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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 June 28, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Common shares, par value $0.01, outstanding as of August 2, 2003 - 7,865,434
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 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 21
Part II. Other Information
-----------------
Items 1, 2, 3 and 5 n/a
Item 4. Submission of Matters to a Vote of
Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts)
(Unaudited)
June 28, December 28,
2003 2002
-------- --------
Assets
Current assets:
Cash and cash equivalents ............... $ 3,495 $ 3,974
Accounts receivable, net ................ 36,083 48,937
Inventories ............................. 27,887 25,357
Deferred income taxes ................... 2,559 2,559
Prepaid expenses and other current assets 1,519 1,879
-------- --------
Total current assets................... 71,543 82,706
-------- --------
Property, plant and equipment - at cost ... 95,054 91,917
Less accumulated depreciation ............. (58,533) (54,728)
-------- --------
Property, plant and equipment, net ........ 36,521 37,189
-------- --------
Deferred income taxes ..................... 5,207 5,207
Other intangibles, net .................... 859 1,111
Goodwill, net ............................. 73,752 73,752
Other non-current assets .................. 3,264 3,553
-------- --------
Total assets........................... $ 191,146 $ 203,518
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................ $ 24,188 $ 22,986
Accrued liabilities ..................... 21,711 28,993
Current maturities of long-term
obligations............................ 158 158
-------- --------
Total current liabilities.............. 46,057 52,137
-------- --------
Long-term obligations - net of current
maturities .............................. 129,576 129,621
Other liabilities ......................... 4,380 4,293
Stockholders' equity:
Preferred Stock - authorized, 500,000
shares, $.01 par value; - None issued.. - -
Common Stock - authorized 15,000,000
shares, $.01 par value; 8,681,196 shares
issued at June 28, 2003 and 8,671,079
shares issued at December 28, 2002...... 87 87
Additional paid-in capital .............. 50,064 50,036
Accumulated deficit ..................... (32,433) (25,958)
Common stock held in treasury - at cost;
822,394 shares at June 28, 2003 and
December 28, 2002 ...................... (6,528) (6,528)
Unearned employee benefits .............. (57) (170)
-------- --------
Total stockholders' equity............. 11,133 17,467
-------- --------
Total liabilities and stockholders'
equity .............................. $ 191,146 $ 203,518
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Thirteen weeks Twenty-six weeks
ended ended
--------------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------------------------------------
Net sales .......................... $54,049 $59,623 $103,178 $110,630
Cost of goods sold ................. 46,425 44,092 86,884 82,326
------ ------ ------- -------
Gross profit ................... 7,624 15,531 16,294 28,304
Operating expenses:
Selling and marketing ........... 4,085 4,503 8,405 8,820
General and administrative ...... 3,297 3,376 7,209 6,685
Amortization of intangible assets 126 123 252 253
------ ------ ------- -------
Operating profit ............... 116 7,529 428 12,546
------ ------ ------- -------
Non-operating income (expense):
Interest income................. 15 5 62 54
Interest expense................ (3,451) (3,454) (6,928) (6,938)
Other income (expense), net..... 11 (169) 7 (197)
------ ------ ------- -------
Net non-operating expense....... (3,425) (3,618) (6,859) (7,081)
------ ------ ------- -------
Earnings (loss) before
income taxes ................. (3,309) 3,911 (6,431) 5,465
Income tax expense ................. (20) (176) (44) (300)
------ ------ ------- -------
Net earnings (loss) ........... $(3,329) $ 3,735 $ (6,475) $ 5,165
====== ====== ======= =======
Net earnings (loss) per common share:
Basic .......................... $ (0.42) $ 0.48 $ (0.82) $ 0.67
====== ====== ======= =======
Diluted ........................ $ (0.42) $ 0.45 $ (0.82) $ 0.63
====== ====== ======= =======
Weighted average common shares
outstanding-basic ................ 7,936 7,750 7,935 7,744
====== ====== ======= =======
Weighted average common shares
outstanding-diluted .............. 7,936 8,212 7,935 8,161
====== ====== ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Twenty-six weeks ended
---------------------
June 28, June 29,
2003 2002
-------- --------
Operating activities:
Net earnings (loss) ............................. $ (6,475) $ 5,165
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization .................. 4,498 5,422
Amortization of restricted stock compensation... 113 113
Loss on the abandonment of assets .............. 3 186
Other, net ..................................... 462 (627)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable..... 12,769 (3,337)
(Increase) in inventories ..................... (2,530) (9,140)
Decrease in prepaid expenses and other 360 903
Increase in accounts payable .................. 1,202 2,806
(Decrease) in accrued liabilities ............. (7,282) (612)
-------- --------
Net cash provided by operating activities 3,120 879
-------- --------
Investing activities:
Capital expenditures, net ....................... (3,582) (2,059)
-------- --------
Net cash used in investing activities ............ (3,582) (2,059)
-------- --------
Financing activities:
Net borrowings under loan and security agreement. - 592
Payments of capital lease obligation ............ (45) (93)
Exercise of stock options, issuance of common
stock under stock purchase plan and other....... 28 91
-------- --------
Net cash provided by (used in) financing activities (17) 590
-------- --------
Net decrease in cash and cash equivalents......... (479) (590)
Cash and cash equivalents at beginning of period.. 3,974 1,091
-------- --------
Cash and cash equivalents at end of period........ $ 3,495 $ 501
======== ========
Supplemental disclosures
Cash paid in the period:
Interest ......................................... $ 6,633 $ 6,178
-------- --------
Income taxes, net ................................ $ 54 $ 155
-------- --------
Non-cash financing activities:
Capital lease obligation ......................... $ - $ 123
-------- --------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts 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
twenty-six weeks ended June 28, 2003 and June 29, 2002, include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows as of June 28, 2003 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 28, 2002. The results of operations for the thirteen and twenty-six
weeks ended June 28, 2003 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. Stock-Based Compensation Plans
The Company has a stock-based compensation plan under which stock
options are granted to key employees and certain key non-employees. There
were no stock options granted during the first and second quarters of 2003.
Stock options were granted during the first quarter of 2002 under stock-
based compensation plans approved by shareholders in 1999. The stock
options granted during the first quarter of 2002 are fully exercisable after
four years and have a ten-year life. The Company also issued shares in 2003
and 2002 under the Company's employee stock purchase plan relating to the
Company's first purchase period (January through June).
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" encourages companies to adopt a
fair value approach to valuing stock-based compensation that would require
compensation cost to be recognized based upon the fair value of the stock-
based instrument issued. The Company has elected, as permitted by SFAS No.
123, to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Based Compensation" and the related
interpretations in accounting for stock option awards under the stock option
plans. Under APB Opinion No. 25, compensation expense is recognized if the
market price on the date of grant exceeds the exercise price. All options
granted by the Company have been granted at market price on the date of
grant. The following table illustrates the effect on net earnings (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based employee
compensation.
Thirteen weeks Twenty-six weeks
ended ended
--------------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------- ------- ------- -------
Net earnings (loss) $ (3,329) $ 3,735 $ (6,475) $ 5,165
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (48) (63) (95) (102)
------- ------- ------- -------
Pro forma net earnings (loss) $ (3,377) $ 3,672 $ (6,570) $ 5,063
======= ======= ======= =======
Earnings (loss) per share:
Basic-as reported $ (0.42) $ 0.48 $ (0.82) $ 0.67
======= ======= ======= =======
Basic-pro forma $ (0.43) $ 0.47 $ (0.83) $ 0.65
======= ======= ======= =======
Diluted-as reported $ (0.42) $ 0.45 $ (0.82) $ 0.63
======= ======= ======= =======
Diluted-pro forma $ (0.43) $ 0.45 $ (0.83) $ 0.62
======= ======= ======= =======
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
Note 3. Net Earnings (Loss) Per Share
The following information presents net earnings (loss) per share basic
and diluted (in thousands, except per share data):
Thirteen weeks Twenty-six weeks
ended ended
---------------------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------- ------- ------- -------
Net earnings (loss) $ (3,329) $ 3,735 $ (6,475) $ 5,165
Weighted average shares
outstanding - basic 7,936,215 7,750,251 7,935,349 7,744,052
Impact of stock options,
warrants and restricted
stock - 461,844 - 417,116
--------- --------- --------- -------
Weighted average shares
outstanding - diluted 7,936,215 8,212,095 7,935,349 8,161,168
========= ========= ========= =========
Net earnings (loss)
per share - basic $ (0.42) $ 0.48 $ (0.82) $ 0.67
======= ======= ======= =======
Net earnings (loss)
per share - diluted $ (0.42) $ 0.45 $ (0.82) $ 0.63
======= ======= ======= =======
Anti-dilutive stock options,
warrants and restricted
stock excluded from
calculation 425,075 - 457,799 -
======= ======= ======= =======
Net earnings (loss) per share - basic is computed based on the weighted
average number of outstanding common shares. Net earnings (loss) per share
- diluted includes the weighted average effect of dilutive stock options,
warrants and restricted stock on the weighted average shares outstanding.
There were no dilutive stock options, warrants and restricted stock included
in the computation of diluted earnings per share during the thirteen and
twenty-six weeks ended June 28, 2003 because the assumed exercise of such
common stock equivalents would have been antidilutive.
Note 4. Goodwill and Other Intangibles
Goodwill and other intangibles principally relate to the excess of the
purchase price over the fair value of tangible assets acquired. Goodwill
and intangible assets that have indefinite useful lives are no longer
amortized, but rather are tested at least annually for impairment.
Intangible assets with indefinite lives are evaluated annually to determine
whether events and circumstances continue to support an indefinite useful
life. Intangible assets that have definite useful lives are amortized over
their useful lives, and are evaluated annually to determine whether events
and circumstances warrant a revision to the remaining period of
amortization.
During the first quarter of 2003 the Company performed its annual
impairment test, which indicated that the Company's goodwill was not
impaired. As of June 28, 2003 and December 28, 2002, the carrying amount of
goodwill was $73,752.
Other intangibles consist of the following:
June 28, 2003 December 28, 2002
---------------------- ----------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(Yrs.) Amount Amortization Amount Amortization
------------------------------------------------------
Amortized intangible
assets:
Patents 7 to 14 $ 1,008 $ (759) $ 1,008 $ (710)
Non-compete
agreements 10 2,928 (2,318) 2,928 (2,115)
------ -------- ------- --------
Total $ 3,936 $ (3,077) $ 3,936 $ (2,825)
====== ======== ======= ========
Aggregate amortization expense for the twenty-six weeks ended June
28, 2003 and June 29, 2002 was $252 and $253, respectively. Aggregate
amortization expense in the second quarter of 2003 and 2002 was $126 and
$123, respectively.
Estimated amortization expense for the remaining six months of fiscal
2003 and the next two fiscal years based on intangible assets at June 28,
2003 is as follows:
Estimated
Amortization
Fiscal Year Expense
----------- -------
2003 $253
2004 $505
2005 $101
Note 5. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds
SFAS No. 4, which required that all gains and losses from extinguishment of
debt be reported as an extraordinary item. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 must be applied in fiscal years
beginning after May 15, 2002. Previously recorded losses on the early
extinguishment of debt that were classified, as an extraordinary item in
prior periods will be reclassified to interest income (expense), net. The
adoption of SFAS No. 145 will have no effect on the Company's financial
position, results of operations, or liquidity but will result in a
reclassification on the Company's condensed consolidated statement of
operations for 2001.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 replaces previous accounting guidance provided
by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)," and
will be effective for the Company for exit or disposal activities initiated
after December 28, 2002. The Company adopted this statement effective
December 29, 2002.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
Interpretation clarifies that a guarantor is required to recognize a
liability for the fair value of the obligation undertaken in issuing a
guarantee and requires certain related disclosures. The Company has not
guaranteed the indebtedness or obligations of others and therefore the
adoption of FIN 45 has had no impact on the Company's financial position,
results of operations, or liquidity.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure". This Statement amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation. The statement permits two transition methods for companies
that adopt the fair value method of accounting for stock-based compensation,
which include the modified prospective and retroactive restatement methods.
The modified prospective method recognizes stock-based employee compensation
cost from the beginning of the fiscal year in which the provisions are first
applied, as if the fair value method had been used to account for all
employee awards granted, modified, or settled in fiscal years beginning
after December 15, 1994. Under the retroactive restatement method, all
periods presented are restated to reflect stock-based employee compensation
cost under the fair value method for all employee awards granted, modified,
or settled in fiscal years beginning after December 15, 1994. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results with a prescribed specific
tabular format and disclosure in the "Summary of Significant Accounting
Policies" or its equivalent. The Company adopted the new disclosure
requirements in 2002 and the effects of adoption are disclosed in Note 2 of
the Company's condensed consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". This statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. As the Company does not currently have any
derivative instruments the adoption of the statement in 2003 will have no
impact on its financial position, results of operations, or liquidity.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
This statement changes the accounting for mandatory redeemable shares, put
options, forward purchase contracts and obligations that can be settled with
shares. As the Company does not currently have any interests in such types
of instruments the adoption of this statement in 2003 will have no impact on
its financial position, results of operations, or liquidity.
Note 6. Inventories
The components of the Company's inventories consist of direct labor,
direct materials and the applicable portion of the overhead required to
manufacture the goods.
June 28, December 28,
2003 2002
------- -------
Finished goods..................... $ 21,588 $ 17,611
Work-in-process.................... 1,809 1,891
Raw materials...................... 4,490 5,855
------- -------
$ 27,887 $ 25,357
======= =======
Note 7. 2001 and 2000 Special, Restructuring and Other Charges Update
During 2000 and 2001 the Company implemented a restructuring plan to
reduce fixed costs and better position the Company for sustained
profitability. The restructuring plan entailed the closure of the
Leominster, Massachusetts manufacturing and warehouse facilities,
reconfiguration of remaining manufacturing facilities, a reduction in
headcount and a realignment of the selling process. The restructuring
charges were accounted for under EITF No. 94-3. The Company identified a
total of 124 hourly and salaried Leominster employees to be terminated in
accordance with the 2001 restructuring initiatives. As of June 28, 2003,
all but one of these employees had been terminated. All planned
restructuring initiatives were completed in 2001.
Restructuring reserves were determined based on estimates prepared at
the time the restructuring actions were approved by management and also
reflect any subsequent changes in management estimates. Restructuring
reserves of $1,734, as of June 28, 2003, are considered adequate. Total net
cash outlays were $445 in the twenty-six week period ended June 28, 2003.
Restructuring reserve balances as of December 28, 2002, activity during the
current period and restructuring reserve balances as of June 28, 2003, were
as follows:
Reserve Amounts Reserve
balance at utilized balance at
12/28/02 in 2003 06/28/03
------- ------ ------
Inventory $ 27 $ (10) $ 17
Leased plant and facilities 1,821 (407) 1,414
Obsolete and duplicate leased
assets 289 (38) 251
Employee related costs 52 - 52
------- ------ ------
$ 2,189 $ (455) $ 1,734
======= ====== ======
As of June 28, 2003, inventory reserves of $17 are primarily related to
the estimated cost to liquidate the obsolete inventory; leased plant and
facilities reserves of $1,414 are primarily related to future minimum lease
payments on a partially vacated facility; obsolete and duplicate leased
assets reserves of $251 are related to future minimum lease payments on
machinery and equipment no longer used in the Company's manufacturing
process and employee related reserves of $52 are primarily related to
employee severance and benefits.
Note 8. Income Taxes
The Company uses the asset and liability method of SFAS No. 109 in
accounting for income taxes. Under this method deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, tax credits
and operating loss carryforwards. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. As required by SFAS No. 109, the Company records a valuation
allowance to reduce its deferred tax assets if it is more likely than not
that the deferred tax assets will not be fully utilized.
Note 9. Segment of an Enterprise
The Company consists of a single operating segment that designs,
manufactures and markets quality consumer housewares products. This
segmentation is based on the financial information presented to the chief
operating decision maker. The following table sets forth the net sales by
product category within the Company's single operating segment.
Product Category Information - Net Sales
Thirteen weeks Twenty-six weeks
ended ended
---------------------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------- ------- -------- --------
General storage .......... $ 21,457 $ 19,695 $ 41,627 $ 34,243
Laundry management ....... 19,818 24,643 36,439 45,098
Closet storage ........... 6,818 6,757 13,451 15,148
Bathware ................. 3,585 5,691 7,296 10,373
Kitchen storage .......... 2,371 2,837 4,365 5,768
------- ------- -------- --------
Total net sales ......... $ 54,049 $ 59,623 $ 103,178 $ 110,630
======= ======= ======== ========
Major Customers
The Company is dependent upon a few customers for a large portion of
its net sales. In the second quarter of 2003, three customers each accounted
for more than 10% of consolidated net sales. The Company's top three
customers, Walmart, Kmart and Target accounted for 29.9%, 28.0% and 12.7% of
consolidated net sales, respectively, in the second quarter of 2003. These
same three customers accounted for 30.0%, 30.4% and 11.0% of consolidated
net sales, respectively, during the twenty-six weeks ended June 28, 2003.
In the second quarter of 2002 three customers each accounted for more than
10% of consolidated net sales. Walmart, Kmart, and Target accounted for
28.2%, 27.7% and 13.7% of the Company's consolidated net sales,
respectively, in the second quarter of 2002. These same three customers
accounted for 31.7%, 24.0% and 13.9% of consolidated net sales,
respectively, during the twenty-six weeks ended June 29, 2002. The loss of
one of these customers could have a material effect on the Company. No
other customer accounted for more than 10% of consolidated net sales in
either 2003 or 2002.
Note 10. Subsequent Events
On July 29, 2003, the Company announced its intention to close its
Eagan, Minnesota manufacturing and warehouse facility as of January 31,
2004. This closure is being done to reduce operating costs and utilize
capacity in the Company's other injection molding plants. The Company
identified a total of approximately 130 hourly and salaried employees to be
terminated as part of the Eagan facility closure. The total cost of the
closing is expected to be about $4.5 million of which $2.5 million will
relate to non-cash asset writedowns. Remaining expenditures relate
primarily to employee severance and the relocation of equipment and
inventory. The Company expects to realize annual cash savings as a result
of the plant closing and currently estimates that the cash savings in the
first year will be approximately $2 million (excluding plant closing costs).
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 28, 2002
Critical Accounting Policies
The Company has identified the most critical accounting principles upon
which its financial status depends. The Company determined the critical
principles by considering accounting policies that involve the most complex
or subjective decisions or assessments. The Company states these accounting
policies in the notes to the annual consolidated financial statements and at
relevant sections in this discussion and analysis. This discussion and
analysis should be read in conjunction with the Company's condensed
consolidated financial statements and related notes included elsewhere in
this report and in the Form 10-K.
The Company's most critical accounting policies are those relating to
revenue recognition, allowance for doubtful accounts, inventory valuation,
restructuring reserves, valuation of deferred income tax assets and
valuation of long-lived and intangible assets. A summary of the critical
accounting policies is as follows:
* Revenue recognition. The Company recognizes revenues and freight billed
to customers upon shipment and after the transfer of all substantial
risks of ownership. Allowances for estimated returns, discounts and
retailer programs are recognized when sales are recorded and are based on
various market data, historical trends and information from customers.
Although the best available information is used to establish the
allowances, such information is often based on estimates of retailer
recovery rates. Retailer recovery can sometimes take up to several years
depending on the particular program. Allowances are reviewed quarterly
and are adjusted based on current estimates of retailer recovery. Due to
changes in estimates, changes in retailer activity and the length of time
required for many programs to run their course, it is possible for
allowance activity to impact earnings in either a positive or negative
manner in any given period.
* 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
credit evaluations of selected high risk customers. 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 allowances 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 allowances.
* 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 raw 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 allowances to absorb expected losses. The
Company also maintains allowances 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, an allowance 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. The Company's historical policy has been to
record restructuring charges for certain costs associated with plant
closures and business reorganization activities upon approval by
management with the appropriate level of authority in accordance with
Emerging Issues Task Force ("EITF") Issue no. 94-3, "Liability
Recognition for Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)". Such costs were recorded as a liability
and include lease termination costs, employee severance and certain
employee termination benefits. These costs were neither associated with
nor do they benefit continuing business activities. Inherent in the
determination of these costs were 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. In July 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". This standard requires costs associated with exit or
disposal activities to be recognized when they are incurred. The
requirements of SFAS No. 146 apply prospectively to activities that are
initiated after December 31, 2002.
* Valuation of Deferred Income Tax Assets. The Company regularly evaluates
its ability to recover the reported amount of our deferred tax assets.
The evaluation considers several factors, including our estimate of the
likelihood that we will generate sufficient taxable income in future
years in which temporary differences reverse. This evaluation is based
primarily on our historical earnings and projected operating results,
applicable net operating loss carryforward expiration dates, and
identified actions under the control of the Company in realizing the
associated carryforward benefits. In the event that actual results
differ from our estimates or we revise future projections, we may need to
adjust the valuation allowance.
* Valuation of Long-Lived and Intangible Assets. The Company assesses the
recoverability of long-lived assets whenever it determines that events or
changes in circumstances indicate that their carrying amount may not
be recoverable. In accordance with generally accepted accounting
principles, indefinite lived intangible assets are subject to annual
impairment tests. The Company's assessments and impairment testing are
primarily based upon management estimates of future cash flows associated
with these assets. Based on the Company's assessments, we have
determined that there has not been a material impairment of any of our
long-lived assets or intangible assets. However, should the Company's
operating results deteriorate, we may determine that some portion of
our long-lived tangible or intangible assets are impaired. Such
determination could result in non-cash charges to income that could
materially affect the Company's consolidated financial position or
results of operations for that period.
Thirteen weeks ended June 28, 2003 compared to the thirteen weeks ended June
29, 2002
In the discussion and analysis that follows, all references to 2003 are
for the thirteen week period ended June 28, 2003 and all references to 2002
are for the thirteen week period ended June 29, 2002.
The following discussion and analysis compares the actual results for
the second quarter of 2003 to the actual results for the second quarter of
2002 with reference to the following (in thousands, except earnings per
share; unaudited):
Thirteen weeks ended
---------------------------------
June 28, 2003 June 29, 2002
-------------- --------------
Net sales ....................... $ 54,049 100.0% $ 59,623 100.0%
Cost of goods sold .............. 46,425 85.9 44,092 74.0
------- ----- ------- -----
Gross profit .................. 7,624 14.1 15,531 26.0
Selling, general and
administrative expenses........ 7,382 13.7 7,879 13.2
Amortization of intangible assets 126 0.2 123 0.2
------- ----- ------- -----
Operating profit .............. 116 0.2 7,529 12.6
Interest expense ................ (3,451) (6.4) (3,454) (5.8)
Other income, net ............... 26 0.0 (164) (0.3)
------- ----- ------- -----
Earnings (loss) before
income taxes ................ (3,309) (6.2) 3,911 6.5
Income tax expense .............. (20) (0.0) (176) (0.3)
------- ----- ------- -----
Net earnings (loss) ........... $ (3,329) (6.2%) $ 3,735 6.2%
======= ===== ======= =====
Net earnings (loss) per share:
Basic ........................ $(0.42) $0.48
Diluted ...................... $(0.42) $0.45
Weighted average common shares
outstanding:
Basic ........................ 7,936 7,750
Diluted ...................... 7,936 8,212
Net sales. Net sales of $54.0 million in 2003 were down 9.3% as
compared to net sales in 2002 of $59.6 million. Net sales declined between
periods due primarily to Kmart store closures, a decline in shelf space at
other customers and selling price declines in response to competitive
pressures. In January 2003, Kmart announced the closure of 326 stores,
approximately 18% of their total store count. Most of the stores had been
closed by the end of April. This resulted in a reduction in net sales
between periods of about $3 million. Laundry sales in the quarter were down
21% compared to a year ago due in part to lost market share and pricing
actions related to far east imports. There was also a sales mix shift as
sales increased in general storage products while declining in other higher
margin product lines. Changes in estimates related to retailer recovery of
deductions and customer programs resulted in a reduction of sales allowances
between periods. Such program and deduction expenses, which are recorded as
a reduction of gross sales, were 7.3% of gross sales in 2003 and 9.0% of
gross sales in 2002. The Company's customer concentration was essentially
unchanged between periods. Sales to the top three customers were 70.6% of
net sales in 2003 as compared to 69.6% in the prior period.
Gross profit. The Company's gross profit in the second quarter was
$7.6 million in 2003 as compared to $15.5 million in 2002 and gross profit
margins decreased to 14.1% of net sales from 26.0% a year ago. The
increased cost of plastic resin was the primary reason for the decreased
gross margins. Plastic resin increased $0.11 per pound in the second
quarter as compared to the second quarter of 2002, resulting in a
$3.6 million cost increase (650 basis point decline in margins). Also
contributing to the gross margin decline was a change in product mix towards
lower margin general storage products. The lower sales levels in the period
also meant reduced production volume over which to absorb fixed
manufacturing costs. Additional depreciation expense of $0.2 million was
recorded due to a change in estimated useful lives for certain assets that
will be effected by the closure of the Eagan, Minnesota facility.
Selling, general, administrative expenses and amortization of
intangible assets. Selling, general, administrative expenses and
amortization of intangible assets decreased to $7.5 million in 2003 from
$8.0 million in 2002. As a percentage of net sales, selling, general,
administrative expenses and amortization of intangible assets increased to
13.9% in 2003 from 13.4% in 2002. Selling, general and administrative
expenses decreased primrily due to lower bad debt expense on export
receivables, reduced incentive compensation and reduced warehousing costs on
the lower 2003 sales volume. Amortization of intangible assets in 2003 was
unchanged from a year ago.
Interest expense. Interest expense of $3.5 million in 2003 was flat to
the prior year period. There were no variable rate borrowings outstanding
during the second quarter.
Other income. Other income was not significant to either period and
consisted primarily of interest income on cash balances and gains/losses on
fixed asset retirements.
Income tax expense. The income tax provision recorded in both periods
relates to state and foreign taxes. No federal income tax expense was
recorded in either period due to the Company's significant tax loss
carryforwards. At December 28, 2002 the Company had tax loss carryforwards
of $35 million which may be used to reduce taxes in the future. However,
there is no assurance that future income will be sufficient to utilize these
tax loss carryforwards.
Net earnings (loss). In 2003 the Company had a net loss of $3.3
million primarily due to increased raw material costs and lower net sales.
This resulted in a loss per share of ($0.42). In the second quarter of
2002, the Company had net earnings of $3.7 million, or $0.45 per diluted
share.
The diluted weighted average number of shares outstanding decreased to
7,936,215 in 2003 from 8,212,095 in 2002. In 2003, dilutive options,
warrants and restricted stock are not included in the computation of diluted
weighted average shares outstanding because the assumed exercise of such
equivalents would have reduced the loss per share.
Twenty-six weeks ended June 28, 2003 compared to the twenty-six weeks ended
June 29, 2002
In the discussion and analysis that follows, all references to 2003 are
for the twenty-six week period ended June 28, 2003 and all references to
2002 are for the twenty-six week period ended June 29, 2002.
The following discussion and analysis compares the actual results for
2003 to the actual results for 2002 with reference to the following (in
thousands, except earnings per share; unaudited):
Twenty-six weeks ended
---------------------------------
June 28, 2003 June 29, 2002
-------------- --------------
Net sales ........................... $103,178 100.0% $110,630 100.0%
Cost of goods sold .................. 86,884 84.2 82,326 74.4
------- ----- ------- -----
Gross profit ...................... 16,294 15.8 28,304 25.6
Selling, general and
administrative expenses ........... 15,614 15.1 15,505 14.0
Amortization of intangible assets.... 252 0.2 253 0.2
------- ----- ------- -----
Operating profit .................. 428 0.5 12,546 11.4
Interest expense .................... (6,928) (6.7) (6,938) (6.3)
Other income, net ................... 69 0.1 (143) (0.1)
------- ----- ------- -----
Earnings (loss) before income taxes (6,431) (6.1) 5,465 5.0
Income tax expense .................. (44) (0.0) (300) (0.3)
------- ----- ------- -----
Net earnings (loss) .............. $ (6,475) (6.1%) $ 5,165 4.7%
======= ===== ======= =====
Net earnings (loss) per share:
Basic ............................ $ (0.82) $ 0.67
Diluted .......................... $ (0.82) $ 0.63
Weighted average common shares
outstanding:
Basic ............................ 7,935 7,744
Diluted .......................... 7,935 8,161
Net sales. Net sales of $103.2 million in 2003 were down 6.7% as
compared to net sales in 2002 of $110.6 million. Net sales declined between
periods due primarily to Kmart store closures, a decline in shelf space at
other customers, selling price declines in response to competitive pressures
and a weak retailer environment in the first quarter of 2003. In January
2003, Kmart announced the closure of 326 stores, approximately 18% of their
total store count. Most of the stores had been closed by the end of April.
This resulted in a reduction in net sales between periods of about $5
million. Laundry sales in the first six months were down 21% compared to a
year ago due in part to lost market share and pricing actions related to far
east imports. There was also a mix shift as net sales increased in general
storage products while declining in all other product lines. Changes in
estimates related to retailer recovery of deductions and customer programs
resulted in a reduction of sales allowances between periods. Such program
and deduction expenses, which are recorded as a reduction of gross sales,
were 7.2% of gross sales in 2003 and 9.1% of gross sales in 2002. The
Company's customer concentration increased slightly. Sales to the top three
customers were 71.4% of net sales in 2003 as compared to 69.6% in the prior
period.
Gross profit. The Company's gross profit in the first half of 2003 was
$16.3 million as compared to $28.3 million in 2002 and gross profit margins
decreased to 15.8% of net sales from 25.6% a year ago. Increased costs of
plastic resin were the primary driver behind the decreased gross margins.
Plastic resin increased $0.08 per pound in the twenty-six week period as
compared to the prior year period, resulting in a $6.5 million cost increase
(630 basis point decline in margins). Contributing to the gross margin
decline was a change in product mix towards lower margin general storage
products. The lower sales levels in the period also meant reduced
production volume over which to absorb fixed manufacturing costs.
Additional depreciation expense of $0.2 million was recorded due to a change
in estimated useful lives for certain assets that will be effected by the
closure of the Eagan, Minnesota facility.
Selling, general, administrative expenses and amortization of
intangible assets. Selling, general, administrative expenses and
amortization of intangible assets increased to $15.9 million in 2003 from
$15.8 million in 2002. As a percentage of net sales, selling, general,
administrative expenses and amortization of intangible assets increased to
15.3% in 2003 from 14.2% in 2002. Selling, general and administrative
expenses increased due to premiums associated with accounts receivable
insurance ($0.7 million) as well as professional fees related to corporate
governance and Sarbanes-Oxley matters ($0.4 million) which were partially
offset by declines in incentive compensation expense, warehousing costs and
bad debt expense. Amortization of intangible assets in 2003 was unchanged
from a year ago.
Interest expense. Interest expense of $6.9 million in 2003 was flat to
the prior year period. There were no variable rate borrowings outstanding
during the first twenty-six weeks of 2003.
Other income. Other income was not significant to either period and
consists primarily of interest income on cash balances and gains/losses on
fixed asset retirements.
Income tax expense. The income tax provision recorded in both periods
relates to state and foreign taxes. No federal income tax expense was
recorded in either period due to the Company's significant tax loss
carryforwards. At December 28, 2002 the Company had tax loss carryforwards
of $35 million which may be used to reduce taxes in the future. However,
there is no assurance that future income will be sufficient to utilize these
tax loss carryforwards.
Net earnings (loss). In the first twenty-six weeks of 2003 the Company
had a net loss of $6.5 million primarily due to increased raw material costs
and lower net sales. This resulted in a loss per share of ($0.82). In the
comparable period of 2002, the Company had net earnings of $5.2 million, or
$0.63 per diluted share.
The diluted weighted average number of shares outstanding decreased to
7,935,349 in 2003 from 8,161,168 in 2002. In 2003, dilutive options,
warrants and restricted stock are not included in the computation of diluted
weighted average shares outstanding because the assumed exercise of such
equivalents would have reduced the loss per share.
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 cash position decreased to $3.5 million at June 28, 2003
from $4.0 million at December 28, 2002. The decrease in cash since December
28, 2002 is primarily the result of the year-to-date loss of $6.5 million.
Most of the cash reduction caused by the decline in earnings was offset by
reductions in working capital. Working capital (excluding cash and short
term debt) at June 28, 2003 was down $4.6 million from December 28, 2002.
Receivables decreased $12.9 million due to lower sales in the second quarter
of 2003 as compared to the fourth quarter of 2002 primarily attributable to
a seasonal reduction in the Company's sales. Inventories increased $2.5
million in the twenty-six week period due to seasonal builds for the higher
third quarter shipping period. Accrual balances declined $7.3 million
during the twenty-six week period due to the $6 million payment of semi
annual interest on the Company's high yield bonds, and the payment of
various annual volume rebates and other sales program incentives.
Capital spending in the twenty-six week period was $3.6 million as
compared to $2.2 million in the comparable period of 2002. Capital spending
was primarily related to new product tooling and normal replacement of
equipment.
The Company believes its $50 million line of credit, together with its
existing cash and cash flow from operations, will provide sufficient capital
to fund operations, make required interest payments and meet anticipated
capital spending needs for the next 12 months. No line of credit borrowings
were outstanding at June 28, 2003 and total borrowing availability under the
line of credit was $43 million. There are no required debt principal
repayments until May 2008.
The Company was in compliance with all loan covenants as of June 28,
2003.
On July 31, 2003, the Company and Fleet Capital Corporation entered
into several amendments to the Company's existing $50 million asset based
senior loan facility. The amendments extend the life of the facility by 29
months to March 31, 2008 and also provide expanded definitions of
availability. The amendments added approximately $13 million to net
availability under the senior loan facility. The expanded definition of
availability will make it easier for the Company to pursue the repurchase of
the Company's high yield bonds.
The following is a table providing the aggregate annual contractual
obligations of the Company including debt, capital lease obligations and
future minimum rental commitments under operating leases at June 28, 2003
and the effect such obligations are expected to have on our liquidity and
cash flows in future periods.
Payments due by period
----------------------
(in thousands)
After
Contractual Obligations Total 1 year 2-3 years 4-5 years 5 years
----------------------- ------- ----- ------ ------- ------
Long-term debt $125,000 $ - $ - $125,000 $ -
Capital lease obligations 14,367 954 1,876 1,848 9,689
Minimum rental commitments
under operating leases 22,593 6,123 9,126 5,050 2,294
------- ----- ------ ------- ------
Total contractual
cash obligations $161,960 $7,077 $11,002 $131,898 $11,983
======= ===== ====== ======= ======
The Company has entered into commitments to purchase certain minimum
annual volumes of plastic resin at formula-based prices. The agreements
expire in December 2003 and December 2004. Future related minimum
commitments to purchase plastic resin, assuming current price levels, are
$45,890 in 2003 and $30,840 in 2004. 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. See "Item 3 Quantitative and Qualitative Disclosures
About Market Risk" - Commodity Risk, which is incorporated by reference to
this section, for further details.
Management Outlook and Business Risks
* The Company's largest customer in 2002 and the first twenty six weeks of
2003 was Kmart. The Company's net sales to Kmart were $74 million in
fiscal year 2002 and $31.4 million in the first twenty six weeks of 2003.
In January 2003, Kmart announced the closure of 326 stores, approximately
18% of their total store count. The store closings have resulted and
will likely continue to result in a reduction in net sales to Kmart in
2003 as compared to 2002. In May 2003, Kmart emerged from bankruptcy with
secured financing of $2 billion. As in 2002, opportunities exist to
further expand our business with Kmart. These will be considered in
light of Kmart's financial situation, our manufacturing capacity levels
and other factors deemed appropriate by management. Given the dynamic
nature and the size of the Company's sales to Kmart, future results may
be either favorably or unfavorably impacted by any number of factors
related to the retailer.
* Historically, plastic resin has represented approximately 20% to 25% of
the Company's cost of goods sold. In the first half of 2003, the
percentage increased to 28% due to higher plastic resin costs and usage.
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. Resin costs in the first
twenty six weeks of 2003 were about $0.06 per pound higher than 5 year
historic averages and $0.08 per pound over last year's comparable period.
Resin costs are expected to decrease during the remainder of 2003 but are
not expected to return to last year's levels. We expect that third
quarter costs could be $0.08-$0.10 per pound over historic averages and
$0.06-$0.08 per pound over last year's third quarter. We expect that
third quarter results in 2003 as compared to the third quarter of 2002
will be negatively affected. While we will make every effort to recover
the higher cost of plastic resin, there is no assurance that future resin
cost increases can be passed on to customers. In 2002, the Company
purchased 157 million pounds of plastic resin. Through June 2003, the
Company has purchased 72 million pounds of plastic resin.
* On July 29, 2003, the Company announced its intention to close its Eagan,
Minnesota manufacturing and warehouse facility as of January 31, 2004.
This closure is being done to reduce operating costs and utilize capacity
in the Company's other injection molding plants. The total cost of the
closing is expected to be about $4.5 million of which $2.5 million will
relate to non-cash asset writedowns. Remaining expenditures relate
primarily to employee severance and the relocation of equipment and
inventory. The Company expects to realize annual cash savings as a
result of the plant closing and currently estimates that the cash savings
in the first year will be approximately $2 million (excluding plant
closing costs). However, the process of closing facilities, moving
equipment and reallocating production and sourcing capabilities often
involves unforeseen difficulties and may require a disproportionate
amount of the Company's financial and other resources, including
management time. Accordingly, there can be no assurance that the Company
will not incur unanticipated plant closing costs or experience
unanticipated difficulties and costs associated with the relocation of
equipment or the manufacture or sourcing of products, any of which could
have a material adverse effect on the Company's anticipated cash savings.
* The Company currently manufacturers the majority of its laundry products
in the U.S. and Mexico. Management believes that its current
manufacturing structure provides increased flexibility to meet customer
needs. All of the Company's competitors rely heavily on foreign sourced
products. Such products are sourced from several countries, including
a significant portion from China. These foreign sourced competitive
products have been introduced at selling prices below ours. This has
caused our profit margins and market share to decline. We have initiated
many cost cutting and other steps to protect our market share and profit
margins and have begun to aggressively explore and increase the
importation of certain laundry products. We will continue to analyze the
competitiveness of our North American based laundry manufacturing
operations. In addition to continuing cost cutting measures, the Company
filed an action with the U.S. International Trade Commission and the U.S.
Department of Commerce on June 30, 2003 seeking relief from a surge
in the importation of illegally priced Chinese ironing boards. The
Company's petition demands the imposition of antidumping duties on the
imported Chinese ironing boards. The Company intends to vigorously
pursue this matter, which may require it to devote financial and other
resources, including management time and increased legal expense. There
can be no assurance as to the timing or outcome of this proceeding.
* In 2002, our highest sales occurred in the fourth quarter. This was due
to large promotional orders related to the post Christmas retail selling
season. Normally, our primary selling season is during the second and
third quarters of the calendar year in connection with the back to school
retail season. Our profitability in 2002 was higher in the second and
third quarters due to the mix of product sold and also due to lower raw
material costs. There is no assurance that our seasonality of sales or
profits in 2002 is indicative of future seasonality.
* Steel tariffs announced in 2002 had a negative impact on the Company's
steel costs in the second half of 2002. The tariffs had the effect of
not only raising foreign steel prices, but domestic steel prices as well.
We expect steel prices in 2003 to exceed prior year levels. We do not
expect that this cost increase can be passed on to customers.
* During 2002, Congress enacted legislation designed to provide higher
standards of corporate governance. While the legislation provides many
good measures to protect shareholders, it also will add to our cost
of operations and the cost of retaining competent Board members. We
estimate that the cost of compliance with the new legislation and the
increased costs associated with our Board of Directors will add
approximately $0.8 million to our operating expenses in 2003.
* As a result of operating losses and restructuring write-offs incurred
in 2000, the Company has significant tax loss carryforwards. These
carryforwards may be used to reduce taxable income in future periods.
The Company had tax loss carryforwards of $35 million (amount includes
carryforwards of $9 million subject to annual limitation) as of December
28, 2002.
* The Company is highly leveraged with total debt representing nearly two
times our net tangible assets. Although all of the Company's outstanding
debt at June 28, 2003 is at fixed rates, any deterioration in our
business could lead to additional borrowings at adjustable rates. Thus a
deterioration of our business combined with a significant change in
interest rates could materially impact earnings and cash flow.
Furthermore, the financial and operating covenants related to the
Company's debt agreements place some restrictions on operations. During
all of 2002 the Company operated within its financial and operating
covenants and expects to continue to operate within the covenants during
2003.
* 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, buyback of bonds at a discount or elimination of shares.
* Management believes that acquisitions provide an opportunity to
meaningfully grow the Company's sales and profits. We expect to consider
acquisition opportunities that are synergistic to existing operations.
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
twenty-six weeks ended June 28, 2003, 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 28, 2002.
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 at formula-based prices. The agreements
expire in December 2003 and December 2004. Future related minimum
commitments to purchase plastic resin, assuming current price levels, are
$45.9 million in 2003 and $30.8 million in 2004. 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. In the event there is a major change in
economic conditions affecting the Company's overall annual plastic resin
volume requirements, the Company and the vendor will mutually agree on how
to mitigate the effects on both parties. Mitigating actions include
deferral of product delivery within the agreement term, agreement term
extension and/or elimination of excess quantities without liability.
Item 4. Controls and Procedures
Maintenance of Disclosure Controls and Procedures. The Company
maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to
Company management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Limitations of Disclosure Controls and Procedures. In designing and
evaluating the disclosure controls and procedures, the Company's management,
including its principal executive officer and principal financial officer,
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Because of the inherent limitations
in all control systems, no controls and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in designing, implementing and
evaluating controls can be faulty, and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and may not be detected.
Quarterly Review. 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
Rule 12a-14 promulgated under the Securities Exchange Act of 1934, as
amended, as of June 28, 2003. Based on that evaluation, the Company's
principal executive officer and principal financial 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 those entities, particularly during the periods
when periodic reports under the Exchange Act are being prepared.
Changes in internal control over financial reporting. There were no
changes in the Company's internal control over financial reporting,
identified in connection with the evaluation of such control, that occurred
during the fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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. Forward-looking statements generally may be
identified by the use of terminology such as "may," "will," "could,"
"should," "potential," "continue," "expect," "intend," "plan," "estimate,"
"anticipate," "believe," or similar phrases or the negatives of such terms.
Such statements are based on management's current expectations and are
subject to risks, uncertainties and assumptions, including those identified
below and in the foregoing "Business Risks," as well as other matters not
yet known to the Company or not currently 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 Company's dependence on a few large customers
* price fluctuations in the raw materials used by the Company,
particularly plastic resin
* unanticipated plant closing costs
* unanticipated difficulties and costs associated with the relocation
of equipment and the manufacture or sourcing of products
* competitive conditions in the Company's markets
* general economic conditions and conditions in the retail environment
* the impact of the level of the Company's indebtedness
* restrictive covenants contained in the Company's various debt
documents
* 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
* relationships with retailers
* the impact of federal, state and local environmental requirements
(including the impact of current or future environmental claims
against the Company)
* our ability to develop and introduce new products and product
modifications necessary to remain competitive
* other factors discussed in "Management Outlook and Business Risks"
above
Given these risks and uncertainties, investors are cautioned not to
place undue reliance on such forward-looking statements. Forward-looking
statements do not guarantee future performance. 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 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 that affect the Company's
business.
PART II. OTHER INFORMATION
Items 1, 2, 3 and 5 of this Part II are either inapplicable or are
answered in the negative and are omitted pursuant to the instructions to
Part II.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 28, 2003, the 2003 Annual Meeting of Stockholders of the Company was
held. The following is a brief description of the matters voted upon at the
meeting and tabulation of the voting therefor:
Proposal No. 1. The election of the following directors, who will serve
until the next annual meeting of stockholders, or until their successors are
elected and qualified, or their earlier death or resignation:
Nominee Votes Received Votes Withheld
------- -------------- --------------
Charles R. Campbell 7,446,178 207,285
Jeffrey C. Rubenstein 7,218,687 434,776
Daniel B. Shure 7,445,535 207,928
Joel D. Spungin 7,378,158 275,305
James R. Tennant 7,292,835 360,628
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment to Loan and Security Agreement made as of
June 1, 2003 by and among Home Products International -
North America, Inc. and Fleet Capital Corporation.
10.2 Second Amendment to Loan and Security Agreement made as of
July 31, 2003 by and among Home Products International -
North America, Inc. and Fleet Capital Corporation.
10.3 Third Amendment to Loan and Security Agreement made as of
July 31, 2003 by and among Home Products International -
North America, Inc. and Fleet Capital Corporation.
31.1 Certification of James R. Tennant, Chief Executive Officer
and Chairman of the Board, dated August 11, 2003 pursuant
to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2 Certification of James E. Winslow, Executive Vice President
and Chief Financial Officer, dated August 11, 2003 pursuant
to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification of James R. Tennant, Chief Executive Officer
and Chairman of the Board, dated August 11, 2003 pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002.
32.2 Certification of James E. Winslow, Executive Vice President
and Chief Financial Officer, dated August 11, 2003 pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.
99.1 Press release dated August 6, 2003.
(b) Current reports on Form 8-K.
Registrant filed a Current Report on Form 8-K dated May 2, 2003 to
disclose that the Registrant issued a press release disclosing its
financial results for its first quarter 2003.
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: August 11, 2003