Back to GetFilings.com
1
================================================================================
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
FOR THE FIFTY TWO WEEKS ENDED DECEMBER 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-17237
---------------------
HOME PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its Charter)
---------------------
DELAWARE 36-4147027
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
4501 WEST 47TH STREET
CHICAGO, ILLINOIS 60632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (773) 890-1010.
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED TITLE OF EACH CLASS
--------------------- -------------------
None Common Stock, Par Value $0.01 Per Share
Securities registered pursuant to Section 12(b) of the Act: None
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 February 11, 1999
- -7,638,961. Aggregate market value of such shares held by non-affiliates as of
that date - $64,306,128.
DOCUMENTS INCORPORATED BY REFERENCE.
Home Products International, Inc. definitive proxy statement dated April
19, 1999 for the 1999 Annual Meeting ("Proxy Statement") -- Part III
================================================================================
2
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Home Products International, Inc. (the "Company" or "HPI") through its
wholly owned subsidiaries 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: general storage products, food storage
products, laundry management products, bathware products, closet storage
products, juvenile products and disposable servingware products. The Company
holds a significant market share in the United States in each of its key product
categories. 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 generated
$252.4 million in net sales for 1998, which makes HPI one of the largest
companies in the fragmented U.S. consumer housewares industry.
The Company is the parent to several operating subsidiaries and includes
the following wholly owned subsidiaries added in 1998: Seymour Housewares
Corporation an Indiana corporation ("Seymour") and Prestige Plastics, Inc. a
Minnesota corporation ("Prestige"). Prestige was the company created to
facilitate the acquisition of assets and the assumption of certain liabilities
comprising the businesses of Anchor Hocking Plastics ("AHP") and Plastics, Inc.
("PI") from Newell Co.
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, Inc. ("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. Selfix became a public company following
an initial public offering of its Common Stock in fiscal 1988.
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.
Once the restructuring was completed, the Company began to aggressively
pursue a strategy of disciplined growth through acquisitions. The following
table presents significant acquisitions within fiscal 1997 and 1998.
ENTITY DATE ACQUIRED
------ ------------------
Tamor Plastics Corporation and its affiliated product
distribution company Houseware Sales, Inc................. January 1, 1997
Seymour Sales Corporation and its wholly owned subsidiary
Seymour Housewares Corporation............................ December 30, 1997
Tenex Corporation's consumer product storage line........... August 14, 1998
Prestige Plastics, Inc. (AHP and PI)........................ September 8, 1998
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
2
3
Acquisition"). Tamor Plastics Corporation and Houseware Sales, Inc. have been
merged to form Tamor Corporation, a Massachusetts corporation and are
collectively referred to herein as "Tamor". Tamor designs, manufactures and
markets quality plastic housewares products within the general storage, closet
storage and juvenile product categories.
SEYMOUR ACQUISITION
Effective December 30, 1997, 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, numerous laundry related accessories and certain
juvenile products.
TENEX ASSET ACQUISITION
Effective August 14, 1998 the Company acquired certain assets (inventory
and molds) which comprised Tenex Corporation's consumer product storage line
(the "Tenex Asset Acquisition"). This product line consisted of plastic storage
bins and containers, rolling carts and stacking drawer systems and was acquired
for $16.4 million in cash. This product line is included in the general storage
products category.
NEWELL ASSET ACQUISITION
Effective September 8, 1998 the Company acquired the assets and assumed
certain liabilities comprising the businesses of AHP and PI, and is referred to
herein as the "Newell Asset Acquisition". AHP is a leading supplier of food
storage containers and PI is a leading supplier of disposable plastic
servingware. The Newell Asset Acquisition was completed for $78.0 million in
cash.
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 numerous excellent acquisition candidates because the suppliers of consumer
houseware products are highly fragmented with no single supplier accounting for
more than 10% of the total sales. The Company believes it is well-positioned to
pursue its strategy of growth through acquisitions given its access to the
capital markets and its increased visibility from its acquisitions.
To improve margins and operating efficiencies, the Company believes large
national retailers are continuing to reduce their 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 has successfully found tremendous
cost-saving synergies among its acquired companies. The Company believes it can
successfully gain market share and increase sales in all of its key product
categories.
(b) Financial information about segments.
Based upon the requirements of Statement of Financial Accounting Standards
("SFAS") No. 131, management of the Company has determined that HPI operates
within in a single segment -- Housewares. As such, the required information for
this section is contained in the Consolidated Financial Statements as included
in Part II, Item 8 of this Form 10-K.
3
4
(c) Narrative description of business.
HOUSEWARES SEGMENT PRODUCTS--HISTORICAL GROSS SALES BY PRODUCT CATEGORY
The following table sets forth the amounts and percentages of the Company's
historical gross sales by product categories within the housewares segment for
the periods indicated. As a result of realignment of the Company's product
categories in 1998, certain prior year amounts have been reclassified (in
thousands except %).
1998 1997 1996
--------------- --------------- --------------
SALES % SALES % SALES %
-------- --- -------- --- ------- ---
General storage...................... $ 58,837 21% $ 47,275 34% $ -- --%
Food storage......................... 13,053 5% -- -- -- --%
Closet storage....................... 38,109 14% 46,390 34% -- --%
Laundry management................... 100,671 37% -- -- -- --%
Bathware............................. 26,686 10% 24,428 18% 24,006 59%
Juvenile............................. 15,780 6% 11,652 8% 7,369 18%
Servingware.......................... 12,584 4% -- -- -- --%
Shutters............................. 8,252 3% 8,385 6% 9,457 23%
-------- -------- -------
Total Gross Sales.......... $273,972 100% $138,130 100% $40,832 100%
Allowances........................... (21,543) (8,806) (2,632)
-------- -------- -------
Total Net Sales............ $252,429 $129,324 $38,200
======== ======== =======
General storage products. The Company offers a variety of plastic storage
containers, rolling carts and stacking drawer systems. The storage containers
range in size from shoe boxes to jumbo (48 gallon) totes, and include specialty
containers sold during the winter holiday season. Storage containers contain a
variety of product attributes, including removable wheels and dome-top lids,
which increase storage capacity. The rolling carts and stacking drawer systems
come in a wide range of sizes and number of shelving units.
Food storage products. This is a new product category which was acquired
in 1998. The primary products sold within this group are StowAways(R), Pop-Top
Storables(R), and Klear Stor(R) and Klear Por(R). All products are approved for
use in contact with food by the United States Food & Drug Administration. The
StowAway(R) line includes 34 individual food storage products each consisting of
a clear base and a colored lid. StowAways(R) are primarily sold in value packs
ranging in size from two to thirty-six piece sets. Pop-Top-Storables(R) products
consist of a clear rigid base and a color lid with a patented "pop top" button
to the side. The unique look of the base and the patented lid differentiate the
line from the competition. Pop-Top-Storables(R) are sold in value packs ranging
from two to sixty piece sets. Klear Stor(R) and Klear Por(R) are plastic storage
products that are clear like glass. There are over 30 variations of these
products within the Company's catalog ranging in sizes from eight ounces to one
gallon.
Closet storage products. This category is primarily comprised of plastic
clothes hangers. Due to the commodity nature of the hanger business, margins in
this category are inherently lower, while unit volumes are substantially higher.
Management believes that the Company 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. Also included in this category are
other plastic organizers, closet and clothing organization products.
Laundry management products. The Company offers a significant variety of
ironing boards (approximately 185 individual SKU's) and management believes that
the Company commands a majority of the U.S. market share. Key products in this
category include the EasyBoard (perforated board), SureFoot (vented, four-leg
board), ReadyPress (over-the-door) and IP2000 (vented, four-leg with hanger
rack). The Company is also the leading manufacturer of ironing board covers and
pads, and also holds a majority of the U.S. market share. The Company offers a
variety of different types of covers and pads in a multitude of 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.
4
5
Additionally, the Company is a leading U.S. producer of laundry accessories. Key
products within this category include: wood and metal drying racks, laundry
bags, hampers and sorters, clotheslines, and clothes pins.
Bathware products. The Company markets a broad line of value-priced
plastic bath accessories and organizers. These include shower organizers, towel
bars, soap dishes, shelves, portable shower sprays, and fog-free shower mirrors.
The Company believes it is a leading producer of opening price-point plastic
bath accessories. In addition, this product category also includes the Company's
complete line of over 150 hooks, primarily made of plastic, the majority of
which are self-adhesive. Augmenting the plastic hook line is a line of metal
picture hooks, sold to the same customer base.
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). 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.
Servingware products. This is a new product category which was acquired in
1998. Products in this category include a wide range of upscale, plastic
disposable beverage and food servingware product lines. The primary products are
Scrollware(R), Prestige(R) and Beverageware(TM). Scrollware(R) consists of clear
plastic plates, bowls, trays and mugs. The products are clear to resemble
crystal and are etched with a baroque design. Prestige(R) products include
plates, bowls, tray and drinkware in three colors; white, black and clear.
Beverageware(TM) products are offered in a variety of shapes and sizes, and come
in three colors; clear, red and green. Each of the products are targeted at
price points above paper, foam and thermofoam plastic alternatives, but below
glass and china options.
Shutters products. Through Shutters, Inc. the Company marketed a unique
line of plastic exterior shutters to the construction trades and consumer home
improvement catalogs. Effective December 27, 1998, the Company sold Shutters,
Inc. to an investment group led by Shutters' management.
DEPENDENCE UPON A SINGLE CUSTOMER OR FEW CUSTOMERS
The Company is dependent upon a few customers for a large portion of its
revenues. In 1998 and 1997 two customers each accounted for more than 10% of
consolidated net sales. The Company's top two customers, Wal-Mart and Kmart,
accounted for 18.5% and 12.1% of net sales respectively in 1998. These same two
customers accounted for 15.7% and 10.1% respectively in 1997. The loss of one of
these customers could have a material effect on the Company. No other customer
accounted for more than 10% of consolidated net sales in 1998 or 1997.
MARKETING AND DISTRIBUTION
The Company's products are sold through national and regional discounters,
hardware/home centers, food/drug stores, juvenile stores, specialty stores and
to hotels. The Company sells directly to major retail customers through its
sales management personnel and through manufacturers' representatives.
Management believes that one of its greatest opportunities is to fully
leverage the Company's long-standing relationships with these customers to gain
additional market share in its core product lines and to successfully introduce
new and enhanced product lines.
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 its retail partners 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, the Company provides its customers with a
variety of retail support
5
6
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.
The Company's marketing efforts also include advertising, promotional and
differentiated packaging programs. Promotions include cooperative advertising,
customer rebates targeted at the Company's value added feature products and
point-of-purchase displays.
PRODUCT RESEARCH AND DEVELOPMENT
The Company's Product Research and Development department uses
computer-aided design (CAD) systems to enhance its product development efforts.
Although the Company's historical accounting records do not separately present
research and development expenses, the Company estimates that for 1998, 1997 and
1996, expenses associated with research and development were $0.7 million, $0.4
million and $0.3 million respectively.
FOREIGN AND EXPORT SALES INFORMATION
The Company's 1998 sales outside the United States accounted for
approximately 6% of its total net sales. Sales to Canada accounted for 3% of the
Company's net sales in 1998.
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
management products, general and food storage products are gifts typically given
at bridal showers which are mostly held during the spring/summer wedding season.
The surge in home buying/building during the spring/summer months increases the
demand for new houseware products which further explains the 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 contributes to
an increase in demand for the Company's houseware products during the second and
third quarters. Additionally, sales of servingware products tend to be higher in
the third and fourth quarters due to holiday events in November and December.
COMPETITION
The housewares industry is highly fragmented and management believes that
no single supplier accounts for more than 10% of total market sales. The Company
competes with a significant number of companies, some which have greater
name-brand recognition, larger customer bases and/or significantly greater
resources than the Company. The Company's key competitors include Newell
Rubbermaid and Sterilite. There are no regulatory or other barriers to entry of
new competitors into the Company's markets. To provide complete product lines,
suppliers of housewares products have begun to consolidate. Accordingly, the
Company believes that it is well positioned to pursue its strategy of growth
through acquisitions.
The Company believes that large national retailers are continuing to reduce
the number of suppliers of housewares products with which they do business to
improve margins and operating efficiencies. These retailers are forming key
relationships 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 that it is well positioned to
continue to meet their needs.
PATENTS, TRADEMARKS AND LICENSES
Subsidiaries of the Company own a number of trademarks and 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
its business.
6
7
RAW MATERIALS AND PRODUCTION
The Company manufactures the majority of its products at its various
manufacturing facilities in the United States and Mexico. In certain instances
the Company has contracted with outside custom molders to produce various
plastic products due to capacity and or time constraints.
The primary raw material used in the Company's plastic injection molding
operations is plastic resin, primarily polypropylene. Resin is a spot commodity
with pricing parameters tied to supply and demand characteristics beyond the
Company's control. The Company 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. Plastic resin is utilized by a
number of different industries, many of which are quite different from the
Company's 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 laundry management
operations are cold rolled steel and greige fabric. The Company purchases
approximately 25,000 tons of cold rolled steel annually, typically at spot
prices. Greige fabric, purchased from brokers, is a cotton based product, with
pricing tied to the world cotton markets. Purchases of greige fabric approximate
7 million yards annually.
The Company's production processes utilize automated machinery and systems
where appropriate. Certain laundry management facilities employ the use of an
automated manufacturing production line to produce 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.
ENVIRONMENT
An environmental report obtained in connection with the Tamor Acquisition
indicated that certain remedial work relating to ground contamination of Tamor's
Leominster, Massachusetts facility was required. The former shareholders of
Tamor placed $1.1 million in escrow to pay for, among other things, any required
remediation at the Leominster facility. The Company has completed certain
remediation projects at the Leominster facility as of December 26, 1998.
Although there can be no assurances, the Company believes that the costs that
may be required in the future plus the amount incurred already will not exceed
the amount in escrow.
Except as described above, the Company believes that 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 26, 1998, the Company employed approximately 1,465 persons
in the United States and Mexico. Approximately 81 are hourly employees at its
Leominster, Massachusetts facility, covered by a collective bargaining agreement
which expires in March, 1999; 100 are hourly employees at its Chicago, Illinois
facilities, covered by a collective bargaining agreement which expires in
January, 2001; 262 are hourly employees at its Reynosa, Mexico facility covered
by a collective bargaining agreement which expires in December, 1999; and 200
are hourly employees at its Eagan, Minnesota facility covered by a collective
bargaining agreement which expires in November 2000.
The Company utilizes the services of approximately 535 temporary workers in
its injection molding operations for assembly and in certain warehouses.
7
8
ITEM 2. PROPERTIES
The Company maintained facilities with an aggregate of 2,326,500 square
feet of space, and 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 (SQUARE
FACILITY USE FEET) OWNED/LEASED
-------- --- ------------ ------------
Fitchburg, MA..................... Distribution 220,000 Leased
Fitchburg, MA..................... Storage 100,000 Leased
Leominster, MA.................... Manufacturing 100,000 Owned
Leominster, MA.................... Sales Office 17,000 Leased
Leominster, MA.................... Storage 120,000 Leased
Louisiana, MO..................... Manufacturing/Distribution 340,000 Owned
Thomasville, GA................... Manufacturing/Distribution 45,000 Owned
Elk Grove Village, IL............. Manufacturing/Distribution Storage 100,000 Leased
Chicago, IL....................... Manufacturing/Distribution Storage 186,000 Leased
Chicago, IL....................... Storage/Distribution 113,500 Leased
Mooresville, NC................... Manufacturing/Distribution 270,000 Owned
McAllen, TX....................... Administration/Distribution 5,000 Leased
Reynosa, Mexico................... Manufacturing 30,000 Owned
Reynosa, Mexico................... Storage 13,000 Leased
Seymour, IN
Corporate....................... Corporate administration 10,000 Owned
East Plant...................... Manufacturing 70,000 Owned
West Plant...................... Manufacturing/Distribution Storage 132,000 Owned
Logistics Center................ Storage/Distribution 105,000 Owned
Logistics Center................ Storage/Distribution 100,000 Leased
Eagan, MN......................... Manufacturing/Distribution Storage 125,000 Leased
Coon Rapids, MN................... Manufacturing/Distribution Storage 75,000 Owned
Coon Rapids, MN................... Storage 50,000 Leased
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 sought $7.0 million in total damages,
one-half from each defendant.
In early 1999 the Company was notified that the suit against the Company
has been dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages and
principal positions as of February 11, 1999, are as follows:
NAME AGE POSITION
- ---- --- --------
James R. Tennant........................... 46 Chairman of the Board and Chief Executive
Officer
James E. Winslow........................... 44 Executive Vice President, Chief Financial
Officer and Secretary
8
9
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 Division
President of True North Communications, an international marketing services
company.
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 agreement of Mr. Tennant.
9
10
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 Market(SM)
under the symbol "HPII". The Company believes that as of February 11, 1999 there
were 275 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
sales prices 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 26, 1998:
First Quarter.......................................... $16.50 $10.75
Second Quarter......................................... $16.63 $10.00
Third Quarter.......................................... $11.69 $ 8.00
Fourth Quarter......................................... $10.75 $ 6.88
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
WARRANTS
On February 27, 1997, the Company issued to General Electric Capital
Corporation ("GECC") a warrant to purchase 79,204 shares of HPII Common Stock at
a purchase price of $5.80 per share. The warrant became exercisable on August 1,
1997, and terminates on February 27, 2007. The warrant was issued in connection
with the February 27, 1997 credit agreement between the Company and GECC. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. See Note 9 to the Company's Consolidated
Financial Statements.
10
11
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $252,429 $129,324 $38,200 $41,039 $40,985
Cost of goods sold..................... 169,213 88,888 22,992 25,678 25,587
-------- -------- ------- ------- -------
Gross profit................. 83,216 40,436 15,208 15,361 15,398
Operating expenses..................... 52,566 27,688 13,843 17,385 18,185
Restructuring charge................... -- -- -- 2,051 1,701
-------- -------- ------- ------- -------
Operating profit (loss)...... 30,650 12,748 1,365 (4,075) (4,488)
Interest expense....................... 15,332 5,152 707 896 999
Other income (expense), net............ 33 70 148 688 (295)
-------- -------- ------- ------- -------
Earnings (loss) before income taxes and
extraordinary charge................. 15,351 7,666 806 (4,283) (5,782)
Income tax expense (benefit)........... 6,601 346 -- (273) 221
-------- -------- ------- ------- -------
Net earnings (loss) before
extraordinary charge................. $ 8,750 $ 7,320 $ 806 $(4,010) $(6,003)
======== ======== ======= ======= =======
Net earnings (loss) before
extraordinary charge per common
share-basic.......................... $ 1.11 $ 1.35 $ 0.21 $ (1.11) $ (1.70)
======== ======== ======= ======= =======
Net earnings (loss) before
extraordinary charge per common
share-diluted........................ $ 1.07 $ 1.29 $ 0.21 $ (1.11) $ (1.70)
======== ======== ======= ======= =======
AS OF FISCAL YEAR END
------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET AND CASH FLOW DATA:
Working capital................................. $ 27,677 $ 8,263 $ 7,152 $ 6,712 $11,026
Property, plant and equipment, net.............. 60,200 28,380 7,934 8,453 10,466
Intangible assets............................... 181,952 29,391 2,527 2,693 1,536
Total assets.......................... 340,043 99,343 24,705 24,976 30,761
Long-term obligations (less current
maturities)................................... 219,536 30,700 6,184 7,022 9,421
Stockholders' equity............................ 58,001 42,216 11,709 10,847 13,623
Cash provided by operating activities........... 20,693 878 1,823 2,575 2,027
11
12
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 1998, 1997 and 1996 are for the
fifty-two weeks ended December 26, 1998, December 27, 1997 and December 28,
1996.
1998 ACQUISITIONS
The Company made three acquisitions in its 1998 fiscal year (all three
combined are referred to herein as the "1998 Acquisitions") and the actual
operating results from each acquisition have been combined with the Company's
since their respective acquisition date.
Effective December 30, 1997 the Company acquired all of the outstanding
common stock of Seymour Sales Corporation and its wholly owned subsidiary,
Seymour Housewares Corporation (collectively, "Seymour"), 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 (1,320,000 shares) and the assumption of $70.0 million
of debt.
Effective August 14, 1998 the Company acquired certain assets (inventory
and molds) which comprised Tenex Corporation's consumer product storage line
(the "Tenex Asset Acquisition"). This product line consisted of plastic storage
bins and containers, rolling carts and stacking drawer systems. The Tenex Asset
Acquisition was completed for $16.4 million in cash.
Effective September 8, 1998 the Company acquired assets and assumed certain
liabilities from Newell Co. (consisting of the businesses of Anchor Hocking
Plastics ("AHP") and Plastics, Inc ("PI") and are referred to herein as the
"Newell Asset Acquisition"). AHP is a leading supplier of food storage
containers and PI is a leading supplier of disposable plastic servingware. The
Newell Asset Acquisition was completed for $78.0 million in cash.
FISCAL YEAR 1998 AS COMPARED TO FISCAL YEAR 1997
The following discussion and analysis compares the actual historical
results of 1998 and 1997:
FIFTY-TWO WEEKS ENDED FIFTY-TWO WEEKS ENDED
DECEMBER 26, 1998 DECEMBER 27, 1997
---------------------- ----------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net sales.......................................... $252,429 100.0% $129,324 100.0%
Cost of goods sold................................. 169,213 67.0% 88,888 68.7%
-------- ------ -------- ------
Gross profit..................................... 83,216 33.0% 40,436 31.3%
Operating expenses................................. 52,566 20.8% 27,688 21.5%
-------- ------ -------- ------
Operating profit................................. 30,650 12.2% 12,748 9.8%
Interest expense................................... 15,332 6.1% 5,152 4.0%
Other income....................................... 33 -- 70 0.1%
-------- ------ -------- ------
Earnings before income taxes and extraordinary
charge........................................... 15,351 6.1% 7,666 5.9%
Income tax expense................................. 6,601 2.6% 346 0.2%
-------- ------ -------- ------
Net earnings before extraordinary charge........... $ 8,750 3.5% $ 7,320 5.7%
Extraordinary charge, net of tax................... 5,107 2.0% -- --
-------- ------ -------- ------
Net earnings....................................... $ 3,643 1.5% $ 7,320 5.7%
======== ========
Net earnings before extraordinary charge per common
share -- basic................................... $ 1.11 $ 1.35
======== ========
Net earnings before extraordinary charge per common
share -- diluted................................. $ 1.07 $ 1.29
======== ========
12
13
Net Sales. Net sales of $252.4 million were up $123.1 million or 95.2% from
the prior year. The increase was primarily driven by the 1998 Acquisitions,
which combined to generate $129.8 million of net sales in 1998. The elimination
of low margin and under performing products along with management's continued
sku rationalization efforts negatively impacted 1998 net sales.
General Storage Products. Net sales in the general storage category of
$53.9 million in 1998 increased $10.4 million or 23.9% from 1997. The primary
contributor to the increase was the Tenex Asset Acquisition coupled with new
product development. New product introductions, including drawer systems (which
include the Tenex Asset Acquisition) contributed $17.4 million to 1998 net
sales. 1998 net sales of storage totes experienced a $7.0 million decline as
retailers more heavily promoted the new drawer systems.
Food Storage Products. This is a new product category for the Company,
which was added through the 1998 acquisition of AHP. Net sales in this category
since the acquisition were $12.0 million, or 4.7% of total 1998 net sales.
Closet Storage Products. Net sales in this product category of $35.0
million experienced a $9.2 million decline, or 20.8% as compared to 1997. The
decline was the result of management's continued elimination of under performing
and low margin sku's. Also included within this category are plastic hangers
which experienced a slight decrease as compared to 1997 due to the elimination
of several low margin customers.
Juvenile Storage Products. Net sales in this product category of $14.6
million increased $4.4 million, or 43.1% as compared to 1997. The primary factor
for the increase was the 1998 acquisition of Seymour which contributed $4.0
million to 1998 net sales.
Laundry Management Products. This is a new product category for the Company
in 1998, which was added through the 1998 acquisition of Seymour. Laundry
management products contributed $93.2 million, or 36.9% of 1998 net sales.
Bathware Products. Net sales in this product category of $24.4 million,
increased $1.1 million or 4.7% from 1997. The primary contributor to the
increase was additional shelf space for the Company's Suction Lock products.
This increase was slightly off set by the continued elimination of low margin
and under performing sku's.
Servingware Products. This is a new product category for the Company, which
was added through the 1998 acquisition of PI. Net sales in this category since
the acquisition were $11.3 million, or 4.5% of 1998 net sales.
Shutters Products. Net sales for 1998 of $8.0 million were flat as compared
to 1997.
Gross Profit. Gross profit of $83.2 million, increased $42.8 million, or
105.8% from the prior year. Gross profit margin experienced an increase from
31.3% in 1997 to 33.0% in 1998. A contributor to the margin improvement from the
prior year was the decline in prices for one of the Company's primary raw
materials, plastic resin. The average cost per pound of plastic resin dropped
from 1997 to 1998; however, much of the savings from the decline in resin prices
were passed along to customers. This was done to maintain shelf space in
response to competitive pressures. Also contributing to the margin improvement
was the introduction of higher margin products, primarily within the general
storage category and the favorable impact generated from the elimination of
under performing and low margin sku's across all of the Company's product lines.
Offsetting some of the margin improvement was a change in the Company's product
mix. In general, product lines acquired as a result of the 1998 Acquisitions had
lower margins than the Company's mix of products in 1997. This was particularly
true of the products acquired in the Tenex Asset Acquisition and AHP products.
Capacity constraints forced the Company to outsource production of the products
acquired in the Tenex Asset Acquisition at a higher cost as compared to in-house
manufacturing. The AHP products have a lower margin due to excess manufacturing
capacity and too much emphasis on deal pricing. Management intends to address
the capacity issue in 1999 and will also focus on new product development within
the food storage category.
Operating Expenses. Operating expenses, including selling, administrative
and amortization of intangibles decreased from 21.5% to 20.8% as a percentage of
net sales from 1997 to 1998. Selling expenses decreased from 14.3% of net sales
in 1997 to 12.4% in 1998. Administrative expenses decreased from 6.5% of
13
14
net sales in 1997 to 6.3% in 1998. The Company's acquisition integration
strategy focuses on combining acquired entities into existing operating
platforms. In this way, fixed expenses are effectively leveraged and minimized.
The decline in selling, marketing and administration expenses as a percentage of
net sales is a direct result of this effort. Amortization of intangibles
increased from .7% in 1997 to 2.1% in 1998. The increase in amortization expense
is the result of goodwill created from the 1998 Acquisitions.
Interest Expense. Interest expense in 1998 was $15.3 million, as compared
to $5.2 million for 1997. The primary contributor to the increase over 1997 was
the result of $180.8 million of debt added related to the 1998 Acquisitions.
Also contributing to the increase was a slightly higher effective interest rate
on the high yield bonds, which was partially offset by a lower incremental
borrowing rate due to the May 1998 Refinancing (as defined in Capital Resources
and Liquidity).
Income Taxes. Income tax expense increased from $0.3 million in 1997 to
$6.6 million in 1998 (before benefit from extraordinary charges). Income tax
expense increased because of a change in the Company's tax paying position. In
1997, the Company was able to use net operating loss carryforwards and the
elimination of a valuation allowance against deferred tax assets to eliminate
the federal tax expense. By the end of fiscal 1997, the net operating losses had
been fully utilized. As such, the Company was in a tax paying position in 1998.
Extraordinary Charge, net of tax. An extraordinary charge in the amount of
$5.1 million, net of tax, for the early retirement of debt, or $0.62 per common
share -- diluted was recorded in 1998. To fund the Seymour Acquisition,
increased financing facilities were obtained to replace and augment existing
facilities as of December 27, 1997, requiring the write-off of $1.7 million, net
of tax, of capitalized costs incurred to obtain the replaced credit facilities.
In addition, in May, 1998 the Company refinanced its existing debt and incurred
an extraordinary charge of $3.4 million, net of tax, for the write-off of
previously capitalized costs relating to the previous credit agreement as well
as penalties for early repayment of debt.
Earnings per share before extraordinary charge -- diluted. Diluted earnings
per share, before extraordinary charge, for 1998 was $1.07 as compared to $1.29
in 1997. The weighted shares outstanding increased from 5,682,000 in 1997 to
8,176,000 in 1998. The increase in weighted average shares outstanding was the
result of 1,320,000 shares issued in the Seymour Acquisition, the June 1997
secondary stock offering of 2,280,000 shares outstanding for the entire period,
stock options exercised during the year and shares issued under the Company's
employee stock purchase plan. Offsetting some of the increase in shares were
treasury stock purchases made in 1998.
As noted above, the Company's tax position has significantly changed since
1997. If the Company had been in a full tax paying position a year ago, diluted
earnings per share before extraordinary charge would have been $0.77 as compared
to the fully taxed earnings per share in 1998 of $1.07.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
The following discussion and analysis compares the actual historical
results of 1997 and 1996 (in thousands, except share and per share amounts):
1997 ACQUISITION.
The Company acquired Tamor Plastics Corporation, and its affiliated product
distribution company, Houseware Sales, Inc. (the "Tamor Acquisition") effective
January 1, 1997. The two companies were merged to form Tamor Corporation
("Tamor"). Tamor, originally founded in 1947 designs, manufactures and markets a
broad range of quality plastic housewares products. Tamor was acquired for $41.9
million consisting
14
15
of $27.8 million in cash, $2.4 million in common stock (480,000 shares) and the
assumption of $11.7 million of debt.
FIFTY-TWO WEEKS ENDED FIFTY-TWO WEEKS ENDED
DECEMBER 26, 1998 DECEMBER 27, 1997
---------------------- ---------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net sales........................................... $129,324 100.0% $38,200 100.0%
Cost of goods sold.................................. 88,888 68.7% 22,992 60.2%
-------- ------ ------- ------
Gross profit...................................... 40,436 31.3% 15,208 39.8%
Operating expenses.................................. 27,688 21.5% 13,843 36.2%
-------- ------ ------- ------
Operating profit.................................. 12,748 9.8% 1,365 3.6%
Interest expense.................................... 5,152 4.0% 707 1.9%
Other income (expense).............................. 70 0.1% 148 0.4%
-------- ------ ------- ------
Earnings before income taxes........................ 7,666 5.9% 806 2.1%
Income tax expense.................................. 346 0.2% -- --
-------- ------ ------- ------
Net earnings........................................ $ 7,320 5.7% $ 806 2.1%
======== =======
Net earnings per common share -- basic.............. $ 1.35 $ 0.21
======== =======
Net earnings per common share -- diluted............ $ 1.29 $ 0.21
======== =======
Net Sales. Net sales of $129.3 million were up $91.1 million from the
prior year. The increase was primarily driven by the Tamor Acquisition. The
Tamor Acquisition contributed a new product category to the Company within the
housewares segment, general storage. General storage products include, among
other items, the flat lid 20, 30, and 48 gallon storage totes. General storage
products added $43.5 million to 1997 net sales. Tamor also manufactures home
organization products, kitchen storage, recycling products and plastic hangers,
all of which are included within the closet/home organization product category.
Tamor contributed $44.2 million to 1997 net sales from closet/home organization
products. Tamor also manufactures juvenile products, primarily plastic hangers
for children's clothes. Tamor contributed $4.1 million to juvenile sales in
1997. 1997 also saw an increase in the bathware product category with the
introduction of the Suction Lock bath line. These increases offset declines in
less profitable juvenile and home organization products. Shutters products
experienced a decrease of $.9 million.
Gross Profit. Gross profit margin for 1997 was 31.3% of net sales, down
from a 1996 margin of 39.8%. The primary factor for the margin decline was the
Tamor Acquisition. Tamor's portfolio of products included certain lower margin
products in the home/closet organization product category than those in the
bathware product category. Additionally, Tamor was forced to outsource
production of certain items due to capacity constraints which negatively
impacted 1997 profit margins.
Operating Expenses. Operating expenses, including selling, administrative,
and amortization of intangibles decreased dramatically as a percentage of net
sales from 1996 to 1997. Selling expenses decreased from 23.7% of net sales in
1996 to 14.3% in 1997. Administrative expenses decreased from 12.0% of net sales
in 1996 to 6.5% in 1997. The primary contributor to the decrease as a percentage
of sales was an increased sales base along with management's continued efforts
to control spending. Amortization of intangibles increased as a percentage of
net sales from 0.5% in 1996 to 0.7% in 1997. The increase in amortization
expense was the result of goodwill added from the Tamor Acquisition.
Interest Expense. Interest expense of $5.2 million in 1997 increased $4.4
million from 1996. The increase was the combined result of additional debt
borrowed to complete the Tamor Acquisition offset by a reduction of debt which
was paid off through funds generated from a secondary public stock offering of
2,280,000 shares in the third quarter of 1997. Proceeds from the offering, $20.9
million, were used to repay $20.6 million of debt and accrued interest of $0.3
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
15
16
the deferred tax assets recorded would be realized. The Company recorded a
provision for state income taxes in the amount of $0.3 million, as a result of
the inability to use tax loss carryforwards in Massachusetts, Tamor's primary
state of business. Tax expense for 1996 was zero as a result of federal and
state tax loss carrybacks.
Net earnings per share -- diluted. Net earnings per share -- diluted in
1997 was $1.29, based on 5,682,000 weighted average common shares outstanding.
This compares to net earnings per share -- diluted of $0.21, based on 3,854,000
weighted average common shares outstanding. The increase in weighted average
common shares outstanding is the result of stock issued in the Tamor
Acquisition, 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.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at December 26, 1998 were $5.0 million as
compared to $0.6 million at December 27, 1997. The increase in cash is partially
the result of a change in the mechanics of the Company's primary credit
facility. Prior to the May 1998 Refinancing (as defined below) the Company was
required to remit collected funds on a daily basis to repay borrowings under the
Company's revolving line of credit. The daily sweeps of cash were no longer
required after the Company's primary credit facility was refinanced with new
lenders in May 1998. All available cash is invested in overnight Eurodollar
sweeps which earn approximately 5.5% per annum.
The Company's financial structure has significantly changed since 1997. To
complete the acquisition of Seymour Housewares in early 1998 the Company
increased its borrowings to include a $20.0 million revolving line of credit,
and $110.0 million of term loans. In May 1998 the Company refinanced all of its
debt so as to provide a more stable platform to implement its consolidation
strategy. On May 14, 1998 the Company issued $125.0 million of Senior
Subordinated Notes (the "Notes") due in 2008. Proceeds from the offering were
used to prepay approximately $122.0 million of indebtedness (primarily from
previous acquisitions) and fund certain transaction costs. Concurrently with the
offering, the Company entered into a revolving credit agreement in the maximum
principal amount of $100.0 million (the "Revolver") which replaced the Company's
prior $20.0 million revolving credit facility. The Notes and the Revolver are
collectively referred to herein as the "May 1998 Refinancing". Availability
under the Revolver as of December 26, 1998 was $51.9 million. The Notes and the
Revolver each contain various affirmative, negative and financial covenants. The
Company was in compliance with all covenants related to the Notes and the
Revolver as of December 26, 1998.
In August 1998 the Company used $16.4 million of available funds from the
Revolver to complete the Tenex Asset Acquisition. In September 1998, the Company
amended and restated the Revolver to include, among other things, a $50.0
million term loan (the "Term Loan"). The Term Loan, along with $28.0 million of
available funds from the Revolver were used to complete the Newell Asset
Acquisition.
Capital spending of $11.9 million in 1998 was used to acquire molds to
support new product introductions, additional injection molding machines and to
purchase the Company's Missouri manufacturing/warehouse facility which was
previously leased. The Company's capital spending needs in 1999 are expected to
be between $15.0 and $20.0 million. Capital projects anticipated for 1999
include upgrading computer hardware and software, additional injection molding
machines, a warehouse expansion and new molds to support product development.
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 ability to successfully fund future acquisitions
will depend on the financial situation of the target company, the
16
17
availability of funds under the Revolver, the possibility of obtaining
additional financing, and the ability to use company stock in lieu of cash.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to only accept two-digit entries in the date code field and can not distinguish
21st century dates from 20th century dates and, as a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements.
State of readiness. The Company is in the process of finalizing its
evaluation of the Year 2000 readiness (the "Project") of its information
technology systems ("IT") and its non IT Systems, ("Non IT") such as building
security, heating and cooling, telephones, voicemail, and other similar items.
The Company currently anticipates that the Project will cover the following
phases: (i) identification of all IT and non IT systems, (ii) assessment of the
repair or replacement requirements, (iii) repair or replacement, (iv) testing,
(v) implementation and (vi) creation of contingency plans in the event of year
2000 failures. The Company is scheduled to have reached Year 2000 compliance for
all IT and non IT Systems prior to December 1999.
The Company is also working with its major suppliers and customers to
determine whether the year 2000 problem will have an adverse effect on the
Company's relationships with them. The Company does not control its suppliers or
customers, and relies on a variety of utilities, telecommunication companies,
banks and other suppliers in order to continue its business. There is no
assurance that such parties will not suffer a year 2000 business interruption,
which, could have a material adverse effect on the Company's financial condition
and its results of operations.
Costs. To date, the Company has not incurred significant expenditures in
connection with the identification and evaluation of the Year 2000 compliance
issues. Management estimates that the Year 2000 compliance costs will be
approximately $0.25 million to $0.75 million. Funds for the Year 2000 compliance
will be obtained from current operations or the Company's revolving credit
facility.
Contingency plan. The Company has not yet finalized its Year 2000
contingency plan. The Company intends to finalize its contingency plan prior to
December 1999. In addition, if further year 2000 compliance issues are
discovered, the Company will evaluate the need for one or more contingency plans
relating to such issues.
MANAGEMENT OUTLOOK AND COMMENTARY
1998's operating and financial performance included the successful
completion of the following initiatives:
- Three 1998 acquisitions were integrated into the HPI family. Cost
reductions were achieved, operations streamlined and profitability
improved. Together, the 1998 Acquisitions added sales of $129.8 million
and earnings before interest, taxes, depreciation and amortization of
$23.7 million
- The continual pruning of products offered for sale resulted in a
reduction of net sales (for those products sold in 1997) but an
improvement in bottom line profitability. About 10% of the company's 1997
sales were eliminated.
- Profitability was improved as operating margins went from 9.8% in 1997 to
12.2% in 1998.
- The Company refinanced its revolving line of credit and term financing.
The net result was a reduction in interest rates of about 200 basis
points and a more flexible, less restrictive loan agreement.
- The Company successfully placed a $125 million Senior Subordinated Note
offering. The placement of the notes was instrumental in allowing for a
favorable refinancing of the Company's other financing arrangements.
- The Company sold its Home Improvement business (Shutters, Inc.) effective
as of December 27, 1998.
17
18
Management expects 1999 to be a challenging year but one that has the
potential to provide increasing rewards to shareholders and associates. Many
opportunities will be pursued and strategic initiatives begun. Some of these
items together with assorted factors that may influence the performance of the
Company in 1999 and beyond are as follows:
- The Tenex Asset Acquisition and the Newell Asset Acquisition will add
significantly to 1999 sales. It is expected that these acquired product
lines will add $50-60 million of revenues in 1999.
- The Company will continue to introduce new products. Products introduced
at the January 1999 Housewares Show have already received placement with
retailers and have begun shipping in the first quarter of 1999.
- During the third quarter of 1998 the Company made two acquisitions: the
Tenex Asset Acquisition and the Newell Asset Acquisition. These two
entities only contributed $0.5 million to the 1998 bottom line results
when related financing costs and goodwill amortization are considered.
They do, however, represent significant opportunities for future earnings
growth. The product line obtained from Tenex will be manufactured by
outside vendors until mid 1999. The Company is in the process of adding
productive capacity and warehousing to its Chicago facility to
accommodate the manufacturing of this line. Once the Company is able to
self manufacture the Tenex products, margins on this line are expected to
improve. The Newell Asset Acquisition obtained two new product lines: PI
and AHP. PI has sufficient margins, new product development and is a
leader in its industry. No immediate actions are planned for this line
other than to use other Company resources to expand distribution. The AHP
line of products, however, represents a significant opportunity for the
Company. Under previous ownership, new product development of the food
storage line was stagnant and the product line faced competitive
challenges. As a result, the line experienced declines in sales and
profits as it attempted to compete on price alone. It is the Company's
intention to develop new products and to invest in a new brand name for
the line. Management expects that this will enhance the product line's
ability to compete, reverse its unfavorable sales trend and improve
margins. This process has begun but may not provide meaningful returns
until late 1999.
- In 1999, management plans to finalize and execute its plans to balance
the production levels of its manufacturing facilities. At present, some
factories are at capacity and others are not. The goal will be to better
utilize the facilities to minimize costs. This opportunity is a direct
result of the Company's acquisition activity. As the Company entered
1998, all facilities were close to maximum capacity. Facilities acquired
during 1998 provide an opportunity to move production from one facility
to another as well as to consider bringing in-house certain production
performed by outside vendors. Facilities in Minnesota (acquired in the
Newell Asset Acquisition) are only at 70% of their molding capacity. The
remaining 30% will be used to produce other general storage and closet
items. The result of this effort is expected to favorably impact margins
in the 2nd half of 1999 and beyond.
- The Company is adding manufacturing capacity for its storage line of
products. 18 injection molding machines were added to the Company's
Chicago facility in early 1999. Not only will this allow the Company to
bring additional production in-house, but also it allows the Company to
replace older machines with more efficient machines. This initiative will
allow the Company to increase its margins by reducing manufacturing time
and cost.
- A 100,000 square foot warehouse is being added in Chicago to reduce the
Company's warehousing costs.
- The Company's primary raw materials are plastic resin, steel, fabric and
corrugated packaging. Fluctuations in the cost of these materials can
have a significant impact on reported results. Management does not expect
to see a significant change in the cost of these materials during 1999.
However, the cost of these items is affected by many variables outside
the control of the company and changes to the current perceived trends
are possible.
- The company operates in a dynamic competitive environment. Many
competitors, some of which with fewer resources than the Company, have
taken advantage of raw material price cuts to propose price
18
19
decreases to customers. As a result, the Company has matched or exceeded
such proposals. The net effect of this is that much of the benefit of raw
material price decreases has been passed through to customers. This trend
may continue in 1999. Further, if raw material costs were to increase,
there can be no guarantee that the Company could successfully pass the
increases along to customers.
- The Company distributes its products primarily in the eastern and midwest
regions of the United States. Distribution to the western United States
is inhibited by the lack of any regional distribution or manufacturing
facilities. Freight costs make distribution from the Company's other
facilities unprofitable. During 1999, management will continue to
evaluate the feasibility of expanding its manufacturing and distribution
capabilities to the west. This could represent a significant growth
opportunity for the Company.
- One component of the Company's acquisition strategy is to combine
acquired entities into existing operating platforms. In this way, fixed
expenses are effectively leveraged and minimized. For the most recent
acquisitions, this process is not yet complete. During 1999, management
will complete certain integration efforts resulting in a reduction of
operating expenses as a percent of net sales and improved operating
results.
- In early 1999, Caldor, a regional retailer in the northeast, announced
plans to close all of its stores and liquidate assets. Caldor was a
significant customer of the Company in 1998 generating sales of about
$9.5 million. Management expects that substantial revenue generated from
Caldor will be lost. Caldor has announced plans to sell some of its
stores to retailers who are customers of the Company. Over time, this
will lessen the impact of the Caldor liquidation. At December 26, 1998,
the Company recorded a bad debt loss to fully address potential
collection issues resulting from Caldor's liquidation.
- The Company has financed previous acquisitions primarily with debt. As a
result the Company is highly leveraged with total debt representing about
80% of the company's book capitalization, or a 4:1 debt to capital ratio.
Earnings could be materially impacted by changes in interest rates.
Management expects that cash flow from operations will be more than
sufficient to fund needed capital improvements and new product
development. During 1998, the Company refinanced its lines of credit
including a reduction in interest rates and a loosening of various
financial covenants. The Company was well within its financial covenants
in 1998 and expects to operate well within the covenants in 1999.
- HPI is a consolidator within the housewares industry. As such, management
will continue to seek strategic acquisitions of companies and product
lines that fit within the desired categories of products for the home.
The Company has the ability to finance some acquisition activity under
its current lines of credit. Management will also consider issuing stock
in lieu of cash where possible. Management believes additional lines of
credit are available from its current lending partners subject to the
earnings contribution of particular acquisition targets.
- Year 2000 computer compliance issues have been addressed. Where
necessary, new systems are in the process of being installed. All new
systems are expected to be fully operational by mid 1999. The cost of
these new systems was primarily funded in 1998. Remaining installation
costs will be less than $1 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks from changes in interest rates and
commodity based raw materials (resin, steel and fabric).
Interest Rate Risk. The Company's Revolver and Term Loan are LIBOR-based
and are subject to interest rate movements. A 10% increase or decrease in the
average cost of the Company's variable rate debt would result in a change in
pretax interest expense of approximately $650, based upon borrowings outstanding
at December 26, 1998.
19
20
Commodity Risk. The Company is subject to fluctuations in commodity type
raw materials such as plastic resin, steel and griege fabric. See Item 1 -- Raw
Materials, which is incorporated by reference to this section, for further
details.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including "General Development of
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 1998
Acquisitions 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 consolidation 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:
(a) Financial Statements
PAGE NO.
--------
Report of Independent Public Accountants................... F-1
Consolidated Balance Sheets at December 26, 1998 and
December 27, 1997........................................ F-2
Consolidated Statements of Operations for 1998, 1997 and
1996..................................................... F-3
Consolidated Statements of Stockholders' Equity for 1998,
1997 and 1996............................................ F-4
Consolidated Statements of Cash Flows for 1998, 1997 and
1996..................................................... F-5
Notes to Consolidated Financial Statements................. F-6
(b) Supplementary Data
Summary of Quarterly Financial Information................. F-18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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.
PART IV
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) 1. Financial Statements
The financial statements and notes to the consolidated financial statements
are referred to in Item 8.
2. Additional Financial Information
PAGE NO.
--------
Reports of Independent Public Accountants on Schedule II... S-1
Schedule II -- Valuation and Qualifying Accounts........... S-2
(b) Reports Filed on Form 8-K
DATE FILED ITEMS REPORTED
- ---------- --------------
11-06-98 The Company filed an amended 8-K related to the Newell Asset
Acquisition to include proforma financial information.
21
22
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
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 -- 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.
2.3 -- 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.
2.4 -- 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.
2.5 -- 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. Incorporated by
reference to Form 10-K filed on March 27, 1998; Exhibit
No. 2.6.
2.6 -- Asset Purchase and Sale Agreement among Plastics, Inc and
Home Products International, Inc. and Newell Co. dated as
of July 31, 1998. Incorporated by Reference to Form 8-K/A
filed on November 6, 1998.
2.7 -- Asset Purchase Agreement among Tenex Corporation, and
Home Products International, Inc., dated July 24, 1998.
Incorporated by reference to Form 10-Q filed on November
10, 1998.
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.
4.2 -- Indenture between Home Products International, Inc., the
Subsidiary Guarantors (as defined therein) and LaSalle
National Bank, dated May 14, 1998. Incorporated by
reference from Form S-4 filed on June 10, 1998.
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.**
22
23
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
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 -- $150,000,000 Amended and Restated Credit Agreement among
Home Products International, Inc, as Borrower, the
Several Lenders from time to time parties thereto, and
The Chase Manhattan Bank as Administrative Agent dated
September 8, 1998. Incorporated by reference to Form
8-K/A filed on November 6, 1998.
10.6 -- Assignment and Assumption Agreement by and between Home
Products International, Inc. and Prestige Plastics, Inc.
Incorporated by reference to Form 8-K/A filed on November
6, 1998.
10.7 -- 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.
10.8 -- 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. Incorporated by reference to Form 10-K filed on
March 27, 1998, Exhibit No. 10.10.
10.9 -- 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. Incorporated by reference to
Form 10-K filed on March 27, 1998, Exhibit No. 10.11.
10.10 -- $5,000,000 Senior Subordinated Note -- General Electric
Capital Corporation, due December 30, 2006. Incorporated
by reference to Form 10-K filed on March 27, 1998,
Exhibit No. 10.12.
10.11 -- $5,000,000 Senior Subordinated Note -- Archimedes
Funding, L.L.C. due December 30, 2006. Incorporated by
reference to Form 10-K filed on March 27, 1998, Exhibit
No. 10.13.
10.12 -- 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. Incorporated by reference to Form 10-K filed
on March 27, 1998, Exhibit No. 10.14.
10.13 -- 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.**
10.14 -- Employment Agreement dated January 5, 1998 between the
Company and Stephen R. Brian, President and Chief
Operating Officer. Incorporated by reference to Form 10-K
filed on March 27, 1998, Exhibit No. 10.16.**
10.15 -- 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.
10.16 -- 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.**
10.17 -- 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.**
23
24
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
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.
*21.1 -- List of Subsidiaries
*23.1 -- Consent of Arthur Andersen 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 and/or a director
participates.
24
25
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 26, 1998 and December 27, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three fifty-two week periods ended December 26, 1998. 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 provide 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 26, 1998 and December 27, 1997, and the
results of its operations and its cash flows for each of the three fifty-two
week periods ended December 26, 1998, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 5, 1999
F-1
26
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FISCAL YEAR END
---------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,986 $ 583
Accounts receivable, net of allowance for doubtful
accounts of $7,196 at December 26, 1998 and $1,716 at
December 27, 1997...................................... 50,238 20,802
Notes and other receivables............................... -- 80
Inventories, net.......................................... 25,296 12,797
Prepaid expenses and other current assets................. 6,880 428
-------- --------
Total current assets.............................. 87,400 34,690
-------- --------
Property, plant and equipment -- at cost.................... 87,854 47,634
Less accumulated depreciation and amortization.............. (27,654) (19,254)
-------- --------
Property, plant and equipment, net.......................... 60,200 28,380
-------- --------
Deferred income taxes....................................... 10,491 3,466
Intangible and other assets................................. 181,952 32,807
-------- --------
Total assets...................................... $340,043 $ 99,343
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term obligations............... $ 3,549 $ 3,850
Accounts payable.......................................... 20,510 9,664
Accrued liabilities....................................... 35,664 12,913
-------- --------
Total current liabilities......................... 59,723 26,427
-------- --------
Other long term liabilities................................. 2,783 --
Long-term obligations -- net of current maturities.......... 219,536 30,700
Stockholders' equity:
Preferred stock -- authorized, 500,000 shares, $.01 par
value; none issued..................................... -- --
Common stock -- authorized 15,000,000 shares, $.01 par
value; 8,024,123 shares issued at December 26, 1998 and
6,674,271 shares issued at December 27, 1997........... 80 67
Additional paid-in capital................................ 48,455 33,956
Retained earnings......................................... 12,259 8,616
Common stock held in treasury -- at cost (376,462 shares
at December 26, 1998 and 58,762 at December 27,
1997).................................................. (2,642) (264)
Currency translation adjustments.......................... (151) (159)
-------- --------
Total stockholders' equity........................ 58,001 42,216
-------- --------
Total liabilities and stockholders' equity........ $340,043 $ 99,343
======== ========
The accompanying notes are an integral part of the financial statements.
F-2
27
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR
-------------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net sales................................................... $252,429 $129,324 $38,200
Cost of goods sold.......................................... 169,213 88,888 22,992
-------- -------- -------
Gross profit.............................................. 83,216 40,436 15,208
Operating expenses
Selling................................................... 31,262 18,332 9,042
Administrative............................................ 15,796 8,474 4,600
Amortization of intangible assets......................... 5,508 882 201
-------- -------- -------
52,566 27,688 13,843
-------- -------- -------
Operating profit.......................................... 30,650 12,748 1,365
-------- -------- -------
Other income (expense)
Interest income........................................... 236 50 80
Interest (expense)........................................ (15,568) (5,152) (707)
Other income (expense).................................... 33 20 68
-------- -------- -------
(15,299) (5,082) (559)
-------- -------- -------
Earnings before income taxes and extraordinary charge....... 15,351 7,666 806
Income tax (expense)........................................ (6,601) (346) --
-------- -------- -------
Earnings before extraordinary charge........................ $ 8,750 $ 7,320 $ 806
Extraordinary charge for early retirement of debt, net of
tax benefits of $3,633.................................... (5,107) -- --
-------- -------- -------
Net earnings................................................ $ 3,643 $ 7,320 $ 806
======== ======== =======
Earnings before extraordinary charge, per common
share -- basic............................................ $ 1.11 $ 1.35 $ 0.21
Extraordinary charge for early retirement of debt, net of
tax....................................................... (0.65) -- --
-------- -------- -------
Net earnings per common share -- basic...................... $ 0.46 $ 1.35 $ 0.21
======== ======== =======
Earnings before extraordinary charge, per common
share -- diluted.......................................... $ 1.07 $ 1.29 $ 0.21
Extraordinary charge for early retirement of debt, net of
tax....................................................... (0.62) -- --
-------- -------- -------
Net earnings per common share -- diluted.................... $ 0.45 $ 1.29 $ 0.21
======== ======== =======
The accompanying notes are an integral part of the financial statements.
F-3
28
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CURRENCY COMMON
ADDITIONAL TRANSLATION STOCK HELD
PREFERRED COMMON PAID-IN RETAINED ADJUSTMENTS IN TREASURY
STOCK STOCK CAPITAL EARNINGS AND OTHER AT COST TOTAL
--------- ------- ---------- -------- ----------- ----------- -------
(IN THOUSANDS)
Balance at December 30,
1995..................... -- 39 10,765 490 (183) (264) 10,847
Net earnings............. -- -- -- 806 -- -- 806
Issuance of 19,639 shares
of common stock issued
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 of 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
Translation
adjustments........... -- -- -- -- 42 -- 42
---- --- ------- ------- ----- ------- -------
Balance at December 27,
1997..................... $ -- $67 $33,956 $ 8,616 $(159) (264) $42,216
==== === ======= ======= ===== ======= =======
Net earnings............. -- -- -- 3,643 -- -- 3,643
Issuance of 20,695 shares
in connection with
employee stock
purchase plan......... -- -- 196 -- -- -- 196
Issuance of 1,320,000
shares of common stock
in connection with
acquisition of Seymour
Housewares
Corporation........... -- 13 14,254 -- -- -- 14,267
Stock options
exercised............. -- -- 49 -- -- -- 49
Treasury stock purchased
at cost............... -- -- -- -- -- (2,378) (2,378)
Translation adjustment... -- -- -- -- 8 -- 8
---- --- ------- ------- ----- ------- -------
Balance at December 26,
1998..................... $ -- $80 $48,455 $12,259 $(151) $(2,642) $58,001
==== === ======= ======= ===== ======= =======
The accompanying notes are an integral part of the financial statements.
F-4
29
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings............................................... $ 3,643 $ 7,320 $ 806
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................ 14,731 5,687 2,214
Extraordinary charge on early retirement of debt......... 8,739 -- --
Changes in assets and liabilities:
Increase in accounts receivable....................... (11,933) (5,428) (1,786)
Decrease (increase) in inventories.................... 6,644 (2,280) 760
Decrease in refundable income taxes................... -- -- 222
Decrease (increase) in net deferred tax asset......... 2,096 (3,466) --
Increase (decrease) in accounts payable............... 4,163 (4,695) 622
(Decrease) increase in accrued liabilities............ (1,315) 5,060 (793)
Other operating activities, net.......................... (6,075) (1,320) (222)
-------- -------- --------
Net cash provided by operating activities.................. 20,693 878 1,823
-------- -------- --------
INVESTING ACTIVITIES:
Tamor Acquisition, net of cash acquired.................... -- (27,876) --
Seymour Acquisition, net of cash acquired.................. (84,882) -- --
Tenex Asset Acquisition.................................... (16,725) -- --
Newell Asset Acquisition, net of cash acquired............. (78,321) -- --
Proceeds from sale of marketable securities................ -- -- 515
Capital expenditures, net.................................. (11,933) (8,382) (1,624)
-------- -------- --------
Net cash used by investing activities...................... (191,861) (36,258) (1,109)
-------- -------- --------
FINANCING ACTIVITIES:
Payments on borrowings -- 2/27/97 Facility................. (28,076) (34,609) (860)
Payments on borrowings -- 12/30/97 Facility................ (120,000) -- --
Payments on Industrial Revenue Bonds....................... (2,400) -- --
Borrowings, net -- 12/30/97 Facility....................... 117,538 -- --
Borrowings, net -- Senior Subordinated Notes............... 120,809 -- --
Borrowings, net -- $50,000 Term Loan....................... 49,460 -- --
Borrowings, net -- term loans and warrant.................. -- 44,158 --
Borrowings under revolving line of credit, net............. 44,000 3,355 --
Prepayment penalty on early retirement of debt............. (3,282) -- --
Net proceeds from secondary stock offering................. -- 20,171 --
Payment of capital lease obligation........................ (335) (164) (32)
Purchase of treasury stock................................. (2,378) -- --
Exercise of common stock options and issuance of common
stock under stock purchase plan.......................... 235 174 74
-------- -------- --------
Net cash provided (used) by financing activities........... 175,571 33,085 (818)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 4,403 (2,295) (104)
Cash and cash equivalents at beginning of year............. 583 2,878 2,982
-------- -------- --------
Cash and cash equivalents at end of year................... 4,986 $ 583 $ 2,878
======== ======== ========
Supplemental disclosures: Cash paid (received) during the
year for:
Interest................................................... $ 11,436 $ 3,568 $ 599
-------- -------- --------
Income taxes, net.......................................... $ 3,458 $ 1,255 (314)
-------- -------- --------
The accompanying notes are an integral part of the financial statements.
F-5
30
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998, DECEMBER 27, 1997, AND DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Products International, Inc. (the "Company"), based in Chicago, is a
leading designer, manufacturer and marketer of a broad range of value-priced,
quality consumer houseware products. The Company's products are marketed
principally through mass market trade channels in the United States and
internationally.
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.
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.
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.
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 on a straight-line basis over a
period not to exceed forty years. Covenants not to compete are amortized on a
straight-line basis over the terms of the respective agreements. Patents,
royalty rights, trademarks
F-6
31
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired and licensing agreements are amortized over their estimated useful
lives ranging from five to ten years. The Company reviews goodwill and other
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. No impairment losses were
recorded in 1998 or 1997.
INCOME TAXES.
Deferred tax assets and liabilities are determined at the end of each
fiscal period, based on differences between the financial statement basis of
assets and liabilities and the tax basis of those same assets and liabilities,
using the currently enacted statutory tax rates.
NET EARNINGS PER COMMON SHARE.
Effective December 29, 1996 the Company adopted Statement of Financial
Accounting Standards SFAS No. 128 "Earnings per Share", which establishes
standards for computing and presenting earnings per share information. Prior
period earnings per share information has been restated. The following
reconciles earnings per share before extraordinary charge for 1998, 1997 and
1996: (in thousands, except per share amounts):
1998 1997 1996
------ ------ ------
Net income before extraordinary charge................. $8,750 $7,320 $ 806
====== ====== ======
Weighted average common shares outstanding -- basic.... 7,898 5,436 3,820
Stock options and warrants............................. 278 246 34
------ ------ ------
Weighted average common shares outstanding --diluted... 8,176 5,682 3,854
====== ====== ======
Net earnings per common share -- basic................. $ 1.11 $ 1.35 $ 0.21
====== ====== ======
Net earnings per common share -- diluted............... $ 1.07 $ 1.29 $ 0.21
====== ====== ======
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 1998, 1997 and 1996, were $725, $414, and $248, 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.
CONCENTRATION OF CREDIT RISK.
The Company is dependent upon a few customers for a large portion of its
revenues. In 1998 and 1997 two customers each accounted for more than 10% of
consolidated net sales. The company's top two customers, Wal-Mart and Kmart,
accounted for 18.5% and 12.1% of net sales respectively in 1998. These same two
F-7
32
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers accounted for 15.7% and 10.1% respectively in 1997. The loss of one of
these customers could have a material effect on the Company. No other customer
accounted for more than 10% of consolidated net sales in 1998 or 1997.
FISCAL YEAR.
The Company's fiscal year ends on the last Saturday in December. References
to the fiscal years 1998, 1997 and 1996 are for the fifty-two weeks ended
December 26, 1998, December 27, 1997 and December 28, 1996.
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.
In fiscal 1998, one of the Company's subsidiaries purchased raw materials
and packaging materials from vendors whose ownership was related to certain
officers of that subsidiary. Such transactions were (i) raw materials of $9,835
in 1997 (the ownership of the vendor changed in 1998 and is no longer a related
party) and (ii) packaging materials of $2,200 in 1998 and $1,700 in 1997.
Management believes the transactions were conducted on an arm's length basis at
competitive prices.
NEW ACCOUNTING STANDARDS.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income", which established standards for reporting
and display of comprehensive income and its components. The provisions of this
statement have been adopted by the Company in the fourth quarter of 1998;
however, there was no material impact and no additional disclosures were
required.
In June 1997, the FASB also issued SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information." The standard requires that companies
disclose "operating segments" based upon the way management analyzes the Company
for making internal operating decisions. The provisions of this statement have
been adopted by the Company in the fourth quarter of 1998. Based upon the
guidance of SFAS 131, management has determined that the Company operates in a
single segment -- Housewares. The adoption of this standard did not have a
material impact on the reporting of the Company.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The standard establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company had no derivative instruments or hedging transactions in 1998 or 1997.
The Company will be required to adopt this standard in 2000, and the adoption is
not anticipated to have a material impact on the financial statements.
NOTE 2. 1998 ACQUISITIONS
Effective December 30, 1997, the Company acquired all of the outstanding
common stock of Seymour Sales Corporation and its wholly owned subsidiary,
Seymour Housewares Corporation, (collectively, "Seymour" and the acquisition is
referred to herein as the "Seymour Acquisition"). 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 was
accounted for as a purchase and as such, the excess of the purchase price over
the estimated fair value of the acquired net assets, which approximates,
$28,900, will be recorded as goodwill and amortized over forty years. 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
F-8
33
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt. Results of Seymour's operations have been included in the Consolidated
Statement of Operations since the date of acquisition.
On September 8, 1998 the Company acquired from Newell Co. certain assets
and assumed certain liabilities comprising the businesses of Anchor Hocking
Plastics, a leading supplier of food storage containers, and Plastics, Inc., a
leading supplier of disposable plastic servingware, for $78,000 in an all cash
transaction (the "Newell Asset Acquisition"). Results of operations have been
included in the Consolidated Statement of Operations since the date of
acquisition. The acquisition was accounted for as a purchase, and as such, the
excess of the purchase price over the estimated fair value of the acquired net
assets, which approximates $59,800, will be recorded as goodwill and amortized
over forty years. The Company is still in the process of finalizing various
items related to purchase accounting; more specifically, fixed asset appraisals,
sku rationalization analysis, production consolidation analysis and other
valuation reserves. The final purchase price allocation will be completed in
1999. Accordingly, the final allocation may have a material impact on the pro
forma information presented below.
The following unaudited proforma information presents a summary of
consolidated results of operations as if the Seymour Acquisition and the Newell
Asset Acquisition each occurred on December 29, 1996:
1998 1997
-------- --------
Net sales................................................... $294,219 $291,143
Net income before extraordinary charge...................... 9,207 4,652
Net income before extraordinary charge per
share -- diluted.......................................... $ 1.13 $ 0.66
These unaudited proforma results have been presented for comparative
purposes only and include certain adjustments, such as additional goodwill
amortization expense and increased interest expense on acquisition debt. The
proforma results do not purport to be indicative of the results of operations
that actually would have resulted had the combination occurred on December 29,
1996, or of future results of operations of the consolidated entities.
On August 14, 1998 the Company acquired certain assets (inventory and
molds) which comprised Tenex Corporation's consumer product storage line for
$16,400 in an all cash transaction, (the "Tenex Asset Acquisition"). This
product line consists of plastic storage bins and containers, rolling carts and
stacking drawer systems. The acquisition was accounted for as a purchase, and as
such, the excess of the purchase price over the estimated fair value of the
acquired net assets, which approximates, $13,200, will be recorded as goodwill
and amortized over a period of twenty years. The Company is still in the process
of finalizing various items related to purchase accounting; more specifically,
fixed asset appraisals, sku rationalization analysis, production consolidation
analysis and other valuation reserves. The final purchase price allocation will
be completed in 1999. Results of operations have been included in the
Consolidated Statement of Operations since the date of acquisition.
The Seymour Acquisition, the Tenex Asset Acquisition and the Newell Asset
Acquisition are collectively referred to herein as the "1998 Acquisitions".
NOTE 3. 1997 ACQUISITIONS.
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
F-9
34
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Tamor Acquisition was accounted for as a purchase, and
the excess of the purchase price over the fair value of the assets acquired
(goodwill) approximated $27,600 and is being amortized over a period of forty
years.
NOTE 4. PUBLIC STOCK OFFERING
On June 24, 1997, the Company completed a public offering of 2,000,000 new
shares of its common stock. Net proceeds in the amount of $18,300 were used to
repay debt and accrued interest. 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 debt and accrued interest.
NOTE 5. INVENTORIES
The components of the Company's inventory were as follows:
1998 1997
-------- --------
Finished goods.............................................. $ 15,771 $ 7,335
Work-in-process............................................. 3,487 2,225
Raw materials............................................... 6,038 3,237
-------- --------
$ 25,296 $ 12,797
======== ========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows:
1998 1997
-------- --------
Buildings and land.......................................... $ 15,364 $ 5,588
Land and building under capital lease....................... 2,535 2,535
Machinery, equipment and vehicles........................... 37,354 17,936
Tools and dies.............................................. 25,519 16,303
Furniture, fixtures and office equipment.................... 5,447 3,339
Leasehold improvements...................................... 1,635 1,933
-------- --------
87,854 47,634
Less accumulated depreciation and amortization.............. (27,654) (19,254)
-------- --------
$ 60,200 $ 28,380
======== ========
F-10
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:
1998 1997
-------- -------
Goodwill, net of accumulated amortization of $6,016 on
December 26, 1998, and $993 on December 27, 1997.......... $172,651 $28,892
Covenants not to compete, net of accumulated amortization of
$452 on December 26, 1998,and $13 on December 27, 1997.... 2,511 77
Industrial Revenue Bond fees, net of accumulated
amortization of $315 on December 26, 1998, and $230 on
December 27, 1997......................................... 88 173
Patents, net of accumulated amortization of $1,626 on
December 26, 1998, and $1,384 on December 27, 1997........ 910 96
Licensing agreement, net of accumulated amortization of $61
on December 26, 1998, and $42 on December 27, 1997........ 134 153
Deferred financing fees, net of accumulated amortization of
$507 on December 26, 1998 and $439 on December 27, 1997... 5,421 3,320
Other assets................................................ 237 96
-------- -------
$181,952 $32,807
======== =======
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1998 1997
-------- --------
Compensation and other benefits............................. $ 6,540 $ 3,012
Sales incentives and commissions............................ 11,288 2,721
Plant relocation and consolidation.......................... 4,863 --
Income taxes payable........................................ 1,075 3,551
Interest payable............................................ 2,659 243
Other....................................................... 9,239 3,386
-------- --------
$ 35,664 $ 12,913
======== ========
F-11
36
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1998 1997
-------- -------
Revolving credit facility, variable rate, due September 8,
2003...................................................... $ 44,000 $ --
Term Loan, variable rate, due September 8, 2004............. 50,000 --
Senior Subordinated Notes, 9.625%, due 2008................. 125,000 --
2/27/97 Facility, variable rate, due 2002................... -- $28,076
Illinois Development Finance Authority (IDFA) variable rate
demand Industrial Development Revenue bonds (Shutters,
Inc. Project) Series 1989, due November 1, 2002........... -- 2,000
Illinois Development Finance Authority (IDFA) variable rate
demand Industrial Development Revenue Bonds (Selfix, Inc.
Project) Series 1990, due September 1, 2005............... 2,000 2,400
Capital lease obligations................................... 2,085 2,074
-------- -------
223,085 34,550
Less current maturities..................................... (3,549) (3,850)
-------- -------
$219,536 $30,700
======== =======
In connection with the Tamor Acquisition, (as more fully described in Note
3) the Company entered into a credit agreement dated February 27, 1997 with GECC
(the "2/27/97 Facility") which provided (i) a $20,000 revolving credit facility;
$3,355 outstanding at December 27, 1997, (ii) $40,000 in term loans; $24,721
outstanding at December 27, 1997, and (iii) a $7,000 subordinated equity bridge
note (the "Subordinated Note"); the Subordinated Note was repaid on June 24,
1997 as indicated below. 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 26, 1998 the Warrant had not been exercised.
As discussed in Note 4, on June 24, 1997, the Company completed a 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 debt of $2,500 and accrued interest of
$100.
In connection with the Seymour Acquisition (as more fully described in Note
2), the Company terminated the 2/27/97 Facility, and entered into a $130,000
credit agreement dated December 30, 1997 (the "12/30/97 Facility") with GECC
which provided (i) a $20,000 revolving credit facility, (ii) $110,000 of term
loans and (iii) a $10,000 senior subordinated note. The 12/30/97 Facility was
refinanced on May 14, 1998, as described below.
On May 14, 1998, the Company issued $125,000 of 9.625% Senior Subordinated
Notes due 2008 (the "Notes") in a public offering. Interest on the Notes is
payable semi-annually on May 1, and November 1. The Notes are guaranteed by the
Company's subsidiaries (see Note 14). The Notes may not be redeemed prior to May
15, 2003. Subsequent to such date, at the option of the Company, the Notes may
be redeemed at various amounts as set forth in the Indenture, but not at a price
less than 100% of par value. Upon the occurrence of a Change in Control, as
defined in the Indenture, the holders of the Notes have the right to require the
Company to repurchase their Notes at a price equal to 101% of par value plus
accrued interest. The Notes contain certain restrictions that, among other
things, will limit the Company's ability to (i) incur additional indebtedness
unless certain financial ratios are met, (ii) pay dividends, (iii) make certain
asset dispositions, or
F-12
37
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(iv) merge with another corporation. The Company was in compliance with all
covenants related to the Notes as of December 26, 1998.
In conjunction with the offering of the Notes, on May 14, 1998 the Company
entered into a five year $100,000 revolving credit agreement (the "Revolver")
with Chase Manhattan Bank, as administrative agent, and several lenders as
parties thereto. The Revolver also contains sub-limits of up to $15,000 for
letters of credit. Borrowings under the Revolver will bear interest at an annual
rate, at the option of the Company, of either (i) prime plus .75%, or (ii) LIBOR
plus a floating rate which is determined based upon certain financial ratios.
This floating rate is adjusted quarterly, and was 1.75% as of December 26, 1998.
The Revolver contains certain affirmative and negative covenants and will
require the Company to maintain certain financial covenants including interest
coverage ratios and maximum leverage ratios. The Company was in compliance with
all covenants related to the Revolver as of December 26, 1998. The Company must
pay a quarterly fee ranging from .0375% to .05%, based upon the unused portion
of the revolving commitments.
On September 8, 1998, in connection with the Newell Asset Acquisition, the
Company amended and restated the Revolver to add among other items, a $50,000
term loan, (the "Term Loan"). The terms and conditions of the amended and
restated Revolver were substantially the same as those established on May 14,
1998. The Term Loan is payable in twenty-four quarterly installments increasing
from $750 to $2,250 per quarter and a final payment due in the amount of $13,250
on September 8, 2004. The Term Loan bears interest at the same options as the
Revolver. Availability under the Revolver at December 26, 1998 was $51,900.
The IDFA variable rate demand Industrial Development Bonds (Shutters
Project) Series 1989, were issued in December 1989, and mature on November 1,
2002. These bonds were repaid December 1, 1998 in preparation of the divestiture
of Shutters. (See Note 13 for additional comments.)
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 26, 1998 was 4.2%, and at December 27, 1997 was 4.6%.
Capital lease obligations include; (i) a lease agreement between one of the
Company's subsidiaries and three related trusts for a manufacturing facility and
the Company's corporate office; and (ii) starting in 1997, various equipment
lease agreements. Lease payments to the trusts for buildings were $533, $519 and
$467, in 1998, 1997 and 1996, respectively, and lease payments for machinery and
equipment in 1998 were $160 and for 1997 were $140.
F-13
38
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule shows future minimum lease payments together with
the present value of the payments for capital lease obligations.
Years ending:
1999................................................... $ 484
2000................................................... 473
2001................................................... 460
2002................................................... 431
2003................................................... 417
Thereafter............................................. 2,318
-------
4,583
Less amount representing interest...................... (2,498)
-------
Present value of minimum lease payments................ $ 2,085
=======
Long-term portion...................................... $ 1,985
Current portion........................................ 100
-------
$ 2,085
=======
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing, warehouse space, office
facilities and machinery under noncancellable operating leases, expiring at
various dates through 2005. Future minimum lease payments amount to $1,900, and
$2,020 for fiscal years 1999 and 2000, respectively. Rent expense under
operating leases for 1998, 1997, and 1996, was $1,985, $1,184, and $354,
respectively.
NOTE 11. INCOME TAXES
Significant components of the Company's deferred tax items as of December
26, 1998 and December 27, 1997 are as follows:
1998 1997
------- ------
Deferred Tax Assets
Inventory reserves and overhead capitalized for tax
purposes............................................... $ 4,160 $1,166
Employee benefit expenses and other accruals.............. 2,319 341
Accounts receivable reserve............................... 3,194 423
Capitalized lease treated as operating lease for tax
purposes............................................... 358 378
Accrued advertising, volume rebates and reserves for
returns................................................ 2,700 890
Other accrued liabilities................................. 3,929 1,171
Net operating loss carryforward........................... 4,568 --
------- ------
Gross deferred tax assets................................... $21,228 $4,369
------- ------
Deferred Tax Liabilities
Depreciation and amortization............................. 6,450 628
Other..................................................... 30 275
------- ------
Gross deferred tax liabilities.............................. 6,480 $ 903
------- ------
Deferred tax assets net of deferred liabilities............. 14,748 3,466
Valuation allowance......................................... (4,257) --
------- ------
Net deferred tax asset...................................... $10,491 $3,466
======= ======
F-14
39
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the various acquisitions in 1998 deferred tax assets and
liabilities were recorded through purchase accounting. Additionally, a valuation
allowance in the amount of $4,257 was recorded through purchase accounting
against a majority of the net operating loss obtained in the Seymour
Acquisition. The valuation allowance is necessary due to the limited amount of
the net operating loss carryforward that can be utilized each year.
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. Additionally in
1997, the Company eliminated the remainder of the valuation allowance against
deferred tax assets.
Income tax expense (benefit) is as follows:
1998 1997 1996
------ ------- -----
Current -- before benefit from extraordinary charge
U.S. federal......................................... $3,998 $ 1,721 $ -
Foreign.............................................. -- -- (10)
State................................................ 1,075 346 --
------ ------- -----
5,073 2,067 (10)
------ ------- -----
Deferred
U.S. federal......................................... 1,528 1,422 266
Increase (decrease) in valuation allowance........... -- (3,143) (256)
------ ------- -----
1,528 (1,721) 10
------ ------- -----
Income tax expense before benefit from extraordinary
charge............................................... $6,601 $ 346 $ --
Current benefit from extraordinary charge for the early
retirement of debt................................... (3,633) -- --
------ ------- -----
Total income tax expense..................... $2,968 $ 346 $ --
====== ======= =====
Income tax expense before benefit from extraordinary charge differs from
amounts computed based on the U.S. federal statutory tax rate applied to
earnings before tax as follows:
1998 1997 1996
------ ------- -----
Computed at statutory U.S. federal income tax rate..... $5,219 $ 2,683 $ 282
State income taxes, net of U.S. federal tax benefit.... 709 383 (39)
Foreign sales corporation benefit...................... (100) -- --
Tax exempt interest.................................... -- -- (12)
Exercise of Stock Options.............................. (22) (34) --
Non deductible goodwill................................ 678 62 --
Other.................................................. 117 395 25
Change in valuation allowance.......................... -- (3,143) (256)
------ ------- -----
$6,601 $ 346 $ --
====== ======= =====
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.
F-15
40
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All options granted subsequent to December 1997, with the exception of
those granted to the Chief Executive Officer, vest within a four year period.
Options granted prior to December 1997 vest over a five year period. The options
granted to the Chief Executive Officer vest on an accelerated schedule in
accordance with his employment contract. All options granted expire ten years
from the date of grant.
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. Shares available for
future grant amounted to 11,612, 132,681 and 1,934 in 1998, 1997 and 1996,
respectively.
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages
companies to adopt a fair value approach to valuing stock-based compensation
that would require compensation cost to be recognized based upon the fair value
of the stock-based instrument issued. The Company has elected, as permitted by
SFAS No. 123, to apply the provisions of APB Opinion 25 "Accounting for Stock
Based Compensation" and the related interpretations in accounting for stock
option awards under the Stock Option Plan. Under APB Opinion 25, compensation
expense is recognized if the market price on the date of grant exceeds the grant
price. All options granted by the Company have been granted at or above market
price on the date of grant, 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 1998 and 1997 using an option pricing model.
Had compensation cost for the Company's 1998, 1997 and 1996 grants been
determined using the fair values and considering the applicable vesting periods,
the Company's reported results would have been reduced by $138 or $0.01 diluted
earnings per share in 1998, by $600 or $0.11 diluted earnings per share in 1997
and by $242 or $0.06 diluted earnings per share in 1996. The average fair value
of options granted in 1998 was $9.99, in 1997 was $10.17 and in 1996 was $4.95.
The fair value of the options granted was determined using the Black-Scholes
option pricing model based upon the weighted average assumptions of: (i) a
dividend yield of 0% for 1998, 1997 and 1996; (ii) expected volatility of the
market price of the Company's common stock of 44% for 1998, 43% for 1997 and 41%
for 1996; (iii) a weighted-average expected life of the options of approximately
five years, and (iv) weighted average risk free interest rates of 6.0% for
fiscal 1998, 6.3% for fiscal 1997 and 6.5% for 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
41
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the transactions in the option plans is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- --------
Balance December 30, 1995................................... 598,527 $ 6.74
Options granted........................................... 248,900 4.95
Options exercised......................................... -- --
Options cancelled/forfeited............................... (65,440) 6.20
--------- ------
Balance at December 27, 1996................................ 781,987 6.21
Options granted........................................... 497,900 10.17
Options exercised......................................... (13,288) 4.58
Options cancelled/forfeited............................... (45,100) 10.38
--------- ------
Balance at December 27, 1997................................ 1,221,499 7.70
Options granted........................................... 193,000 9.99
Options exercised......................................... (8,457) 6.28
Options cancelled/forfeited............................... (71,931) 5.58
--------- ------
Balance at December 26, 1998................................ 1,334,111 $ 8.15
=========
NOTE 13. SUBSEQUENT EVENTS
Effective December 27, 1998 (fiscal 1999) the Company sold Shutters, Inc.
("Shutters") its home improvement products division. Proceeds from the sale were
used to pay down debt. The anticipated gain on the sale will not be material to
the Company on a consolidated basis. Shutters 1998 net sales were approximately
3% of consolidated net sales.
NOTE 14. SUBSIDIARY GUARANTEES OF SENIOR SUBORDINATED NOTES
The $125,000 9.625% Senior Subordinated Notes due 2008 (the "Notes") are
guaranteed by all subsidiaries other than inconsequential subsidiaries (the
"Subsidiary Guarantors"). The guarantee obligations of the Subsidiary Guarantors
are full, unconditional and joint and several. There are no restrictions on the
ability of the Company's subsidiaries to declare and pay dividends or other
distributions to the Company.
F-17
42
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 8. QUARTERLY FINANCIAL INFORMATION -- UNAUDITED (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
1998 MARCH 28 JUNE 27 SEPTEMBER 26 DECEMBER 26
---- -------- -------- ------------ -----------
Net sales................................ $52,408 $54,985 $68,243 $76,793
Gross profit............................. 15,953 18,879 22,369 26,015
Earnings before extraordinary charge..... $ 1,246 $ 3,029 $ 3,114 $ 1,361
Net earnings (loss)...................... $ (491) $ (341) $ 3,114 $ 1,361
Net earnings before extraordinary charge
per common share -- basic.............. $ 0.16 $ 0.38 $ 0.39 $ 0.18
Net earnings before extraordinary charge
per common share -- diluted............ $ 0.15 $ 0.37 $ 0.38 $ 0.17
Net earnings (loss) per common
share -- basic......................... $ (0.06) $ (0.04) $ 0.39 $ 0.18
Net earnings (loss) per common share --
diluted................................ $ (0.06) $ (0.04) $ 0.38 $ 0.17
------- ------- ------- -------
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
1997 MARCH 29 JUNE 28 SEPTEMBER 27 DECEMBER 27
---- -------- -------- ------------ -----------
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
Net earnings (loss) per common
share -- basic......................... $ 0.24 $ 0.41 $ 0.37 $ 0.31
Net earnings (loss) per common share --
diluted................................ $ 0.23 $ 0.40 $ 0.36 $ 0.30
------- ------- ------- -------
F-18
43
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 periods ended December
26, 1998 and December 27, 1997 included in this Form 10-K, and have issued our
report thereon dated February 5, 1999. 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.
Chicago, Illinois
February 5, 1999
S-1
44
SCHEDULE II
HOME PRODUCTS INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 26, 1998,
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 27, 1997,
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 28, 1996
ADDITIONS
--------------------- DEDUCTIONS
BALANCE AT CHARGED TO (NET BALANCE
BEGINNING BALANCES COSTS AND WRITE-OFFS/ AT END
OF PERIOD ACQUIRED EXPENSES RECOVERIES) OF PERIOD
---------- -------- ---------- ----------- ---------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 26, 1998.............................. $1,716 $4,104 $2,169 $ (793) $7,196
December 27, 1997.............................. 901 659 499 (343) 1,716
December 28, 1996.............................. 1,395 -- 211 (705) 901
WARRANTY RESERVES
December 26, 1998.............................. $ 272 $ - $ - $ (68) $ 204
December 27, 1997.............................. 453 -- -- (181) 272
December 28, 1996.............................. 495 -- -- (42) 453
INVENTORY RESERVES
December 26, 1998.............................. $1,367 $6,051 $2,517 $2,955 $6,980
December 27, 1997.............................. 993 300 698 (624) 1,367
December 28, 1996.............................. 2,411 -- 678 (2,096) 993
S-2
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOME PRODUCTS INTERNATIONAL, INC.
By /s/ JAMES R. TENNANT
------------------------------------
James R. Tennant, Chief Executive
Officer
Date: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES R. TENNANT
- -----------------------------------------------------
James R. Tennant Chairman of the Board and March 24, 1999
Director
/s/ JAMES E. WINSLOW
- -----------------------------------------------------
James E. Winslow Executive Vice President, Chief March 24, 1999
Financial Officer and Secretary
/s/ CHARLES R. CAMPBELL
- -----------------------------------------------------
Charles R. Campbell Director March 24, 1999
/s/ JOSEPH GANTZ
- -----------------------------------------------------
Joseph Gantz Director March 24, 1999
/s/ STEPHEN P. MURRAY
- -----------------------------------------------------
Stephen P. Murray Director March 24, 1999
/s/ MARSHALL RAGIR
- -----------------------------------------------------
Marshall Ragir Director March 24, 1999
/s/ JEFFREY C. RUBENSTEIN
- -----------------------------------------------------
Jeffrey C. Rubenstein Director March 24, 1999
/s/ DANIEL B. SHURE
- -----------------------------------------------------
Daniel B. Shure Director March 24, 1999
/s/ JOEL D. SPUNGIN
- -----------------------------------------------------
Joel D. Spungin Director March 24, 1999
II-1