-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MlN/IdIxHh4BcDGTBs+cmJwCClUtQngLhduD2wltTIcLSqux59y2KmVza94L153W g+HZoZ9geKjmXXCCzGhOeA== 0000950135-98-005764.txt : 19981111 0000950135-98-005764.hdr.sgml : 19981111 ACCESSION NUMBER: 0000950135-98-005764 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EKCO GROUP INC /DE/ CENTRAL INDEX KEY: 0000018827 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 112167167 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07484 FILM NUMBER: 98743331 BUSINESS ADDRESS: STREET 1: 98 SPIT BROOK RD CITY: NASHUA STATE: NH ZIP: 03062 BUSINESS PHONE: 6038881212 MAIL ADDRESS: STREET 1: 98 SPIT BROOK RD CITY: NASHUA STATE: NH ZIP: 03062 FORMER COMPANY: FORMER CONFORMED NAME: CENTRONICS CORP DATE OF NAME CHANGE: 19880504 FORMER COMPANY: FORMER CONFORMED NAME: CENTRONICS DATA COMPUTER CORP DATE OF NAME CHANGE: 19870304 10-Q 1 EKCO GROUP, INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended SEPTEMBER 27, 1998 ------------------ Commission File Number 1-7484 EKCO GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2167167 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 98 SPIT BROOK ROAD, NASHUA, NEW HAMPSHIRE 03062 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (603) 888-1212 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 ------ ------ As of November 2, 1998, there were issued and outstanding 19,639,948 shares of common stock of the registrant. 1 2 PART I ITEM 1. FINANCIAL STATEMENTS
EKCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 27, DECEMBER 28, 1998 1997 ------------ ----------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 919 $ 14,565 Accounts receivable, net 60,526 45,529 Inventories 89,112 74,150 Other current assets 7,180 9,021 Deferred income taxes 7,181 6,877 --------- -------- Total current assets 164,918 150,142 Property and equipment, net 39,377 35,678 Other assets 7,494 7,563 Excess of cost over fair value of net assets acquired, net 127,995 107,422 --------- -------- Total assets $ 339,784 $300,805 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion long-term obligations $ 1,743 $ -- Accounts payable 15,968 14,040 Accrued expenses 32,087 29,290 Income taxes 8,522 6,344 --------- -------- Total current liabilities 58,320 49,674 --------- -------- Long-term obligations, less current portion 150,292 124,270 --------- -------- Other long-term liabilities 11,040 11,974 --------- -------- Series B ESOP Convertible Preferred Stock, net; outstanding 1,193 shares and 1,315 shares, respectively, redeemable at $3.61 per share 4,337 4,399 --------- -------- Commitments and contingencies -- -- Minority interest 494 494 --------- -------- Stockholders' equity Common stock, $.01 par value; outstanding 19,624 shares and 19,066 shares, respectively 196 191 Capital in excess of par value 111,239 109,462 Retained earnings 8,064 4,665 Unearned compensation (2,403) (2,787) Accumulated other comprehensive loss (1,795) (1,537) --------- -------- 115,301 109,994 --------- -------- Total liabilities and stockholders' equity $ 339,784 $300,805 ========= ========
The accompanying notes are an integral part of the financial statements. 2 3
EKCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED --------------------- ---------------------- 1998 1997 1998 1997 -------- --------- --------- --------- Net revenues $ 89,052 $ 81,818 $ 227,423 $ 193,216 -------- --------- --------- --------- Costs and expenses Cost of sales 58,658 52,634 154,799 128,662 Selling, general and administrative 18,585 16,123 52,241 45,868 Special charge -- 169 -- 783 Amortization of excess of cost over fair value 1,057 909 3,166 2,725 -------- --------- --------- --------- 78,300 69,835 210,206 178,038 -------- --------- --------- --------- Income before interest and income taxes 10,752 11,983 17,217 15,178 -------- --------- --------- --------- Net interest Interest expense 3,660 3,072 10,741 9,325 Investment income (57) (75) (191) (605) -------- --------- --------- --------- 3,603 2,997 10,550 8,720 -------- --------- --------- --------- Income from operations before income taxes 7,149 8,986 6,667 6,458 Income tax expense 3,501 4,450 3,268 3,227 -------- --------- --------- --------- Net income $ 3,648 $ 4,536 $ 3,399 $ 3,231 ======== ========= ========= ========= Earnings per common share: Basic $ 0.19 $ 0.24 $ 0.18 $ 0.17 ======== ========= ========= ========= Diluted $ 0.17 $ 0.22 $ 0.16 $ 0.16 ======== ========= ========= ========= Weighted average number of shares used in computation of per share data: Basic 19,526 18,979 19,309 18,867 ======== ========= ========= ========= Diluted 21,348 20,983 21,296 20,761 ======== ========= ========= =========
The accompanying notes are an integral part of the financial statements. 3 4
EKCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (AMOUNTS IN THOUSANDS) (UNAUDITED) 1998 1997 ---- ---- Cash flows from operating activities Net loss $ 3,399 $ 3,231 Adjustments to reconcile net income to net cash provided by (used in) operations Depreciation 5,805 5,475 Amortization of excess of cost over fair value 3,166 2,725 Amortization of deferred finance costs 497 426 Other amortization 3,446 3,941 Special charges -- 783 Other (71) 2,464 Changes in certain assets and liabilities, net of effects from acquisition of business, affecting cash provided by (used in) operations Accounts receivable (10,891) (16,016) Inventories (6,388) (31,479) Prepaid marketing costs (2,816) (4,790) Other assets 2,366 203 Accounts payable and accrued expenses 2,199 553 Income taxes payable 2,180 4,240 -------- -------- Net cash provided by (used) in operations Continuing operations 2,892 (28,244) Discontinued operations -- (570) -------- -------- Net cash provided by (used in) operations 2,892 (28,814) -------- -------- Cash flows from investing activities Proceeds from sale of property and equipment 68 144 Capital expenditures for operations (8,597) (5,078) Proceeds from sale of discontinued operations -- 17,600 Acquisition of businesses (26,935) -- -------- -------- Net cash provided by (used in) investing activities (35,464) 12,666 -------- -------- Cash flows from financing activities Proceeds from issuance of long-term obligations 30,074 -- Payment of long-term obligations (12,645) -- Other 1,364 832 -------- -------- Net cash provided by financing activities 18,793 832 Effect of exchange rate changes on cash 133 (15) -------- -------- Net decrease in cash and cash equivalents (13,646) (15,331) Cash and cash equivalents at beginning of year 14,565 15,706 -------- -------- Cash and cash equivalents at end of period $ 919 $ 375 ======== ======== Cash paid (refunded) during the period for Interest $ 7,241 $ 5,915 Income taxes 1,088 (3,218)
The accompanying notes are an integral part of the financial statements. 4 5 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND OTHER MATTERS The consolidated condensed financial statements included herein have been prepared by EKCO Group, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is believed, however, that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The consolidated condensed financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The condensed financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the Company's financial position and the results of its operations. Such adjustments are of a normal recurring nature. A large part of the Company's business is seasonal. Historically, revenues in the last half of the calendar year have been greater than revenues in the first half of the year. Accordingly, the results for the entire year may not necessarily be the product of annualizing results for any interim period. The Company recently adopted Financial Accounting Standards Board Statement No.130 "Reporting Comprehensive Income". Comprehensive income for the three and nine months ended September 27, 1998 and September 28, 1997, respectively, was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- (AMOUNTS IN THOUSANDS) Net income $ 3,648 $ 4,536 $ 3,399 $ 3,231 ------- ------- ------- ------- Other comprehensive income (loss): Foreign currency translation adjustment (124) 14 (259) (70) Pension liability adjustment -- -- 1 -- ------- ------- ------- ------- (124) 14 (258) (70) ------- ------- ------- ------- Comprehensive income $ 3,524 $ 4,550 $ 3,141 $ 3,161 ======= ======= ======= =======
(2) ACQUISITION OF ASPEN PET PRODUCTS, INC. In January 1998, the Company completed the acquisition (the "Acquisition") of all of the outstanding equity securities of APP Holding Corporation ("APP"), the parent corporation and sole stockholder of Aspen Pet Products, Inc. ("Aspen"), a marketer of dog and cat supplies and accessories, as well as other pet products. Pursuant to the Stock Purchase and Sale Agreement, the Company paid approximately $24.5 million in cash and refinanced APP's outstanding bank debt of approximately $9.1 million. In addition, if Aspen achieves certain predetermined financial results during fiscal 1998, 1999, 2000, 2001, and 2002, the Company will make additional annual payments to certain former APP stockholders equal, in the aggregate, to 25% of the amount by which Aspen's Gross 5 6 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (2) ACQUISITION OF ASPEN PET PRODUCTS, INC. (CONTINUED) Profit (as defined) for each such year exceeds the Base Profit Amount (as defined). The Acquisition has been accounted for under the purchase method of accounting and goodwill of approximately $24 million is being amortized over 40 years. In connection with the Acquisition, liabilities were assumed as follows (amounts in thousands): Fair value of assets acquired $ 37,067 Cash paid for stock of Aspen (24,478) Expenses incurred in connection with the acquisition (450) -------- Liabilities assumed $ 12,139 ========
The following unaudited pro forma combined results of operations for the three and nine months ended September 28, 1997 have been prepared assuming that the Acquisition occurred at the beginning of such period. In preparing the pro forma data, adjustments have been made for: (i) the amortization of goodwill; (ii) the interest expense related to the borrowings under the Company's credit facility to finance a portion of the purchase price; (iii) the reduction in investment income due to the utilization of the Company's cash and investments to finance a portion of the purchase price; (iv) the elimination of Aspen's costs associated with shareholder transactions; and (v) the effect on income taxes of the foregoing pro forma adjustments. The following unaudited pro forma financial information is not necessarily indicative of results of operations that would have occurred had the Acquisition been effected at the beginning of such fiscal period or of future results of the combined companies.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 28, 1997 SEPTEMBER 28, 1997 ------------------ ------------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues $89,882 $214,782 Income before income taxes 9,390 7,538 Net income 4,789 3,898 Earnings per common share Basic .25 .21 Diluted .23 .19
(3) ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following:
SEPTEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Accounts receivable $61,614 $46,486 Allowance for doubtful accounts (1,088) (957) ------- ------- $60,526 $45,529 ======= =======
6 7 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) INVENTORIES The components of inventory were as follows:
SEPTEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Raw materials $13,002 $12,984 Work in process 4,833 3,811 Finished goods 71,277 57,355 ------- ------- $89,112 $74,150 ======= =======
(5) PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following:
SEPTEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Property and equipment at cost Land, buildings and improvements $17,026 $14,598 Equipment, factory and other 67,041 60,624 ------- ------- 84,067 75,222 Less accumulated depreciation 44,690 39,544 ------- ------- $39,377 $35,678 ======= =======
(6) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET Excess of cost over fair value of net assets acquired is net of accumulated amortization of $35,487 and $32,321 as of September 27, 1998 and December 28, 1997, respectively. (7) LONG-TERM OBLIGATIONS Long-term obligations consisted of the following:
SEPTEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Term loan $ 9,286 $ -- Credit facility 16,149 -- 9.25% Senior Notes, due 2006 (net of unamortized discount of $663 and $730, respectively) 124,337 124,270 Other 2,263 -- -------- -------- 152,035 124,270 Less current portion 1,743 -- -------- -------- $150,292 $124,270 ======== ========
The principal of the term loan is payable in quarterly installments of approximately $357,000, which commenced on March 31, 1998. 7 8 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Borrowings under the term loan can be prepaid in whole or in part at any time with no premium or penalty, and bear interest at the same rates as available under the credit facility. Borrowings under both the term loan and the credit facility mature in November 2002. (8) INCOME TAXES The Company's effective tax rate fluctuates significantly due to the impact of goodwill amortization, which is not deductible for tax purposes. The Company's effective tax rate as reported in its latest annual report on Form 10-K was 51% for the year ended December 28, 1997. The anticipated effective rate for fiscal 1998 is 49%. (9) SERIES B ESOP CONVERTIBLE PREFERRED STOCK, NET Series B ESOP Convertible Preferred Stock, net, consisted of the following:
SEPTEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Series B ESOP Convertible Preferred Stock, par value $.01, redeemable at $3.61 per share $4,337 $4,757 Unearned compensation -- (358) ------ ------ $4,337 $4,399 ====== ======
(10) COMMON STOCK, $.01 PAR VALUE Share information regarding common stock consisted of the following:
SEPTEMBER 27, 1998 DECEMBER 28, 1997 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Authorized shares 60,000 60,000 ====== ====== Shares issued 29,039 28,481 Shares held in treasury 9,415 9,415 ------ ------ 19,624 19,066 ====== ======
(11) EARNINGS (LOSS) PER COMMON SHARE Basic earnings per common share is based upon the weighted average number of common shares outstanding during each period. Diluted earnings per common share is based upon the weighted average number of common shares and dilutive common stock equivalent shares outstanding during each period, including Series B ESOP Convertible Preferred Stock. The weighted average number of shares used in computation of diluted earnings per share consisted of the following for the periods presented: 8 9
EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, 1998 1997 1998 1997 ---- ---- ---- ---- (AMOUNTS IN THOUSANDS) Weighted average shares of common stock outstanding during the period 19,526 18,979 19,309 18,867 Series B ESOP Convertible Preferred Stock 1,221 1,376 1,261 1,398 Weighted average common equivalent shares due to stock options and warrants 602 628 726 496 ------- ------- ------- ------- 21,349 20,983 21,296 20,761 ======= ======= ======= ======= Net earnings used in determining per share amount Basic $ 3,648 $ 4,536 $ 3,399 $ 3,231 ======= ======= ======= ======= Diluted $ 3,648 $ 4,536 $ 3,399 $ 3,231 ======= ======= ======= =======
(12) CONTINGENCIES LEGAL PROCEEDINGS The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company's management is of the opinion that the expected final outcome should not have a material adverse effect on the Company's financial position, results of operations or liquidity. ENVIRONMENTAL MATTERS From time to time, the Company has had claims asserted against it by regulatory agencies or private parties for environmental matters relating to the generation or handling of hazardous substances by the Company or its predecessors, and the Company has incurred obligations for investigations or remedial actions with respect to certain of such matters. While the Company does not believe that any such claims asserted or obligations incurred to date will result in a material adverse effect upon the Company's financial position, results of operations or liquidity, the Company is aware that at its facilities in Massillon and Hamilton, Ohio; Easthampton, Massachusetts; Chicago, Illinois; Lititz, Pennsylvania; and at its previously owned facility in Hudson, New Hampshire, hazardous substances, oil or both have been detected and that additional investigation will or may be, and remedial action will or may be, required at such facilities. Operations at these and other facilities currently or previously owned or leased by the Company utilize, or in the past have utilized, hazardous substances. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. 9 10 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In connection with the acquisition of Kellogg Brush Manufacturing Co. (now known as EKCO Cleaning, Inc. ("Cleaning")) and subsidiaries by the Company in 1993, the Company engaged environmental engineering consultants ("Consultants") to review potential environmental liabilities at all of Cleaning's properties. Such investigation and testing resulted in the identification of likely environmental remedial actions, operation, maintenance and ground water monitoring and the estimated costs thereof. Management, based upon the engineering studies, originally estimated the total remediation and ongoing ground water monitoring costs to be approximately $6.0 million, including the effects of inflation, and accordingly at that time recorded a liability of approximately $3.8 million, representing the undiscounted costs of remediation and the net present value of future costs discounted at 6%. Based upon the most recent cost estimates provided by the Consultants, the Company believes the total remediation and compliance costs will be approximately $1.1 million and the expense for the ongoing operation, maintenance and ground water monitoring will be approximately $20,500 for Fiscal 1998 and for each of the 30 years thereafter. As of September 27, 1998, the liability recorded by the Company was approximately $2.8 million. Although the current estimated costs of remediation are less than the liability recorded at September 27, 1998, the Company does not consider any further adjustment to be prudent at this time given the inherent uncertainties involved in completing the remediation processes. The Company expects to pay approximately $145,500 of the remediation costs in the current year ("Fiscal 1998") with the balance being paid out in fiscal 1999 and 2000. During the first nine months of Fiscal 1998, the Company paid approximately $60,000 of such costs. The estimates may subsequently change should additional sites be identified or further remediation measures be required or undertaken or interpretation of current laws or regulations be modified. The Company has not anticipated any insurance proceeds or third-party payments in arriving at the above estimates. (13) SPECIAL CHARGE The special charge for the three and nine months ended September 28, 1997 relates to the recognition of appreciation in value of stock appreciation rights granted to the Company's former chief executive officer pursuant to a December 1996 severance arrangement. (14) SUBSEQUENT EVENT On October 28, 1998 the Company announced that it had signed a Letter of Intent with Lassen Manufacturing, Inc., Los Angeles, California, with respect to the proposed sale to Lassen of the Wright-Bernet and Cleaning Specialty divisions of the Company's cleaning products business. The Company expects to incur a pre-tax charge of approximately $16.2 million in the fourth quarter ending January 3, 1999, which equates to $15.2 million or $0.71 per diluted share, after related income tax benefits. Included in the charge is a $13.7 million write-off of goodwill for which there is no tax benefit. Lassen Manufacturing intends to continue to manufacture Wright-Bernet products at the Hamilton, Ohio facility under a lease agreement with the Company, and will continue to utilize the Cleaning Specialty manufacturing facility in Nashville, Tennessee. Completion of the transaction is expected by year-end and is subject to due diligence and the execution of a definitive agreement. 10 11 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following discussion and analysis of the consolidated results of operations for the thirteen week period ended September 27, 1998 (the "Third Quarter of Fiscal 1998") and September 28, 1997 (the "Third Quarter of Fiscal 1997") and for the thirty-nine week period ended September 27, 1998 (the "First Nine Months of Fiscal 1998") and September 28, 1997 (the "First Nine Months of Fiscal 1997") and the financial condition at September 27, 1998 should be read in conjunction with the Company's Consolidated Condensed Financial Statements and Notes thereto. Because of the seasonality of the Company's revenues, which have historically been concentrated in the second half of its fiscal year, the results of operations for and the balance sheet as of the end of any interim period may not be indicative of either a full year's operations or the financial condition of the Company at the end of any fiscal year. NET REVENUES Net revenues by product category were as follows:
THIRD QUARTER FIRST NINE MONTHS ------------- ----------------- 1998 1997(1) 1998(1) 1997(1) ---- ------- ------- ------- (AMOUNTS IN THOUSANDS) Bakeware $28,134 $ 28,007 $ 59,845 $ 57,810 Kitchenware 27,046 27,591 75,241 66,359 Cleaning products 13,858 16,630 40,286 42,716 Pest control and small animal care and control products 10,871 9,590 29,068 26,331 Pet products 9,143 -- 22,983 -- ------- -------- -------- -------- $89,052 $ 81,818 $227,423 $193,216 ======= ======== ======== ========
(1) Certain amounts have been reclassified to be consistent with the classification used for the three months ended September 27, 1998. Net revenues for the Third Quarter and First Nine Months of Fiscal 1998, which include $9.1 million and $23.0 million, respectively for Aspen Pet Products, Inc. ("Aspen"), which was acquired during January 1998, increased approximately $7.2 million (8.8%) and $34.2 million (17.7%) from the comparable prior year periods, respectively. Excluding the effect of the acquisition of Aspen, net revenues for the First Nine Months of Fiscal 1998 increased $11.2 million (5.8%) from the comparable prior year period. The increase in net revenues was primarily the result of increases in sales of the Company's kitchenware products in the first six months of fiscal 1998, which include new categories such as cookware, cutlery and barware. Additionally, kitchenware revenues benefited from sales of cutlery and flatware under the Regent Sheffield(R) and Wiltshire(R) brand names. The North American rights to those brand names were licensed by the Company in May 1998. Sales of the Company's bakeware benefited from a greater penetration in upscale markets from Farberware(R) products, while sales of the Company's pest control and small animal care and control products benefited from a strong rodent season resulting from warm weather brought on by El Nino and increased distribution of new products. These increases were partially offset by a decline in sales of the Company's cleaning products which were adversely affected by the loss of some major customers and a large pallet and 11 12 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) NET REVENUES (CONTINUED) flood relief promotion in Fiscal 1997 that was not repeated in Fiscal 1998. Net revenues for the Third Quarter of Fiscal 1998, excluding the effect of the acquisition of Aspen, declined $1.9 million (2.3%) from the comparable prior year period. The decline was primarily the result of lower sales of the Company's cleaning products previously mentioned. Additionally, sales of the Company's kitchenware products in the Third Quarter of Fiscal 1998 were adversely affected by sluggish retail sales of certain major customers and intense competitive pricing. GROSS PROFIT The gross profit margin for the Third Quarter and First Nine Months of Fiscal 1998 was 34.1% and 31.9%, respectively. For the Third Quarter and First Nine Months of Fiscal 1997, the gross profit margin was 35.7% and 33.4%, respectively. The decline in gross profit margin from the prior year periods was primarily due to inefficiencies within the manufacturing of the Company's cleaning products, the effect of intensive competition in the Company's kitchenware products, and increases in manufacturing and distribution costs incurred in anticipation of a higher than realized volume of sales. The decline in gross profit margin was partially offset by the inclusion of Aspen, which had a gross profit margin higher than the Company's consolidated gross profit margin. During the Second Half of Fiscal 1997, the Company consolidated its cleaning product manufacturing facilities into one facility. The target productivity was not achieved during the First Nine Months of 1998. See Liquidity and Capital Resources for information regarding the Company's proposed sale of a portion of its cleaning products business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses for the Third Quarter and First Nine Months of Fiscal 1998, which includes $1.6 million and $3.9 million, respectively for Aspen, increased approximately $2.5 million (15.3%) and $6.4 million (13.9%), respectively from the comparable prior year periods. Excluding Aspen, the increase was $900,000 (5.0%) and $2.5 million (5.3%), respectively. The increase was primarily due to costs associated with sales of cutlery and flatware under the Regent Sheffield(R) and Wiltshire(R) brand names, expansion of the Company's international operations, and, for the First Nine Months of Fiscal 1998, costs associated with increase in revenues. SPECIAL CHARGE The special charge for fiscal 1997 relates to the recognition of appreciation in value of stock appreciation rights granted to the Company's former chief executive officer pursuant to a December 1996 severance arrangement. NET INTEREST EXPENSE Net interest expense increased from $3.0 million and $8.7 million for the Third Quarter and First Nine Months of Fiscal 1997, respectively, to $3.6 million and $10.6 million for the Third Quarter and First Nine Months of Fiscal 1998, respectively. The increase was primarily due to higher borrowings in Fiscal 1998 due to the acquisition of 12 13 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) NET INTEREST EXPENSE (CONTINUED) Aspen in January 1998 and the acquisition of exclusive rights to sell cutlery and flatware under the Regent Sheffield(R) and Wiltshire(R) brand names in May 1998. LIQUIDITY AND CAPITAL RESOURCES In January 1998, the Company completed the acquisition (the "Acquisition") of all of the outstanding equity securities of APP Holding Corporation ("APP"), the parent corporation and sole stockholder of Aspen, a marketer of dog and cat supplies and accessories, as well as other pet products. Pursuant to the Stock Purchase and Sale Agreement, the Company paid approximately $24.5 million in cash and refinanced APP's outstanding bank debt of approximately $9.1 million. In addition, if Aspen achieves certain predetermined financial results during fiscal 1998, 1999, 2000, 2001 and 2002, the Company will make additional annual payments to certain former APP stockholders equal, in the aggregate, to 25% of the amount by which Aspen's Gross Profit (as defined) for each such year exceeds the Base Profit Amount (as defined). The Acquisition has been accounted for under the purchase method of accounting and goodwill of approximately $24 million is being amortized over 40 years. During May 1998, the Company acquired the exclusive North American rights to sell cutlery and flatware products under the Regent Sheffield(R) and Wiltshire(R) brands. The Company paid approximately $2.5 million in cash for the rights and inventory with a value of approximately $2.3 million, and is obligated to make future royalty payments pursuant to a license agreement. On October 28, 1998 the Company announced that it had signed a Letter of Intent with Lassen Manufacturing, Inc., Los Angeles, California, with respect to the proposed sale to Lassen of the Wright-Bernet and Cleaning Specialty divisions of the Company's cleaning products business. The Company expects to incur a pre-tax charge of approximately $16.2 million in the fourth quarter ending January 3, 1999, which equates to $15.2 million or $0.71 per diluted share, after related income tax benefits. Included in the charge is a $13.7 million write-off of goodwill for which there is no tax benefit. Lassen Manufacturing intends to continue to manufacture Wright-Bernet products at the Hamilton, Ohio facility under a lease agreement with the Company, and will continue to utilize the Cleaning Specialty manufacturing facility in Nashville, Tennessee. Completion of the transaction is expected by year-end and is subject to due diligence and the execution of a definitive agreement. During the First Nine Months of Fiscal 1998, the Company generated approximately $2.9 million from operations. The comparable results for the prior year was a usage of approximately $28.8 million. Such funds, along with a portion of cash on hand at December 28, 1997, proceeds from a $10 million term loan and borrowings of approximately $7.4 million under the Company's revolving credit facility were used to fund (i) the acquisition of Aspen, (ii) the acquisition of the exclusive North American rights to market products under the Regent Sheffield(R) and Wiltshire(R) brands, and (iii) capital expenditures of approximately $8.6 million. 13 14 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) At September 27, 1998, $26.0 million was available for general corporate purposes under the Company's credit facility, net of approximately $12.9 million in outstanding letters of credit. The Company believes it has sufficient borrowing capacity to finance its ongoing operations for the foreseeable future. The Company, however, may require additional funds to finance acquisitions. Inventories increased from $74 million at December 28, 1997 to $89 million at September 27, 1998. The increase was primarily due to the acquisition of Aspen, the addition of Regent Sheffield(R) and Wiltshire(R) products and the build up of new products. Seasonality was also a factor in the increased inventory levels. The increase in accounts receivable and accrued expenses from the December 28, 1997 levels were primarily due to the seasonality of the Company's business. The Company has provided approximately $2.8 million for environmental remediation and ongoing operation, maintenance and ground water monitoring costs associated with facilities owned or occupied by the Company's cleaning products business. The Company believes this provision is adequate, but will continue to monitor and adjust the provision, as appropriate, should additional sites be identified or further remediation measures be required or undertaken or should interpretation of current laws or regulations be modified. YEAR 2000 DATE CONVERSION The Year 2000 issue relates to the inability of certain computer software programs to properly recognize and process date-sensitive information relative to the year 2000 and beyond. Without corrective measures, this issue could cause computer applications to fail or to create erroneous results. Incomplete or untimely resolution of the Year 2000 issue by the Company or by its key vendors, customers, suppliers or by other third parties could have a materially adverse impact on the Company's business, operations or financial condition in the future. Beginning in September 1997 as part of a larger company-wide enhancement program (more fully described below), the Company reviewed its infrastructure, including its computer equipment, software and systems ("IT Systems") which could be affected by the Year 2000 issue. To date, the Company has completed the solutions implementation and testing phase for 60% of all critical IT Systems and anticipates that the solutions implementation and testing for the remaining 40% will be completed by the end of the second quarter of fiscal 1999. All non-critical IT Systems are currently in the solutions implementation phase, which, along with testing, is scheduled for completion by the end of the second quarter of fiscal 1999. The Company's Year 2000 compliance initiatives ("Year 2000 Project") also include a comprehensive review of the embedded chip technology contained in its non-IT Systems, such as buildings, plant, equipment and other infrastructure. This review is presently in process, and the Company anticipates completion of the review during the first quarter of fiscal 1999. In addition, in the fourth quarter of Fiscal 1998 the Company will commence a formal communication program with 14 15 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) YEAR 2000 DATE CONVERSION (CONTINUED) its key vendors, customers, suppliers and other third parties to determine the status of their Year 2000 compliance programs and to assess the likelihood and potential impact on the Company of non-compliance by any such party. Based on the results of the Company's Year 2000 Project, the Company anticipates that it will develop contingency plans during the second quarter of fiscal 1999 to mitigate the major effects of any anticipated disruptions. The Company's Year 2000 Project is just one component of its larger company-wide program to enhance its IT Systems and non-IT Systems (the "Enhancement Program"). The Company engaged a software consulting firm to assist it with the Enhancement Program and is also utilizing internal and external resources to implement and test its IT Systems as part of the Year 2000 Project. Other components of the Company's Enhancement Program have not been delayed due to the Year 2000 Project and are in the process of being implemented. Based on currently available information, the Company estimates the cost of the entire Enhancement Program, including the Year 2000 Project, to be $1.5 million. To date, the Company has expended $650,000 of the estimated project costs and projects that an additional $350,000 will be expended in Fiscal 1998 and $500,000 will be expended in fiscal 1999. The Company's Enhancement Program costs are funded through cash from operations and borrowings under the Company's credit facility. Based on currently available information, the Company expects that all phases of its Year 2000 Project will be completed by the end of the second quarter of fiscal 1999. With the completed and planned Year 2000 Project modifications to its IT Systems and non-IT Systems, the Company currently believes that the Year 2000 issue should not pose significant operational problems to the Company. There can be no assurance, however, that the systems of other parties on which the Company's business relies, including, but not limited to, the Company's key vendors, customers, suppliers and other third parties, will be converted on a timely basis. If the Company's Year 2000 Project does not achieve the desired results or is not completed in a timely manner or if the systems and applications of key third parties are materially impacted by the Year 2000 issue, the Company could lose certain of its abilities to efficiently engage in the normal business activities of purchasing, manufacturing or delivering its products, which could have a material adverse effect on the Company's business, financial condition or results of operations. Although some business disruption in the Company's business may be likely as a result of Year 2000 failures by third parties, the Company is not able at this time to ascertain the extent of any such disruption. The dates on which the Company believes it will complete its Year 2000 Project modifications and initiatives and the project costs are based on management's best estimates. There can be no guarantee, however, that these estimates will be achieved and actual results could differ materially from those anticipated. In addition to the Company's reliance on third parties to remediate their own Year 2000 issues, specific factors that might cause such material differences include, but are not limited to, the continued availability and cost of trained personnel and the ability to locate and correct all relevant computer codes. 15 16 GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) INFLATION Inflation in general was not considered to be a significant factor in the Company's operations during the periods discussed above. BUSINESS OUTLOOK This Quarterly Report, including "Management's Discussion and Analysis of Results of Operations and Financial Condition," contains forward-looking statements within the meaning of the safe harbor provision of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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: the impact of the level of the Company's indebtedness; restrictive covenants contained in the Company's various debt documents; general economic conditions and conditions in the retail environment; the Company's dependence on a few large customers; price fluctuations in the raw materials used by the Company; competitive conditions in the Company's markets; the timely introduction of new products; the impact of competitive products and pricing; certain assumptions related to consumer purchasing patterns; the seasonal nature of the Company's business; the timely implementation by the Company of its Year 2000 Project, the future costs associated with its Year 2000 Project and the timely conversion by key vendors, customers, suppliers and other third parties on which the Company's business relies; and 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 results may fluctuate, especially when measured on a quarterly basis. These forward-looking statements represent the Company's best estimate as of the date of this Form 10-Q. The Company assumes no obligation to update such estimates except as required by the rules and regulations of the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings cannot be determined with certainty, the Company's management, after consultation with legal counsel, is of the opinion that the expected final outcome should not have a material adverse effect on the Company's financial position, results of operations or liquidity. 16 17 GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) ENVIRONMENTAL REGULATION AND CLAIMS From time to time, the Company has had claims asserted against it by regulatory agencies or private parties for environmental matters relating to the generation or handling of hazardous substances by the Company or its predecessors, and the Company has incurred obligations for investigations or remedial actions with respect to certain of such matters. While the Company does not believe that any such claims asserted or obligations incurred to date will result in a material adverse effect upon the Company's financial position, results of operations or liquidity, the Company is aware that at its facilities in Massillon and Hamilton, Ohio; Easthampton, Massachusetts (more fully described in Note 12 of Notes to Consolidated Condensed Financial Statements hereinabove); Chicago, Illinois and Lititz, Pennsylvania; and at the previously owned facility in Hudson, New Hampshire, hazardous substances, oil or both have been detected and that additional investigation will be, and remedial action will or may be, required at such facilities. Operations at these and other facilities currently or previously owned or leased by the Company utilize, or in the past have utilized, hazardous substances. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. ITEM 5. OTHER INFORMATION To be considered for inclusion in the proxy statement relating to the Annual Meeting of Stockholders to be held in 1999, stockholder proposals must be received no later than November 27, 1998. To be considered for presentation at the Annual Meeting, although not included in the proxy statement, proposals must be received no later than March 12, 1999. All stockholder proposals should be marked for the attention of John Jay Althoff, Secretary of the Company, 98 Spit Brook Road, Suite 102, Nashua, New Hampshire 03062. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit: EXHIBIT NO. DESCRIPTION ----------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K: None 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EKCO GROUP, INC. ------------------------------------ (Registrant) Date: November 10, 1998 By: /S/ MALCOLM L. SHERMAN -------------------------- ------------------------------- Malcolm L. Sherman Chairman and Chief Executive Officer By: /S/ DONATO A. DENOVELLIS ------------------------------- Donato A. DeNovellis Executive Vice President, Finance and Administration, and Chief Financial Officer 18 19 INDEX TO EXHIBIT FILED WITH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998 EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule 19 EX-27.1 2 FINANCIAL DATA SCHEDULE 9-MOS SEP-27-1998
5 9-MOS JAN-03-1999 DEC-29-1997 SEP-27-1998 919 0 61,614 1,088 89,112 164,918 84,067 44,690 339,784 58,320 150,292 4,337 0 196 115,105 339,784 227,423 227,423 154,799 207,040 3,166 276 10,741 6,667 3,268 3,399 0 0 0 3,399 0.18 0.16
EX-27.2 3 RESTATED FDS FOR 9-MOS SEP 28, 1997
5 9-MOS DEC-28-1997 DEC-30-1996 SEP-28-1997 375 0 58,924 1,116 78,799 154,475 77,424 43,002 304,898 58,097 124,248 4,401 0 189 106,991 304,898 193,216 193,216 128,662 174,530 3,508 358 9,325 6,458 3,227 3,231 0 0 0 3,231 0.17 0.16
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