
that separate financial statements of the Subsidiary Guarantors would
not be material to investors.
Note 4. During fiscal 1997 the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which
established standards for the computation and presentation of
earnings per share information. Prior period net earnings (loss) per
share have been restated. Net earnings (loss) per common shares -
basic, was calculated by dividing net earnings (loss) applicable to
common shares by the weighted average number of common shares
outstanding during each period. Net earnings (loss) per common share
- diluted, reflects the potential dilution that could occur assuming
exercise of all outstanding "in-the-money" stock options. A
reconciliation of the net earnings (loss) and the number of shares
used in computing basic and diluted earnings per share were as
follows:
<PAGE>
<TABLE>
Thirteen Weeks Twenty-six Weeks
Ended Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings (loss) per common
share - basic:
Net earnings (loss) applicable
to common shares.................. $ (341) $ 1,789 $ (832) $ 2,822
Weighted average common shares
outstanding for the period ....... 7,947 4,323 7,938 4,311
Net earnings (loss) per common
share - basic..................... $ (0.04) $ 0.41 $ (0.10) $ 0.65
Net earnings (loss) per common
share - diluted:
Net earnings (loss) applicable
to common shares................ $ (341) $ 1,789 $ (832) $ 2,822
Weighted average common shares
outstanding for the period ....... 7,947 4,323 7,938 4,311
Increase in shares which would
result from exercise of "in-the-
money" stock options.............. 336 183 362 199
Weighted average common shares
outstanding assuming conversion
of the above securities........... 8,283 4,506 8,300 4,510
Net earnings (loss) per common
share - diluted................... $ (0.04) $ 0.40 $ (0.10) $ 0.63
</TABLE>
Note 5. The provision for income taxes is determined by applying an
estimated annual effective tax rate (federal, state and foreign
combined) to income before taxes. The estimated annual effective
income tax rate is based upon the most recent annualized forecast of
pretax income and permanent book/tax differences.
<PAGE>
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 Seymour Acquisition (as defined below) 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 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.
Seymour Acquisition. Effective December 30, 1997, (within the
Company's 1998 fiscal year) the Company acquired Seymour, (the
"Seymour Acquisition") and Seymour's actual results have been
combined with the Company's since the date of acquisition. Seymour
is a leading designer, manufacturer and marketer of consumer laundry
care products. Seymour manufactures and markets a full line of
ironing boards, ironing board covers and pads and numerous laundry
related accessories.
Seymour was acquired for a total purchase price of $100.7
million, consisting of $16.4 million in cash, $14.3 million in common
stock (1,320,700 shares) and the assumption of $70.0 million of debt.
The necessary funds to complete the acquisition were obtained from a
credit agreement entered into on December 30, 1997, (the "12/30/97
Credit Agreement").
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<TABLE>
Thirteen weeks ended June 27, 1998 compared to the thirteen weeks
ended June 28, 1997
In the discussion and analysis that follows, all references to
the second quarter of 1998 are to the thirteen week period ended June
27, 1998 and all references to the second quarter of 1997 are to the
thirteen week period ended June 28, 1997. The following discussion
and analysis compares the actual results for the second quarter of
1998 to the actual results for the second quarter of 1997 with
reference to the following (in thousands, except share and per share
amounts; unaudited):
Thirteen weeks ended
June 27, 1998 June 28, 1997
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Net sales..................... $ 54,985 100.0% $33,023 100.0%
Cost of goods sold............ 36,106 65.7 22,899 69.3
Gross profit................ 18,879 34.3 10,124 30.7
Operating expenses............ 10,437 18.9 6,664 20.2
Operating profit............ 8,442 15.4 3,460 10.5
Interest expense.............. (3,382) (6.2) (1,608) (4.9)
Other income.................. 49 0.1 23 0.1
Earnings before income taxes 5,109 9.3 1,875 5.7
Income tax (expense).......... (2,080) (3.8) (86) (0.3)
Earnings before extraordinary
charge...................... 3,029 5.5 1,789 5.4
Extraordinary charge.......... (3,370) (6.1) - -
Net earnings (loss)........... $ (341) (0.6)% $1,789 5.4%
Earnings before extraordinary
charge per share - basic.... $0.38 $0.41
Earnings before extraordinary
charge per share - diluted... $0.37 $0.40
Net earnings (loss) per share -
basic....................... ($0.04) $0.41
Net earnings (loss) per share -
diluted..................... ($0.04) $0.40
Weighted average common shares
outstanding - basic......... 7,947,182 4,322,988
Weighted average common shares
outstanding - diluted....... 8,283,130 4,505,771
</TABLE>
<PAGE>
Net sales. Net sales of $55.0 million in the second quarter of
1998 increased $22.0 million, or 66.7%, from net sales of $33.0
million in the second quarter of 1997. The Seymour Acquisition
contributed $26.0 million to net sales in the quarter. The Company's
remaining subsidiaries experienced a decrease in the second quarter
of 1998 totaling $4.0 million. Net sales were down primarily as a
result of the Company's continuing effort to cutback or eliminate the
sales of certain under performing products. Also impacting the second
quarter of 1998 was a decline in juvenile products due to a $1.0
million one time promotional order in the second quarter of 1997. In
addition, sales as compared to the prior period were negatively
impacted by the bankruptcy of several retailers during the fourth
quarter of 1997 and the first quarter of 1998. Sales to such
customers for the second quarter of 1997 totaled $0.6 million as
compared to $0.2 million in the second quarter of 1998.
Gross profit. Gross profit increased from $10.1 million in the
second quarter of 1997 to $18.9 million in the second quarter of 1998
while gross profit margins increased from 30.7% in the second quarter
of 1997 to 34.3% in the second quarter of 1998. The Seymour
Acquisition contributed $8.8 million to gross profit in the quarter.
Improved gross profit margins were due primarily to a decrease in the
cost of plastic resin. Declines in resin costs were a reflection of
plastic resin market factors and not as a result of any change in the
Company's buying practices. Margins also improved from a year ago as
a result of improved product mix from SKU reductions and higher
margins on new product sales. Negatively impacting margins in the
second quarter of 1998 was unfavorable overhead absorption on
decreased production in response to the sales decline.
Operating expenses. Operating expenses of $10.4 million in the
second quarter of 1998 were up $3.8 million as compared to the second
quarter of 1997. Operating expenses as a percent of net sales
improved from 20.2% in the second quarter of 1997 to 18.9% in the
second quarter of 1998. Excluding the impact of amortization,
operating expenses as a percent of sales improved even more from
19.6% in 1997 to 17.3% in 1998. Operating expense savings in the
quarter were primarily from reduced selling and marketing expenses
related to the successful consolidation of the Selfix and Seymour
selling and marketing functions. Administrative expenses increased
due to an increase in employee wages and benefits, the implementation
of a new incentive compensation plan and increased professional
services.
Interest expense. Interest expense of $3.4 million in the
second quarter of 1998 increased $1.8 million from $1.6 million in
the second quarter of 1997. The issuance of $70.0 million of debt in
connection with the Seymour Acquisition caused the majority of the
increased interest expense between periods. In addition, the Company
issued $125.0 million of high yield notes in May, 1998 at a fixed
interest rate of 9.625%. The fixed rate is slightly higher than the
Company's previous floating rate under its revolving credit
agreement.
<PAGE>
Income tax expense. Income tax expense increased by $2.0
million to $2.1 million for the second quarter of 1998 from $0.1
million in the first quarter of 1997. Income tax expense increased
because of a change in the Company's tax position. In 1997, the
Company was able to use net operating loss carryforwards and reduce
income tax expense. By the end of fiscal year 1997, the tax loss
carryforwards had been fully utilized. As such, the Company is now
in a tax paying position. The second quarter of 1998 provision
included a provision for both federal and state income taxes.
Earnings before extraordinary charge. Earnings before
extraordinary charge increased to $3.0 million in the second quarter
of 1998 from first quarter 1997 earnings of $1.8 million. Diluted
earnings per share before extraordinary charge in the second quarter
of 1998 were $0.37 per common share based on 8,283,130 weighted
average common shares outstanding as compared to diluted earnings per
share before extraordinary charge in the first quarter of 1997 of
$0.40 per common share based on 4,505,771 weighted average common
shares outstanding. The increase in weighted average common shares
outstanding was the result of a public stock offering in July, 1997
(2,280,000 new shares issued) and shares issued in connection with
the Seymour Acquisition (1,320,700).
Extraordinary charge. An extraordinary charge, net of tax, for
the early retirement of debt of $3.4 million, or $0.41 per common
share - diluted was recorded to write off deferred financing charges
associated with the 12/30/97 Credit Agreement. In May, 1998 the
Company refinanced its debt requiring the write-off of previously
capitalized costs. As part of the refinancing, the Company also
incurred penalties for early repayment of debt.
Net earnings. A net loss of $0.3 million, or $0.04 per common
share - diluted, was incurred in the second quarter of 1998 based on
8,283,130 weighted average common shares outstanding. This compares
to net earnings of $1.8 million, or $0.40 per common share - diluted,
in the second quarter of 1997 based on 4,505,771 weighted average
common shares outstanding.
Operating Results by Industry Segment
The Company operates in two industry segments: (i) housewares
products and (ii) home improvement products.
Housewares
The housewares segment significantly improved its profitability
in the second quarter of 1998. Operating profits increased $5.1
million from $3.0 million in the second quarter of 1997 to operating
profits of $8.1 million in the second quarter of 1998. The
improvement was the result of the Seymour Acquisition which
contributed $5.0 million to operating profits in the quarter. Aside
from the Seymour Acquisition the housewares segment experienced a
slight increase in operating profits attributable to a margin
improvement of almost 6.0% and a reduction in operating expenses.
Partially offsetting the margin improvement was a decline in net
sales of $4.0 million due to a continuing effort to cutback or
eliminate certain under performing products, a decrease in juvenile
<PAGE>
sales related to a one-time promotional order in the second quarter
of 1997 and the bankruptcy of several retailers during the fourth
quarter of 1997 and the first quarter of 1998.
Home Improvement Products
Operating profits for the home improvement segment decreased
$0.2 million from $0.5 million for the second quarter of 1997 to $0.3
million for the second quarter of 1998 attributable to a decline in
margins. While customer sales remained flat between quarters the
amount of molding done for the housewares segment decreased $0.5
million in the second quarter of 1998. Due to this decrease in
production the home improvement segment had significant unfavorable
overhead absorption which reduced margins in 1998.
Twenty-six weeks ended June 27, 1998 compared to the twenty-six weeks
ended June 28, 1997
The following discussion and analysis compares the actual
results for the twenty-six weeks ended June 27, 1998 to the actual
results for the twenty-six weeks ended June 28, 1997 with reference
to the following (in thousands, except share and per share amounts;
unaudited):
<PAGE>
<TABLE>
Twenty-six weeks ended
June 27, 1998 June 28, 1997
<S> <C> <C> <C> <C>
Net sales..................... $107,393 100.0% $64,761 100.0%
Cost of goods sold............ 72,561 67.6 45,509 70.3
Gross profit................ 34,832 32.4 19,252 29.7
Operating expenses............ 21,298 19.8 13,266 20.5
Operating profit............ 13,534 12.6 5,986 9.2
Interest expense.............. (6,388) (5.9) (3,139) (4.8)
Other income.................. 107 0.1 178 0.3
Earnings before income taxes 7,253 6.8 3,025 4.7
Income tax (expense).......... (2,978) (2.8) (203) (0.3)
Earnings before extraordinary
charge...................... 4,275 4.0 2,822 4.4
Extraordinary charge.......... (5,107) (4.8) - -
Net earnings (loss)........... $ (832) (0.8)% $ 2,822 4.4%
Earnings before extraordinary
charge per share - basic.... $ 0.54 $ 0.65
Earnings before extraordinary
charge per share - diluted.. $ 0.52 $ 0.63
Net earnings (loss) per share
- basic..................... $ (0.10) $ 0.65
Net earnings (loss) per share
- diluted................... $ (0.10) $ 0.63
Weighted average common shares
outstanding - basic......... 7,937,925 4,310,884
Weighted average common shares
outstanding - diluted....... 8,299,873 4,509,727
</TABLE>
Net sales. Net sales of $107.4 million in 1998 increased $42.6
million, or 65.7%, from net sales of $64.8 million in 1997. The
Seymour Acquisition contributed $49.0 million to net sales in the
period. The Company's remaining subsidiaries experienced a decrease
in the first half of 1998 totaling $6.4 million. Net sales were down
primarily as a result of the Company's continuing effort to cutback
or eliminate the sales of certain under performing products. Also
impacting 1998 was a decline in juvenile products due to a $1.0
million one time promotional order in the second quarter of 1997. In
addition, sales as compared to the prior period were negatively
impacted by the bankruptcy of several retailers during the fourth
quarter of 1997 and the first quarter of 1998. Sales to such
customers for 1997 totaled $1.6 million as compared to $0.3 million
in 1998.
<PAGE>
Gross profit. Gross profit increased from $19.3 million in 1997
to $34.8 million in 1998 while gross profit margins increased from
29.7% in 1997 to 32.4% in 1998. The Seymour Acquisition contributed
$15.5 million to gross profit in the period. Improved gross profit
margins were due primarily to a decrease in the cost of plastic
resin. Declines in resin costs were a reflection of plastic resin
market factors and not as a result of any change in the Company's
buying practices. Margins also improved from a year ago as a result
of improved product mix from SKU reductions and higher margins on new
product sales. Negatively impacting margins was unfavorable overhead
absorption on decreased production in response to the sales decline.
Operating expenses. Operating expenses of $21.3 million in 1998
were up $8.0 million as compared to 1997. Operating expenses as a
percent of net sales improved from 20.5% in 1997 to 19.8% in 1998.
Excluding the impact of amortization, operating expenses as a percent
of sales improved even more from 19.9% in 1997 to 18.1% in 1998.
Operating expense savings in the period were primarily from reduced
selling and marketing expenses related to the successful
consolidation of the Selfix and Seymour selling and marketing
functions. Administrative expenses increased due to an increase in
employee wages and benefits, the implementation of a new incentive
compensation plan, additional computer expenses and increased
professional services.
Interest expense. Interest expense of $6.4 million in 1998
increased $3.3 million from $3.1 million in 1997. The issuance of
$70.0 million of debt in connection with the Seymour Acquisition
caused the majority of the increased interest expense between
periods. In addition, the Company issued $125.0 million of high
yield notes in May, 1998 at a fixed interest rate of 9.625%. The
fixed rate is slightly higher than the Company's previous floating
rate under its revolving credit agreement.
Income tax expense. Income taxes increased by $2.8 million to
$3.0 million for 1998 from $0.2 million in 1997. Income tax expense
increased because of a change in the Company's tax position. In
1997, the Company was able to use net operating loss carryforwards
and reduce income tax expense. By the end of fiscal year 1997, the
tax loss carryforwards had been fully utilized. As such, the Company
is now in a tax paying position. The 1998 provision included a
provision for both federal and state income taxes.
Earnings before extraordinary charge. Earnings before
extraordinary charge increased to $4.3 million in 1998 from 1997
earnings of $2.8 million. Diluted earnings per share before
extraordinary charge for the twenty-six weeks ended June 27, 1998
were $0.52 per common share based on 8,299,873 weighted average
common shares outstanding as compared to diluted earnings per share
before extraordinary charge for the twenty-six weeks ended June 28,
1997 of $0.63 per common share based on 4,509,727 weighted average
common shares outstanding. The increase in weighted average common
shares outstanding was the result of a public stock offering in July,
1997 (2,280,000 new shares issued) and shares issued in connection
with the Seymour Acquisition (1,320,700).
<PAGE>
Extraordinary charge. An extraordinary charge, net of tax, for
the early retirement of debt of $5.1 million, or $0.62 per common
share - diluted was recorded in the period. To fund the Seymour
Acquisition, increased financing facilities were obtained to replace
and augment existing facilities as of December 27, 1997, requiring
the write-off of $1.7 million of capitalized costs incurred to obtain
the replaced credit facilities. In May, 1998 the Company refinanced
its existing debt and incurred an extraordinary charge of $3.4
million for the write-off of previously capitalized costs relating to
the 12/30/97 Credit Agreement as well as penalties for early
repayment of debt.
Net earnings. A net loss of $0.8 million, or $0.10 per common
share - diluted, was incurred in 1998 based on 8,299,873 weighted
average common shares outstanding. This compares to net earnings of
$2.8 million, or $0.63 per common share - diluted, in 1997 based on
4,509,727 weighted average common shares outstanding.
Capital Resources and Liquidity
Cash and cash equivalents at June 27, 1998 were $3.8 million as
compared to $0.6 million at December 27, 1997. Total assets
increased $134.4 million in the six month period to $233.8 million
while stockholders' equity increased $13.5 million, or 32.0%, to
$55.8 million. Working capital increased $23.5 million, or 283%, to
$31.8 million at June 27, 1998. The increase in assets and
stockholders' equity were primarily the result of the Seymour
Acquisition. The increase in working capital is a result of
increased receivables and inventory and lower short term debt related
to the May 1998 refinancing. Cash provided by operating activities
was $1.1 million for the first half of 1998. Increases in cash and
cash equivalents also resulted from borrowings in excess of funds
required to close the Seymour Acquisition and additional borrowings
related to the refinancing in May 1998.
In May, 1998 the Company refinanced its existing debt to provide
financial flexibility and resources necessary to pursue strategic
acquisitions. The Company issued $125.0 million 10 year fixed rate
senior subordinated notes (the Notes"). In addition to the Notes the
Company also entered into a $100.0 million senior revolving credit
facility to be used to finance future acquisitions and working
capital needs. At June 27, 1998, the Company had total short and
long term debt outstanding of $135.3 million and unused availability
under the revolving credit facility of $88.4 million. During the
remainder of 1998, $0.9 million of debt will come due.
The Company's capital spending needs in 1998 are expected to be
between $8.0 and $10.0 million. Most of the spending relates to new
injection molding presses to expand existing capacity and to replace
old, inefficient machines. The replacement machines are expected to
reduce manufacturing cycle times and ongoing maintenance costs. In
addition, the Company exercised an option in the first quarter of
1998 to purchase the leased manufacturing and warehouse facility in
Missouri at an approximate cost of $1.4 million. Where possible,
management will pursue alternative means of financing such as capital
leases and other purchase money transactions. In addition, operating
leases will be pursued to the extent they represent attractive
economic alternatives.
<PAGE>
The Company believes its 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 outlook section contains a number of forward-looking
statements which are based upon current expectations. Actual results
may differ materially. These statements do not take into account the
potential effects of future mergers or acquisitions.
The Company expects sales and earnings before extraordinary
charges in the second half of 1998 to be similar to first half
results and does not expect to incur any extraordinary charges in the
second half of 1998. Resin prices have remained lower than expected
in the first half of 1998 and management expects prices to remain
steady over the remainder of the year. Margins are expected to
decline slightly in response to competitive pressures; manufacturing
efficiencies are expected to improve.
Management continues to believe that significant growth
opportunities exist in the plastic storage container category. The
Company, however, is currently using all of its production capacity
and is also using outside custom molders to meet the sales demand.
During the rest of 1998 the Company will evaluate its production
capacity needs and identify ways by which to add capacity. It is
management's intention to have the capacity in place by 1999 to allow
for aggressive pursuit of profitable sales growth in this category.
In addition to the Company's goal of 10% annual growth from new
products and product line improvements the Company will continue to
aggressively pursue acquisitions that are accretive to earnings.
Management anticipates that the fragmented nature of the housewares
industry will continue to provide significant opportunities for
growth through strategic acquisitions of complementary businesses.
Management intends to acquire businesses at attractive multiples of
cash flow and achieve operational and distribution efficiencies
through integration of complementary businesses.
The Company, consistent with its acquisition strategy, announced
on August 3, 1998 that it has signed separate definitive agreements
to acquire Newell Plastics (consisting of Anchor Hocking Plastics and
Plastics, Inc.) from Newell Corporation in a cash transaction, and
the consumer storage line of Tenex Corporation in a cash transaction.
Management estimates that both transactions will be accretive to
earnings in 1999 and that the addition of these businesses to the
Company's existing subsidiaries will result in combined revenues of
$310 million in 1999. The addition of these two respected brands
reaffirms and propels forward the Company's commitment to leading the
consolidation in its industry by building a portfolio of companies
with established positions in the mass market channels. Both
transactions are expected to close during the Company's fiscal third
quarter.
<PAGE>
Year 2000 Issues
The Company has investigated the extent to which its operations
are subject to Year 2000 issues. The Company has assessed the
measures it believes will be necessary to avoid any material
disruption to its operations relating to Year 2000 complications in
the Company's information technology systems. The Company has
developed a plan to implement such measures prior to December 1999.
Management believes that the cost to the Company of the necessary
modifications and upgrades to the Company's computer systems and
other operating equipment will not be material. The Company has not
conducted a detailed investigation of the Year 2000 readiness of its
material suppliers. It is uncertain whether such suppliers will be
prepared fully for Year 2000 issues. Management believes many of its
key customers are assessing their Year 2000 issues; however, there
can be no assurances that the Company's key customer will not have a
Year 2000 issue that adversely affects the company.
PART II Other Information
ITEM 4. Submission of matters to a vote of Security Holders.
_
(a) and (c). The Company held its annual meting of stockholders on
May 20, 1998 and the following matters were voted on at that meeting:
1. The election of the following directors, who will serve until
their successors are elected and qualified, or their earlier
death or resignation:
Broker
Director For Withheld Non-votes
Charles R. Campbell 4,917,145 29,755 0
Joseph Gantz 4,906,761 40,139 0
Stephen Murray 4,906,261 40,639 0
Marshall Ragir 4,892,145 54,755 0
Jeffrey C. Rubenstein 4,916,540 30,360 0
Daniel B. Shure 4,917,345 29,555 0
Joel D. Spungin 4,917,145 29,755 0
James R. Tennant 4,917,145 29,755 0
2. The adoption of a staggered board of directors was not
approved. The voting was as follows: FOR, 2,058,965; AGAINST
1,752,034; ABSTAIN 29,690 and BROKER NO-VOTE 1,106,211.
3. The adoption of the Executive Incentive Plan, (as defined in
the Definative Proxy) was approved by the stockholders. The
voting was as follows: FOR 4,744,343; AGAINST 70,522, and
ABSTAIN 132,035.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
1. Purchase Agreement between Home Products
International, Inc., Selfix, Inc., Seymour
Housewares Corporation, Shutters, Inc., Tamor
Corporation, Chase Securities, Inc. and
NationsBank Montgomery Securities, LLC dated May
7, 1998. Incorporated by reference from Exhibit
1.1.1 to Form S-4 filed on June 10, 1998.
3.1.1 Certificate of Incorporation of Selfix, Inc. as
amended. Incorporated by reference from Exhibit
3.1.2 to Form S-4 filed on June 10, 1998.
3.1.2 Certificate of Incorporation of Seymour
Housewares Corporation, as amended.
Incorporated by reference from Exhibit 3.1.3 to
Form S-4 filed on June 10, 1998.
3.1.3 Articles of Incorporation of Tamor Corporation,
as amended. Incorporated by reference from
Exhibit 3.1.4 to Form S-4 filed on June 10,
1998.
3.1.4 Articles of Incorporation of Shutters, Inc., as
amended. Incorporated by reference to Exhibit
3.1.5 to Form S-4 filed on June 10, 1998.
3.2.1 By-laws of Selfix, Inc. Incorporated by
reference to Exhibit 3.2.2 to Form S-4 filed on
June 10, 1998.
3.2.2 By-laws of Seymour Housewares Corporation.
Incorporated by reference to Exhibit 3.2.3 to
Form S-4 filed on June 10, 1998.
3.2.3 By-laws of Tamor Corporation. Incorporated by
reference to Exhibit 3.2.4 to Form S-4 filed on
June 10, 1998.
3.2.4 By-laws of Shutters, Inc. Incorporated by
reference to Exhibit 3.2.5 to Form S-4 filed on
June 10, 1998.
4.1.1 Indenture between Home Products International,
Inc., the subsidiary Guarantors (as defined
therein) and La Salle National Bank dated May
14, 1998. Incorporated by reference to Exhibit
4.1.1 to Form S-4 filed on June 10, 1998.
4.1.2 Specimen Certificate of 9.625% Senior
Subordinated Notes due 2008 ("Original Notes").
Incorporated by reference to Exhibit 4.1.2 to
Form S-4 filed on June 10, 1998.
<PAGE>
4.1.3 Specimen Certificate of 9.625% Senior
Subordinated Notes due 2008 (the "Exchange
Notes"). Incorporated by reference to Exhibit
4.1.3 to Form S-4 filed on June 10, 1998.
4.1.4 Exchange and Registration Rights Agreement, by
and among Home Products International, Inc.,
Chase Securities, Inc. and NationsBank
Montgomery Securities LLC dated May 14, 1998.
Incorporated by reference to Exhibit 4.1.4 to
Forms S-4 filed on June 10, 1998.
10.1 Credit Agreement among Home Products
International, Inc., the several banks and other
financial institutions or entities from time to
time parties to the Credit Agreement and the
Chase Manhattan Bank, as Administrative Agent,
dated May 14, 1998. Incorporated by reference
to Exhibit 10.1.1 to Forms S-4 filed on June 10,
1998.
10.2 Home Products International, Inc. Executive
Incentive Plan. Incorporated by reference to
the Registrant's definitive proxy statement
dated April 16, 1998.
27 Financial Data Schedule (only filed
electronically with S.E.C.)
(b) Reports on Form 8-K
On April 7, 1998 the Registrant filed a Form 8-K
to report the Company's intention to issue
$125.0 million, 10 year, fixed rate senior
subordinated debt. No financial statements were
included.
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 11, 1998
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