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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 28, 2002
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 2, 2002 -
7,847,435
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
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 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 24
Part II. Other Information
-----------------
Item 1. Legal Proceedings 26
Items 2 through 5 are not applicable n/a
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Certifications 28-29
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except share amounts)
(Unaudited)
September 28, December 29,
2002 2001
-------- --------
Assets
Current assets:
Cash and cash equivalents .................. $ 5,264 $ 1,091
Accounts receivable, net ................... 40,876 36,577
Inventories ................................ 32,762 17,043
Prepaid expenses and other current assets... 1,753 2,275
-------- --------
Total current assets ..................... 80,655 56,986
-------- --------
Property, plant and equipment - at cost ...... 90,977 87,502
Less accumulated depreciation and
amortization ............................... (52,369) (44,871)
-------- --------
Property, plant and equipment, net ........... 38,608 42,631
-------- --------
Other intangibles, net ....................... 1,236 1,616
Goodwill, net ................................ 74,759 74,759
Other non-current assets ..................... 11,764 11,351
-------- --------
Total assets ............................ $ 207,022 $ 187,343
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................... $ 24,859 $ 16,834
Accrued liabilities ........................ 34,785 33,916
Current maturities of long-term
obligations .............................. 158 158
-------- --------
Total current liabilities ................ 59,802 50,908
-------- --------
Long-term obligations - net of current
maturities ................................. 129,593 130,447
Other liabilities ............................ 3,265 3,168
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value; - None issued ..... - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,669,829 shares issued at
September 28, 2002 and 8,641,338 shares
issued at December 29, 2001 ............... 87 87
Additional paid-in capital ................. 50,034 49,920
Accumulated deficit ........................ (29,004) (40,262)
Common stock held in treasury - at cost
822,394 shares at September 28, 2002 and
December 29, 2001 ....................... (6,528) (6,528)
Deferred compensation ...................... (227) (397)
-------- --------
Total stockholders' equity ............ 14,362 2,820
-------- --------
Total liabilities and stockholders' equity $ 207,022 $ 187,343
======== ========
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
(unaudited)
(Dollar amounts in thousands, except per share amounts)
Thirteen weeks Thirty-nine weeks
ended ended
--------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------------------------------------
Net sales ......................... $67,799 $66,064 $178,429 $196,048
Cost of goods sold ................ 51,271 48,002 133,597 147,874
Special (income) charge, net ...... (73) - (73) 110
------ ------ ------- -------
Gross profit .................... 16,601 18,062 44,905 48,064
Operating expenses:
Selling ......................... 4,362 4,155 13,182 14,556
Administrative .................. 3,098 4,331 9,783 12,049
Amortization of intangible assets 127 665 380 2,524
Restructuring and other charges.. - - - 2,483
------ ------ ------- -------
7,587 9,151 23,345 31,612
------ ------ ------- -------
Operating profit ................ 9,014 8,911 21,560 16,452
------ ------ ------- -------
Other income (expense):
Interest income ................. 7 12 61 29
Interest expense ................ (3,432) (3,828) (10,370) (14,698)
Other income, net ............... 637 14,446 440 14,533
------ ------ ------- -------
(2,788) 10,630 (9,869) (136)
------ ------ ------- -------
Income before income taxes ...... 6,226 19,541 11,691 16,316
Income tax expense ................ (133) (93) (433) (191)
------ ------ ------- -------
Net income ..................... $ 6,093 $19,448 $ 11,258 $ 16,125
====== ====== ======= =======
Net income per common share:
Basic ........................... $ 0.78 $ 2.57 $ 1.45 $ 2.14
====== ====== ======= =======
Diluted ......................... $ 0.74 $ 2.49 $ 1.37 $ 2.10
====== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Thirty-nine weeks ended
---------------------
September 28, September 29,
2002 2001
-------- --------
Operating activities:
Net income ..................................... $ 11,258 $ 16,125
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.................. 7,868 10,648
Amortization of stock compensation............. 170 170
Gain on the sale of servingware product line... (663) (14,489)
Loss on the abandonment of assets.............. 186 -
Other, net..................................... (317) 749
Changes in current assets and liabilities:
(Increase) in accounts receivable ........... (4,299) (4,829)
(Increase) decrease in inventories .......... (15,719) 3,307
Decrease in prepaid expenses and other....... 523 252
Increase (decrease) in accounts payable ..... 8,688 (1,438)
Increase in accrued liabilities ............. 869 1,619
-------- --------
Net cash provided by operating activities........ 8,564 12,114
-------- --------
Investing activities:
Proceeds from sale of servingware product
line, net .................................... - 69,501
Proceeds from sale of building, net ............ - 1,218
Capital expenditures, net ...................... (3,578) (3,742)
-------- --------
Net cash (used in) provided by investing
activities ................................... (3,578) 66,977
-------- --------
Financing activities:
Net payments under loan and security agreement.. (859) -
Net payments on revolving line of credit........ - (38,020)
Payments on term loan borrowings ............... - (40,500)
Payments of capital lease obligation ........... (68) (112)
Exercise of stock options, issuance of common
stock under stock purchase plan and other .... 114 111
-------- --------
Net cash used in financing activities (813) (78,521)
-------- --------
Net increase in cash and cash equivalents ...... 4,173 570
Cash and cash equivalents at beginning of year.. 1,091 3,152
-------- --------
Cash and cash equivalents at end of period ..... $ 5,264 $ 3,722
======== ========
Supplemental disclosures
Cash paid in the period:
Interest ....................................... $ 6,256 $ 10,612
-------- --------
Income taxes, net .............................. $ 230 $ 209
-------- --------
Non-cash financing activities:
Capital lease obligation ....................... $ 73 $ -
-------- --------
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share amounts)
Note 1. General Information
Home Products International, Inc. (the "Company"), based in Chicago, is
a leading designer, manufacturer and marketer of a broad range of value-
priced, quality consumer houseware products. The Company's products are
marketed principally through mass-market trade channels in the United States
and internationally.
The condensed consolidated financial statements for the thirteen and
thirty-nine weeks ended September 28, 2002 and September 29, 2001, include,
in the opinion of management, all adjustments (consisting of normal
recurring adjustments and reclassifications) necessary to present fairly the
financial position, results of operations and cash flows as of September 28,
2002 and for all periods presented.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
incorporated by reference in the Company's Form 10-K for the year ended
December 29, 2001. The results of operations for the thirteen and thirty-
nine weeks ended September 28, 2002 are not necessarily indicative of the
operating results to be expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note 2. Goodwill and Other Intangibles
In June 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after July 1, 2001 to be
accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. Previously
recorded goodwill and other intangibles will be evaluated against this new
criteria and may result in certain intangibles being combined into goodwill,
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS No. 142 requires the use
of a non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of SFAS No.
141 and SFAS No. 142 were adopted by the Company on July 1, 2001 and
December 30, 2001, respectively.
Upon adoption of SFAS No. 142, the Company performed an impairment test
of its goodwill in the first quarter of 2002 and determined that no
impairment of the recorded goodwill existed. Under SFAS No. 142, goodwill
will be tested for impairment at least annually and more frequently if an
event occurs which indicates that goodwill may be impaired. As required by
SFAS No. 142, the results for periods prior to adoption have not been
restated.
Intangibles consist of the following (dollars in thousands):
September 28, 2002 December 29, 2001
---------------------------------------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(Yrs) Amount Amortization Amount Amortization
--------------------------------------------------------------
Amortized intangible assets:
Patents ...................... 7 to 14 $ 1,008 $ (686) $ 1,008 $ (612)
Non-compete agreements ....... 10 2,928 (2,044) 2,928 (1,708)
------- -------- ------- --------
Total ...................... $ 3,936 $ (2,700) $ 3,936 $ (2,320)
======= ======== ======= ========
Intangible assets not
subject to amortization:
Goodwill ..................... $131,373 $ (56,614) $131,373 $ (56,614)
======= ======== ======= ========
Aggregate amortization expense (dollars in thousands) for the thirty-
nine weeks ended September 28, 2002 was $380.
Estimated amortization expense for the next five fiscal years and
thereafter from December 30, 2001 based on intangible assets at December 30,
2001 is as follows (dollars in thousands):
Estimated
Amortization
Fiscal Year Expense
----------- -------
2002 $505
2003 $505
2004 $505
2005 $101
2006 $ -
Thereafter $ -
The following table provides comparative net income and net income per
share as if the non-amortization provisions of SFAS No. 142 had been adopted
for all periods presented (in thousands, except per share data):
Thirteen weeks Thirty-nine weeks
ended ended
--------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------------------------------------
Reported net income .............. $ 6,093 $19,448 $ 11,258 $ 16,125
Add back goodwill amortization .... - 520 - 2,060
------ ------ ------- -------
Adjusted net income .............. $ 6,093 $19,968 $ 11,258 $ 18,185
====== ====== ======= =======
Reported basic earnings per share.. $ 0.78 $ 2.57 $ 1.45 $ 2.14
Add back goodwill amortization .... - 0.07 - 0.27
------ ------ ------- -------
Adjusted basic earnings per share.. $ 0.78 $ 2.64 $ 1.45 $ 2.41
====== ====== ======= =======
Reported diluted earnings per share $ 0.74 $ 2.49 $ 1.37 $ 2.10
Add back goodwill amortization .... - 0.07 - 0.27
------ ------ ------- -------
Adjusted diluted earnings per share $ 0.74 $ 2.54 $ 1.37 $ 2.37
====== ====== ======= =======
Weighted average shares:
Basic 7,796 7,556 7,785 7,525
Diluted 8,259 7,824 8,217 7,665
Note 3. Long-Lived Assets
The FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", dated August 2001. This statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-lived Assets to be Disposed of", and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
SFAS No. 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentations of discontinued operations to
include more disposal transactions. The Company adopted the provisions of
SFAS No. 144 on December 30, 2001. No impairment of long-lived assets has
been recorded under SFAS No. 144.
Note 4. New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement applies to all entities and applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
It requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs would be capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company believes that
the adoption of SFAS No. 143 will not have a material impact, if any, on its
results of operations, cash flows or financial position.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior
guidance required that a liability for an exit cost be recognized at the
date of an entity's commitment to an exit plan. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002.
Note 4. Inventories
The components of the Company's inventory consist of direct labor,
direct materials and the applicable portion of the overhead required to
manufacture the goods.
September 28, December 29,
2002 2001
------ ------
Finished goods..................... $23,573 $12,016
Work-in-process.................... 2,669 1,717
Raw materials...................... 6,520 3,310
------ ------
$32,762 $17,043
====== ======
Note 5. Net Income Per Share
The following information presents net income per share basic and
diluted (in thousands, except per share data):
Thirteen weeks Thirty-nine weeks
ended ended
--------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------------------------------------
Net income ...................... $ 6,093 $19,448 $ 11,258 $ 16,125
Weighted average shares
outstanding: basic ............ 7,796 7,556 7,785 7,525
Impact of stock options, warrants
and restricted stock .......... 463 268 432 140
------ ------ ------- -------
Weighted average shares
outstanding: diluted .......... 8,259 7,824 8,217 7,665
====== ====== ======= =======
Net income per share: basic ..... $ 0.78 $ 2.57 $ 1.45 $ 2.14
====== ====== ======= =======
Net income per share: diluted ... $ 0.74 $ 2.49 $ 1.37 $ 2.10
====== ====== ======= =======
Net income per share - basic is computed based on the weighted average
number of outstanding common shares. Net income per share - diluted
includes the weighted average effect of dilutive options, warrants and
restricted stock on the weighted average shares outstanding.
Note 6. 2001 Special, Restructuring and Other Charges
During 2000 and 2001 the Company implemented a restructuring plan
designed to reduce fixed costs and better position the Company for
sustained profitability. The restructuring plan entailed the closure of the
Leominster, Massachusetts facility, reconfiguration of remaining
manufacturing facilities, a reduction in headcount and a realignment of the
selling process. All planned restructuring initiatives were completed in
2001.
During the first quarter of 2001 the Company recorded a pretax charge
of $2,593, of which $110 was deemed to be Special Charges (included in cost
of goods sold) and $2,483 was Restructuring and Other Charges (collectively
referred herein as the "2001 Charges").
The 2001 Charges were comprised of (i) $175 charge to relocate and
liquidate inventory at Leominster and other facilities, (ii) $1,179 charge
for the relocation of machinery and equipment and $971 charge for lease
termination and sub-lease costs (total net charge of $2,150), (iii) $29
charge to write off obsolete and duplicate assets that were used at the
Leominster facility and other facilities, (iv) $341 charge for employee
related severance costs, (v) ($37) reversal of charge associated with other
related restructuring costs, and (vi) ($65) reversal of SKU reduction and
inventory adjustments relating to the 1999 restructuring plan that was
undertaken to further maximize the Company's marketing and operational
productivity and to strengthen relationships with its key retail partners
("1999 Special Charges"). The total 2001 Charges were $2,658 excluding the
impact of the 1999 Special Charges reversal and consisted of cash items
totaling $2,431 and non-cash items totaling $227.
During the third quarter of 2002 a change in management estimates
resulted in a ($73) reversal to income. The change in management estimates
related to a ($73) reversal to income of inventory liquidation allowances
due to higher recovery values on the disposed inventory (included in cost of
goods sold). In addition, remaining charges/(income) were recorded as
restructuring and other charges and are made up of the following: (i)
additional charges of $355 related to litigation on the early termination of
a lease (see Note 9 - Contingent Liabilities of the Notes to Condensed
Financial Statements, for additional details); (ii) $46 of employee benefit
related costs, and (iii) other costs of ($401) were reversed to income due
to the favorable resolution of customer accruals.
Pre-tax special and restructuring costs (income) consisted of the following
(in thousands):
Thirteen weeks Thirty-nine weeks
ended ended
--------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------------------------------------
Cost of Goods Sold:
Special Charges (Income):
Inventory relocation and
liquidation $ (73) $ - $ (73) $ 175
SKU reduction and inventory
adjustments related to 1999 - - - (65)
------ ------ ------- -------
Total charge (income) to
cost of goods sold (73) - (73) 110
------ ------ ------- -------
Operating Expenses:
Restructuring and Other Charges:
Plant and facilities:
Relocation of machinery
& equipment - - - 1,179
Lease termination
& sub-lease costs 355 - 355 971
Elimination of obsolete assets - - - 29
Employee related costs 46 - 46 341
Other costs (401) - (401) (37)
------ ------ ------- -------
Total charge to operating expenses - - - 2,483
------ ------ ------- -------
Total net charges (income) $ (73) $ - $ (73) $ 2,593
====== ====== ======= =======
The Company identified a total of 124 hourly and salaried Leominster
employees to be terminated in accordance with the 2001 restructuring
initiatives. As of September 28, 2002 all but one of these employees had
been terminated.
Restructuring plans are proceeding as planned and remaining
restructuring reserves of $3,650, as of September 28, 2002, are considered
adequate. Total net cash outlays were $376 in the thirty-nine week period
ended September 28, 2002. Restructuring reserve balances as of December 29,
2001, activity during the current year and restructuring reserve balances as
of September 28, 2002, were as follows:
Reserve Change in Costs Reserve
balance estimate incurred balance
at in in at
12/29/01 2002 2002 09/28/02
------- ------ ------ -------
Inventory $ 278 $ (73) $ (130) $ 75
Leased plant and 3,116 355 (258) 3,213
facilities
Obsolete and duplicate
leased assets 373 - (63) 310
Employee related costs 50 46 (44) 52
Other 412 (401) (11) -
------- ------ ------ -------
$ 4,229 $ (73) $ (506) $ 3,650
======= ====== ====== =======
The inventory cost reserves of $75 at September 28, 2002 are primarily
related to the estimated cost to liquidate the obsolete inventory. The
leased plant and facilities reserves of $3,213 are primarily related to
future minimum lease payments on a partially vacated facility and potential
settlement costs related to an exited warehouse facility (see Note 9 -
Contingent Liabilities of the Notes to Condensed Financial Statements for
further details). The obsolete and duplicate leased assets reserves of $310
are related to future minimum lease payments on machinery and equipment no
longer used in the Company's manufacturing process. Employee related
reserves of $52 are primarily related to employee severance and benefits.
Note 7. Divestiture of Product Line
On June 7, 2001, the Company entered into a definitive agreement to
sell its commercial servingware product line, Plastics, Inc. ("PI"), to A &
E Products Group LP, an affiliate of Tyco International. The Company
completed the sale on July 6, 2001 for $71,250 in cash (the "Sale"). The net
sale proceeds of $69,500 (including transaction costs and other related
costs) were used to retire the Company's term debt and a portion of its
revolving credit borrowings. For more information about the divestiture see
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 18, 2001 and Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on July 27, 2001.
During the third quarter of 2002, the Company agreed to an adjustment
of the selling price related to PI. The sale agreement with A & E included
a purchase price adjustment based on the net assets of PI at the closing
date. As a result of the final determination of net asset values, the
Company made a payment to A & E in September 2002 of $2,414. At the time of
the Sale in 2001, estimated reserves of $3,077 were established for the
payment. Accordingly, $663 was reversed to other income during the third
quarter of 2002.
The unaudited pro forma historical results for the thirteen and thirty-
nine weeks ended September 29, 2001, as if the Plastics, Inc. product line
had been sold at the beginning of fiscal 2001, are estimated to be:
Thirteen weeks Thirty-nine weeks
ended ended
-----------------------
Sept. 29, Sept. 29,
2001 2001
-----------------------
Net sales ......................... $ 65,499 $ 176,880
======= ========
Net income ........................ $ 4,830 $ 1,057
======= ========
Net income per diluted common share $ 0.62 $ 0.14
======= ========
The pro forma results reflect the elimination of PI related goodwill
amortization and a reduction of interest expense on the retirement of debt
due to the divestiture for fiscal 2001. The pro forma results are not
necessarily indicative of what actually would have occurred if the
divestiture had been completed as of the beginning of each of the fiscal
periods presented, nor are they necessarily indicative of future
consolidated results.
Note 8. Income Taxes
As of fiscal year end 2001 the Company had income tax loss
carryforwards relating to U.S. net operating losses of $40 million (which
include tax loss carryforwards of $9 million subject to annual limitations)
which expire in 2010 to 2020. Accordingly, the income tax provision
primarily reflects state and foreign taxes.
Note 9. Contingent Liabilities
On September 5, 2002, the Company was served a complaint relating to a
breach of a commercial lease and negligent use of the property it had
occupied prior to 2001. The Company is aggressively defending itself against
all allegations. The Company has recorded an accrual based on management's
best estimate of the potential settlement value of the complaint.
Management believes that the Company's ultimate liability, if any, in
excess of amounts already accrued, is not likely to have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related notes and management's
discussion and analysis of financial condition and results of operations
contained in the Company's Form 10-K for the year ended December 29, 2001.
Critical Accounting Policies
The Company's most critical accounting policies upon which its
financial position and results of operations depend are those relating to
revenue recognition, allowance for doubtful accounts, inventory valuation
and restructuring reserves. The Company added the policy for allowance for
doubtful accounts to its list of critical accounting policies after the end
of the first quarter of 2002. During the third quarter, the Company did not
change those policies or adopt any new polices. The Company summarizes its
most critical accounting policies below.
* Revenue recognition. The Company recognizes revenues and freight billed
to customers, upon shipment and when all substantial risks of ownership
change. Allowances for estimated returns, discounts and retailer
incentives and promotions are recognized when sales are recorded and are
based on various market data, historical trends and information from
customers. Actual returns, discounts and retailer incentives and
promotions historically have not been materially different from
estimates.
* Allowance for Doubtful Accounts. The Company evaluates the collectibility
of its accounts receivable based upon an analysis of historical trends,
aging of accounts receivable, write-off experience and expectations of
future performance. Delinquent accounts are written off to selling,
general and administrative expense when circumstances make further
collection unlikely. In the event of a specific customer bankruptcy or
reorganization, specific reserves are established to write down accounts
receivable to the level of anticipated recovery. The Company may consult
with third-party purchasers of bankruptcy receivables when establishing
specific reserves.
* Inventory valuation. The Company values inventory at cost (not in excess
of market) determined by the first-in, first-out (FIFO) method.
Inventory costs are based on standard costs, adjusted for actual
manufacturing and material purchase price variances. The Company
includes materials, labor and manufacturing overhead in the cost of
inventories. Management regularly reviews inventory for salability and
has established obsolescence reserves to absorb expected losses. The
Company also maintains reserves for inventory shrinkage. At a minimum,
the Company takes an annual physical inventory verifying the items on
hand and adjusting its inventory to physical counts. Periodic cycle
counting procedures are used to verify inventory accuracy between
physical inventories. In the interim periods, a reserve for shrinkage is
established based upon historical experience and recent physical
inventory results. Inventory obsolescence and shrinkage are charged to
cost of sales.
* Restructuring reserves. Upon approval of a restructuring plan by
management with the appropriate level of authority, the Company records
restructuring reserves for certain costs associated with plant closures
and business reorganization activities. Such costs are recorded as
a liability and include lease termination costs, employee severance
and certain employee termination benefits. These costs are neither
associated with nor do they benefit continuing business activities.
Inherent in the determination of these costs are assessments related to
the most likely expected outcome of the significant actions to accomplish
the restructuring. The Company reviews the status of restructuring
activities on an ongoing basis and, if appropriate, records changes based
on such activities.
2001 Special, Restructuring and Other Charges
During 2000 and 2001 the Company implemented a restructuring plan
designed to reduce fixed costs and better position the Company for
sustained profitability. The restructuring plan entailed the closure of
the Leominster, Massachusetts facility, reconfiguration of remaining
manufacturing facilities, a reduction in headcount and a realignment of the
selling process. All planned restructuring initiatives were completed in
2001.
During the first quarter of 2001 the Company recorded a pretax charge
of $2.6 million, of which $0.1 million was deemed to be Special Charges
(included in cost of goods sold) and $2.5 million was Restructuring and
Other Charges (collectively referred to herein as the "2001 Charges").
During the third quarter 2002 a change in management estimates resulted
in a $0.1 million reversal to income. The change in management estimates
related to a $0.1 million reversal to income of inventory liquidation
allowances due to higher recovery values on the disposed inventory (included
in cost of goods sold). In addition, remaining charges/(income) were
recorded as restructuring and other charges and are made up of the
following: (i) additional charges of $0.3 million related to litigation on
the early termination of a lease (see Note 9 - Contingent Liabilities of the
Notes to Condensed Consolidated Financial Statements, included herein, for
additional details); (ii) $0.1 million of employee benefit related costs,
and (iii) other costs of $0.4 million were reversed to income due to the
favorable resolution of customer accruals.
Divestiture of the Plastics, Inc. Product Line
On July 6, 2001, the Company completed the sale of its commercial
servingware product line, Plastics, Inc. ("PI"), to A & E Products Group LP
("A & E"), an affiliate of Tyco International (the "Sale"). The net sale
proceeds of $69.5 million, net of transaction costs and other related costs,
were used to retire the Company's term debt and a portion of its revolving
credit borrowings. The Sale affects the comparability of financial results
between periods.
During the third quarter of 2002, the Company agreed to an adjustment
of the selling price related to PI. The sale agreement with A & E included
a purchase price adjustment based on the net assets of PI at the closing
date. As a result of the final determination of net asset values, the
Company made a payment to A & E in September 2002 of $2.4 million. At the
time of the Sale in 2001, estimated reserves of $3.1 million were
established for the payment. Accordingly, $0.7 million was reversed to
other income during the third quarter of 2002.
Thirteen weeks ended September 28, 2002 compared to the thirteen weeks ended
September 29, 2001
In the discussion and analysis that follows, all references to the
third quarter of 2002 are to the thirteen week period ended September 28,
2002 and all references to the third quarter of 2001 are to the thirteen
week period ended September 29, 2001. The following discussion and analysis
compares the actual results for the third quarter of 2002 to the actual
results for the third quarter of 2001 with reference to the following
(dollars in thousands, except per share amounts; unaudited):
Thirteen weeks ended
---------------------------------
Sept. 28, 2002 Sept. 29, 2001
---------------------------------
Net sales .......................... $67,799 100.0% $66,064 100.0%
Cost of goods sold ................. 51,271 75.6 48,002 72.7
Special (income) charges, net ...... (73) (0.1) - -
------ ----- ------ -----
Gross profit ..................... 16,601 24.5 18,062 27.3
Operating expenses ................. 7,460 11.0 8,486 12.8
Amortization of intangible assets... 127 0.2 665 1.0
Restructuring and other charges, net - - - -
------ ----- ------ -----
Operating profit ................. 9,014 13.3 8,911 13.5
Interest expense ................... (3,432) (5.1) (3,828) (5.8)
Other income, net .................. 644 0.9 14,458 21.9
------ ----- ------ -----
Income before income taxes ....... 6,226 9.1 19,541 29.6
Income tax expense ................. (133) (0.2) (93) (0.1)
------ ----- ------ -----
Net income ...................... $ 6,093 8.9% $19,448 29.5%
====== ===== ====== =====
Net income per share - basic $0.78 $2.57
Net income per share - diluted $0.74 $2.49
Weighted average common shares
Outstanding -
Basic 7,796 7,556
Diluted 8,259 7,824
Net sales. Net sales of $67.8 million in the third quarter of 2002
increased $1.7 million from $66.1 million in the third quarter of 2001.
However, the divestiture of the servingware product line caused a sales
reduction of $0.6 million. On a pro forma basis, sales increased $2.3
million or 3.5%. Sales increases were primarily the result of additional
product placement at the Company's top three customers. Third quarter sales
to the top three customers were $51.1 million in 2002 as compared to $44.3
million in 2001. The growth at the largest customers was partially offset
by declines in the Company's remaining customer base. The shift in mix of
sales towards the major discount retailers reflects the continuing shift in
buying patterns of consumers.
The Company's primary selling season is during the second and third
quarters of the calendar year, typically representing over 50% of sales for
the year. Growth rates in any individual quarter may not be indicative of
the entire year or coming quarters.
Special (income) charges, net. In the third quarter of 2002, the
Company recorded income from Special Charges of $0.1 million. The income
resulted from the final closeout of discontinued inventories related to the
2001 closure of the Company's former Leominster manufacturing facility.
Gross profit. The Company's gross profit in the third quarter of 2002
was $16.6 million as compared to $18.1 million in the third quarter of 2001
and gross profit margins decreased to 24.5% from 27.3% in the prior year
period. Gross margins declined as a result of changes in mix of product
sold (more general storage items and fewer laundry and bath items) and
slightly higher raw material costs. Increased plastic resin and steel costs
were somewhat offset by decreases in other commodity costs. Gross profit in
the third quarter of 2002 also included a $0.5 million reversal to income of
trade program accruals related to prior years. The divested servingware
product line contributed $0.2 million of gross profit in the third quarter
of 2001.
Operating expenses. Operating expenses in the third quarter of 2002
were $7.5 million versus $8.5 million in the third quarter of 2001. The
third quarter of 2001 was impacted by increased bad debt reserves related to
Ames and higher incentive compensation expense.
Restructuring and other charges, net. In connection with the Company's
restructuring plan, which was announced during the fourth quarter 2000,
changes in management estimates were recorded in the third quarter of 2002.
Charges of $0.3 million and $0.1 million were recorded related to litigation
on the early termination of a lease and employee benefit related costs,
respectively. Other costs of $0.4 million were reversed to income due to
the favorable resolution of customer accruals.
Amortization of intangible assets. Amortization of intangible assets
in the third quarter 2002 was 0.2% of net sales or $0.1 million versus 1.0%
or $0.7 million in the third quarter of 2001. The decrease in 2002 reflects
the change in accounting principles that eliminates goodwill amortization.
Remaining amortization of intangible assets relates to patents, trademarks
and non-compete agreements.
Interest expense. Interest expense of $3.4 million in the third
quarter of 2002 decreased $0.4 million from $3.8 million in the third
quarter of 2001. The decrease in interest expense is primarily due to the
significant retirement of debt during the last twelve months. Outstanding
debt at September 28, 2002 was $13.2 million lower than a year ago. Debt
reductions are due to improved operating results while keeping working
capital levels fairly constant.
Other income. Other income in the third quarter of both 2002 and 2001
is primarily related to the Sale of PI. In the third quarter of 2001, the
Company generated other income of $14.5 million due to the gain on the Sale.
Upon final settlement of the purchase price in the third quarter of 2002,
the Company was able to reverse reserves of $0.7 million to income.
Income tax expense. The income tax provision recorded in both years
relates to state and foreign taxes. No federal income tax expense was
recorded in either year due to the Company's significant tax loss
carryforwards.
Net income. In the third quarter of 2002 the Company had net income of
$6.1 million, or $0.74 per diluted share, as compared to net income of $19.4
million, or $2.49 per diluted share in the third quarter of 2001. The gain
on the Sale of PI added $14.5 million to the 2001 third quarter result. On
a pro forma basis that excludes the 2001 earnings from PI, the gain from the
sale of PI and the impact of the change in accounting for goodwill, net
income in third quarter of 2001 would have been $5.3 million, or $0.68 per
diluted share. This compares to third quarter 2002 net income (pro forma
which excludes the income from Special Charges and the PI related gain of
$0.7 million) of $5.4 million, $0.65 diluted per share.
The diluted weighted average number of shares outstanding increased to
8,258,516 in the third quarter of 2002 from 7,824,364 in the comparable
prior year period. The increase in the weighted average number of shares
outstanding was due to increases in the Company's stock price and the
resulting dilutive impact of stock options on the number of shares
outstanding.
Thirty-nine weeks ended September 28, 2002 compared to the thirty-nine weeks
ended September 29, 2001
In the discussion and analysis that follows, all references to 2002 are
to the thirty-nine week period ended September 28, 2002 and all references
to 2001 are to the thirty-nine week period ended September 29, 2001. The
following discussion and analysis compares the actual results for 2002 to
the actual results for 2001 with reference to the following (dollars in
thousands, except per share amounts; unaudited):
Thirty-nine weeks ended
---------------------------------
Sept. 28, 2002 Sept. 29, 2001
---------------------------------
Net sales .......................... $178,429 100.0% $196,048 100.0%
Cost of goods sold ................. 133,597 74.9 147,874 75.4
Special (income) charges, net ...... (73) - 110 0.1
------- ----- ------- -----
Gross profit ..................... 44,905 25.1 48,064 24.5
Operating expenses ................. 22,965 12.9 26,605 13.6
Amortization of intangible assets .. 380 0.2 2,524 1.3
Restructuring and other charges, net - - 2,483 1.3
------- ----- ------- -----
Operating profit ................. 21,560 12.0 16,452 8.3
Interest expense ................... (10,370) (5.7) (14,698) (7.5)
Other income, net .................. 501 0.3 14,562 7.4
------- ----- ------- -----
Income before income taxes........ 11,691 6.5 16,316 8.2
Income tax expense ................. (433) (0.2) (191) (0.1)
------- ----- ------- -----
Net income ........................ $ 11,258 6.3% $ 16,125 8.1%
======= ===== ======= =====
Net income per share - basic $1.45 $2.14
Net income per share - diluted $1.37 $2.10
Weighted average common shares
Outstanding -
Basic 7,785 7,525
Diluted 8,217 7,665
Net sales. Net sales of $178.4 million in 2002 decreased $17.6 million
from $196.0 million in 2001. The divestiture of the servingware product
line resulted in a sales reduction of $19.2 million. An additional $6.2
million of sales was lost due to the bankruptcy of several customers,
primarily Ames. More than offsetting the lost sales to bankrupt customers
were favorable sales gains at the Company's largest three customers. Sales
to the top three customers totaled $128.0 million in 2002 as compared to
$109.3 million in 2001, an increase of 17%. The higher sales at these
customers are the result of increased product placement as well as the
continuing shift in buying patterns of consumers towards the national
discount retail chains.
Special Charges. In 2002, the Company recorded income from Special
Charges of $0.1 million. The income resulted from the final closeout of
discontinued inventories related to the 2001 closure of the Company's former
Leominster manufacturing facility.
In 2001, the Company recorded expense from Special Charges of $0.1
million in connection with the closure of the Leominster facility and the
realignment of other manufacturing facilities. The primary component of the
Special Charges included inventory reserves to relocate and liquidate
inventory.
Gross profit. The Company's gross profit in 2002 was $44.9 million as
compared to $48.1 million in 2001 and gross profit margins improved to 25.1%
from 24.5% a year ago. The divested servingware product line, which had
higher margins than the housewares product lines, contributed $7.2 million
of gross profit in 2001. Excluding the servingware product line, gross
margins were 25.1% in 2002 as compared to 23.2% in the prior year. Gross
margins benefited from productivity and efficiency initiatives as well as
other factory cost reduction programs. Additional margin improvements were
the result of favorable raw material prices as well as lower freight and
selling commission costs.
Operating expenses. Operating expenses in 2002 were $23.0 million
versus $26.6 million in 2001. The sale of PI reduced operating expenses by
$3.0 million. Pro forma operating expenses, which exclude PI, have
decreased between years due to lower warehousing costs and bad debt expense.
Amortization of intangible assets. Amortization of intangible assets
in 2002 was 0.2% of net sales or $0.4 million versus 1.3% or $2.5 million in
2001. The decrease in 2002 reflects the change in accounting principles that
eliminates goodwill amortization. Remaining amortization of intangible
assets relates to patents and trademarks.
Restructuring and other charges, net. In connection with the Company's
restructuring plan, which was announced during the fourth quarter 2000,
changes in management estimates were recorded in 2002. Charges of $0.3
million and $0.1 million were recorded related to litigation on the early
termination of a lease and employee benefit related costs, respectively.
Other costs of $0.4 million were reversed to income due to the favorable
resolution of customer accruals. In 2001, the Company recorded restructuring
and other charges of $2.5 million related to the continued implementation of
the fourth quarter 2000 restructuring plan. The charges were comprised of
(i) charge for the relocation of machinery and equipment, (ii) lease
termination and sub-lease costs, (iii) write off of obsolete and duplicate
assets that were used at the Leominster facility and other facilities, (iv)
employee related severance costs, and (v) reversal of other related
restructuring costs.
Interest expense. Interest expense of $10.4 million in 2002 decreased
$4.3 million from $14.7 million in 2001. The decrease in interest expense is
primarily due to the significant retirement of debt during the last fifteen
months. Debt paydowns are due to the proceeds from the Sale of PI, improved
operating results and reductions in average working capital.
Other income. Other income in both years is primarily related to the
Sale of PI. In 2001, the Company generated other income of $14.5 million
due to the gain on the Sale. Upon final settlement of the purchase price in
the third quarter of 2002, the Company was able to reverse reserves of $0.7
million to income.
Income tax expense. The income tax provision recorded in both years
relates to state and foreign taxes. No federal income tax expense was
recorded in either year due to the Company's significant tax loss
carryforwards.
Net income. In 2002 the Company had net income of $11.3 million, or
$1.37 per diluted share, as compared to net income of $16.1 million, or
$2.10 per diluted share in 2001. The gain on the Sale of PI added $14.5
million to the 2001 result. On a pro forma basis that excludes the 2001
earnings from PI, the gain from the sale of PI, restructuring charges,
special charges and the impact of the change in accounting for goodwill, net
income in 2001 would have been $5.2 million, or $0.68 per diluted share.
This compares to 2002 net income (pro forma which excludes the income from
Special Charges and the PI related gain of $0.7 million) of $10.5 million,
$1.28 per diluted share.
The diluted weighted average number of shares outstanding increased to
8,216,783 in 2002 from 7,664,741 in 2001. The increase in the weighted
average number of shares outstanding was due to increases in the Company's
stock price and the resulting dilutive impact of stock options on the number
of shares outstanding.
Capital Resources and Liquidity
The Company's primary sources of liquidity and capital resources
include cash provided from operations and borrowings under the Company's
credit facility.
The Company's net debt position (short and long term debt, net of cash
on hand) decreased during the third quarter. Net debt at September 28, 2002
was $124.5 million as compared to $130.7 million on June 29, 2002 and $129.5
million at December 29, 2001. The decrease in net debt during the third
quarter was $6.2 million as earnings were retained in the business. Working
capital (excluding cash and short term debt) of $15.7 million was up $1.2
million from June 29, 2002. While inventories increased to meet fourth
quarter promotional orders, accounts payable also increased and somewhat
offset the cash usage. Semi annual high yield bond interest payments of $6
million will come due in the fourth quarter.
During the first nine months of 2002, net debt decreased $5.0 million.
Working capital (excluding cash and short term debt) has increased by $10.6
million due to seasonal increases in both receivables and inventories. An
increase in the volume of imported finished goods has also contributed to
the higher inventory level.
Capital spending in the third quarter was $1.4 million which brings
capital spending for the first nine months of the year to $3.6 million.
Capital spending in the first nine months of 2001 was $3.7 million. Capital
spending in the current year is primarily related to new product tooling and
normal replacement of equipment.
The Company made a payment of approximately $2.4 million to A & E
Products Group LP, an affiliate of Tyco International, in September 2002.
This payment was the final post-closing adjustment related to the sale of
the Company's Plastics, Inc. servingware product line.
The Company believes its $50 million line of credit together with its
existing cash flow from operations will provide sufficient capital to fund
operations, make required interest payments and meet anticipated capital
spending needs for at least the next 12 months. No line of credit
borrowings were outstanding at September 28, 2002. Total borrowing
availability under the line of credit was $47.3 million at September 28,
2002.
The Company was in compliance with all loan covenants as of September
28, 2002.
Management Outlook and Business Risks
* In January 2002, Kmart announced that it had filed for bankruptcy
protection. Kmart is the Company's second largest customer and did $50
million of business with the Company in 2001. The Company's receivable
from Kmart at the time of the bankruptcy filing was $6.7 million. The
Company does not expect to collect this money in 2002 but is hopeful that
some portion will be recovered in 2003 when Kmart expects to emerge from
bankruptcy. As part of Kmart's recovery plan, they have announced the
closure of 284 stores, approximately 13% of their total store count. To
date, our sales to Kmart have increased over prior years despite the
store closings and reduced sales volumes in stores that have remained
open. In 2002, the Company expects total sales to Kmart of about $70
million with over $20 million in the fourth quarter. Opportunities exist
to further expand our business in 2003, although these must be considered
in light of Kmart's financial situation. Given the dynamic nature and
size of the Kmart bankruptcy filing, future results may be either
favorably or unfavorably impacted by any number of factors related to
Kmart.
* The Company's primary selling season is during the second and third
quarters of the calendar year, typically representing over 50% of our
sales for the year. Growth rates in any individual quarter may not be
indicative of the entire year or coming quarters.
* The Company's primary raw materials are plastic resin, steel, fabric and
corrugated packaging. Fluctuations in the cost of these materials can
have a significant impact on reported results.
* Plastic resin currently represents approximately 15% to 20% of the
Company's cost of goods sold. During 2001, resin prices were down
slightly to the prior year and were lower than historical averages.
These cost decreases were largely passed on to customers through selling
price reductions. During the first nine months of 2002, market prices
for resin have fluctuated but on average are similar to 2001. However,
fourth quarter costs are expected to exceed the costs paid a year ago.
There is no assurance that future resin price increases can be passed on
to customers. Plastic resin costs are impacted by several factors
outside the control of the Company including supply and demand
characteristics, oil and natural gas prices and the overall health of the
economy. Any of these factors could potentially have a positive or
negative impact on plastic resin prices and the Company's profitability.
* Steel tariffs announced earlier this year had a negative impact on the
Company's steel costs in the third quarter of 2002. Not only has foreign
steel risen in price, but domestic producers have raised their prices as
well. The Company currently uses both domestic and foreign steel in its
ironing boards. We expect steel prices in the fourth quarter of 2002 to
exceed both last year's cost and the costs we experienced earlier this
year.
* The Company is currently the only U.S. manufacturer of ironing boards and
believes that this provides the Company with increased flexibility to
meet customer needs. However, the changing competitive environment,
including increased foreign competition, may cause us to reconsider the
multiple ways in which we manufacture and source our laundry products.
* During the first half of 2001, the Company completed all of its
restructuring initiatives including the closure of its east coast
operations and the realignment of several manufacturing facilities.
These changes were made to improve production efficiency and lower costs.
Savings as compared to 2001 were realized in the first half of 2002 and
the improved processes remain in place. As we begin to anniversary the
changed processes, we expect the incremental savings between years will
be less.
* As a result of operating losses and restructuring write-offs incurred
in 2000, the Company has significant tax loss carryforwards. These
carryforwards can be used to reduce taxable income in future periods.
The Company has tax loss carryforwards of $40 million (amount includes
carryforwards of $9 million subject to annual limitation) as of December
29, 2001.
* The Company is highly leveraged with total debt representing nearly two
times our net tangible assets. Accordingly, earnings and cash flow could
be materially impacted by changes in interest rates or other business
factors. Furthermore, the financial and operating covenants related to
the Company's debt agreement place some restrictions on operations.
During all of 2001 and the first nine months of 2002, the Company
operated well within its financial and operating covenants and expects to
operate within the covenants in the remainder of 2002.
* The Company's financing arrangements and financial covenants with Fleet
Capital take into account seasonal fluctuations and changes to the
Company's collateral base. Because the financing is asset based,
availability of funds to borrow is dependent on the quality of the
Company's asset base, primarily its receivables and inventory. Should
Fleet Capital determine that such assets do not meet the bank's credit
tests, availability can be restricted. Given the Company's retail
customer base, it is possible that certain customers could be excluded
from the asset base thus reducing credit availability.
* Given the Company's fixed debt position and positive cash flows,
management may from time-to-time look at opportunities to buy its common
stock or high yield bonds. A buyback might be done if such transactions
are accretive to shareholders through either a reduction of interest
expense or elimination of shares.
* Over the past four years, the Company's growth has come primarily via
acquisition. The Company still believes that acquisitions provide the
best opportunity to meaningfully grow the Company's sales and profits. As
our cash and debt levels improve, we may pursue additional acquisitions.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk is impacted by changes in interest
rates and price volatility of certain commodity based raw materials.
Interest Rate Risk. The Company's revolving credit agreement is LIBOR-
based and is subject to interest rate movements. During the thirteen and
thirty-nine weeks ended September 28, 2002 the Company did not experience
any material changes in interest rate risk that would affect the disclosures
presented in the Company's Annual Report on Form 10-K for the fifty-two week
period ended December 29, 2001.
Commodity Risk. The Company is subject to price fluctuations in
commodity based raw materials such as plastic resin, steel and griege
fabric. Changes in the cost of these materials may have a significant impact
on the Company's operating results. The cost of these items is affected by
many factors outside of the Company's control and changes to the current
trends are possible. See "Management Outlook and Business Risks" above.
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin. These purchase commitments approximate 64%
of the Company's total annual plastic resin purchases. The Company expects
to purchase in excess of 140 million pounds of resin in 2002. The
agreements expire in December 2002 and December 2003. The purchase
commitment pricing is not tied to fixed rates; therefore, the Company's
results of operations or financial position could be affected by significant
changes in the market cost of plastic resin.
Item 4. Controls and Procedures
(a) Under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and
principal financial officer, the Company conducted an evaluation of its
disclosure controls and procedures, as such term is defined under Rules
12a-14 promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of filing date of this report. Based on their evaluation,
the Company's principal executive officer and principal accounting
officer concluded that, as of the date of such evaluation, the Company's
disclosure controls and procedures were adequate and designed to ensure
that material information relating to the Company and its consolidated
subsidiary would be made known to them by others within the entity.
(b) There have been no significant changes (including corrective
actions with regard to significant deficiencies or material weaknesses)
in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation referenced
in paragraph (a) above.
Forward Looking Statements
This quarterly report on Form 10-Q, including the "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Management Outlook and Business Risks" and "Quantitative and Qualitative
Disclosures about Market Risk" sections, contain forward-looking statements
within the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The Company generally identifies forward-
looking statements by the use of terminology such as "may," "will," "could,"
"should," "potential," "continue," "expect," "intend," "plan," "estimate,"
"project," "anticipate," believe," or similar phrases or the negatives of
such terms. Such statements are based on management's current expectations
and currently available information. Such statements are subject to risks,
uncertainties and assumptions, including those described below under the
caption "Management Outlook and Business Risks", as well as other matters
not yet known to or considered material by the Company, which could cause
actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are
not limited to:
* the impact of the level of the Company's indebtedness
* restrictive covenants contained in the Company's various debt documents
* general economic conditions
* the Company's dependence on a few large customers
* price fluctuations in the raw materials used by the Company, particularly
plastic resin and steel
* competitive conditions in the Company's markets
* the seasonal nature of the Company's business
* fluctuations in the stock market
* the extent to which the Company is able to retain and attract key
personnel
* financial condition of our retail customers
* relationships with retailers
* the impact of federal, state and local environmental requirements
(including the impact of 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
revise 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 in this report and in the Company's periodic
reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission. Such reports attempt to advise interested parties of the
factors which affect the Company's business.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 - Contingent Liabilities of the Notes to Condensed
Consolidated Financial Statements, included herein, regarding a
lawsuit pending against the Company.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Current reports on Form 8-K.
Registrant filed a Current Report on Form 8-K dated August 13 2002,
under Item 9 (Regulation FD Disclosure) disclosing certifications
made by the Registrant's Chairman of the Board and Chief Executive
Officer, James R. Tennant, and Executive Vice President and Chief
Financial Officer, James E. Winslow, solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Registrant filed a Current Report on Form 8-K dated August 16, 2002,
to disclose that the Registrant issued a press release disclosing its
financial results for its second quarter 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Home Products International, Inc.
By: /s/ James E. Winslow
--------------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer
Dated: November 8, 2002
CERTIFICATIONS
I, James R. Tennant, Chairman of the Board and Chief Executive Officer of
Home Products International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Products
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 8, 2002 By: /s/ James R. Tennant
--------------------------------
James R. Tennant
Chairman of the Board and
Chief Executive Officer
I, James E. Winslow, Executive Vice President and Chief Financial Officer of
Home Products International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Products
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 8, 2002 By: /s/ James E. Winslow
--------------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer