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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the Fifty Two
Weeks Ended December 27, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee required)
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 60632
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
(773) 890-1010
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each Exchange On Which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common, Par Value $0.01 Per Share
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Shares of common stock, par value $0.01 outstanding at March 25, 1998 --
7,943,680. Aggregate market value of such shares held by non-affiliates as of
that date -- $128,091,840.
DOCUMENTS INCORPORATED BY REFERENCE.
Home Products International, Inc. definitive proxy statement dated April
13, 1998 for the 1998 Annual Meeting ("Proxy Statement") -- Part III
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PART I
ITEM 1. BUSINESS
Home Products International, Inc. designs, manufactures and markets a broad
range of quality consumer houseware products. The Company is a leading supplier
to large national retailers of value-priced laundry care products and
accessories, storage and organization products including storage containers,
bath and shower organization products, hooks, hangers, home/closet organization
products and juvenile organization products. The Company holds a significant
market share in the United States in its key product categories of ironing
boards, ironing board covers and pads, plastic storage containers, plastic
hangers and bath and shower organization products. The Company's products are
sold in the United States through most of the large national retailers,
including Wal-Mart, Sam's Club, Target, Kmart, Home Depot, Toys 'R Us, Walgreens
and Bed Bath & Beyond. The Company also sells its products internationally in
over 40 countries. The Company is comprised of four operating subsidiaries,
Tamor, which was acquired February 28, 1997, (effective as of January 1, 1997),
Seymour, which was acquired December 30, 1997, Selfix and Shutters. On a
consolidated pro forma basis, 1997 net sales of $222.3 million makes HPI one of
the largest companies in the fragmented U.S. consumer housewares industry.
References to "HPI" or the "Company" are to Home Products International,
Inc., a Delaware corporation, and its wholly owned subsidiaries, Selfix, Inc., a
Delaware corporation ("SELFIX"), Tamor Corporation, a Massachusetts corporation
("TAMOR"), Shutters, Inc., an Illinois corporation ("SHUTTERS"), and Seymour
Housewares Corporation an Indiana corporation ("SEYMOUR"). On February 18, 1997,
the Company became the holding company for, and successor registrant under the
Securities Exchange Act of 1934 (the "EXCHANGE ACT") to, Selfix and Selfix
became a wholly-owned subsidiary of the Company through a holding company
reorganization under the General Corporation Law of Delaware. Where the context
requires, certain references to the "Company" are to Home Products
International, Inc., in its capacity as a holding company, or to Selfix prior to
the holding company reorganization. The holding company structure is intended to
provide a framework that will accommodate future growth from internal
operations, acquisitions, and joint ventures, while providing for greater
administrative and operational flexibility.
The Company was originally founded as Selfix in 1952 as a privately held
manufacturer and distributor of plastic hooks. After being acquired in 1962 by
Meyer and Norma Ragir, the Company expanded the number of product categories it
offered, as well as the product lines within each category, resulting in
increased net sales and net earnings. In fiscal 1987, Selfix acquired Shutters,
a manufacturer and marketer of home improvement products, primarily durable
plastic exterior shutters. Selfix became a public company following an initial
public offering of its Common Stock in fiscal 1988. Although net sales had
increased to approximately $40.0 million in fiscal 1993, Selfix's operating
profits were marginal primarily due to under performing products, some of which
were acquired in two unsuccessful acquisitions in the early 1990's, and the
death of the Company's chief executive officer in 1992 which caused a void in
management. In addition, a lack of management controls resulted in sales of many
under performing products and a significant increase in operating expenses
primarily attributable to increased overhead expenses.
In April, 1994, Selfix hired James Tennant, then a member of its Board of
Directors with substantial marketing and management experience, to be Chairman
of the Board of Directors and Chief Executive Officer. Mr. Tennant set out to
restructure the Company's operations and improve its profitability. As part of
this restructuring, the Company replaced its entire senior management group,
focused its sales and marketing efforts, increased its distribution
capabilities, upgraded its financial and systems controls, eliminated under
performing product lines which resulted in a significant decrease of SKU's and
reduced overhead expenses. The Company incurred operating losses of
approximately $4.5 million in fiscal 1994 and $4.0 million in fiscal 1995,
resulting primarily from the costs of this restructuring. The restructuring,
completed in fiscal 1995, contributed to operating profits of $1.4 million in
fiscal 1996 and net earnings of $0.8 million.
Once the restructuring was completed, Selfix began to aggressively pursue a
strategy of disciplined growth through acquisition. Effective January 1, 1997,
the Company completed the acquisition of Tamor and its affiliated product
distribution company, Houseware Sales, Inc., and effective December 30, 1997 the
Company completed its acquisition of Seymour.
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TAMOR ACQUISITION
Effective January 1, 1997, the Company acquired Tamor Plastics Corporation,
a privately held company founded in 1947, and its affiliated product
distribution company, Houseware Sales, Inc. (the "TAMOR ACQUISITION"). (Tamor
Plastics Corporation and Houseware Sales, Inc. are collectively referred to
herein as "TAMOR"). Tamor designs, manufactures and markets quality plastic
housewares products. If the Tamor Acquisition had occurred on January 1, 1996,
the Company's 1996 net sales of $38.2 million would have been increased by $75.7
million to $113.9 million and operating profits of $1.4 million would have
increased by $6.8 million to $8.2 million. See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Fiscal Year 1997 as
Compared to Fiscal Year 1996, for further comment on the positive impact of the
Tamor Acquisition on the overall fiscal 1997 operating results.
SEYMOUR ACQUISITION
Effective December 30, 1997, (within the Company's 1998 fiscal year) the
Company acquired Seymour Sales Corporation and its wholly owned subsidiary,
Seymour Housewares Corporation, (collectively, "SEYMOUR"), a privately held
company originally founded in 1942 (the "SEYMOUR ACQUISITION"). Seymour is a
leading designer, manufacturer, and marketer of consumer laundry care products.
Seymour produces a full line of ironing boards, ironing board covers and pads
and numerous laundry related accessories. The Company believes that the Seymour
Acquisition will result in significant increases in 1998 sales. If the Seymour
Acquisition had occurred on January 1, 1997, the Company's 1997 net sales of
$129.3 million would have been increased by $93.0 million to $222.3 million and
operating profit of $12.7 million would have been increased by $2.6 million to
$15.3 million. The pro forma operating profit of $15.3 million includes a charge
of $2.6 million related to management's plans to consolidate and dispose of
certain manufacturing operations.
CONSOLIDATION STRATEGY
The Company plans to take advantage of consolidation opportunities in the
housewares industry, a large market comprised of a highly fragmented supplier
base. To provide complete product lines to national retailers, suppliers of
housewares products have begun to consolidate. The Company believes that there
are a number of excellent acquisition candidates because the suppliers of
consumer houseware products are highly fragmented with no single supplier
accounting for more than 5% of the total sales. The Company believes it is
well-positioned to pursue its strategy of growth through acquisition given its
access to the capital markets and its increased visibility from the recent
acquisitions of Tamor and Seymour.
To improve margins and operating efficiencies, the Company believes large
national retailers are continuing to reduce the number of suppliers of
housewares products. These retailers are forming key partnerships with suppliers
that can provide complete product lines within product categories, profitable
fast-turning products, timely delivery and merchandising support. With its
numerous product lines and strong relationships with these retailers, the
Company believes it is well positioned to continue to meet their needs.
The Company intends to aggressively pursue a strategy of disciplined growth
through acquisitions. By consolidating product lines and channels of
distribution through acquisitions, the Company believes it can successfully gain
market share and increase sales in its key product categories of ironing boards,
ironing board pads and covers, plastic storage containers, plastic hangers and
bath and shower organization products.
GENERAL
HPI currently operates in two industry segments:
1) The design, manufacture, marketing, and distribution of high
quality HOUSEWARES products is accomplished through its wholly owned
subsidiaries, Selfix, Tamor and Seymour. These products, generally branded
as "Selfix", "Tamor" or "Seymour" products, are sold principally through
mass market trade channels: discount, variety, supermarket, drug,
hardware/home center, and specialty stores. Selfix and Tamor products
generally retail from $1 to $20, with a substantial majority retailing for
under $10. Seymour products generally retail from $2 to $40. The Company
believes it is a leading manufacturer of
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high-quality, value-priced, and high-volume, bath and shower organizer
products, storage containers, home organization products, and consumer
laundry care products.
2) The design, manufacture, and marketing of quality HOME IMPROVEMENT
PRODUCTS is accomplished through its wholly owned subsidiary, Shutters.
These products, generally branded as "Shutters, Inc." products, are sold
principally through wholesalers that service the residential construction,
repair and remodeling industry. The Company believes that Shutters is a
leading manufacturer of durable, plastic exterior shutters.
PRODUCTS
Gross Sales by Product Category -- Historical.
The following table sets forth the amounts and percentages of the Company's
historical gross sales by product categories, for the periods indicated. These
sales do not reflect the historical sales of Tamor (pre 1997 sales), nor does it
include sales figures for Seymour.
GROSS SALES
1997 1996 1995
--------------- -------------- --------------
SALES % SALES % SALES %
----- - ----- - ----- -
(IN THOUSANDS, EXCEPT PERCENTAGES)
Home/Closet Organization........................ $ 54,172 40% $ 8,527 21% $12,789 29%
Storage Containers.............................. 47,275 34 -- -- -- --
Bath and Shower Organization.................... 16,646 12 15,479 38 15,071 35
Juvenile Products............................... 11,652 8 7,369 18 6,683 15
-------- --- ------- --- ------- ---
Housewares Products........................... $129,745 94% $31,375 77% $34,543 79%
Home Improvement Products..................... 8,385 6 9,457 23 8,993 21
-------- --- ------- --- ------- ---
Total Gross Sales............................... $138,130 100% $40,832 100% $43,536 100%
=== === ===
Allowances...................................... (8,806) (2,632) (2,497)
-------- ------- -------
Total Net Sales................................. $129,324 $38,200 $41,039
======== ======= =======
The following table sets forth consolidated pro forma gross sales by
product category as if the acquisition of Seymour and Tamor had occurred on
January 1, 1995. This table is provided in order to show sales trends by product
category.
PRO FORMA GROSS SALES
1997 1996 1995
--------------- --------------- ---------------
SALES % SALES % SALES %
----- - ----- - ----- -
(IN THOUSANDS, EXCEPT PERCENTAGES)
Ironing Boards, Covers, and Pads.............. $ 75,370 32% $ 73,025 32% $ 76,695 36%
Home/Closet Organization...................... 55,874 23 48,859 22 49,332 23
Storage Containers............................ 47,275 20 39,050 17 24,243 11
Laundry Accessories........................... 17,562 7 21,603 10 20,200 10
Bath and Shower Organization.................. 16,646 7 15,479 7 15,071 7
Juvenile Products............................. 16,614 7 18,222 8 18,841 9
-------- --- -------- --- -------- ---
Housewares Products......................... $229,341 96% $216,238 96% $204,382 96%
Home Improvement Products................... 8,385 4 9,457 4 8,993 4
-------- --- -------- --- -------- ---
Total Gross Sales............................. $237,726 100% $225,695 100% $213,375 100%
=== === ===
Allowances.................................... (15,439) (16,981) (14,723)
-------- -------- --------
Total Net Sales............................... $222,287 $208,714 $198,652
======== ======== ========
Ironing Boards, Covers and Pads. The Company offers a significant variety
of ironing boards under the Seymour brand name (approximately 185 individual
SKU's) and command over 75% of the U.S. market. Key
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products in this category include the EasyBoard (perforated board), SureFoot
(vented, four-leg board), ReadyPress (over-the-door) and WorkWizard (vented,
four-leg with hanger rack). The Company is the leading manufacturer of ironing
board covers and pads, under the Seymour brand name, and hold approximately 65%
of the U.S. market. The Company offers eight different types of covers and pads
in over 85 different designs that fit not only its own ironing boards, but all
regular size boards. The Company's covers are known for their scorch resistance
and it is the only company that sells ironing board covers with 3M Scotchguard
protection.
Home/Closet Organization Products. The Company offers a variety of products
for general home organization, under both the "Selfix" and "Tamor" brand names.
This category is comprised primarily of plastic clothes hangers, which
represented 33% of this category's gross dollar sales in 1997. Due to the
commodity nature of the hanger segment, margins in this category are inherently
lower, while unit volumes are substantially higher. Management believes that
Tamor has a leading U.S. market share in plastic clothes hangers, and that its
broad product offering gives it a competitive advantage over other hanger
manufacturers. In addition to plastic hangers, the Company markets a complete
line of over 150 hooks, primarily made of plastic, under the brand name Selfix.
The original product marketed by Selfix was a plastic hook, unique in that it
employed a proprietary no-tools mounting system. Selfix has expanded its
offering of these patented, self-adhesive hooks, and the Company believes it
offers a complete line in the opening price point segment. Augmenting the
plastic hooks are a line of metal picture hooks, sold to the same customer base.
Also included in this category are other plastic organizers, closet and
clothing care products, recycling containers, plastic kitchen organizers
(including vinyl coated wire kitchen organizers) and miscellaneous housewares
products.
Storage Containers. The Company offers a variety of plastic home storage
containers under the Tamor brand name. These range in size from shoe boxes to
jumbo (48 gallon) totes, and include specialty containers sold during the winter
holiday season. These products range in retail price from $2 to $20 and contain
a variety of product attributes, including removable wheels and domed-top lids,
which increase storage capacity. Management believes these features are key to
obtaining shelf space and competing in the market. This is the fastest growing
segment for Tamor, and management believes it has a meaningful share of the $800
million U.S. market.
Laundry Accessories. The Company is the leading U.S. producer of laundry
accessories with approximately 25% of the total U.S. market. Key products within
this category include: drying racks, laundry bags, hampers and sorters,
clotheslines, and clothes pins.
Bath and Shower Organization. The Company markets a broad line of
value-priced plastic bath accessories and organizers, primarily under the brand
name Selfix. These include shower organizers, towel bars, soap dishes, shelves,
portable shower sprays, and fog-free shower mirrors. In January of 1997, Selfix
launched a major line extension in the Bath and Shower Organization category,
Suction-Lock(R) Organizers. The Company believes it is a leading producer of
opening price-point plastic bath accessories.
Juvenile Products. The Company markets a line of quality children's
organization products, under the brand names Tidy Kids(R), Kidtivity(R) and Lil'
Helpers(TM). Selfix, Tamor, and Seymour each market juvenile products. These
products include closet extenders, hook racks, storage cubes, clothes hangers,
under-the-bed storage trolleys, and safety gates. These products are sold in the
juvenile or housewares departments of its core customers, and also through
specialty juvenile retailers like Toys R Us and Babies R Us. The Company
believes it created a market niche of children's organization products in the
development and successful sales of its Tidy Kids(R) and Lil Helpers(TM)
products, and that it offers the premier children's organization program in the
industry.
Home Improvement Products. Through Shutters, the Company markets a unique
line of plastic exterior shutters to the construction trades and consumer home
improvement catalogs. Because of a patented design, the shutters are assembled
from components, rather than formed in a single piece. This allows the shutters
to be configured in the largest variety of sizes and colors in the industry.
Shutters markets the shutters in component form to remodeling distributors, and
in finished form to home center retailers. In both cases, the
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key competitive advantage is customization of size and color, and quick
turnaround service. In 1997 Shutters entered a new market segment with
"fixed-size" shutters, utilizing existing trade channels.
MARKETING AND DISTRIBUTION
The Company's housewares products are sold through national and regional
discount, variety, supermarket, drug, hardware/home center, and specialty
stores. Selfix, Tamor and Seymour all sell directly to major retail customers
through its sales management personnel and through manufacturer's
representatives. Selfix, Tamor, and Seymour sell to approximately 3,000 other
customers, through a network of approximately 50 independent manufacturers
representatives. Including Seymour on a pro forma basis, Wal-Mart (including
Sam's Club) accounted for 23% of the Company's gross sales in 1997, K-mart
Corporation accounted for 12% of 1997 gross sales, and Target accounted for 6%
of 1997 gross sales. The loss of one these customers could have a material
effect on the Company. No other customer accounted for more than 5% of sales.
The Company's primary marketing strategy is to design innovative products
with consumer features and benefits, and focus on marketing the product to its
retail selling partners. Management believes that one of its competitive
advantages is prompt and reliable product delivery of value-priced high-volume
products, allowing customers to maintain minimal inventories. The Company
believes that the customer specific merchandising programs it offers enable
retailers to achieve a higher return on its products than the products of many
of its competitors. To that end, Selfix, Tamor and Seymour offer customers a
variety of retail support services, including customized merchandise
planogramming, small shipping packs, point-of-purchase displays,
Electronic-Data-Interchange (EDI) order transmission, and just-in-time (JIT)
product delivery.
Shutters sells its home improvement products through 20 independent
manufacturers' representatives to approximately 800 customers, the majority of
which are distributors who supply home repair and remodeling contractors.
Shutters also sells directly to national and regional home improvement catalog
distributors.
PRODUCT AND RESEARCH DEVELOPMENT
The Company's Product Research and Development department uses
computer-aided design (CAD) systems to enhance its product development efforts.
New products have been a critical driver in the Company's sales growth. Although
the Company's historical accounting records do not separately present research
and development expenses, the Company estimates that for 1997, 1996 and 1995,
expenses associated with research and development were $360,000, $330,000 and
$501,000, respectively.
FOREIGN AND EXPORT SALES/SEGMENT INFORMATION
Including Seymour on a pro forma basis, the Company's 1997 sales outside
the United States accounted for 7% of its total net sales. Sales to Canada
accounted for 3% of the Company's net sales in 1997.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations and Note 15 to Consolidated Financial Statements for information
regarding the gross sales, operating profit (loss) and identifiable assets
attributable to each operating and geographic reporting segments.
SEASONALITY
Sales of the Company's houseware products are generally higher in the
second and third quarter of the calendar year. This seasonality is primarily
attributable to the spring/summer wedding season, increased home buying/building
during the spring/summer months, and the back to school season. Laundry care
products, and storage container products, gifts typically given at bridal
showers, (held during the spring/summer wedding season) generate increased
demand for these and the Company's other houseware products. The surge in home
buying/building during the spring/summer months and the need for new houseware
products further explain seasonality of the Company's houseware products.
Finally, the back-to-school season, including college students moving out of the
house for the first time also contribute to an increase in demand for the
Company's houseware products during the spring/summer months.
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Sales of the Company's home improvement products are generally higher in
the second and third quarter as well. This seasonality is attributable to the
favorable weather conditions typically experienced in the spring and summer
months.
COMPETITION
The Company competes with a number of well established domestic and foreign
manufacturers, some with greater resources than the Company. Many of the
Company's products also compete with substitute products made of alternate
materials. The Company believes it is recognized as a strong competitor in the
marketplace based on its innovative yet value-priced products and reliable,
timely volume delivery.
The Company exports products manufactured in the United States and
purchases finished goods products from Asia and Latin America. Consequently, the
Company's competitive position may be affected by fluctuations in the exchange
rates of certain foreign currencies relative to the U.S. dollar.
PATENTS, TRADEMARKS AND LICENSES
Subsidiaries of the Company own a number of trademarks and approximately
150 United States mechanical and design patents relating to various products and
manufacturing processes. The Company believes that in the aggregate its patents
enhance its business, in part by discouraging competitors from adopting patented
features of its products. The Company believes, however, that there are no
patents, trademarks or licenses material to the business.
Through the acquisition of Mericon Child Safety Products in 1995, Selfix
obtained a licensing agreement with Fisher-Price, Inc. of East Aurora, N.Y. The
agreement required the Company to pay a percentage-based royalty to Fisher-Price
for sales by Selfix of Fisher-Price branded products, which are designed,
manufactured and marketed by Selfix. As of December 27, 1997, the Company
terminated its agreement with Fisher-Price. The termination of the agreement is
not expected to have a significant impact on sales. Sales of Fisher-Price
branded products in 1997 approximated $.6 million.
RAW MATERIALS AND PRODUCTION
The Company manufactures the majority of its products at its various
manufacturing facilities. As a result of the Seymour Acquisition, the Company
has been able to significantly diversify its primary raw material needs. With
the acquisition of Seymour, whose primary raw materials are cold rolled steel
and greige fabric, plastic resin based products accounted for approximately 55%
of the Company's 1997 pro forma net sales, as compared to 95% prior to the
acquisition.
The primary raw material used in the Company's plastic injection molding
operations is plastic resin, primarily polypropylene. Plastic is a spot
commodity with pricing parameters tied to supply and demand characteristics
beyond the Company's control. In total, the Company expects to use 80 million
pounds of plastic resin in 1998.
Because of the large amount of plastic resin used and the relative
inability to pass cost increases along to its retail customers, the Company is
highly susceptible to changes in plastic resin pricing. For fiscal 1997 the cost
of resin on a pro forma basis accounted for approximately 18% of the Company's
total cost of goods sold and 13% of the Company's net sales. Plastic resin
prices can vary widely from year to year and are very difficult to predict
beyond a few months. Tamor's plastic resin cost history is illustrative of the
swings that can occur in resin pricing. Tamor, which uses about 90% of the
Company's resin requirements, experienced average price increases from 1993 to
1994 of 26%, from 1994 to 1995 of another 25% but then experienced price
decreases from 1995 to 1996 of 16%, and from 1996 to 1997 of 10%.
Due to the nature of certain resin based products the Company is able to
use off-prime grades of resin. As a result, it does not purchase its plastic
resin directly from manufacturers but rather is able to buy through brokers in a
secondary market. This enables the Company to buy at a discount. Buying
off-prime material at a discount gives the Company a cost advantage over some of
its competitors but does not alleviate the pricing risks inherent with buying a
commodity raw material. Plastic resin is utilized by a number of different
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industries, many of which are quite different from the Company's primary
housewares business. For example, the automobile and housing industries are very
large users of plastic resin. As such, demand changes in the automobile industry
or the number of new housing starts can have an impact on plastic resin pricing.
There is no futures market for plastic resin. As such, the Company cannot
lock in its costs without purchasing significant quantities beyond its immediate
manufacturing needs. Management has determined that it will purchase resin in
quantities that best fit its manufacturing needs and ability to store such
purchases.
The primary raw materials used in the Company's consumer laundry care
operations are cold rolled steel and greige fabric. Steel procurement, including
secondary and primary steel, and steel wire, is typically at spot prices which
have moderated during 1997, and are anticipated to remain flat throughout 1998.
The Company purchases approximately 25,000 tons of cold rolled steel annually.
Greige fabric, purchased from brokers, is a cotton based product, with pricing
tied to the world cotton markets. The Company anticipates a slight increase in
the cost of greige fabric in the second half of 1998. Purchases of greige fabric
approximate 7 million yards annually.
The Company's production processes utilize automated machinery and systems
where appropriate. Certain laundry care facilities employ the use of an
automated manufacturing production line to produce perforated top ironing
boards. Additionally, automated cutting and layout machines are used to maximize
the usage of greige fabric. The Company also performs all printing and coating
of the ironing board covers and pads in-house. Many of the injection molding and
extrusion operations are also automated and are supported by incentive based,
manually performed secondary operations.
INVENTORY CONTROL
The Company produces to and sells from inventory, based on forecasted unit
sales, and generally ships within a short period of time after receipt of an
order. Consequently, the Company does not believe that information with respect
to backlog is meaningful.
ENVIRONMENT
Compliance with Federal, state or local provisions relating to protection
of the environment is not expected to have a material effect on the Company's
capital expenditures, earnings or competitive position.
EMPLOYEES
As of December 30, 1997, the Company employed 1,240 persons in the United
States. Approximately 90 are hourly employees at its Leominster, Massachusetts
facility, covered by a collective bargaining agreement which expires in March,
1999; 150 are hourly employees at its Chicago, Illinois facilities, covered by a
collective bargaining agreement which expires in January, 2001; and 200 are
hourly employees at its Reynosa, Mexico facility covered by a collective
bargaining agreement which expires in December, 1999.
The Company utilizes the services of approximately 350 temporary workers in
its injection molding operations, for assembly and in certain warehouses.
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ITEM 2. PROPERTIES
The Company, including Seymour, maintained facilities with an aggregate of
1,924,000 square foot of space. The Company considers all of its facilities to
be in good operating condition. Currently, all of the Company's manufacturing
facilities are operating at or near full capacity. The following table
summarizes the principal physical properties, both owned and leased, used by the
Company in its operations:
SIZE
FACILITY USE (SQUARE FEET) OWNED/LEASED
-------- --- ------------- ------------
SELFIX
Chicago, IL...................... Manufacturing/Distribution 186,000 Leased
Chicago, IL...................... Storage/Distribution 83,500 Leased
TAMOR
Fitchburg, MA.................... Distribution 220,000 Leased
Leominster, MA................... Manufacturing 100,000 Owned
Leominster, MA................... Sales Office 5,000 Leased
Leominster, MA................... Storage 120,000 Leased
Louisiana, MO.................... Manufacturing/Distribution 340,000 Owned
Thomasville, GA.................. Manufacturing/Distribution 45,000 Owned
SHUTTERS
Hebron, IL....................... Manufacturing/Distribution 62,500 Owned
SEYMOUR
Mooresville, NC.................. Manufacturing/Distribution 270,000 Owned
McAllen, TX...................... Administration/Distribution 5,000 Leased
Reynosa, Mexico.................. Manufacturing 30,000 Owned
Seymour, IN
Corporate...................... Corporate administration 10,000 Owned
East Plant..................... Manufacturing 70,000 Owned
South Plant.................... Manufacturing/Distribution 105,000 Owned
Skaggs Facility................ Storage 40,000 Leased
West Plant..................... Manufacturing/Distribution/Storage 132,000 Owned
Logistics Center............... Storage/Distribution 100,000 Leased
Selfix closed its 34,000 square foot Canadian assembly and packaging
facility in March, 1996. The Scarborough, Ontario facility was subject to a
lease expiring in 1999, however the Company terminated the lease as of March 31,
1997. The cost to terminate the lease was not material to the Company's 1997
financial results.
ITEM 3. LEGAL PROCEEDINGS
A subsidiary of the Company was notified in early 1997, that it has been
named co-defendants, along with an unrelated third party, in a product
liability/personal injury suit. The suit seeks $7.0 million in total damages,
one-half from each defendant. The Company, and its subsidiary have adequate
levels of insurance coverage, and its defense is being handled by its insurance
carrier's attorneys. Although management of the Company cannot predict the
ultimate outcome of this matter with certainty, it believes that the ultimate
resolution to this matter will not have a material effect on the Company's
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages and
principal positions as of March 25, 1998, are as follows:
NAME AGE POSITION
---- --- --------
James R. Tennant.......................... 45 Chairman of the Board and Chief Executive Officer
Stephen R. Brian.......................... 49 President and Chief Operating Officer
James E. Winslow.......................... 43 Executive Vice President, Chief Financial Officer
and Secretary
James R. Tennant joined the Company as Chairman of the Board and Chief
Executive Officer in April, 1994. Mr. Tennant was elected a Director of the
Company in December, 1992 and was a member of the Company's Compensation
Committee until April, 1994. From 1982 to 1994, Mr. Tennant was President of
Foote, Cone & Belding/Direct, an international advertising agency. Previously,
he was employed by Young and Rubicam, an advertising agency, his final position
being Executive Vice President.
Stephen R. Brian joined the Company as President and Chief Operating
Officer in January 1998. From June, 1996 to January, 1998, Mr. Brian was
President and Chief Executive Officer of Seymour Housewares Corporation. From
April, 1994 to June, 1996, Mr. Brian was Executive Vice President Manufacturing
and Technology for Sunbeam. Prior to April, 1994, Mr. Brian was employed by
Hamilton Beach/Proctor Silex with his final position being Executive Vice
President of Operations.
James E. Winslow was named Executive Vice President in October, 1996. Mr.
Winslow joined the Company as Chief Financial Officer and Senior Vice President
in November, 1994. In 1994, Mr. Winslow was Executive Vice President and Chief
Financial Officer of Stella Foods, Inc. From 1983 to 1994, Mr. Winslow was
employed by Wilson Sporting Goods Co. in various capacities, his final position
being Vice President and Chief Financial Officer.
Officers serve at the discretion of the Board of Directors, except as
provided in the employment agreements of Mr. Tennant and Mr. Brian.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The NASDAQ National Markets(SM)
under the symbol "HPII". The Company believes that as of March 25, 1998 there
were 250 holders of record and in excess of 1,000 beneficial holders of the
Company's common stock.
The Company has never paid a cash dividend on its common stock and
currently anticipates that all of its earnings will be retained for use in the
operation and expansion of its business.
The following table sets forth for the periods indicated the high and low
bid quotations for the Common Stock as reported on The NASDAQ National
Market(SM). The prices reported reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not reflect actual transactions.
HIGH LOW
---- ---
Fifty-two weeks ended December 27, 1997:
First Quarter............................................. $12.75 $ 8.00
Second Quarter............................................ $11.19 $ 9.38
Third Quarter............................................. $15.88 $ 9.75
Fourth Quarter............................................ $14.75 $10.25
Fifty-two weeks ended December 28, 1996:
First Quarter............................................. $ 5.63 $ 4.13
Second Quarter............................................ $ 5.13 $ 4.13
Third Quarter............................................. $ 5.00 $ 4.50
Fourth Quarter............................................ $ 8.63 $ 4.25
Fifty-two weeks ended December 30, 1995:
First Quarter............................................. $ 5.25 $ 4.00
Second Quarter............................................ $ 5.25 $ 4.25
Third Quarter............................................. $ 5.75 $ 4.25
Fourth Quarter............................................ $ 5.88 $ 4.75
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................... $129,324 $38,200 $41,039 $40,985 $39,711
Cost of goods sold.......................... 88,888 22,992 25,678 25,587 22,504
-------- ------- ------- ------- -------
Gross profit............................. 40,436 15,208 15,361 15,398 17,207
Operating expenses.......................... 27,688 13,843 17,385 18,185 14,214
Restructuring charge........................ -- -- 2,051 1,701 --
-------- ------- ------- ------- -------
Operating profit (loss).................. 12,748 1,365 (4,075) (4,488) 2,993
Interest expense............................ 5,152 707 896 999 1,066
Other income (expense), net................. 70 148 688 (295) 126
-------- ------- ------- ------- -------
Earnings (loss) before income taxes......... 7,666 806 (4,283) (5,782) 2,053
Income tax expense (benefit)............. 346 -- (273) 221 574
-------- ------- ------- ------- -------
Earnings (loss) before the cumulative effect
of a change in accounting for income
taxes.................................... 7,320 806 (4,010) (6,003) 1,479
-------- ------- ------- ------- -------
Cumulative effect of a change in accounting
for income taxes......................... -- -- -- -- 36
-------- ------- ------- ------- -------
Net earnings (loss)...................... $ 7,320 $ 806 $(4,010) $(6,003) $ 1,515
======== ======= ======= ======= =======
Net earnings per common share -- Basic...... $ 1.35 $ 0.21 $ (1.11) $ (1.70) $ 0.43
======== ======= ======= ======= =======
Net earnings per common share -- Diluted.... $ 1.29 $ 0.21 $ (1.11) $ (1.70) $ 0.43
======== ======= ======= ======= =======
AS OF FISCAL YEAR END
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET AND CASH FLOW DATA:
Working capital............................. $ 8,263 $ 7,152 $ 6,712 $11,026 $12,752
Property, plant and equipment, net.......... 28,380 7,934 8,453 10,466 11,524
Intangible assets........................... 29,391 2,527 2,693 1,536 2,941
Total assets................................ 99,343 24,705 24,976 30,761 35,354
Long-term obligations (less current
maturities).............................. 30,700 6,184 7,022 9,421 9,120
Stockholders' equity........................ 42,216 11,709 10,847 13,623 19,326
Cash provided by operating activities....... 878 1,823 2,575 2,027 4,193
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reports on a 52-53 week year ending on the last Saturday of
December. References to the fiscal years 1997, 1996 and 1995 are for the
fifty-two weeks ended December 27, 1997, December 28, 1996, and December 30,
1995.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
The following discussion and analysis compares the actual results of 1997
to the pro forma results for 1996. Management believes that such a comparison
(pro forma 1996 results for Tamor) is necessary to meaningfully analyze the
changes occurring in such years. The pro forma financial results give effect to
the Tamor Acquisition, and related financing, as if each of the transactions had
occurred on January 1, 1996. The pro forma operating expenses reflect (i)
additional amortization expense resulting from the recording of goodwill
associated with the Tamor Acquisition, (ii) net estimated cost savings as a
result of the Tamor Acquisition, including a net reduction in discretionary
distributions paid to and on behalf of related parties of Tamor and (iii)
additional costs associated with the Company's 401(k) and profit sharing plans
and certain other fees. The pro forma interest expense reflects the estimated
net increase in interest expense as if the Tamor Acquisition and related
financing had occurred on January 1, 1996. The pro forma number of weighted
average shares assumes the shares issued as a result of the Tamor Acquisition
(480,000 shares) and a warrant issued in connection with the acquisition
financing were outstanding as of January 1, 1996.
As such, in the discussion that follows, all comparisons are made on a pro
forma basis with reference to the following (in thousands, except per share
amounts):
PRO FORMA
FIFTY-TWO WEEKS FIFTY-TWO WEEKS
ENDED ENDED
DECEMBER 27, 1997 DECEMBER 28, 1996
----------------- -----------------
Net sales.............................................. $129,324 100.0% $113,904 100.0%
Cost of goods sold..................................... 88,888 68.7% 80,810 70.9%
-------- ----- -------- -----
Gross profit......................................... 40,436 31.3% 33,104 29.1%
Operating expenses..................................... 27,688 21.5% 24,864 21.8%
-------- ----- -------- -----
Operating profit..................................... 12,748 9.8% 8,240 7.3%
Interest expense....................................... 5,152 4.0% 6,328 5.6%
Other income (expense)................................. 70 .1% 847 .7%
-------- ----- -------- -----
Earnings before income taxes........................... 7,666 5.9% 2,759 2.4%
Income tax expense..................................... 346 .2% 160 .1%
-------- ----- -------- -----
Net earnings........................................... $ 7,320 5.7% $ 2,599 2.3%
======== ===== ======== =====
Net earnings per common share -- Basic................. $ 1.35 $ 0.60
======== ========
Net earnings per common share -- Diluted............... $ 1.29 $ 0.59
======== ========
Net Sales. Net sales of $129.3 million were up $15.4 million from the prior
year. The sales increase was primarily driven by new product introductions
within Tamor's storage container line. The introduction of the flat lid 20, 30,
and 48 gallon storage totes contributed $12.0 million of new product sales.
Growth in the storage category was driven by continuing consumer trends toward
larger, more durable products for storage of seasonal and other items. Sales of
plastic hangers increased $3.4 million from 1996 as a result of aggressive
pricing action taken in response to competitive pressures. 1997 also saw an
increase in the bath and shower category with the introduction of Selfix's
Suction Lock bath line. This increase offsets declines in less profitable
juvenile and home organization products. Home improvement products experienced a
decrease of $.9 million due to postponed remodeling projects by end users.
Gross Profit. Gross profit margins in 1997 were 31.3% of net sales, up
significantly from 1996 margins of 29.1%. The margin improvement was a direct
result of a decline in the cost of plastic resin. The average cost of plastic
resin dropped from $0.37 per pound in 1996 to $0.33 in 1997. The Company used 74
million pounds of
13
14
plastic resin in 1996 and as such realized savings of approximately $2.6 million
as compared to 1996. This savings represents 2% of 1997 net sales. Declines in
resin costs were a reflection of plastic resin market factors and not as a
result of any change in the Company's buying practices. In addition to the
decrease in plastic resin, margins also benefited from improved usage of
existing capacity. Tamor was able to shift some of its excess molding capacity
($2.1 million) to Selfix and Shutters, allowing all three entities to run nearly
at full capacity. Fixed costs were absorbed over an expanded manufacturing
volume thus reducing unit costs as a percent of net sales.
Operating Expenses. Operating expenses, including selling, administrative,
and amortization of intangibles decreased slightly as a percentage of net sales
from 1996 to 1997. Selling expenses decreased from 14.9% of net sales in 1996 to
14.3% in 1997. The slight decrease as a percentage of net sales is attributable
to the Company's continuous efforts to effectively manage costs. Administrative
expenses increased from 6.2% of net sales in 1996 to 6.5% in 1997. The minor
increase is due to the 1997 implementation of two separate incentive bonus plans
, as well as an increase in the reserve for bad debts. Amortization of
intangibles increased slightly but as a percentage of net sales remained
constant at .7% of net sales.
Interest Expense. Interest expense of $5.2 million in 1997 decreased $1.2
million from 1996 due to a secondary public stock offering of 2.3 million shares
in the third quarter. Proceeds from the offering, $20.9 million, were used to
repay a subordinated note of $7.0 million, term notes of $13.6 million, and
accrued interest of $.3 million.
Income taxes. The Company was able to use federal net operating loss
carryforwards, and the elimination of its valuation allowance to reduce the 1997
federal tax liability to zero. The valuation allowance was eliminated as a
result of the Company's determination that it was more likely than not that the
benefit of the deferred tax assets recorded would be realized. The Company
recorded a provision for state income taxes in the amount of $346, as a result
of the inability to use tax loss carryforwards in Massachusetts, Tamor's primary
state of business. The pro forma 1996 results also reflect zero federal tax
expense, and the state provision recorded reflects the actual state taxes paid
by Tamor.
Net earnings. Net earnings in 1997 were $7.3 million, or $1.29 per common
share -- diluted, based on 5.7 million weighted average common shares
outstanding. This compares to net earnings of $2.6 million in 1996, or $.59 per
common share -- diluted, based on 4.4 million weighted average common shares
outstanding. The $4.7 million increase in profitability is due to a 13.5%
increase in net sales combined with a 2.2% increase in gross margin. The
increase in weighted average common shares outstanding is the result of the
secondary public stock offering in July, 1997, the exercise of stock options
throughout 1997, and stock issued in connection with the Company's Employee
Stock Purchase Plan.
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15
FISCAL 1996 COMPARED TO FISCAL 1995
The following discussion and analysis compares the actual historical
results of 1996 and 1995 without consideration for the Tamor Acquisition, (in
thousands, except per share amounts):
FIFTY-TWO FIFTY-TWO
WEEKS ENDED WEEKS ENDED
DECEMBER 28, 1996 DECEMBER 30, 1995
------------------ ------------------
Net sales......................................... $38,200 100.0% $41,039 100.0%
Cost of goods sold................................ 22,992 60.2% 25,678 62.6%
------- ------ ------- ------
Gross profit................................. 15,208 39.8% 15,361 37.4%
Operating expenses................................ 13,843 36.2% 17,385 42.3%
Restructuring charge.............................. -- -- 2,051 5.0%
------- ------ ------- ------
Operating profit............................. 1,365 3.6% (4,075) (9.9)%
Interest expense.................................. 707 1.9% 896 2.2%
Other income (expense)............................ 148 .4% 688 1.7%
------- ------ ------- ------
Earnings before income taxes...................... 806 2.1% (4,283) (10.4)%
Income tax expense................................ -- -- 273 .6%
------- ------ ------- ------
Net earnings...................................... $ 806 2.1% $(4,010) (9.8)%
======= ====== ======= ======
Net earnings per common share -- Basic............ $0.21 $(1.11)
======= =======
Net earnings per common share -- Diluted.......... $0.21 $(1.11)
======= =======
General. Fiscal 1996 results began to reflect the positive benefits of the
restructuring actions taken during fiscal years 1994 and 1995. The Company's net
earnings in fiscal 1996 of $0.8 million reflect reduced operating expenses,
improved manufacturing efficiencies and increased gross profit margins.
Overhead reductions and operating initiatives which were implemented in
1994 and 1995 directly benefited 1996 results as follows: (i) a 24% reduction in
the workforce; (ii) the elimination of unprofitable product lines; (iii) the
closing of three facilities; (iv) a reduction in outside warehousing costs; (v)
a 29% reduction of gross inventory; and (vi) the reduction of operating expenses
below amounts spent in fiscal 1993.
Net sales. Net sales of $38.2 million in 1996 decreased $2.8 million, or
7%, from net sales in 1995 of $41.0 million. The reduction in sales was a direct
result of decisions made in 1995 to discontinue the sale of certain under
performing housewares products. Discontinued products, accounting for $3.3
million of 1995 net sales, were across all of the housewares product lines but
were greatest in the hooks and home helpers and home organization product lines.
Home bathwares sales increased 3% from 1995 as a result of an expanded line of
shower organizers. Juvenile products sales increased 10% as the Company had a
full year in which to sell the child safety product line acquired in October,
1995. Home improvement products increased 5% as a result of increased placement
with remodeling distributors.
Gross profit. Gross profit margins in 1996 were 39.8% of net sales, an
increase from margins in 1995 of 37.4% of net sales. Increased gross profit
margins were attributable to a slight decrease in the cost of plastic resin but
more significantly to the impact of decisions made in 1995 and the selling of
fewer lower margin products. Plastic resin costs declined about 9% during 1996
to an average cost of $0.48 per pound from an average cost of $0.53 per pound
for plastic resin during 1995. Selfix used approximately seven million pounds of
plastic resin resulting in a cost savings of $0.3 million as compared to 1995
cost levels. The declines in resin costs were a reflection of plastic resin
market factors and not as a result of any change in the Company's buying
practices.
Operating expenses. Selling expenses decreased from 25.5% of net sales in
1995 to 23.7% of net sales in 1996. Warehousing and customer service costs were
reduced by the first quarter closing of the Company's Canadian facility. All
Canadian business is now serviced from the Company's manufacturing and
distribution facilities in Chicago. The closing resulted in personnel reductions
and reduced warehousing costs. In addition,
15
16
management decided that the Company was better served by outsourcing certain
product design services. This resulted in further personnel related savings.
Administrative expenses also decreased as a percent of net sales.
Administrative expenses were 12% of net sales in 1996 as compared to 15.7% in
1995. Management efforts to evaluate and reduce spending successfully reduced
personnel costs, professional fees and nearly all other administrative items.
Costs related to the search and evaluation of acquisition targets were
significantly decreased in 1996. Management devoted the majority of its
attention to cost reduction efforts, manufacturing efficiencies, and managing
the impact of selling a reduced number of product lines. Fourth quarter costs in
1996 of approximately $0.2 million related to the Tamor Acquisition were
capitalized. In addition, 1995 included an increase in the allowance for
doubtful accounts of $0.4 million to address the uncertain financial condition
of several retailers. Further, management decided in 1995 to outsource its
management information department and incurred $0.4 million of charges for
related severance payments and equipment write-offs.
Amortization of intangibles decreased from 1.1% of net sales in 1995 to
0.5% in 1996. The decrease in amortization is the result of 1995 write-offs of
previously capitalized patents and trademarks related to discontinued product
lines.
Restructuring charge. Restructuring charges totaling $2.1 million were
recorded in 1995 related to discontinuing certain unprofitable product lines,
closing the Company's Canadian facility and moving the Canadian operations to
Chicago. Such charges included severance benefits, the write-off of Canadian
fixed assets, early lease termination charges on the Canadian building lease and
the write-off of inventory and intangibles related to discontinued product
lines. The charges for the closing and relocation of the Canadian operation
totaled $1.0 million including severance benefits of $0.2 million covering all
of the Canadian employees. The relocation of the Canadian operation was
completed in the first half of 1996. The remaining $1.1 million of restructuring
charges related to product lines the Company decided to discontinue and the
write-off of related product molds, inventory and patents. The after tax and
earnings per share impact of the write-off of depreciable assets in connection
with the 1995 restructuring charge was $1.0 million and $0.27, respectively.
Interest expense. In December, 1995, the Company used excess cash to pay
down a $1.5 million note payable to a bank. In addition, $0.8 million of
installment payments on variable rate demand bonds were made. As a result of
these payments, Selfix's 1996 interest expense was reduced $0.2 million as
compared to 1995. Changes in interest rates had no significant impact on
interest expense between years.
Other income (expense). 1996 other income of $0.1 million was significantly
less than the $0.7 million of other income in 1995. Other income in 1995 was
positively impacted by the favorable settlement of a non-compete and consulting
agreement. The favorable settlement allowed $0.3 million of related accruals to
be reversed into 1995 earnings. In addition, 1995 other income included gains on
sales of fixed assets and a franchise tax refund.
Income taxes. The Company was able to use tax losses from prior years to
reduce current year tax provisions to zero. In 1995 and 1994, however, the
Company was unable to record a significant tax benefit on pre-tax losses because
of the unavailability of tax loss carrybacks. An income tax benefit of $0.3
million was recorded in 1995 through the utilization of alternative minimum tax
carrybacks. The Company has about $6.5 million of book tax losses to shelter
future reported pre-tax earnings.
Net earnings (loss). Net earnings in 1996 were $0.8 million or $0.21 per
common share -- diluted, based on 3.9 million weighted average common shares
outstanding. This compares to a net loss of $4.0 million in 1995 or $1.11 loss
per common share -- diluted, based on 3.6 million weighted average common shares
outstanding. The $4.8 million turnaround in profitability was due to the
operating improvements achieved over the prior few years and the $2.1 million
decrease in restructuring charges. The increase in common shares and common
share equivalents was the result of stock issued in connection with the
Company's Stock Purchase Plan and the dilutive impact of stock options. The
increase in the Company's year end stock price from $5.625 to $8.625 caused
several previously issued stock option grants to be treated as dilutive for
purposes of the common share equivalent determination.
16
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OPERATING RESULTS BY INDUSTRY SEGMENT
The Company operates in two industry segments: (i) housewares products and
(ii) home improvement products.
HOUSEWARES
The housewares segment significantly improved its profitability in 1997.
Operating profit of $12.3 million was achieved compared to pro forma (for the
Tamor Acquisition) operating profits in 1996 of $7.7 million. The improvement
resulted primarily from a 13.5% increase in net sales and a drop in the cost of
plastic resin of $0.03 per pound or $2.4 million as compared to 1996. Other
factors adding to the improvement were better utilization of existing capacity,
allowing for the reduction in outside molding, and holding selling and marketing
expenses steady in spite of the increase in sales.
Operating profit of $.9 million in 1996 was up $5.8 million as compared to
a loss in 1995, of $4.9 million. The improvement resulted from higher gross
profit margins and reduced operating expenses. The majority of the operating
initiatives and cost cutting measures of the prior two years benefited the
housewares segment. The Selfix line of products was significantly streamlined
from nearly 2,000 SKU's in 1994 to under 700 as of the end of 1996. The
reduction in SKU's has allowed management to concentrate on selling more
profitable products, allocate capital resources accordingly and cutback
personnel. Additionally, 1995 results included a $2.1 million restructuring
charge, whereas 1996 did not.
HOME IMPROVEMENT PRODUCTS
Operating profit of the home improvement segment remained flat from 1997 to
1996 at $.5 million. Sales for 1997 decreased $1.1 million as a result of
postponed remodeling projects by end users. Offsetting the effects of a decline
in sales were higher gross profit margins. The cost of plastic resin decreased
$0.06 per pound in 1997 or $.2 million as compared to 1996. Shutters was able to
operate at nearly full capacity in 1997 by molding for the housewares segment,
allowing them to absorb their fixed costs over an expanded manufacturing volume,
thus reducing unit costs as a percentage of net sales. In response to the sales
shortfall, operating expenses were significantly reduced in 1997.
Operating profits in 1996 of $.5 million declined from $.8 million in 1995.
The decline in profitability occurred primarily in the first quarter when sales
were significantly constrained by weather conditions in the midwest and
northeast. Late winter storms deferred the start of the building season. This
resulted in missed sales and significant unabsorbed fixed manufacturing costs.
Although sales caught up later in the year, the unabsorbed manufacturing costs
could not be recovered. In addition, operating expenses increased 8% to support
new product introductions and to pursue new trade channel opportunities. During
the fourth quarter, management initiated a series of changes to permanently
reduce manufacturing costs and operating expenses. This resulted in a fourth
quarter profit as compared to historical fourth quarter losses. Further, these
changes positioned the home improvement segment for improved profitability in
1997.
SEYMOUR ACQUISITION
Effective December 30, 1997, (within the Company's 1998 fiscal year) the
Company acquired Seymour, a privately held company originally founded in 1942.
Seymour is a leading designer, manufacturer and marketer of consumer laundry
care products. Seymour manufactures and markets a full line of ironing boards,
ironing board covers and pads and numerous laundry related accessories.
Seymour was acquired for a total purchase price of $100.7 million,
consisting of $16.4 million in cash, $14.3 million in common stock (1,320,700
shares) and the assumption of $70.0 million of debt. The necessary funds to
complete the acquisition were obtained from a credit agreement entered into on
December 30, 1997, (the "12/30/97 CREDIT AGREEMENT"), with the lenders which are
parties thereto and General Electric Capital Corporation ("GECC").
The financing facilities under the 12/30/97 Credit Agreement consist of a
$20.0 million revolving credit facility and two term loans totaling $110.0
million. The Company also executed a $10.0 million senior
17
18
subordinated note in favor of GECC. The revolving credit facility, the term
loans and the senior subordinated note provided a total of $140.0 million of
available financing. The 12/30/97 Credit Agreement is secured by a pledge of all
of the assets of the subsidiaries of the Company and all of the shares of
capital stock of such subsidiaries. Interest on the revolving credit facility
and term loans is initially charged at floating rates of 100-150 basis points
over the lender's prime rate or 250-300 basis points over LIBOR, at the option
of the Company. The senior subordinated note of $10.0 million bears interest at
a floating rate of 300 basis points over the lender's prime rate, but in no
event less than 11%. (See Note 16 to Consolidated Financial Statements for
additional information in regards to the 12/30/97 Credit Agreement).
If the Seymour Acquisition had occurred on January 1, 1997, the Company's
1997 net sales of $129.3 million would have been increased by $93.0 million to
$222.3 million and operating profits of $12.7 million would have been increased
by $2.6 million to $15.3 million. The pro forma operating profit of $15.3
million includes a charge of $2.6 million related to management's plans to
consolidate and dispose of certain manufacturing operations.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at December 27, 1997 were $.6 million as compared
to $2.9 million at December 28, 1996. The decrease in cash is the result of
daily sweeps against the Company's revolving line of credit that was established
in February, 1997 in connection with the Tamor Acquisition. Capital spending of
$8.6 million was used to acquire molds to support new product introductions,
additional injection molding machines and to fund an expansion of the company's
Missouri warehouse facility. Since the Tamor Acquisition, working capital has
increased $4.3 million.
In July, 1997, the Company completed a secondary stock offering of 2.3
million shares of common stock. Net proceeds of $20.9 million were used to repay
a subordinated note of $7.0 million, term notes of $13.6 million and accrued
interest of $.3 million.
The required borrowings for the Seymour Acquisition have significantly
changed the Company's financial structure. To fund the acquisition, increased
financing facilities were provided by commercial lenders to replace and augment
the financing facilities in place at December 27, 1997. The new financing
facilities consist of $110.0 million of term loans and a $20.0 million revolving
line of credit under the 12/30/97 Credit Agreement and a $10.0 million senior
subordinated note. At March 25, 1998, the Company had total short and long term
debt outstanding of $126.7 million and unused availability under the revolving
line of credit of $11.8 million. During 1998, $5.0 million of debt will come
due.
The Company's capital spending needs in 1998 are expected to be between
$10.0 and $12.0 million. Most of the spending relates to new injection molding
presses to expand existing capacity and to replace old, inefficient machines.
The replacement machines are expected to reduce manufacturing cycle times and
ongoing maintenance costs. In addition, the Company exercised an option to
purchase the leased manufacturing and warehouse facility in Missouri at an
approximate cost of $1.4 million. Where possible, management will pursue
alternative means of financing such as capital leases and purchase money
transactions. In addition, operating leases will be pursued to the extent it
represents an attractive economic alternative.
The Company believes its existing financing facilities together with its
cash flow from operations will provide sufficient capital to fund operations,
make the required debt repayments and meet the anticipated capital spending
needs.
Management intends to continue to pursue its consolidation strategy within
the housewares industry. The current financing facilities are not intended to
fund future acquisitions. The ability to successfully fund future acquisitions
will depend on the financial situation of the target company, possible
renegotiation of existing credit terms or the possibility of obtaining an
alternative credit facility, and the ability to use company stock in lieu of
cash. Alternative financing arrangements are currently being explored including
the possibility of a public debt offering, and the creation of a working capital
and acquisition line of credit. However, no commitments have been made as of
March 25, 1998.
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OUTLOOK
1997's operating and financial results exceeded management's expectations
at the time of the January, 1997 Tamor acquisition. Several planned strategic
initiatives were successfully completed:
- integration of the Tamor business into HPI
- utilization of excess manufacturing capacity to improve gross profit
margins
- continued improved profitability of the Selfix business
- follow-on stock offering of 2.3 million shares, which raised over $20
million to pay down debt, increased institutional ownership and expanded
analyst coverage of the Company
- increased share price and shareholder value with share price rising 43%
- announcement at year end of the completion of the Seymour Acquisition
Management expects 1998 to be an equally fulfilling year for its
shareholders.
On a pro forma basis, 1997 sales were up 13.5% to 1996. While increased
sales and market presence is vitally important, growth must also be profitable.
Not all of the 1997 sales growth was sufficiently profitable. In addition, the
company was using its productive capacity at nearly 100%. As a result, the
Company faces the challenge in 1998 of putting manufacturing capacity to its
most profitable use. Certain products will continue to be outsourced but only
when product profitability targets are met. To this end, management anticipates
slower sales growth in 1998 while new product sales replace products expected to
be discontinued. This will allow the Company to better use its manufacturing
capacity to produce those products that provide the highest returns. During
1998, the Company will evaluate its production capacity needs and identify ways
by which to add capacity. Management continues to believe that significant sales
growth opportunities exist in the storage container category. It is management's
intention to have the capacity in place by 1999 to allow for aggressive pursuit
of profitable sales growth in this category.
The Seymour Acquisition will add significantly to 1998 sales. If the
Seymour Acquisition had occurred on January 1, 1997, the Company's 1997 sales
would have increased by $93 million. Further, it is management's intention to
fully integrate Seymour's operating functions such as sales, marketing and
finance into the existing operating departments of other HPI businesses. This
will allow for a reduction of pro forma operating expenses and improved
profitability.
The Seymour product line is more seasonal than the Company's other
products. Sales of Seymour products are concentrated in the second and third
quarter. This corresponds to the spring/summer wedding season and the
back-to-school season. As a result, 1998 sales and earnings are expected to be
significantly higher in the second and third quarters as compared to the first
and fourth quarters.
Because the Seymour products are composed primarily of steel and fabric,
they provide a diversification hedge against the Company's exposure to
fluctuations in the cost of plastic resin. In 1998, management expects the cost
of plastic resin to represent about 12% of net sales as compared to 22% in 1997.
The Company currently expects resin prices to increase slightly in 1998 as a
result of changes in product mix, the composition of resins used and a
tightening of resin supply.
As a result of the Seymour Acquisition, the Company is highly leveraged and
as such will be more sensitive to changes in interest rates. Further, the
Company will be subject to tight borrowing limits and mandatory repayments.
Management expects, however, that cash flow from operations will be sufficient
to fund needed capital improvements and new product development. Offsetting some
of the interest rate risk is a reduction in interest rate margins as defined in
the 12/30/97 Credit Agreement. The Company's 1997 financial performance allowed
for a lessening of such margins by about 50 basis points.
Management will continue to seek strategic acquisitions of companies and
product lines that fit within the desired categories of products for the home.
Management expects continued sales and earnings growth from future acquisitions
but that additional financing may be necessary to support acquisition activity.
19
20
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including "Business," "Properties," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements within the
meaning of the "safe-harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties which
could cause actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are not
limited to: (i) the anticipated effect of the Tamor Acquisition and the Seymour
Acquisition on the Company's sales and earnings; (ii) the impact of the level of
the Company's indebtedness; (iii) restrictive covenants contained in the
Company's various debt documents; (iv) general economic conditions and
conditions in the retail environment; (v) the Company's dependence on a few
large customers; (vi) price fluctuations in the raw materials used by the
Company, particularly plastic resin; (vii) competitive conditions in the
Company's markets; (viii) the seasonal nature of the Company's business; (ix)
the Company's ability to execute its acquisition strategy; (x) fluctuations in
the stock market; (xi) the extent to which the Company is able to retain and
attract key personnel; (xii) relationships with retailers; and (xiii) the impact
of federal, state and local environmental requirements (including the impact of
current or future environmental claims against the Company). As a result, the
Company's operating results may fluctuate, especially when measured on a
quarterly basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Listed below are the financial statements and supplementary data included
in this part of the Annual Report on Form 10-K:
PAGE NO.
--------
(a) Financial Statements
Reports of Independent Public Accountants................... F-1
Consolidated Balance Sheets at December 27, 1997 and F-3
December 28, 1996...........................................
Consolidated Statements of Operations for 1997, 1996 and F-4
1995........................................................
Consolidated Statements of Stockholders' Equity for 1997, F-5
1996 and 1995...............................................
Consolidated Statements of Cash Flows for 1997, 1996 and F-6
1995........................................................
Notes to Consolidated Financial Statements.................. F-7
(b) Supplementary Data
Summary of Quarterly Financial Information.................. F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of the Company has appointed Arthur Andersen LLP,
independent public accountants, as independent auditors to examine the annual
consolidated financial statements of the Company and its subsidiary companies
for 1998. Arthur Andersen LLP has served as the Company's independent auditors
since 1996.
The Company dismissed Grant Thornton LLP, its independent public
accountants, effective April 12, 1996.
In connection with the audit of 1995, and during the interim period prior
to the dismissal, there were no disagreements with the former accountants on any
matter of accounting principle or practice, financial statement disclosure, or
auditing scope or procedure.
During 1995 and during the interim period prior to engagement by Arthur
Andersen LLP, there were no consultations with Arthur Andersen LLP with regard
to either the application of accounting principles as to any specific
transaction, either completed or proposed; the type of audit opinion that would
be rendered on the Company's financial statements; or any matter of
disagreements with the former accountants.
The former accountants' report on the financial statements of the Company
for 1995 was unqualified.
The Company's Board of Directors approved the audit committee's
recommendation to change accountants.
20
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers is included under
Part I of this Form 10-K.
Information set forth under "Election of Directors" in the Proxy Statement
is incorporated herein by reference. The information set forth under "Executive
Officers of the Registrant" in Part I of this Annual Report on Form 10-K is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Compensation of Executive Officers" and
"Employment Agreements" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the "Security Ownership of Principal
Stockholders and Management" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Listed below are the financial statements, additional financial
information, reports and exhibits included in this part of the Annual Report on
Form 10-K:
(A) FINANCIAL STATEMENTS
The financial statements and notes to the consolidated financial statements
are referred to in Item 8.
(B) ADDITIONAL FINANCIAL INFORMATION PAGE NO.
Reports of Independent Public Accountants on Schedule II.... F-24
Schedule II -- Valuation and Qualifying Accounts............ F-26
(C) REPORTS FILED ON FORM 8-K
DATE FILED ITEMS REPORTED
---------- --------------
11-24-97 The Company signed a definitive agreement to acquire Seymour
Housewares, Inc. There were no financial statements filed
with this Form 8-K.
(D) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
21
22
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
2.1 Agreement and Plan of Merger, dated as of February 13, 1997,
by and among Selfix, Inc., HPI Merger, Inc. and Home
Products International, Inc. Incorporated by reference from
Exhibit 2.1 to Form 8-B Registration Statement filed on
February 20, 1997.
2.2 Agreement and Plan of Merger, dated as of October 24, 1995,
by and among Selfix, Inc., Mericon Corporation,Claw, L.L.C.
and Dennis Buckshaw. Incorporated by reference from Exhibit
2.2 to Form 8-B Registration Statement filed on February 20,
1997.
2.3 Stock Purchase Agreement, made as of January 1, 1997,
between the Company, Leonard J. Tocci, Richard M. Tocci,
Lawrence J. Tata, Michael P. Tata and Barbara L. Tata.
Incorporated by reference from Exhibit 2.2 to Form 8-K dated
February 28, 1997.
2.4 Agreement and Plan of Merger, dated as of January 1, 1997,
by and among the Company, Houseware Sales, Inc. and the
individual shareholders of Houseware Sales, Inc.
Incorporated by reference from Exhibit 2.1 to Form 8-K dated
February 28, 1997.
2.5 Amended and Restated Agreement, dated December 30, 1997, by
and among the Company, Seymour Sales Corporation, Seymour
Housewares Corporation, and Chase Venture Capital Associates
(majority shareholder of Seymour Sales Corporation).
Incorporated by reference from Exhibit 2.1 to Form 8-K dated
January 13, 1998, which was subsequently modified as stated
in Item 2 to Form 8-K/A dated March 16, 1998.
*2.6 Form of Escrow Agreement (Exhibit 2.8 from Amended and
Restated Agreement, dated December 30, 1997 by and among the
Company, Seymour Sales Corporation, Seymour Housewares
Corporation, and Chase Venture Capital Associates (majority
shareholder of Seymour Sales Corporation)) by and among
HPII, the security holders of Sales, Majority Shareholder,
and LaSalle.
3.1 Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on February 7, 1997.
Incorporated by reference from Exhibit 3.1 to Form 8-B
Registration Statement filed on February 20, 1997.
3.2 By-laws of the Company. Incorporated by reference from
Exhibit 3.2 to Form 8-B Registration Statement filed on
February 20, 1997.
4.1 Form of Rights Agreement dated as of May 21, 1997, between
Home Products International, Inc. and ChaseMellon
Shareholder Services L.L.C., as Rights Agent, which includes
as Exhibit B thereto the Form of Right Certificate.
Incorporated by reference from Exhibit 4.2 to Form S-2
Registration Statement (File No. 333-25871) filed on April
25, 1997.
10.1 The Company's 1994 Stock Option Plan. Incorporated by
reference from Exhibit A of the Company's Proxy Statement
for its 1994 Annual Meeting.**
10.2 The Company's 1991 Stock Option Plan. Incorporated by
reference from Exhibit A of the Company's Proxy Statement
for its 1991 Annual Meeting.**
10.3 The Company's 1987 Stock Option Plan Incorporated by
reference from Exhibit 10.8 to Form S-1 Registration
Statement No. 33-23881.**
10.4 Lease, dated July 24, 1980, among Selfix as Tenant and NLR
Gift Trust and MJR Gift Trust as Landlord concerning
Selfix's facility in Chicago, Illinois. Incorporated by
reference from Exhibit 10.9 to Form S-1 Registration
Statement No. 33-23881.
10.5 Patent licensing agreement, dated as of November 2, 1971,
between Selfix and Meyer J. Ragir concerning M.J. Molding
Process. Incorporated by reference from Exhibit 10.13 to
Form S-1 Registration Statement No. 33-23881.
10.6 Patent licensing agreement, dated as of November 15, 1971,
between Selfix and Meyer J. Ragir concerning Suction Lock
Products. Incorporated by reference from Exhibit 10.14 to
Form S-1 Registration Statement No. 33-23881.
10.7 Patent licensing agreement, dated as of June 1, 1981,
between Selfix and Meyer J. Ragir concerning Shower
Organizer Products. Incorporated by reference from Exhibit
10.15 to Form S-1 Registration Statement No. 33-23881.
22
23
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.8 Loan Agreement dated December, 1989 between Selfix and
Illinois Development Finance Authority in connection with
Selfix's Industrial Revenue Bond. Incorporated by reference
from the Company's Form 10-K for the year ended May 31,
1990.
10.9 Loan Agreement dated September, 1990 between Selfix and
Illinois Development Finance Authority in connection with
Selfix's Industrial Revenue Bond. Incorporated by reference
from the Company's Form 10-K for the fifty-two weeks ended
December 28, 1991.
*10.10 Credit Agreement dated as of December 30, 1997 among Selfix,
Inc., Tamor Corporation, Seymour Housewares Corporation, and
Shutters, Inc., as Borrowers, the Company, General Electric
Capital Corporation, as Agent and Lender, and other Lenders
signatory hereto from time to time.
*10.11 Note Purchase Agreement dated as of December 30, 1997, among
Selfix, Inc., Tamor Corporation, Shutters, Inc., and Seymour
Housewares Corporation, Home Products International, Inc.,
(referred to herein as Joint Issuers) and General Electric
Capital Corporation individually, and as Agent for itself
and other Note Purchasers signatory hereto.
*10.12 $5,000,000 Senior Subordinated Note -- General Electric
Capital Corporation, due December 30, 2006.
*10.13 $5,000,000 Senior Subordinated Note -- Archimedes Funding,
L.L.C. due December 30, 2006.
*10.14 Subordinated Note Security Agreement dated December 30, 1997
among Selfix, Inc., Tamor Corporation, Shutters, Inc., and
Seymour Housewares Corporation, Home Products International,
Inc., (collectively referred to herein as Grantors) in favor
of General Electric Capital Corporation.
10.15 Employment Agreement dated January 1, 1997 between the
Company and James R. Tennant, Chairman of the Board and
Chief Executive Officer. Incorporated by reference from
Exhibit 10.10 to Form 8-B Registration Statement filed on
February 20, 1997.**
*10.16 Employment Agreement dated January 5, 1998 between the
Company and Stephen R. Brian, President and Chief Operating
Officer.**
10.17 Reimbursement Agreement by and among Selfix, Shutters, Inc.
and LaSalle National Bank dated as of April 12, 1996
relating to letter of credit issued in connection with the
Series 1990 Bonds. Incorporated by reference from Exhibit
10.11 to Form 8-B Registration Statement filed on February
20, 1997.
10.18 Lease Agreement, dated March 6, 1992, by and between
Gottsegen Realty Venture, Robert Gottsegen, Trustee, as
Landlord and Victory Button, Inc., as Tenant (predecessor in
interest to Tamor) for Warehouse Facilities at Fitchburg,
Massachusetts, and First Addendum dated May 10, 1993.
10.19 Description of the 1998 Executive Incentive Bonus Plan.
Incorporated by reference to the Compensation Committee
Report contained in Form Pre 14A dated April 13, 1998.**
10.20 Description of the 1998 Management Incentive Bonus Plan.
Incorporated by reference to the Compensation Committee
Report contained in Form Pre 14A dated April 13, 1998.**
*11.1 Statement Regarding Computation of Earnings Per Share is
included in the Notes to the Consolidated Financial
Statements referred to in Item 8 hereof.
16.1 Letter re: Change in Certifying Accountant. Incorporated by
reference from Exhibit 16.1 to Form 8-K filed by the Company
on April 22, 1996.
*21.1 List of Subsidiaries.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Grant Thornton LLP.
*27.1 Financial Data Schedule.
- -------------------------
* Filed herewith, exhibits not marked with an asterisk are incorporated by
reference.
** Indicates an employee benefit plan, management contract or compensatory plan
or arrangement in which a named executive officer participates.
23
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Home Products International, Inc.
We have audited the accompanying consolidated balance sheets of Home
Products International, Inc. (formerly Selfix, Inc.) (a Delaware corporation)
and subsidiaries as of December 27, 1997 and December 28, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fifty-two week periods then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Home Product International,
Inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the
results of its operations and its cash flows for the fifty-two week periods then
ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 6, 1998
F-1
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Home Products International, Inc. (formerly Selfix, Inc.)
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the 52-week period ended December 30,
1995 of Home Products International, Inc., (formerly Selfix, Inc.). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of their operations and their
consolidated cash flows for the 52-week period ended December 30, 1995 of Home
Products International, Inc. and Subsidiaries, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Chicago, Illinois
February 9, 1996
F-2
26
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FISCAL YEAR END
----------------------
1997 1996
---- ----
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 583 $ 2,878
Accounts receivable, net of allowance for doubtful
accounts of $1,716 at December 27, 1997 and $901 at
December 28, 1996...................................... 20,802 6,476
Notes and other receivables............................... 80 119
Inventories, net.......................................... 12,797 4,391
Prepaid expenses and other current assets................. 428 100
-------- --------
Total current assets................................... 34,690 13,964
-------- --------
Property, plant and equipment -- at cost.................... 47,634 22,515
Less accumulated depreciation and amortization.............. (19,254) (14,581)
-------- --------
Property, plant and equipment, net.......................... 28,380 7,934
-------- --------
Deferred income taxes....................................... 3,466 --
Intangible and other assets................................. 32,807 2,807
-------- --------
Total assets................................................ $ 99,343 $ 24,705
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............... $ 3,850 $ 838
Accounts payable.......................................... 9,664 1,956
Accrued liabilities....................................... 12,913 4,018
-------- --------
Total current liabilities.............................. 26,427 6,812
-------- --------
Long-term obligations -- net of current maturities.......... 30,700 6,184
Stockholders' equity:
Preferred stock -- authorized, 500,000 shares, $.01 par
value; none issued..................................... -- --
Common stock -- authorized 15,000,000 shares, $.01 par
value; 6,674,271 shares issued at December 27, 1997 and
3,881,423 shares issued at December 28, 1996........... 67 39
Additional paid-in capital................................ 33,956 10,839
Retained earnings......................................... 8,616 1,296
Common stock held in treasury -- at cost (58,762
shares)................................................ (264) (264)
Currency translation adjustments.......................... (159) (201)
-------- --------
Total stockholders' equity............................. 42,216 11,709
-------- --------
Total liabilities and stockholders' equity.................. $ 99,343 $ 24,705
======== ========
The accompanying notes are an integral part of the financial statements.
F-3
27
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net sales.................................................. $129,324 $38,200 $41,039
Cost of goods sold......................................... 88,888 22,992 25,678
-------- ------- -------
Gross profit............................................. 40,436 15,208 15,361
Operating expenses
Selling.................................................. 18,332 9,042 10,474
Administrative........................................... 8,474 4,600 6,433
Amortization of intangible assets........................ 882 201 478
Restructuring charge..................................... -- -- 2,051
-------- ------- -------
27,688 13,843 19,436
-------- ------- -------
Operating profit (loss).................................. 12,748 1,365 (4,075)
-------- ------- -------
Other income (expense)
Interest income.......................................... 50 80 230
Interest (expense)....................................... (5,152) (707) (896)
Other income (expense)................................... 20 68 458
-------- ------- -------
(5,082) (559) (208)
-------- ------- -------
Earnings (loss) before income taxes........................ 7,666 806 (4,283)
Income tax (expense) benefit............................... (346) -- 273
-------- ------- -------
Net earnings (loss)........................................ $ 7,320 $ 806 $(4,010)
======== ======= =======
Net earnings (loss) per common share -- Basic.............. $ 1.35 $ 0.21 $ (1.11)
======== ======= =======
Net earnings (loss) per common share -- Diluted............ $ 1.29 $ 0.21 $ (1.11)
======== ======= =======
The accompanying notes are an integral part of the financial statements.
F-4
28
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON
ADDITIONAL CURRENCY STOCK HELD
PREFERRED COMMON PAID-IN RETAINED TRANSLATION OTHER, IN TREASURY
STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS NET AT COST TOTAL
--------- ------ ---------- -------- ----------- ------ ----------- -----
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1994...... $ -- $36 $ 9,360 $ 4,500 $(222) $(51) $ -- $13,623
Net loss.......................... -- -- -- (4,010) -- -- -- (4,010)
Issuance of 250,000 shares of
common stock in connection with
the acquisition of Mericon Child
Safety Products................. -- 3 1,372 -- -- -- -- 1,375
Issuance of 9,147 shares of common
stock in connection with
exercise of stock options....... -- -- 33 -- -- -- -- 33
Purchase of 58,762 common share
held in treasury at cost........ -- -- -- -- -- -- (264) (264)
Other............................. -- -- -- -- -- 60 -- 60
Translation adjustments........... -- -- -- -- 30 -- -- 30
---- --- ------- ------- ----- ---- ----- -------
BALANCE AT DECEMBER 30, 1995...... -- 39 10,765 490 (192) 9 (264) 10,847
Net earnings...................... -- -- -- 806 -- -- -- 806
Issuance of 19,639 shares of
common stock in connection with
employee stock purchase plan.... -- -- 74 -- -- -- -- 74
Other............................. -- -- -- -- -- (9) -- (9)
Translation adjustments........... -- -- -- -- (9) -- -- (9)
---- --- ------- ------- ----- ---- ----- -------
BALANCE AT DECEMBER 28, 1996...... -- 39 10,839 1,296 (201) -- (264) 11,709
Net earnings...................... -- -- -- 7,320 -- -- -- 7,320
Issuance of 19,560 shares in
connection with employee stock
purchase plan................... -- -- 107 -- -- -- -- 107
Issuance or 480,000 shares of
common stock in connection with
Tamor Acquisition............... -- 5 2,395 -- -- -- -- 2,400
Issuance of 2,280,000 shares of
common stock in connection with
secondary public offering....... -- 23 20,148 -- -- -- -- 20,171
Issuance of warrant............... -- -- 400 -- -- -- -- 400
Stock options exercised........... -- -- 67 -- -- -- -- 67
Issuance of 13,288 shares of
common stock in connection with
the exercise of stock options...
Translation adjustments........... -- -- -- -- 42 -- -- 42
---- --- ------- ------- ----- ---- ----- -------
BALANCE AT DECEMBER 27, 1997...... $ -- $67 $33,956 $ 8,616 $(159) $ -- $(264) $42,216
==== === ======= ======= ===== ==== ===== =======
The accompanying notes are an integral part of the financial statements.
F-5
29
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR
-----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ 7,320 $ 806 $(4,010)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 5,687 2,214 3,337
Provision for restructuring charge..................... -- -- 2,051
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............. (5,428) (1,786) 494
(Increase) decrease in inventories..................... (2,280) 760 105
Decrease in refundable income taxes.................... -- 222 159
Increase in net deferred tax asset..................... (3,466) -- --
(Increase) decrease in notes and other receivables..... -- (35) 1,691
Increase (decrease) in accounts payable................ (4,695) 622 (681)
Increase (decrease) in accrued liabilities............. 5,060 (793) (603)
Other operating activities, net........................ (1,320) (187) 32
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 878 1,823 2,575
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Tamor Acquisition, net of cash acquired................... (27,876) -- --
Proceeds from sale or maturity of marketable securities... -- 515 408
Capital expenditures, net................................. (8,382) (1,624) (1,215)
Restricted cash -- Industrial Revenue Bond................ -- -- 5
Mericon Child Safety Products Acquisition, net of cash
acquired............................................... -- -- (921)
------- ------- -------
NET CASH USED FOR INVESTING ACTIVITIES...................... (36,258) (1,109) (1,723)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings.................................... (34,609) (860) (2,471)
Proceeds from borrowings and warrants..................... 44,158 -- --
Net proceeds from borrowings under revolving line of
credit................................................. 3,355 -- --
Net proceeds from secondary stock offering................ 20,171 -- --
Payment of capital lease obligation....................... (164) (32) (27)
Purchase of treasury stock................................ -- -- (264)
Exercise of common stock options and issuance of common
stock under stock purchase plan........................ 174 74 33
------- ------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES........ 33,085 (818) (2,729)
------- ------- -------
Net decrease in cash and cash equivalents................. (2,295) (104) (1,877)
Cash and cash equivalents at beginning of year............ 2,878 2,982 4,859
------- ------- -------
Cash and cash equivalents at end of year.................. $ 583 $ 2,878 $ 2,982
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest.................................................. $ 3,568 $ 599 $ 822
------- ------- -------
Income taxes, net......................................... 1,255 (314) (457)
------- ------- -------
The accompanying notes are an integral part of the financial statements.
F-6
30
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Products International, Inc. (the "Company") and its subsidiary
companies design, manufacture and market products in two industry segments:
housewares products and home improvement products. Housewares products are
marketed principally through mass market trade channels throughout the United
States and internationally. Home improvement products are sold principally
through wholesalers that service the residential construction, repair, and
remodeling industry throughout the United States.
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company
and its subsidiary companies. All significant intercompany transactions and
balances have been eliminated. The accompanying statements do not include the
accounts of Seymour Sales Corporation or its wholly owned subsidiary, Seymour
Housewares Corporation, (collectively, "Seymour"), as the Company did not
complete the acquisition until after the end of fiscal 1997. See Note 16 for
more information regarding the acquisition of Seymour.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments and Credit Risk.
The carrying value of cash, cash equivalents, investments and long-term
obligations approximate their fair values based upon quoted market rates. As of
December 27, 1997, and December 28, 1996, the Company had no significant
concentrations of credit risk related to cash equivalents.
Inventories.
Inventories are stated at the lower of cost or net realizable value with
cost determined on a first in, first out (FIFO) basis.
Property, Plant and Equipment.
Property, plant and equipment are stated at cost. Depreciation is charged
against results of operations over the estimated service lives of the related
assets.
Improvements to leased property are amortized over the life of the lease or
the life of the improvement, whichever is shorter. For financial reporting
purposes, the Company uses the straight-line method of depreciation. For tax
purposes, the Company uses accelerated methods where permitted.
F-7
31
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated service lives of the fixed assets are as follows:
Buildings................................................... 30 years
Land and building under capital lease....................... lease term
Machinery, equipment and vehicles........................... 3 - 8 years
Tools, dies and molds....................................... 5 years
Furniture, fixtures and office equipment.................... 2 - 8 years
Leasehold improvements...................................... lease term
Revenue Recognition.
The Company recognizes revenue as products are shipped to customers.
Intangible Assets.
Goodwill, which represents the excess of the purchase price over the fair
value of net assets acquired, is amortized over forty years. Covenants not to
compete are amortized on a straight-line basis over the terms of the respective
agreements. Patents, royalty rights, trademarks acquired and licensing
agreements are amortized over their estimated useful lives ranging from five to
ten years.
Long-Lived Assets.
In fiscal 1996, the Company adopted Statement of Financial Accounting
Standard No. 121, ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of". The statement requires entities
to review long-lived assets and certain intangible assets in certain
circumstances, and if the value of the asset is impaired, an impairment loss
shall be recognized. The adoption of this policy had no material effect on the
Company's financial position or results of operations.
Income Taxes.
Deferred tax assets and liabilities are determined at the end of each
period, based on differences between the financial statement bases of assets and
liabilities and the tax bases of those same assets and liabilities, using the
currently enacted statutory tax rates.
Net Earnings (Loss) Per Common Share.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which established new standards for the computation and presentation of earning
per share information. As required, the Company has adopted the provisions of
SFAS 128 for its year end 1997 financial statements, and has restated all prior
year earnings per share information. Net earnings (loss) per common
share -- basic, was calculated by dividing net earnings (loss) applicable to
common shares by the weighted average number of common shares outstanding during
each year. Net earnings (loss) per common share -- diluted, reflects the
potential dilution that could occur assuming exercise of all outstanding
"in-the-money" stock options. A reconciliation of the net earnings (loss)
F-8
32
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the number of shares used in computing basic and diluted earnings per share
was as follows (in thousands, except share and per share amounts):
1997 1996 1995
---- ---- ----
Net earnings (loss) per common share -- Basic:
Net earnings (loss) applicable to common shares...... $7,320 $ 806 $(4,010)
====== ====== =======
Weighted average common shares outstanding for the
year............................................... 5,436 3,820 3,617
====== ====== =======
Net earnings (loss) per common share -- Basic........ $ 1.35 $ 0.21 $ (1.11)
====== ====== =======
Net earnings (loss) per common share -- Diluted:
Net earnings (loss) applicable to common shares...... $7,320 $ 806 $(4,010)
====== ====== =======
Weighted average common shares outstanding for the
year............................................... 5,436 3,820 3,617
Increase in shares which would result from exercise
of "in-the-money" stock options.................... 246 34 --
------ ------ -------
Weighted average common shares assuming conversion of
the above securities............................... 5,682 3,854 3,617
====== ====== =======
Net earnings (loss) per common share -- Diluted...... $ 1.29 $ 0.21 $ (1.11)
====== ====== =======
Benefit Plans.
The Company provides a profit sharing and savings plan (including a 401(k)
plan) to which both the Company and eligible employees may contribute. Company
contributions to the profit sharing and savings plan are voluntary and at the
discretion of the Board of Directors. The Company matches the employee 401(k)
plan contributions with certain limitations. The total Company contributions to
both plans are limited to the maximum deductible amount under the Federal income
tax law.
The Company provides retirement plans for its employees covered under
collective bargaining agreements. The amount of the Company contribution is
determined by the respective collective bargaining agreement.
The contributions to all the profit sharing, savings, and retirement plans
for 1997, 1996 and 1995, were $414, $248, and $259, respectively.
Cash and Cash Equivalents.
The Company considers all highly liquid, short-term investments with an
original maturity of three months or less, to be cash equivalents.
Fiscal Year.
The Company's fiscal year ends on the last Saturday in December. References
to the fiscal years 1997, 1996 and 1995 are for the fifty-two weeks ended
December 27, 1997, December 28, 1996 and December 30, 1995.
Related Parties.
A director of the Company is the executor and co-trustee of certain estates
and trusts which lease facilities to the Company as discussed in Note 9. In
addition, the director is a partner in a law firm which is the Company's general
counsel. Total fees paid to this law firm in fiscal 1997 were $730.
F-9
33
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1997 the Company engaged the services of a management consulting
firm in which a director of the Company is a partner. Total fees paid to this
management consulting firm in 1997 were $99.
In fiscal 1997, Tamor purchased raw materials and packaging from vendors
whose ownership was related to certain officers of Tamor. Such transactions were
as follows: (i) raw materials totaling $9,835, and packaging totaling $1,700.
Management believes the transactions were conducted on an arm's length basis at
competitive prices.
NOTE 2. ACQUISITION OF TAMOR PLASTICS CORPORATION AND HOUSEWARE SALES, INC.
Pursuant to an agreement dated October 29, 1996, the Company, as of January
1, 1997, took operating and financial control of Tamor Plastics Corporation, and
its affiliated product distribution company, Houseware Sales, Inc.,
(collectively, "TAMOR"), assumed substantially all of the liabilities of Tamor
and retained substantially all of the earnings from Tamor's operations (the
"TAMOR ACQUISITION"). Actual results are combined since the date of effective
control although the purchase did not close until February 28, 1997. Tamor,
founded in 1947, designs, manufactures, and markets quality plastic houseware
products, including storage totes, hangers, and juvenile organization products.
The Tamor Acquisition was completed by the Company for a total purchase
price of $41,900 consisting of $27,800 in cash, $2,400 of Common Stock (480,000
shares), and the assumption of $11,700 of short and long-term debt. The funds
used for the Tamor Acquisition were obtained from a credit agreement entered
into with General Electric Capital Corporation, ("GECC"), on February 27, 1997,
(the "CREDIT AGREEMENT"). See Note 9 for additional information on the Credit
Agreement.
The Tamor Acquisition was accounted for as a purchase, and the operating
results of Tamor have been included in the accompanying financial statements
from January 1, 1997, the effective date of the acquisition. The excess of the
purchase price over the fair value of the assets acquired (goodwill)
approximated $27,599 and is being amortized over a period of forty years.
The unaudited pro forma consolidated results of operations as of December 28,
1996 would have been as follows, if the Tamor Acquisition had occurred on
January 1, 1996:
Net Sales................................................... $113,914
Gross Profit................................................ 33,104
Operating Income............................................ 8,240
Net Income.................................................. 2,599
Net earnings per common share -- Basic...................... $ 0.60
Net earnings per common share -- Diluted.................... $ 0.59
Adjustments made in arriving at the pro forma combined results include
increased interest expense and amortization of debt issuance costs on
acquisition debt, amortization of goodwill, and certain operating expense
reductions. No effect has been given in operating expenses to the fair value of
the assets acquired, depreciable values or lives, or synergistic benefits which
may be realized from the acquisition.
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the Tamor Acquisition been in effect as of
January 1, 1996 nor do they purport to be indicative of the results that will be
obtained in the future.
NOTE 3. ACQUISITION OF MERICON CHILD SAFETY PRODUCTS
On October 24, 1995, the Company acquired 100% of the common stock of
Mericon Child Safety Products for a total purchase price of $2,421 consisting of
250,000 shares of the Company's common stock. The acquisition was accounted for
as a purchase, and accordingly, the results of operations are included in the
F-10
34
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated financial results from the date of acquisition. The purchase price
in excess of the fair value of net assets acquired (goodwill) of approximately
$1,796 is being amortized over a period of forty years.
NOTE 4. PUBLIC STOCK OFFERING
On June 30, 1997, the Company completed a secondary public offering of
2,000,000 new shares of its common stock. Net proceeds in the amount of $18,300
were used to repay the subordinated note of $7,000, term notes of $11,100, and
accrued interest of $200. On July 16, 1997, an additional 280,000 shares were
sold pursuant to an underwriter's over-allotment provision. Net proceeds of
$2,600 were used to repay term notes of $2,500 and accrued interest of $100.
See Note 9 for additional information regarding the repayment of debt.
NOTE 5. INVENTORIES
The components of the Company's inventory were as follows:
1997 1996
---- ----
Finished goods.............................................. $ 7,335 $2,604
Work-in-process............................................. 2,225 1,003
Raw materials............................................... 3,237 784
------- ------
$12,797 $4,391
======= ======
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows:
1997 1996
---- ----
Buildings and land....................................... $ 5,588 $ 2,176
Land and building under capital lease.................... 2,535 2,535
Machinery, equipment and vehicles........................ 17,936 7,092
Tools and dies........................................... 16,303 6,704
Furniture, fixtures and office equipment................. 3,339 2,679
Leasehold improvements................................... 1,933 1,329
-------- --------
47,634 22,515
Less accumulated depreciation and amortization........... (19,254) (14,581)
-------- --------
$ 28,380 $ 7,934
======== ========
F-11
35
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
1997 1996
---- ----
Goodwill, net of accumulated amortization of $993 on
December 27, 1997, and $223 on December 28, 1996.......... $28,892 $1,978
Covenants not to compete, net of accumulated amortization of
$13 on December 27, 1997, and $7 on December 28, 1996..... 77 23
Industrial Revenue Bond fees, net of accumulated
amortization of $230 on December 27, 1997, and $202 on
December 28, 1996......................................... 173 201
Patents, net of accumulated amortization of $1,384 on
December 27, 1997, and $1,327 on December 28, 1996........ 96 153
Licensing agreement, net of accumulated amortization of $42
on December 27, 1997, and $23 on December 28, 1996........ 153 172
Deferred financing fees, net of accumulated amortization of
$439 on December 27, 1997, and $20 on December 28, 1996... 3,320 77
Other assets................................................ 96 203
------- ------
$32,807 $2,807
======= ======
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1997 1996
---- ----
Compensation and other benefits............................. $ 3,012 $1,540
Sales incentives and commissions............................ 2,721 814
Income taxes payable........................................ 3,551 92
Other....................................................... 3,629 1,572
------- ------
$12,913 $4,018
======= ======
F-12
36
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1997 1996
---- ----
Revolving credit facility, variable rate, due August 28,
2002...................................................... $ 3,355 $ --
Term Loan A, variable rate, due July 1, 2002................ 11,783 --
Term Loan B, variable rate, due July 1, 2004................ 12,938 --
Illinois Development Finance Authority (IDFA) variable rate
demand Industrial Development Revenue bonds (Shutters
Project) Series 1989, due November 1, 2002................ 2,000 2,400
Illinois Development Finance Authority (IDFA) variable rate
demand Industrial Development Revenue Bonds (Selfix, Inc.
Project) Series 1990, due September 1, 2005............... 2,400 2,800
Capital lease obligations................................... 2,074 1,822
------- ------
34,550 7,022
Less current maturities..................................... (3,850) (838)
------- ------
$30,700 $6,184
======= ======
In connection with the Tamor Acquisition, (as more fully described in Note
2), the Company entered into a credit agreement dated February 27, 1997 (the
"CREDIT AGREEMENT"), with GECC which provided (i) a $20,000 revolving credit
facility, (ii) a twenty-two quarter $20,000 term loan, and (iii) a thirty
quarter $20,000 term loan. In addition, the Company obtained a $7,000
subordinated equity bridge note (the "SUBORDINATED NOTE") through GECC. However,
as more fully described in Note 16, effective December 30, 1997 the Company
terminated the February 27, 1997, Credit Agreement, and entered into a $130,000
credit agreement dated December 30, 1997 (the "12/30/97 CREDIT AGREEMENT") with
GECC. In addition to the 12/30/97 Credit Agreement, the Company obtained a
$10,000 senior subordinated note, also through GECC.
In connection with the Subordinated Note, the Company issued a warrant (the
"WARRANT") to purchase 79,204 shares of common stock, exercisable at 50% of the
Market price ($5.80 per share), as defined in the Warrant. The exercise period
commenced on August 1, 1997, and terminates on February 27, 2007. The Warrant
was recorded by the Company at its estimated fair value of $400. As of December
27, 1997 the Warrant had not been exercised.
As discussed in Note 4, on June 24, 1997, the Company completed a secondary
public offering of 2,000,000 shares of its common stock. Net proceeds in the
amount of $18,300 were used to fully repay the Subordinated Note of $7,000, term
notes of $11,100, and accrued interest of $200. On July 16, 1997, an additional
280,000 shares were sold pursuant to an underwriter's over-allotment provision.
Net proceeds of $2,600 were used to repay term notes of $2,500 and accrued
interest of $100.
The IDFA variable rate demand Industrial Development Bonds (Shutters
Project) Series 1989, were issued in December 1989, and mature on November 1,
2002. Interest is calculated based upon a weekly variable rate, and is paid
monthly. Principal is payable in annual installments, due on December 1. The
variable rate at December 27, 1997, and December 28, 1996, was 4.6%.
The IDFA variable rate demand Industrial Development Bonds (Selfix Project)
Series 1990, were issued in September 1990, and mature on September 1, 2005.
Interest is calculated based upon a weekly variable rate, and is paid monthly.
Principal is payable in annual installments, due on December 1. The variable
rate at December 27, 1997, and December 28, 1996, was 4.6%.
F-13
37
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital lease obligations include; (i) a lease agreement between Selfix and
two related trusts for Selfix's principal factory and corporate office; and (ii)
starting in fiscal 1997, various equipment lease agreements. Lease payments to
the trusts were $519, $467 and $491, in 1997, 1996 and 1995, respectively, and
lease payments for machinery and equipment in 1997 were $140.
The following schedule shows future minimum lease payments together with
the present value of the payments for capital lease obligations.
Years ending:
1998...................................................... $ 430
1999...................................................... 422
2000...................................................... 417
2001...................................................... 407
2002...................................................... 367
Thereafter................................................ 2,604
-------
Less amount representing interest........................... (4,644)
-------
Present value of minimum lease payments..................... $ 2,074
=======
Long-term portion........................................... $ 1,974
Current portion............................................. 100
-------
$ 2,074
=======
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing, distribution, and office
facilities under noncancellable operating leases, expiring at various dates
through 1999. Future minimum lease payments amount to $1,046, and $1,020 for
fiscal years 1998 and 1999, respectively. Rent expense under operating leases
for 1997, 1996, and 1995, was $1,184, $354, and $381, respectively.
NOTE 11. INCOME TAXES
The components of earnings (loss) before income taxes are as follows:
1997 1996 1995
---- ---- ----
Domestic............................................. $7,602 $1,122 $(3,262)
Foreign.............................................. 64 (316) (1,021)
------ ------ -------
$7,666 $ 806 $(4,283)
====== ====== =======
F-14
38
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax items as of December
27, 1997 and December 28, 1996 are as follows:
1997 1996
---- ----
DEFERRED TAX ASSETS
Inventory reserves and overhead capitalized for tax
purposes............................................... $1,166 $ 414
Employee benefit expenses and other accruals.............. 341 450
Accounts receivable reserve............................... 423 241
Capitalized lease treated as operating lease for tax
purposes............................................... 378 430
Accrued advertising, volume rebates and reserves for
returns................................................ 890 109
Other accrued liabilities................................. 235 344
Net operating loss carryforward........................... -- 612
Other..................................................... 936 889
------ -------
Gross deferred tax assets................................... 4,369 3,489
------ -------
DEFERRED TAX LIABILITIES
Depreciation.............................................. 628 301
Other..................................................... 275 45
------ -------
Gross deferred tax liabilities.............................. 903 346
------ -------
Deferred tax assets net of deferred liabilities............. 3,466 3,143
Valuation allowance......................................... -- (3,143)
------ -------
Net deferred tax asset...................................... $3,466 $ --
====== =======
In fiscal 1997, the Company received a refund of approximately $330
relating to federal income taxes paid in prior years. Through the claim for
refund filed, and the level of fiscal 1997 taxable income, the Company utilized
all federal net operating loss carryforwards in fiscal 1997.
The Company has research and development credit carryforwards of
approximately $11, expiring through the year 2010, state investment tax credit
carryforwards of approximately $86 expiring through 2000 and foreign net
operating loss carryforwards of $1,082 expiring in 2002.
The Company eliminated the valuation allowance as of December 27, 1997
based upon the determination that it is more likely than not that the Company
will realize the benefits generated from the deferred tax assets recorded.
Income tax expense (benefit) is as follows:
1997 1996 1995
---- ---- ----
Current
U.S. federal........................................ $ 1,721 $ 0 $(247)
Foreign............................................. -- (10) 22
State............................................... 346 0 (48)
------- ----- -----
2,067 (10) (273)
------- ----- -----
Deferred
U.S. federal........................................ 1,422 266 (463)
Increase (decrease) in valuation allowance.......... (3,143) (256) 463
------- ----- -----
(1,721) 10 --
------- ----- -----
Total income tax expense (benefit).................... $ 346 $ -- $(273)
======= ===== =====
F-15
39
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) differs from amounts computed based on the
U.S. federal statutory tax rate applied to earnings (loss) before tax as
follows:
1997 1996 1995
---- ---- ----
Computed at statutory U.S. federal income tax
rate.............................................. $ 2,683 $ 282 $(1,456)
State income taxes, net of U.S. federal tax
benefit........................................... 383 (39) (32)
Foreign tax rate difference and foreign loss
carryforwards..................................... -- -- 460
Tax exempt interest................................. -- (12) (25)
Exercise of Stock Options........................... (34) -- --
Non deductible goodwill............................. 62 -- --
Other............................................... 395 25 317
Change in valuation allowance....................... (3,143) (256) 463
------- ----- -------
$ 346 $ -- $ (273)
======= ===== =======
NOTE 12. STOCK OPTIONS
Under the 1987, 1991 and 1994 stock option plans as amended, (collectively,
the "Stock Option Plan") key employees and certain key nonemployees were granted
options to purchase shares of the Company's common stock. All stock option
grants are authorized by the Compensation Committee of the Board of Directors,
which is comprised of outside directors.
Options granted may or may not be "incentive stock options" as defined by
the Internal Revenue Code of 1986. The exercise price is determined by the
Company's Board of Directors at the time of grant but may not be less than 100%
of the market price at the time of grant for incentive stock options. Options
may not be granted for a term greater than ten years.
All options granted, with the exception of those granted to the Chief
Executive Officer, vest within a five year period. The options granted to the
Chief Executive Officer vest on an accelerated schedule in accordance with his
employment contract.
In 1997, the shareholders of the Company voted to increase the maximum
number of shares of common stock which may be granted under the Stock Option
Plan by 450,000 shares to a maximum available of 1,475,000. A total of 120,820
shares of common stock have been issued as of December 27, 1997 from the Stock
Option Plan, and 1,354,180 shares remain in reserve.
The Company applies APB Opinion 25 "Accounting for Stock Based Compensation
and related interpretations in accounting for stock option awards under the
Stock Option Plan. Accordingly, no compensation cost has been recognized in the
Company's financial statements. As required by SFAS 123, the Company has
computed, for pro forma disclosure purposes, the value of options granted during
fiscal years 1997 and 1996 using an option pricing model. The weighted average
assumptions used for stock option grants for 1997 and 1996 were a dividend yield
of 0%, expected volatility of the market price of the Company's common stock of
43% for 1997, and 41% for 1996, a weighted-average expected life of the options
of approximately five years, and weighted average risk free interest rates of
6.3% for fiscal 1997 and 6.5% for fiscal 1996.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock based compensation plan.
F-16
40
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's 1997 and 1996 grants been
determined using the above fair values and considering the applicable vesting
periods, the Company's reported results would have been impacted as follows:
1997 1996 1995
---- ---- ----
Net earnings (loss)
As reported......................................... $7,320 $ 806 $(4,010)
Pro forma........................................... 6,720 564 (4,092)
Net earnings (loss) per common share -- Basic
As reported......................................... $ 1.35 $0.21 $ (1.11)
Pro forma........................................... $ 1.24 $0.15 $ (1.13)
Net earnings (loss) per common share -- Diluted
As reported......................................... $ 1.29 $0.21 $ (1.11)
Pro forma........................................... $ 1.18 $0.15 $ (1.13)
A summary of the transactions in the option plans is as follows:
1997 1996 1995
------------------ ---------------- -----------------
SHARES PRICE* SHARES PRICE* SHARES PRICE*
------ ------ ------ ------ ------ ------
Options outstanding at beginning of year.... 781,987 $ 6.21 598,527 $6.74 557,842 $8.65
Granted..................................... 497,900 10.17 248,900 4.95 626,700 7.22
Exercised................................... (13,288) 4.58 -- -- (8,147) 4.15
Canceled.................................... (45,100) 10.38 (65,440) 6.20 (577,868) 9.14
--------- ------- --------
Unexercised options outstanding at end of
year...................................... 1,221,499 7.70 781,987 6.21 598,527 6.74
========= ======= ========
Options exercisable at end of year.......... 199,734 6.75 16,754 4.89 15,784 4.69
========= ======= ========
Available for grant......................... 132,681 1,934 195,394
========= ======= ========
- -------------------------
* Weighted average
1997 1996 1995
-------------- ------------- --------------
Price range of options
Granted...................................... $4.38 - $14.00 $4.25 - $6.00 $4.13 - $12.00
Exercised.................................... $4.23 - $ 5.00 $ -- - $ -- $4.00 - $ 4.23
Canceled..................................... $4.25 - $10.38 $4.13 - $8.00 $3.13 - $12.00
Outstanding.................................. $4.13 - $14.00 $4.13 - $8.00 $4.13 - $ 8.00
- -------------------------
* Weighted average
The above stock options have the following characteristics as of December
27, 1997:
SHARES REMAINING LIFE SHARES
GRANT YEAR OUTSTANDING PRICE* (IN YEARS)* EXERCISABLE
- ---------- ----------- ------ -------------- -----------
Pre-1995..................................... 16,399 $ 5.09 5.5 16,399
1995......................................... 512,200 6.88 7.5 116,668
1996......................................... 238,000 4.96 8.8 66,667
1997......................................... 454,900 10.15 9.8 --
--------- -------
1,221,499 199,734
========= =======
- -------------------------
* Weighted average
F-17
41
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. EMPLOYEE STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan allows eligible employees to purchase
up to 200,000 shares of the Company's stock. The purchase price shall be the
lesser of 85% of the fair market value of a common share on the first day of
each purchase period or the fair market value of a common share on the last day
of such purchase period, adjusted to the nearest 1/8 point. As of December 27,
1997, and December 28, 1996, 19,560, and 19,639 shares respectively had been
purchased under the plan.
NOTE 14. STATEMENT OF OPERATIONS AND RESTRUCTURING CHARGES
In the fourth quarter of 1995, the Company announced its intent to
consolidate facilities and exit additional product lines. The 1995 charge is a
result of the Company's decision to exit certain unprofitable product lines,
close the Company's Canadian facility and move the Canadian operations to the
Chicago manufacturing and distribution facilities. The restructuring charges for
these initiatives totaled $2,051. The charges for the closing and relocation of
the Canadian operation totaled $951 including severance benefits of $184
covering all of the Canadian employees. The relocation of the Canadian operation
was completed in the first half of 1996. The remaining $1,100 of restructuring
charges pertains to product lines the Company has decided to exit and the
related write-off of product molds, inventory and patents. Approximately $66 of
inventory reserves, $74 of accrued legal and accrued severance and $140 of
accrued facility closing costs remained on the Company's books at December 28,
1996. As of December 27, 1997, no balances remained in these accounts.
In 1995, the Company received approximately $1,400, net of a contingent
liability, as its share of the net proceeds from a patent suit settlement. The
Company recorded approximately $500 as its share of the proceeds in other income
in 1994.
NOTE 15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two industry segments, the housewares segment and
the home improvement products segment. The housewares segment provided
approximately 94% of the Company's gross sales in 1997 and the home improvement
products segment provided approximately 6% of the Company's gross sales in 1997.
Sales to customers outside the United States in 1997 accounted for approximately
6% of total net sales
F-18
42
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with Canada accounting for approximately 2% of total net sales. Information
about the Company's operations in these segments is as follows:
1997 1996 1995
---- ---- ----
Gross sales:
Housewares...................................... $129,745 $31,375 $34,543
Home improvement products....................... 8,385 9,457 8,993
-------- ------- -------
Consolidated................................. $138,130 $40,832 $43,536
======== ======= =======
Operating profit (loss):
Housewares...................................... $ 12,277 $ 904 $(4,892)
Home improvement products....................... 471 461 817
-------- ------- -------
Consolidated................................. $ 12,748 $ 1,365 $(4,075)
======== ======= =======
Identifiable assets:
Housewares...................................... $ 93,898 $19,615 $19,676
Home improvement products....................... 5,445 5,090 5,300
-------- ------- -------
Consolidated................................. $ 99,343 $24,705 $24,976
======== ======= =======
Depreciation and amortization:
Housewares...................................... $ 5,274 $ 1,532 $ 2,684
Home improvement products....................... 413 682 653
-------- ------- -------
Consolidated................................. $ 5,687 $ 2,214 $ 3,337
======== ======= =======
Capital expenditures, net:
Housewares...................................... $ 8,062 $ 982 $ 880
Home improvement products....................... 320 642 335
-------- ------- -------
Consolidated................................. $ 8,382 $ 1,624 $ 1,215
======== ======= =======
Information about the Company's operations by geographic area is as
follows:
1997 1996 1995
---- ---- ----
Gross sales:
United States................................... $136,407 $38,855 $40,283
Foreign......................................... 1,723 1,977 3,253
-------- ------- -------
Consolidated................................. $138,130 $40,832 $43,536
======== ======= =======
Operating profit (loss):
United States................................... $ 12,689 $ 1,386 $(2,975)
Foreign......................................... 59 (21) (1,100)
-------- ------- -------
Consolidated................................. $ 12,748 $ 1,365 $(4,075)
======== ======= =======
Identifiable assets:
United States................................... $ 99,018 $24,170 $23,699
Foreign......................................... 325 535 1,277
-------- ------- -------
Consolidated................................. $ 99,343 $24,705 $24,976
======== ======= =======
As a percentage of gross sales, a single customer represented 23% in 1997,
and 12% in each of 1996 and 1995. A second customer represented 10% of 1997
gross sales, and less than 10% of gross sales in each of 1996 and 1995.
F-19
43
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. SUBSEQUENT EVENTS
Effective December 30, 1997, (within the Company's fiscal 1998), the
Company completed the acquisition of Seymour Sales Corporation and its wholly
owned subsidiary, Seymour Housewares Corporation, (collectively, "SEYMOUR").
Seymour, headquartered in Seymour, Indiana, is an industry leading manufacturer
and marketer of consumer laundry care products, including a full line of ironing
boards, ironing board covers and pads, and numerous laundry related accessories.
The acquisition will be accounted for as a purchase. As such, the excess of
the purchase price over the estimated fair value of the acquired net assets,
which approximates, $35,000, will be recorded as goodwill and amortized over
forty years. The purchase price allocation will be determined in 1998 when
additional information becomes available. Accordingly, the final allocation may
have a material effect on the pro forma information presented below.
Total consideration for the acquisition was $100,700, consisting of
approximately $16,400 in cash, $14,300 in common stock (1,320,700 shares) and
the assumption of $70,000 of debt.
The following unaudited pro forma information for the fifty-two weeks ended
December 27, 1997 presents the combined results of operations as if the
acquisition had been completed at the beginning of 1997, and may not be
indicative of what would have occurred had the acquisition actually been made as
of such date, or results which may occur in the future.
Had the Seymour Acquisition occurred on January 1, 1997, pro forma net
sales would have been $222,287, and operating profit would have been $15,332.
Pro forma net income before extraordinary item would have been $3,972 or $0.59
per common share -- basic and $0.57 per common share -- diluted. Pro forma net
earnings, after a $1,800 net of tax extraordinary item for the write-off of
deferred financing fees related to a prior credit agreement would have been
$2,172 or $0.32 per common share -- basic and $0.31 per common share -- diluted.
Adjustments made in arriving at the pro forma unaudited combined results
include increased interest expense, amortization of debt issuance costs on
acquisition debt, amortization of goodwill, certain operating expense reductions
and income tax expense recorded at an estimated combined statutory rate of 40%,
prior to adjustment to the valuation allowance. No effect has been given in
operating expenses to the fair value of assets acquired, depreciable values or
lives, transition and restructuring costs or synergistic benefits which may be
realized from the acquisition.
The source of funds for the acquisition included the proceeds of a $130,000
Credit Agreement, dated December 30, 1997, (the "12/30/97 CREDIT AGREEMENT"),
among the Company, Selfix, Shutters, Tamor, and Seymour, the lenders which are
parties thereto and General Electric Capital Corporation ("GECC") as agent, and
a $10,000 senior subordinated note (the "12/30/97 SENIOR SUBORDINATED NOTE"),
dated December 30, 1997. The 12/30/97 Credit Agreement consists of a $20,000
revolving credit facility (the "12/30/97 REVOLVER") and $110,000 in senior term
loans. All loans under the 12/30/97 Credit Agreement are secured by
substantially all of the assets of the subsidiaries of the Company (including
Seymour) and a pledge by the Company of all the outstanding shares of capital
stock of such subsidiaries.
The provisions of the 12/30/97 Credit Agreement include restrictions on
additional indebtedness, asset sales, acquisitions or mergers, capital
expenditures and dividend payments, among other things. As defined in the
12/30/97 Credit Agreement, the Company is also required to meet certain
financial tests which include, but are not limited to, those relating to a
minimum net worth test and a minimum interest coverage ratio.
The 12/30/97 Revolver provides up to $20,000 (including a letter of credit
facility of up to $15,000) subject to the availability of sufficient qualifying
collateral. Interest is charged, at the Company's option, at either (i) the 1, 2
or 3 month reserve adjusted LIBOR rate plus a margin of 2.5%; or (ii) a floating
rate equal to the prime rate plus a margin of 1.0%. Interest is paid monthly for
borrowings which bear interest based on
F-20
44
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the prime rate and is paid at the end of the applicable LIBOR period for
borrowings which bear interest based on a LIBOR rate. An unused facility fee of
.5% per annum is charged on the average unused daily balance. As of December 30,
1997, there were no borrowings outstanding on the 12/30/97 Revolver and unused
availability was $13,400. Availability was reduced by several letters of credit
outstanding as of December 30, 1997, which totaled $6,600. The 12/30/97 Revolver
terminates on December 30, 2002.
The 12/30/97 Credit Agreement also includes two senior term loans, (i)
consisting of a $50,000 twenty-four quarter senior term loan ("SENIOR TERM LOAN
A") and (ii) a $60,000 thirty-two quarter senior term loan ("SENIOR TERM LOAN
B"). Both term loans are immediately due and payable in full if the 12/30/97
Revolver is terminated.
Senior Term Loan A is required to be repaid in quarterly principal
installments commencing in April 1998. Aggregate principal repayments for the
Senior Term Loan A are as follows:
YEARS ENDING
- ------------
1998................................................................... $ 3,750
1999................................................................... 6,500
2000................................................................... 7,750
2001................................................................... 9,500
2002................................................................... 10,000
Thereafter............................................................. 12,500
Interest is charged, at the Company's option at either: (i) the 1, 2 or 3
month reserve adjusted LIBOR plus a margin of 2.5%; or (ii) a floating rate
equal to the prime rate plus a margin of 1.0%. Interest is paid monthly for
borrowings which bear interest based on the prime rate and is paid at the end of
the applicable LIBOR period for borrowings which bear interest based on a LIBOR
rate.
Senior Term Loan B is required to be repaid in quarterly principal
installments commencing in April of 1998. Aggregate principal repayments for the
Senior Term Loan B are as follows:
YEARS ENDING
- ------------
1998................................................................... $ 450
1999................................................................... 600
2000................................................................... 600
2001................................................................... 600
2002................................................................... 600
Thereafter............................................................. 57,150
Interest is charged, at the Company's option, at either: (i) the 1, 2 or 3
month reserve adjusted LIBOR plus a margin of 3.0%; or (ii) a floating rate
equal to the prime rate plus a margin of 1.5%. Interest is paid monthly for
borrowings which bear interest based on the prime rate and is paid at the end of
the applicable LIBOR period for borrowings which bear interest based on a LIBOR
rate.
The interest rates applicable to the obligations outstanding under the
12/30/97 Credit Agreement are subject to adjustment (up or down) based on the
Company's year to date 1998 consolidated financial performance.
The 12/30/97 Senior Subordinated Note matures on December 30, 2006, and is
secured by a second lien on substantially all of the assets of the Company's
subsidiaries. As such, the 12/30/97 Senior Subordinated Note is subordinated in
right of payment from the proceeds of such collateral to the 12/30/97 Revolver
and to the Senior Term Loans A and B. If all outstanding obligations under the
12/30/97 Credit Agreement have been paid and the commitment under the 12/30/97
Revolver has been terminated, the Company must prepay the 12/30/97 Senior
Subordinated Note in full. Interest is payable monthly, and is charged at a rate
of prime
F-21
45
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus a margin of 3%, but in no event less than 11% per annum. The 12/30/97
Senior Subordinated Note is due and payable in a single installment on December
30, 2006.
The 12/30/97 Senior Subordinated Note contains a fee which is due and
payable to GECC upon repayment of the principal. If the 12/30/97 Senior
Subordinated Note is repaid in full on or prior to December 30, 1999, the
required fee is $500; if repaid in full after December 30, 1999, but prior to
December 30, 2000, the fee is $750; if repaid in full after December 30, 2000,
but prior to December 30, 2001, the fee is $1,200; if repaid in full after
December 30, 2001, but prior to December 30, 2002, the fee is $1,600; and if
repaid on or after December 30, 2002, the fee is $2,000.
The 12/30/97 Credit Agreement provides for mandatory prepayments of
obligations under the 12/30/97 Credit Agreement and the 12/30/97 Senior
Subordinated Note from proceeds received in certain transactions outside the
normal scope of the Company's business, such as the sale of fixed assets, or the
receipt of insurance proceeds. Additionally, the Company is subject to an annual
mandatory prepayment out of "excess cash", as defined in the 12/30/97 Credit
Agreement. The Company will be subject to a prepayment premium, as defined in
the 12/30/97 Credit Agreement, until December 30, 1999, if the revolving credit
facility is terminated or the Company prepays all or any portion of the Senior
Term Loans A or B other than as a result of the mandatory prepayments discussed
above.
F-22
46
ITEM 8. QUARTERLY FINANCIAL INFORMATION -- UNAUDITED (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
MARCH 29 JUNE 28 SEPTEMBER 27 DECEMBER 27
-------- -------- ------------ -----------
1997
Net sales.......................................... $31,738 $33,023 $32,875 $31,688
Gross profit....................................... 9,128 10,124 10,377 10,807
Net earnings (loss)................................ 1,032 1,789 2,421 2,078
Earnings (loss) per common share -- Basic.......... $ 0.24 $ 0.41 $ 0.37 $ 0.31
Earnings (loss) per common share -- Diluted........ $ 0.23 $ 0.40 $ 0.36 $ 0.30
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
MARCH 30 JUNE 29 SEPTEMBER 28 DECEMBER 28
-------- -------- ------------ -----------
1996
Net sales.......................................... $ 8,625 $10,155 $10,728 $ 8,692
Gross profit....................................... 2,858 4,311 4,388 3,651
Net earnings (loss)................................ (1,116) 709 764 449
Earnings (loss) per common share -- Basic.......... $ (0.29) $ 0.19 $ 0.20 $ 0.11
Earnings (loss) per common share -- Diluted........ $ (0.29) $ 0.19 $ 0.20 $ 0.11
F-23
47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE II
Board of Directors
Home Products International Inc.
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of Home Products International, Inc.
(formerly Selfix, Inc.) as of and for the fifty-two week period ended December
27, 1997 and December 28, 1996 included in this Form 10-K, and have issued our
report thereon dated February 6, 1998. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The financial statement
schedule listed in Item 14(b) is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 6, 1998
F-24
48
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
Board of Directors
Home Products International, Inc. (Formerly Selfix, Inc.)
In connection with our audit of the consolidated financial statements of
Home Products International, Inc. (formerly Selfix, Inc.) and Subsidiaries
referred to in our report dated February 9, 1996, we have also audited Schedule
II for the 52-week period ended December 30, 1995. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Chicago, Illinois
February 9, 1996
F-25
49
SCHEDULE II
HOME PRODUCTS INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 27, 1997,
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 28, 1996,
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 30, 1995
ADDITIONS
---------------------- DEDUCTIONS
BALANCE AT CHARGED TO (NET BALANCE
BEGINNING COSTS AND BALANCES WRITE-OFFS/ AT END
OF PERIOD EXPENSES ACQUIRED RECOVERIES) OF PERIOD
---------- ---------- -------- ----------- ---------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 27, 1997.......................... $ 901 $ 499 $659 $ (500) $1,716
December 28, 1996.......................... $1,395 $ 211 $ -- $ (705) $ 901
December 30, 1995.......................... $1,431 $ 524 $ -- $ (560) $1,395
WARRANTY RESERVES
December 27, 1997.......................... $ 453 $ -- $ -- $ (181) $ 272
December 28, 1996.......................... $ 495 $ -- $ -- $ (42) $ 453
December 30, 1995.......................... $ 511 $ -- $ -- $ (16) $ 495
INVENTORY RESERVES
December 27, 1997.......................... $ 993 $ 698 $300 $ (624) $1,367
December 28, 1996.......................... $2,411 $ 678 $ -- $(2,096) $ 993
December 30, 1995.......................... $1,560 $1,648 $ -- $ (797) $2,411
F-26