UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 23, 2000
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.
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(Exact name of registrant as specified in its Charter)
Delaware 36-4147027
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
4501 West 47th Street
Chicago, Illinois 60632
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (773) 890-1010.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Common shares, par value $0.01, outstanding as of October 30, 2000 - 7,278,471
HOME PRODUCTS INTERNATIONAL, INC.
INDEX
Page
Number
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I. Part Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of
Operations and Retained Earnings 4
Condensed Consolidated Statements of
Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Part II. Other Information
Items 1 through 3 are not applicable
Item 5. Other Events 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
PART I Financial Information
ITEM 1. Financial Statements
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
September 23, December 25,
2000 1999
(unaudited)
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Assets
Current assets:
Cash and cash equivalents $ 2,779 $ 4,861
Accounts receivable, net 56,878 59,571
Inventories, net 32,372 24,064
Prepaid expenses and other current assets 5,995 7,558
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Total current assets 98,024 96,054
Property, plant and equipment - at cost 109,807 98,678
Less accumulated depreciation and amortization (41,348) (31,420)
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Property, plant and equipment, net 68,459 67,258
Intangible, net and other assets 175,800 180,594
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Total assets $342,283 $343,906
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Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 5,058 $ 5,571
Accounts payable 27,399 23,820
Accrued liabilities 29,795 33,651
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Total current liabilities 62,252 63,042
Long-term obligations - net of current maturities 222,486 221,334
Other liabilities 3,005 2,908
Stockholders' equity:
Preferred Stock - authorized, 500,000 shares,
$.01 par value; - None issued - -
Common Stock - authorized 15,000,000 shares,
$.01 par value; 8,100,865 shares issued at
September 23, 2000 and 8,068,863 shares
issued at December 25, 1999 81 81
Additional paid-in capital 49,071 48,800
Retained earnings 11,916 14,269
Common stock held in treasury - at cost 822,394
shares at September 23, 2000 and December 25, 1999 (6,528) (6,528)
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Total stockholders' equity 54,540 56,622
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Total liabilities and stockholders' equity. $342,283 $343,906
======= =======
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
Thirteen-Weeks Thirty-nine Weeks
Ended Ended
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Sept 23, Sept 25, Sept 23, Sept 25,
2000 1999 2000 1999
------ ------ ------- -------
Net sales $83,566 $79,737 $222,565 $220,103
Cost of goods sold 63,494 52,917 164,607 144,144
Special charge - 8,947 - 8,947
------ ------ ------- -------
Gross profit 20,072 17,873 57,958 67,012
Operating expenses
Selling 10,236 10,491 30,554 30,093
Administrative 2,937 3,840 10,578 12,806
Amortization of intangible assets 1,327 1,341 3,962 4,082
Restructuring and other charges - 5,610 - 5,610
Other nonrecurring charges - 443 - 443
------ ------ ------- -------
14,500 21,725 45,094 53,034
------ ------ ------- -------
Operating profit (loss) 5,572 (3,852) 12,864 13,978
Other income (expense)
Interest income 17 39 65 143
Interest (expense) (5,664) (5,091) (16,435) (15,019)
Other income (expense), net 19 128 (545) 239
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(5,628) (4,924) (16,915) (14,637)
------ ------ ------- -------
Loss before income taxes (56) (8,776) (4,051) (659)
Income tax benefit (expense) 24 3,363 1,698 (36)
------ ------ ------- -------
Net loss (32) (5,413) (2,353) (695)
Retained earnings at beginning
of period 11,948 16,977 14,269 12,259
------ ------ ------- -------
Retained earnings at end of period $11,916 $11,564 $ 11,916 $ 11,564
====== ====== ======= =======
Net loss per common share - basic ($0.00) ($0.74) ($0.32) ($0.09)
====== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Thirty-nine weeks Ended
------------------------
September September
23, 25,
2000 1999
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Operating activities:
Net loss $ (2,353) $ (695)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 13,890 12,021
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,693 (5,604)
(Increase) in inventories (8,308) (4,160)
Decrease in prepaid expenses and other
current assets 1,563 5,141
Increase in accounts payable 3,579 7,747
(Decrease) in accrued liabilities (3,856) (156)
Other operating activities, net 929 (1,698)
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Net cash provided by operating activities 8,137 12,596
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Investing activities:
Proceeds on sale of business, net - 4,692
Proceeds from sale of building, net - 977
Capital expenditures, net (11,129) (14,061)
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Net cash used for investing activities (11,129) (8,392)
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Financing activities:
Payments on term loan borrowings (5,000) (2,250)
Net proceeds from borrowings under revolving
line of credit 5,750 300
Payment of capital lease obligation (111) (265)
Purchase of treasury stock - (3,886)
Exercise of stock options, issuance of common
stock under stock purchase plan and other 271 197
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Net cash provided by financing activities 910 (5,904)
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Net decrease in cash and cash equivalents (2,082) (1,700)
Cash and cash equivalents at beginning of period 4,861 4,986
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Cash and cash equivalents at end of period $ 2,779 $ 3,286
======= =======
Supplemental disclosures: Cash paid in the
period for:
Interest $ 11,868 $ 10,698
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Income taxes, net $ 0 $ 3,478
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The accompanying notes are an integral part of the financial statements.
HOME PRODUCTS INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share amounts)
Note 1. Home Products International, Inc. (the "Company"), based in Chicago,
is a leading designer, manufacturer and marketer of a broad range of value-
priced, quality consumer houseware products. The Company's products are
marketed principally through mass-market trade channels in the United States
and internationally.
The condensed consolidated financial statements include the accounts of
the Company and its subsidiary companies. All significant intercompany
transactions and balances have been eliminated.
The unaudited condensed financial statements included herein as of and
for the thirteen-weeks and thirty-nine weeks ended September 23, 2000 and
September 25, 1999 reflect, in the opinion of the Company, all adjustments
(which include only normal recurring adjustments) necessary for the fair
presentation of the financial position, the results of operations and cash
flows. These unaudited financial statements should be read in conjunction
with the audited financial statements and related notes thereto included in
the Company's 1999 Annual Report on Form 10-K. The results for the interim
periods presented are not necessarily indicative of results to be expected
for the full year.
Note 2. In the first quarter of 2000 the Company incurred $598 of other
non - recurring costs associated with the exploration of strategic
alternatives aimed at enhancing shareholder value. Such costs included fees
related to investment bankers, accountants, lawyers and travel expenses.
These costs are included in the "Other income (expense)" section of the
Condensed Consolidated Statements of Operation and Retained Earnings.
Note 3. Inventories are summarized as follows:
September 23, December 25,
2000 1999
------ ------
Finished goods $21,495 $15,890
Work-in-process 3,837 2,168
Raw materials 7,040 6,006
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$32,372 $24,064
====== ======
Note 4. The following information reconciles earnings per share - basic and
earnings per share - diluted:
Thirteen-Weeks Thirty-nine Weeks
Ended Ended
------------------ ------------------
Sept 23, Sept 25, Sept 23, Sept 25,
2000 1999 2000 1999
------ ------ ------ ------
Net loss $ (32) $(5,413) $(2,353) $ (695)
Weighted average common shares
outstanding - basic 7,278 7,272 7,274 7,465
Impact of stock options and warrants - 197 - 185
Weighted average common shares
outstanding - diluted 7,278 7,469 7,274 7,650
====== ====== ====== ======
Net loss per share - basic $ (0.00) $ (0.74) $ (0.32) $ (0.09)
Net loss per share - diluted $ (0.00) $ (0.74) $ (0.32) $ (0.09)
Stock options and warrants are not considered dilutive for the
thirteen- week or thirty-nine week periods ended September 23, 2000 because
of the loss in the periods; furthermore, as the Company's stock price has
fallen below the lowest option value, none of the stock options or warrants
are currently dilutive.
Note 5. In the third quarter of 1999, the Company recorded a $15,000
pretax charge, comprised of a Special Charge and a Restructuring and Other
Nonrecurring Charge, (together referred to herein as the "Charges"). The
Charges were incurred in accordance with a plan adopted in July 1999 to
consolidate two of the Company's wholly-owned subsidiaries and to implement
a national branding strategy.
The third quarter 2000 utilization of the reserve established in
connection with the Charges was as follows:
Reserve Activity Reserve
balance at in Q3 balance at
06/24/00 2000 09/23/00
------- ------ -------
Inventory $ 3,428 $ 860 $ 2,568
Molds 496 - 496
Elimination of duplicate assets 149 - 149
Employee costs 401 71 330
Other 359 39 320
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$ 4,833 $ 970 $ 3,863
======= ====== =======
The total activity charged against the accrual in the thirteen-weeks
ended September 23, 2000 was $970, of which $738 were non cash costs.
Note 6. The provision for income taxes is determined by applying an
estimated annual effective tax rate (federal, state and foreign combined) to
income before taxes. The estimated annual effective income tax rate is
based upon the most recent annualized forecast of pretax income and
permanent book/tax differences.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related footnotes and management's
discussion and analysis of financial condition and results of operations
contained in the Company's Form 10-K for the year ended December 25, 1999.
Thirteen-weeks ended September 23, 2000 compared to the thirteen-weeks ended
September 25, 1999
In the discussion and analysis that follows, all references to the
third quarter of 2000 are to the thirteen-week period ended September 23,
2000 and all references to the third quarter of 1999 are to the thirteen-
week period ended September 25, 1999. The following discussion and analysis
compares the actual results for the third quarter of 2000 to the actual
results for the third quarter of 1999 with reference to the following (in
thousands, except per share amounts; unaudited):
Thirteen-weeks ended
---------------------------------------
September 23, 2000 September 25, 1999
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Net sales $ 83,566 100.0% $ 79,737 100.0%
Cost of goods sold 63,494 76.0 52,917 66.4
Special charges - - 8,947 11.2
------- ----- ------- -----
Gross profit 20,072 24.0 17,873 22.4
Operating expenses 14,500 17.4 15,672 19.7
Restructuring and other charges - - 5,610 6.9
Other nonrecurring charges - - 443 0.6
------- ----- ------- -----
Operating profit (loss) 5,572 6.6 (3,852) (4.8)
Interest expense (5,664) (6.8) (5,091) (6.4)
Other income 36 0.1 167 0.2
------- ----- ------- -----
Loss before income taxes (56) (0.1) (8,776) (11.0)
Income tax benefit 24 0.0 3,363 4.2
------- ----- ------- -----
Net loss $ (32) (0.1)% $ (5,413) (6.8)%
======= ===== ======= =====
Net loss per share - Basic ($0.00) $(0.74)
Net loss per share - Diluted ($0.00) $(0.74)
Weighted average common shares
Outstanding - basic 7,278 7,272
Weighted average common shares
Outstanding - diluted 7,278 7,469
Net sales. Net sales of $83.6 million in the third quarter of 2000
increased $3.9 million, or 4.8%, from net sales of $79.7 million in the
third quarter of 1999. Sales of laundry and servingware products were
especially strong in the quarter. Laundry products increased 9.2% and
servingware products increased 7.0%. Sales increases in these two product
lines were driven by both additional placement within existing customers and
by the addition of new customers. Offsetting the sales gains were decreases
in kitchen and juvenile products. Kitchen and juvenile product sales were
down due to the elimination of several low profit margin products.
Together, sales in these two categories were down $0.6 million.
Gross profit. Gross profit in the third quarter of 2000 decreased to
$20.1 million from $26.8 million, excluding the impact of the special
charges, in the prior year period. Gross profit margins declined to 24.0%
from 33.6%, before the impact of the restructuring and other nonrecurring
charges, a year ago. The decline in profit margins is partially due to
increased cost of plastic resin, the Company's primary raw material
component. Plastic resin costs have increased 37% from the third quarter
1999. The cost increases in plastic resin are attributable to increased
demand for plastic resin beyond manufacturers' ability to supply. The
impact of the increased plastic resin cost on gross profit was approximately
$3.7 million. In addition, deterioration in selling prices significantly
impacted margins. The Company sells a majority of its volume to several
large, mass market retailers. These customers do not accept price increases
(to cover increased raw material costs for instance) and in fact continue to
push for price concessions. The Company's competitors have been willing to
provide further price reductions thus causing the Company to match their
prices to retain shelf space. The result of this competitive environment is
reduced selling prices despite higher raw material costs, which negatively
impacts margins. The Company's El Paso facility, opened in the first
quarter, is not yet up to capacity. Unabsorbed costs related to the El Paso
facility in the third quarter of 2000 were $1.1 million.
Operating expenses. Operating expenses of $14.5 million in the third
quarter of 2000 were down $1.2 million as compared to the third quarter of
1999. As a percentage of net sales, operating expenses decreased to 17.4%,
or 2.3%, during 2000 from 19.7% in 1999. Improvement over the third quarter
1999 was primarily due to the company consolidation of administrative
functions, which were a result of the 1999 restructuring charge. In
addition, certain compensation and benefit accruals were reduced in the
current quarter.
Interest expense. Interest expense of $5.7 million in the third
quarter of 2000 increased $0.6 million from $5.1 million in the third
quarter of 1999. The increase in interest expense is the result of higher
average debt levels than a year ago and rising interest rates. The
continued cash funding of costs related to the third quarter 1999
restructuring charges slightly affected the company's debt. On average,
debt was $7 million higher in 2000 and interest rates increased 70 basis
points.
Income tax expense. As a result of the Company's pre-tax loss for the
third quarter of 2000, a tax benefit in the amount of $0.02 million was
recorded.
Net earnings (loss). The Company had a net loss of $0.03 million in
the third quarter of 2000, a loss of ($0.00) per diluted common share based
on 7.28 million weighted average common shares outstanding. This compares to
net earnings in the third quarter of 1999 of $3.6 million, before impact of
the $15.0 million ($9.0 million net of tax benefit) restructuring charge, or
$0.48 per diluted common share, based on 7.47 million weighted average
common shares outstanding. The primary contributor to the decrease in
weighted average common shares outstanding was the Company's common share
buyback activity during 1999. Stock options and warrants are not considered
dilutive in the period due to the net loss; furthermore, as the Company's
stock price has fallen below the lowest option value, none of the stock
options or warrants are currently dilutive.
Thirty-nine weeks ended September 23, 2000 compared to the thirty-nine weeks
ended September 25, 1999
All references to 2000 are to the thirty-nine week period ended
September 23, 2000 and all references to 1999 are to the thirty-nine week
period ended September 25, 1999. The following discussion and analysis
compares the actual results of 2000 to the actual results of 1999 with
reference to the following (in thousands, except per share amounts;
unaudited):
Thirty-nine weeks ended
---------------------------------------
September 23, 2000 September 25, 1999
------------------ ------------------
Net sales $222,565 100.0% $220,103 100.0%
Cost of goods sold 164,607 74.0 144,144 65.5
Special charges - - 8,947 4.1
------- ----- ------- -----
Gross profit 57,958 26.0 67,012 30.4
Operating expenses 45,094 20.3 46,981 21.4
Restructuring and other charges - - 5,610 2.4
Other nonrecurring charges - - 443 0.2
------- ----- ------- -----
Operating profit 12,864 5.7 13,978 6.4
Interest expense (16,435) (7.4) (15,019) (6.9)
Other (expense) income (480) (0.2) 382 0.2
------- ----- ------- -----
Loss before income taxes (4,051) (1.9) (659) (0.3)
Income tax benefit (expense) 1,698 0.8 (36) 0.0
------- ----- ------- -----
Net loss $ (2,353) (1.1)% $ (695) (0.3)%
======= ===== ======= =====
Net loss per share - basic $ (0.32) $ (0.09)
Net loss per share - diluted $ (0.32) $ (0.09)
Weighted average common
shares Outstanding - basic 7,274 7,465
Weighted average common
shares Outstanding - diluted 7,274 7,650
Net sales. Net sales in 2000 increased to $222.6 million, or $2.5
million, from $220.1 million in 1999. Sales of servingware products have
increased by 14.7% over the prior year while laundry products were up 5.0%.
Strong sales of servingware and laundry products were offset by decreases in
kitchen and juvenile products. Sales of servingware and laundry products
were up due to strong sales to existing customers and an increase in new
customers sales. The decrease in kitchen and juvenile product line sales
were due to the discontinuance of several low profit margin products that
occurred during the Company's 1999 restructuring. Sales were also impacted
by a major retailer's reduction in inventories. Sales to this major retail
customer were off by more that $4.3 million compared to last year.
Gross Profit. Gross profit in 2000 declined to $58.0 million from $75.9
million, before the impact of the special charge, a year ago. Gross profit
margins declined to 26.0% from 34.5%, excluding the impact of the special
charge, a year ago. The gross profit margin has been negatively impacted by
an increase in the cost of plastic resin. Plastic resin costs have
increased about 40% from 1999, a trend that began in the second quarter of
1999. The impact of the increased plastic resin cost on the gross profit
margin was approximately $11.5 million, over 500 basis points. Gross profit
margins were also significantly impacted by the deterioration in selling
prices and a product mix shift during 2000. Customer and competitor
pressures have pushed down selling prices even though raw material costs
have increased. This is mainly due to the fact that the Company sells a
majority of its volume to several large mass market retailers. These
customers are requiring price reductions even though raw material costs have
increased. In addition, the Company's competitors have been willing to
grant further price concessions causing the Company to match their prices to
maintain market share. Gross profit was also negatively impacted by the
Company's new El Paso facility. Unabsorbed costs related to the El Paso
facility were $2.6 million in 2000.
Operating expenses. Operating expenses of $45.1 million in 2000 were
$1.9 million lower than the prior year. As a percentage of net sales,
operating expenses decreased in 2000 to 20.3%, or 1.1%, from 21.4% in 1999.
Savings have been primarily driven by the third quarter 1999 consolidation
of operating functions. These savings were partially offset by higher
distribution and freight costs.
Interest expense. Interest expense in 2000 increased to $16.4 million,
or $1.4 million, from $15.0 million in 1999. The increase in interest
expense is the result of higher average debt levels than a year ago.
Increased interest rates have impacted interest costs during 2000. Debt
levels were also affected by the continued funding of the cash costs related
to the third quarter 1999 restructuring charge.
Income tax expense. As a result of the Company's pre-tax loss for 2000,
a tax benefit in the amount of $1.7 million was recorded.
Net earnings (loss). The Company had a net loss of $2.4 million in
2000, a loss of ($0.32) per diluted common share based on 7.27 million
weighted average common shares. This compares to net earnings in 1999,
excluding the impact of the special, restructuring and other nonrecurring
charges, of $8.3 million, or $1.09 per diluted common share based on 7.65
million weighted average common shares outstanding. Stock options and
warrants are not considered dilutive in the period due to the net loss:
however, as the Company's stock price has fallen below the lowest option
value, none of the stock options or warrants would be dilutive. The primary
contributor to the decrease in weighted average common shares outstanding
was the Company's common share buyback activity during 1999.
Capital Resources and Liquidity
Positive cash flow of $3.5 million was generated in the third quarter.
This compares to positive cash flow of $6 million in the third quarter of
last year. The decrease between years is directly attributable to the
decline in earnings. Year-to-date, cash and cash equivalents has decreased
to $2.8 million as a result of the Company's operating losses. Cash on hand
decreased $2.1 million while debt increased by $0.7 million. Capital
spending for the thirty-nine weeks was $11.1 million, primarily related to
the build-out of the new El Paso facility and final funding of the new
computer systems installed in the fourth quarter of 1999.
Working capital at the end of the third quarter was $38.1 million as
compared to $33.7 million at the beginning of the year. Working capital
increased due to higher inventories and lower accrued liabilities.
Inventories are up due to seasonal factors and the opening of the El Paso
manufacturing facility. Accrued liabilities are down because the Company
has funded the accruals that were established in connection with the 1999
restructuring.
The Company, effective September 22, 2000, negotiated a Second
Amendment to the Revolving Credit Agreement ("the Revolver") to better suit
current business needs. The Second Amendment provides the Company with
financial covenants that the Company believes should be easier to achieve,
but in exchange provides the Company less flexibility in other areas. As
part of the Second Amendment, among other limitations, the associated line
of credit was reduced to $85 million, certain financial covenants were
adjusted and the interest rate charged to the Company was increased. In
general, interest rates under the Revolver were increased about 100 basis
points. The interest rate paid on borrowings under the Revolver in the
fourth quarter of 2000 will be at approximately LIBOR plus 300 basis points.
Availability under the Revolver at September 23, 2000 was approximately $31
million. The Company was in compliance with all loan covenants as of
September 23, 2000.
The Company believes its financing facilities together with its cash flow
from operations will provide sufficient capital to fund operations, make
required debt and interest payments and meet anticipated capital spending
needs.
Management Outlook and Commentary
* The HOMZ brand introduced during 1999 continues to receive good initial
acceptance. The Company will continue to look for sales opportunities
that leverage the brand's effective point of purchase appearance.
* Gross profit margins are expected to remain at or below current levels
for the remainder of the year. Plastic resin prices are not likely to
significantly decline (see discussion below). In addition selling prices
continue to come under competitive pressure. Certain competitors are
holding the line on selling prices (and in some cases reducing selling
prices) despite the significant increase in raw material costs. These
plus other factors discussed below will continue to provide a very
challenging business environment. As a result of these factors, we
expect margins and profitability for the remainder of 2000 to be
significantly below prior year results.
* Fourth quarter sales are expected to be below third quarter sales but
should be ahead of prior year. Seasonal factors are responsible for
lower sales in the fourth quarter as compared to third quarter. As
compared to last year, we expect sales will increase consistent with our
improved market share position.
* The El Paso facility began shipment of laundry and storage products
during the second quarter. With the successful opening of the facility,
the Company now has an additional tool by which to gain sales
distribution. New distribution has already been achieved however, the
expected penetration of west coast customers has gone slower than
anticipated. The Company believes that the opening of the El Paso
facility will not only enhance the Company's sales growth. This facility
has new, highly efficient manufacturing equipment which will result in
lower production costs as compared to the Company's other manufacturing
locations. In addition, El Paso is currently a very favorable labor
market that can provide needed manpower at a reasonable rate.
* A major national retailer has publicly announced its intentions to close
certain stores and to cut back inventories. The impact of these customer
plans cannot be estimated at this time but it will likely have some
negative impact as early as the fourth quarter of 2000.
* 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
the fourth quarter. 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 buys about 150 million pounds of resin a year, representing
20-25% of the Company's cost of goods sold. During 1999 and so far in
2000, the cost of plastic resin increased about $0.10/pound. This
occurred after a several year period of declining plastic resin costs
during which selling prices also declined in response to competitive
pressures. As plastic resin costs have increased, the Company has been
unable to fully pass along this increase to its customers. The ability
to increase prices is hampered by both the nature of the retail customer
environment and other competitive factors. The future cost of plastic
resin is difficult to predict. Plastic resin costs are impacted by
several factors outside the control of the Company including supply and
demand characteristics, crude oil and natural gas prices as well as the
overall health of the economy. Any of these factors could have a
positive or negative impact on plastic resin costs.
* As we have done in the past, management will review its product offering.
As a result, we may decide to exit certain products that cannot achieve
an acceptable cash rate of return given current raw material costs. The
cost to exit certain products cannot presently be estimated but would
likely be significant.
* The Company operates on a 52/53 week year ending on the Saturday closest
to the end of the calendar year. Fiscal year 2000 will be a 53 week
year.
* The Company has submitted an application for listing on the NASDAQ
SmallCap Market. Once the application is accepted the Company will no
longer be listed on the NASDAQ Stock Market.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. For the thirty-nine week period ended September
23, 2000, the Company did not experience any material changes in interest
rate risk that would affect the disclosures presented in the Company's
Annual Report on Form 10-K for the fifty-two week period ended December 25,
1999.
Commodity Risk. The Company is subject to fluctuations in commodity
based raw materials such as plastic resin, steel and griege fabric. There
have been no significant changes in the costs of steel and griege fabric in
the thirty nine-week period ended September 23, 2000. As previously
mentioned the cost of plastic resin continued to increase in the thirty-nine
week period ended September 23, 2000.
As compared to a year ago, the Company's resin costs, on average,
increased approximately 39.9%. This increase negatively impacted gross
margin by $11.5 million during the first three quarters of 2000. The
Company anticipates that it will consume in excess of 150 million pounds of
resin in fiscal 2000.
Forward Looking Statements
This quarterly report on Form 10-Q, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations, "Management
Outlook and Commentary" and "Quantitative and Qualitative Disclosures about
Market Risk" sections contain forward-looking statements within the meaning
of the "safe-harbor" provisions of the Private Securities Litigation Reform
Act of 1995. 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 impact of the level of the Company's indebtedness; (ii)
restrictive covenants contained in the Company's various debt documents;
(iii) general economic conditions and conditions in the retail environment;
(iv) the Company's dependence on a few large customers; (v) price
fluctuations in the raw materials used by the Company (vi) competitive
conditions in the Company's markets; (vii) the seasonal nature of the
Company's business; (viii) the Company's ability to execute its acquisition
strategy; (ix) fluctuations in the stock market; (x) the extent to which the
Company is able to retain and attract key personnel; (xi) relationships with
retailers; and (xii) 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. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully
review and consider the various disclosures made by the Company which
attempt to advise interested parties of the factors which affect the
Company's business, in this report, as well as the Company's periodic
reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission.
PART II Other Information
ITEM 5. OTHER EVENTS
Effective September 22, 2000, Home Products International, Inc. ("HPI")
has negotiated a Second Amendment to the Revolving Credit Agreement ("the
Revolver") to better suit current business needs. The Second Amendment
includes amended financial covenants that are predicated on HPI's current
business plan.
As part of the Second Amendment, among other limitations, the
associated line of credit was reduced to $85 million, certain financial
covenants were adjusted, capital spending limits were reduced and the
interest rate charged HPI was increased.
HPI's $85 million revolving credit line is credit based. In other
words, the Company can borrow up to $85 million to fund daily operations
without reference to a borrowing base determination or other limiting
factors other than continued compliance with the financial and other general
covenants. In the past, the HPI's borrowings under the revolving line of
credit have ranged from $45 million to $65 million.
In general, interest rates under the Revolver were increased about 1%.
The interest rate paid on borrowings under the Revolver in the fourth
quarter of 2000 will be at approximately LIBOR plus 3%.
Availability under the Revolver at September 23, 2000 was approximately
$31 million. HPI was in compliance with all loan covenants as of September
23, 2000.
HPI is a highly leveraged business. As a consequence, it is dependent
upon its Revolver to provide essential liquidity, and borrowings under that
facility are dependent upon HPI's fulfillment of the financial covenants
that it contains. Although violations of the financial covenants contained
in the Revolver can be waived should HPI at some future time not be able to
satisfy those financial covenants it would significantly, and negatively,
affect HPI's business by, among other things, restricting growth in sales or
necessitating HPI's obtaining a replacement credit facility. HPI's ability
to obtain a replacement facility would be dependent on the financial markets
and its financial condition at that time.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 Exhibit 10.1 - Second Amendment, dated as of
September 22, 2000, to the Amended and Restated
Credit Agreement, dated as of September 8, 1998,
among Home Products International, Inc., the
several banks and other financial institutions
or entities from time to time parties thereto,
and The Chase Manhattan Bank, as administrative
agent.
27 Financial Data Schedule (only filed
electronically with S.E.C.)
(b) Reports on Form 8-K - not applicable.
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 hereunto duly authorized.
Home Products International, Inc.
By: /s/ James E. Winslow
----------------------------------
James E. Winslow
Executive Vice President and
Chief Financial Officer
Dated: November 6, 2000