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 25, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-17237 HOME PRODUCTS INTERNATIONAL, INC. (Exact name of registrant as specified in its Charter) Delaware 36-4147027 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4501 West 47th Street Chicago, Illinois 60632 (Address of principal (Zip Code) executive offices) Registrant's telephone number including area code (773) 890-1010. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common shares, par value $0.01, outstanding as of October 31, 1999 - 7,223,702 HOME PRODUCTS INTERNATIONAL, INC INDEX Page Number Part I. Financial Information ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 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 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information Items 1 through 5 are not applicable Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 PART I Financial Information ITEM 1. Financial Statements HOME PRODUCTS INTERNATIONAL, INC. Condensed Consolidated Balance Sheets (in thousands, except share amounts) September 25, December 26, 1999 1998 (unaudited) ------- ------- Assets Current assets: Cash ....................................... $ 3,286 $ 4,986 Accounts receivable, net ................... 54,790 50,238 Inventories, net ........................... 28,616 25,296 Prepaid expenses and other current assets .. 1,703 6,880 ------- ------- Total current assets ..................... 88,395 87,400 Property, plant and equipment - at cost....... 97,038 87,854 Less accumulated depreciation................. (29,601) (27,654) Property, plant and equipment, net............ 67,437 60,200 Intangible and other assets................... 188,696 192,443 ------- ------- Total assets.................................. $344,528 $340,043 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term obligations $ 5,558 $ 3,549 Accounts payable ........................... 27,852 20,510 Accrued liabilities ........................ 39,023 35,664 ------- ------- Total current liabilities ................ 72,433 59,723 Long-term obligations - net of current maturities................................... 215,312 219,536 Other liabilities............................. 2,876 2,783 Stockholders' equity: Preferred Stock - authorized, 500,000 shares, $.01 par value; None issued ....... - - Common Stock - authorized 15,000,000 shares, $.01 par value; 8,046,096 shares issued at September 25, 1999 and 8,024,123 shares issued at December 26, 1998 ............... 81 80 Additional paid-in capital ................. 48,790 48,455 Retained earnings .......................... 11,564 12,259 Common Stock held in treasury - at cost; 822,394 shares September 25, 1999 and 376,462 shares issued at December 26, 1998 (6,528) (2,642) Currency translation adjustments ........... - (151) ------- ------- Total stockholders' equity ............... 53,907 58,001 ------- ------- Total liabilities and stockholders' equity.... $344,528 $340,043 ======= ======= 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 Ended Weeks Ended ------------------- ------------------ Sept 25, Sept 26, Sept 25, Sept 26, 1999 1998 1999 1998 ------ ------ ------- ------- Net sales ...................... $79,737 $68,243 $220,103 $175,637 Cost of goods sold ............. 52,917 45,874 144,144 118,435 Special charge ................. 8,947 - 8,947 - ------ ------ ------- ------- Gross profit ................ 17,873 22,369 67,012 57,202 Operating expenses Selling ..................... 10,491 8,182 30,093 20,720 Administrative .............. 3,840 3,817 12,806 10,713 Amortization of intangible assets ..................... 1,341 1,203 4,082 3,068 Restructuring and other charges .................... 5,610 - 5,610 - Other nonrecurring charges . 443 - 443 - ------ ------ ------- ------- 21,725 13,202 53,034 34,501 ------ ------ ------- ------- Operating profit ............ (3,852) 9,167 13,978 22,701 Other income (expense) Interest income ............. 39 41 143 96 Interest (expense) .......... (5,091) (3,872) (15,019) (10,260) Other income (expense), net . 128 1 239 53 ------ ------ ------- ------- (4,924) (3,830) (14,637) (10,111) ------ ------ ------- ------- Earnings (loss) before income taxes and extraordinary charge (8,776) 5,337 (659) 12,590 Income tax benefit (expense) ... 3,363 (2,223) (36) (5,201) ------ ------ ------- ------- Earnings (loss) before extraordinary charge .......... (5,413) 3,114 (695) 7,389 Extraordinary charge for early retirement of debt, net of tax benefit of $3,698 ............. - - - (5,107) ------ ------ ------- ------- Net earnings (loss) ............ (5,413) 3,114 (695) 2,282 Retained earnings at beginning of period ..................... 16,977 7,784 12,259 8,616 ------ ------ ------- ------- Retained earnings at end of period ........................ $11,564 $10,898 $ 11,564 $ 10,898 ====== ====== ======= ======= Net earnings (loss) per common share - basic ($0.74) $ 0.39 ($0.09) $ 0.29 ====== ====== ======= ======= Net earnings (loss) per common share-diluted .................. ($0.74) $ 0.38 ($0.09) $ 0.28 ====== ====== ======= ======= The accompanying notes are an integral part of the financial statements. HOME PRODUCTS INTERNATIONAL, INC. Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Thirty-nine Weeks Ended Sept 25, Sept 26, 1999 1998 ------ ------- Cash flows from operating activities: Net earnings (loss) ....................... $ (695) $ 2,282 Adjustments to reconcile net earnings to Net cash provided (used) by operating activities: Depreciation and amortization ............ 12,021 9,314 Changes in assets and liabilities: (Increase) in accounts receivable ...... (5,604) (9,755) (Increase) decrease in inventories ..... (4,160) 1,854 Decrease (increase) in prepaids and other current assets ........................ 5,141 (2,023) Increase in accounts payable ........... 7,747 3,061 (Increase) decrease in accrued liabilities ............................ (156) 3,596 Other operating activities, net .......... (1,698) 5,604 ------ ------- Net cash provided by operating activities.. 12,596 13,933 ------ ------- Cash flows from investing activities: Proceeds on sale of business .............. 4,692 - Proceeds on sale of building .............. 977 - Seymour acquisition, net of cash acquired . - (14,882) Tenex acquisition, net of cash acquired .. - (16,725) Prestige Plastics acquisition, net of cash acquired ................................. - (78,321) Capital expenditures ...................... (14,061) (7,729) ------ ------- Net cash (used) for investing activities.... (8,392) (117,657) ------ ------- Cash flows from financing activities: Payments on borrowings .................... (2,250) (219,218) Net proceeds from borrowings and warrants . - 286,672 Net proceeds from borrowings under revolving line of credit ............................ 300 41,931 Purchase of treasury stock ................. (3,886) - Payment of capital lease obligation ........ (265) (184) Exercise of common stock options and issuance of common stock under stock purchase plan ............................ 197 211 ------ ------- Net cash provided (used) by financing activities................................. (5,904) 109,412 ------ ------- Net increase in cash and cash equivalents . (1,700) 5,688 Cash and cash equivalents at beginning of period ................................... 4,986 583 ------ ------- Cash and cash equivalents at end of period $ 3,286 $ 6,271 ====== ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest .................................. $10,698 $ 359 Income taxes .............................. 3,478 817 The accompanying notes are an integral part of the financial statements. HOME PRODUCTS INTERNATIONAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) (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 housewares products. The Company's products are marketed principally through mass market trade channels throughout 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 consolidated financial statements included herein as of September 25, 1999 and for the thirteen and thirty-nine weeks ended September 25, 1999 and September 26, 1998 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 1998 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. Inventories are summarized as follows: September December 25, 1999 26, 1998 ------ ------ Finished goods ................... $17,715 $15,771 Work-in-process .................. 3,829 3,487 Raw materials .................... 7,072 6,038 ------ ------ $28,616 $25,296 Note 3. The following information reconciles earnings per share - basic and earnings per share - diluted: Thirteen Weeks Thirty-nine Weeks Ended Ended ----------------- ----------------- Sept 25, Sept 26, Sept 25, Sept 26, 1999 1998 1999 1998 ------ ----- ------ ----- Net earnings (loss) ............. $(5,413) $3,114 $ (695) $2,282 Weighted average common shares outstanding - basic ............ 7,272 7,961 7,465 7,946 Impact of stock options and warrants ....................... 197 211 185 311 ------ ----- ------ ----- Weighted average common shares outstanding - diluted .......... 7,469 8,172 7,650 8,257 ====== ===== ====== ===== Net earnings (loss) per share - basic .......................... $(0.74) $0.39 $(0.09) $0.29 Net earnings (loss) per share - diluted ........................ $(0.74) $0.38 $(0.09) $0.28 As a result of the net loss in the thirteen and thirty-nine week periods ended September 25, 1999, the basic weighted average shares outstanding value is used for both the basic and diluted calculation to prevent diluted earnings per share from being antidilutive. Note 4. 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. Note 5. Special, restructuring and other nonrecurring charges Expected Non cash Cash charge Totals charge ------- ------- ------- Cost of goods sold: Special SKU reduction and charges: inventory adjustments $ 1,515 $ 5,555 $ 7,070 Production and distribution facilities 830 149 979 Discontinued molds - 898 898 ------- ------- ------- Subtotal $ 2,345 $ 6,602 $ 8,947 Operating Exp.: Restructuring and other charges Employee related costs $ 1,369 $ - $ 1,369 Write-off of assets 166 3,557 3,723 Transaction costs 444 74 518 ------- ------- ------- Subtotal $ 1,979 $ 3,631 $ 5,610 Other nonrecurring charges Employee related costs $ 293 $ - $ 293 HOMZ brand 150 - 150 ------- ------- ------- Subtotal $ 443 $ - $ 443 ------- ------- ------- Total Charges $ 4,767 $ 10,233 $ 15,000 Tax benefit - 40% (6,000) ------- Net (benefit) charge $ 9,000 In July 1999, the Company announced a restructuring plan to further maximize its marketing and operational productivity and to further strengthen relationships with its key retail partners. The major elements of the restructuring focus on a newly created national branding strategy, elimination of low volume stock keeping units, (sku's) and the consolidation of sales, marketing and administrative functions. The Company's commitment is to become a "one company, one brand" supplier to its customers. When fully implemented all products will go to market under the HOMZ brand. Along with this change, the Company has consolidated its Tamor and Selfix-Seymour operations into a unified entity. This change has resulted in the downsizing of certain duplicated functions, such as the selling, marketing and administrative departments. During the Company's third quarter, management began to implement the restructuring plan. Accordingly, special, restructuring and other nonrecurring charges (cumulatively the "Charges") were determined and recorded. As a part of the restructuring, an extensive product line and sku review was performed. As a result, approximately one-third of the company's total sku's (representing less than 10% of consolidated sales) have been eliminated. The utilization of reserves established in connection with the Charges in Q3 1999 was as follows (before tax benefit): Q3 Activity in Reserve Balance 1999 Charge Q3 1999 at Sept. 25, 1999 ------- ------ ------ Inventory $ 7,070 $ 806 $ 6,264 Molds 898 402 496 Plant and facilities 979 - 979 Asset write-offs 3,723 3,150 573 Employee costs 1,662 631 1,031 Other 668 224 444 ------- ------ ------ $ 15,000 $ 5,213 $ 9,787 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 26, 1998. Third Quarter 1999 Charges. In July 1999 the Company announced a restructuring plan to further maximize its marketing and operational productivity and to further strengthen relationships with its key retail partners. The major elements of the restructuring focus on a newly created national branding strategy, elimination of low volume sku's and the consolidation of sales, marketing and administrative functions. The Company's commitment is to become a "one company, one brand" supplier to its custmers. As disclosed in Note 5 to the Condensed Consolidated Financial Statements, the Company recorded special, restructuring and other nonrecurring charges (the "Charges") in the third quarter of 1999 totaling $15.0 million, (before tax benefit of $6,000). The total pretax charge has been allocated $8.9 million to cost of goods sold and $6.1 million to operating expenses. Details of the Charges are discussed later within this section. Third Quarter 1998 Acquisitions. The Company made two acquisitions within its third quarter of 1998 (the "Third Quarter 1998 Acquisitions") and the actual results have been combined with the Company's since the date of the respective acquisition. The Third Quarter 1998 Acquisitions are as follows: Entity Date Acquired ------ ------------- Tenex Corporation's consumer product storage line ("TCPS")........... August 14, 1998 Prestige Plastics, Inc.*.......... September 8, 1998 * Prestige Plastics, Inc. is comprised of two operating divisions; Anchor Hocking Plastics ("AHP") and Plastics, Inc. ("PI"). Thirteen weeks ended September 25, 1999 compared to the thirteen weeks ended September 26, 1998 In the discussion and analysis that follows, all references to the third quarter of 1999 are to the thirteen week period ended September 25, 1999 and all references to the third quarter of 1998 are to the thirteen week period ended September 26, 1998. The following discussion and analysis compares the actual results for the third quarter of 1999 to the actual results for the third quarter of 1998 with reference to the following (in thousands, except per share amounts; unaudited): Thirteen weeks ended September 25, September 26, 1999 1998 ---- ---- Net sales..................... $ 79,737 100.0% $ 68,243 100.0% Cost of goods sold............ 52,917 66.4 45,874 67.2 Special charge................ 8,947 11.2 - - ------- ----- ------- ----- Gross profit................ 17,873 22.4 22,369 32.8 Operating expenses............ 15,672 19.7 13,202 19.4 Restructuring and other charges 5,610 6.9 - - Other nonrecurring charges.... 443 0.6 - - ------- ----- ------- ----- Operating profit............ (3,852) (4.8) 9,167 13.4 Interest expense.............. (5,091) (6.4) (3,872) (5.7) Other income (expense)........ 167 0.2 42 0.1 Earnings (loss) before income taxes....................... (8,776) (11.0) 5,337 7.8 Income tax benefit (expense).. 3,363 4.2 (2,223) (3.2) ------- ----- ------- ----- Net earnings (loss)........... $ (5,413) (6.8)% $ 3,114 4.6% ======= ===== ======= ===== Net earnings (loss) per share - basic.................... $(0.74) $0.39 Net earnings (loss) per share - diluted.................. $(0.74) $0.38 Weighted average common shares outstanding - basic......... 7,272 7,961 Weighted average common shares outstanding - diluted....... 7,469 8,172 Net sales. Net sales of $79.7 million in the third quarter of 1999 increased $11.5 million, or 16.8%, from net sales of $68.2 million in the third quarter of 1998. The sales increase is attributable to a solid "back-to-school" season and significant contributions from product lines acquired in the Third Quarter 1998 Acquisitions, specifically in the storage and servingware products. The third quarter of 1999 benefited from a full 13 weeks of net sales from the Third Quarter 1998 Acquisitions, whereas the third quarter of 1998 contained less than 13 weeks (6 weeks for TCPS and 3 weeks for AHP and PI). The Third Quarter 1998 Acquisitions contributed $12.2 million to the increase and internal growth and new product development generated $5.0 million. Included in new product development are sales generated from molds and inventory acquired by the Company in June 1999. The total purchase price for the molds and inventory acquired was less than $5.0 million. The product lines acquired compliment the Company's storage and laundry product lines and are sold to the Company's current customer base. Negatively impacting sales in the quarter was the loss of sales to Caldor, a regional retailer in the northeast, due to their Chapter 7 bankruptcy filing and the divestiture of Shutters, Inc. in early 1999 which combined to generate a decrease in net sales of $5.7 million. Gross profit. As disclosed in Note 5 to the Condensed Consolidated Financial Statements, the Company recorded a special charge in the third quarter of 1999 to undertake a restructuring and consolidation plan. The total charge incurred as a component of cost of goods sold was $8.9 million. The majority of the special charge was established to cover the elimination of under performing sku's. The Company has discontinued approximately one-third of its total sku's (which represents less than 10% of consolidated sales) and this charge is to adjust the carrying values of certain inventory and molds associated with the discontinued products. Gross profit before impact of the special charge increased from $22.4 million in the third quarter of 1998 to $26.8 million in the third quarter of 1999 while gross profit margins, before impact of the special charge, increased from 32.8% in the third quarter of 1998 to 33.6% in the third quarter of 1999. The increase in margin is primarily attributable to an elimination of under performing sku's across all product lines (largest benefit achieved within the laundry/bathware product lines), improved margins on the product lines acquired in the Third Quarter 1998 Acquisitions and favorable purchase price variances on steel and fabrics as compared to the prior period. In addition, margins were negatively impacted in 1999 by an increase in plastic resin costs as compared to the prior year. Operating expenses. As discussed in Note 5 to the Condensed Consolidated Financial Statements, the Company recorded a $5.6 million restructuring and other charge and a $0.5 million other nonrecurring charge in the third quarter 1999. These charges primarily relate to employee related costs such as severance and relocation costs, adjustments to obsolete assets and transaction costs to implement the consolidation and restructuring plan. Operating expenses, excluding the impact of the restructuring and other nonrecurring charges, increased $2.5 million from $13.2 million in 1998 to $15.7 million in the third quarter of 1999. Operating expenses as a percent of net sales slipped slightly from 19.4% in 1998 to 19.7% in 1999. The overall increase in expenses is primarily related to the Third Quarter 1998 Acquisitions which were included for a full 13 week period in 1999 as compared to less than 13 weeks in 1998. Further contributing to the increase are costs related to a computer system conversion at one of the Company's subsidiaries. Slightly offsetting the increase was the positive effect of consolidating selling, marketing and administrative functions of two of the Company's subsidiaries. Additionally, 1999 amortization expense contained a full 13 weeks of amortization related to goodwill from the Third Quarter 1998 Acquisitions as opposed to less than 13 weeks recorded in 1998. Interest expense. Interest expense of $5.1 million in the third quarter of 1999 increased $1.2 million from $3.9 million in the third quarter of 1998. The increase is primarily attributable to debt related to the Third Quarter 1998 Acquisitions which was outstanding for the full 13 weeks of the third quarter of 1999 as compared to less than the full 13 week period in the third quarter of 1998. Further contributing to the increase, the Company purchased 763,632 shares of treasury stock at a total cost of $6.3 million since the third quarter of 1998. Income tax expense. Income taxes have been accrued in both 1999 and 1998 based upon estimated effective tax rates. Tax expense for 1999 reflects the $6.0 million benefit from the $15.0 million Charges. Net earnings. The Company had net earnings of $3.6 million in the third quarter of 1999, before impact of the $15.0 million ($9.0 million net of tax benefit) restructuring charge, or $0.48 per common share - diluted, based on 7,469,000 weighted average common shares outstanding. This compares to net earnings of $3.1 million in the third quarter of 1998, or $0.38 per common share - diluted, based on 8,172,000 weighted average common shares outstanding. The decrease in weighted average common shares outstanding was primarily the result of treasury stock purchased since the third quarter of 1998. The net loss for the third quarter of 1999, after inclusion of the special, restructuring and other nonrecurring charges, was $5.4 million or $0.74 per common share - diluted. Thirty-nine weeks ended September 25, 1999 compared to the thirty-nine weeks ended September 26, 1998 In the discussion and analysis that follows, all references to 1999 are to the thirty-nine week period ended September 25, 1999 and all references to 1998 are to the thirty-nine week period ended September 26, 1998. The following discussion and analysis compares the actual results for 1999 to the actual results for 1998 with reference to the following (in thousands, except per share amounts; unaudited): Thirty-nine weeks ended September 25, September 26, 1999 1998 ---- ---- Net sales..................... $220,103 100.0% $175,637 100.0% Cost of goods sold............ 144,144 65.5 118,435 67.4 Special charge................ 8,947 4.1 - 67.4 ------- ----- ------- ----- Gross profit................ 67,012 30.4 57,202 32.6 Operating expenses............ 46,981 21.4 34,501 19.7 Restructuring and other charges 5,610 2.4 - - Other nonrecurring charges.... 443 0.2 - - ------- ----- ------- ----- Operating profit............ 13,978 6.4 22,701 12.9 Interest expense.............. (15,019) (6.9) (10,260) (5.8) Other income.................. 382 0.2 149 0.1 ------- ----- ------- ----- Earnings (loss) before income taxes............... (659) (0.3) 12,590 7.2 Income tax (expense).......... (36) (0.0) (5,201) (3.0) ------- ----- ------- ----- Earnings (loss) before extraordinary charge ........ (695) (0.3) 7,389 4.2 Extraordinary charge.......... - - (5,107) (2.9) ------- ----- ------- ----- Net earnings (loss)........... $ (695) (0.3)% $ 2,282 1.3% ======= ===== ======= ===== Net earnings (loss)per share - basic.................... $ (0.09) $ 0.29 Net earnings (loss) per share - diluted $ (0.09) $ 0.28 Weighted average common shares outstanding - basic......... 7,465 7,946 Weighted average common shares outstanding - diluted....... 7,650 8,257 Net sales. Net sales of $220.1 million in 1999 increased $44.5 million, or 25.3% from net sales of $175.6 million in 1998. The largest contributor to the increase was the Third Quarter 1998 Acquisitions, which contributed $49.2 million in net sales in the 39 week period. Internal growth and new product development, excluding the incremental impact of the Third Quarter 1998 Acquisitions, contributed $11.7 million to net sales in the quarter. Included in new product development are sales generated from molds and inventory acquired by the company in June 1999. The total purchase price for the molds and inventory acquired was less than $5.0 million. The product lines acquired compliment the Company's storage and laundry product lines and are sold to the Company's current customer base. The loss of sales to Caldor, a regional retailer in the northeast, due to their Chapter 7 bankruptcy filing and the divestiture of Shutters, Inc. combine to negatively impact net sales by $16.4 million. Gross profit. As disclosed in Note 5 to the Condensed Consolidated Financial Statements, the Company recorded a special charge in the third quarter of 1999 to undertake a restructuring and consolidation plan. The total charge incurred as a component of cost of goods sold was $8.9 million. The majority of the special charge was established to cover the elimination of under performing sku's. The Company has discontinued approximately one-third of its total sku's (which represents less than 10% of consolidated sales) and this charge is to adjust the carrying values of certain inventory and molds associated with the discontinued products. Gross profit, excluding the impact of the special charge, for 1999 was $76.0 million or 34.5% as compared to $57.2 million or 32.6% for 1998. This represents an increase of 1.9 percentage points over the prior period. The elimination of under performing sku's, a change in product mix, and favorable purchase price variances on all major raw materials contributed to the margin improvement as compared to the prior period. Margins continue to benefit from the elimination of lower margin sku's. The Company has experienced a reduction in sales of certain lower margin laundry products and an increase in higher margin bath and servingware products. The Company has incurred favorable variances on steel, fabric and resin; however, increasing resin costs in the third quarter of 1999 have begun to diminish the favorable impact from resin. Operating expenses. As disclosed in Note 5 to the Condensed Consolidated Financial Statements, the Company recorded restructuring and other charges in the amount of $5.6 million and other nonrecurring charges in the amount of $0.5 million in the third quarter of 1999 to undertake a restructuring and consolidation plan. These charges primarily relate to employee related costs such as severance and relocation costs, adjustments to obsolete assets and transaction costs to implement the consolidation and restructuring plan. Operating expenses, excluding the impact of the above charges, increased $12.5 million from $34.5 million in 1998 to $47.0 million in 1999. Operating expenses as a percent of net sales increased slightly from 19.7% in 1998 to 21.4% in 1999. The Third Quarter 1998 Acquisitions, which incurred 39 weeks of activity in 1999 as compared to less than 13 weeks in 1998, were the primary driver in the increased operating expenses. Interest expense. Interest expense of $15.0 million in 1999 increased $4.7 million from $10.3 million in 1998. Debt issued in connection with the Third Quarter 1998 Acquisitions generated the majority of the increase. Further contributing to the increase, the Company purchased 763,632 shares of treasury stock at a total cost of $6.3 million since the third quarter of 1998. Income tax expense. Income taxes have been accrued in both 1999 and 1998 based upon estimated effective tax rates. Tax expense in 1999 includes a $6.0 million benefit from the $15.0 million Charges. Extraordinary charge. An extraordinary charge, net of tax, for the early retirement of debt of $5.1 million, or $0.61 per common share - diluted was recorded in 1998. Net earnings. The Company had net earnings, excluding the impact of the special, restructuring and other nonrecurring charges, of $8.3 million in 1999, or $1.09 per common share - diluted, based on 7,650,000 weighted average common shares outstanding. This compares to net earnings in 1998 of $2.3 million, or $0.28 per common share - diluted, based on 8,257,320 weighted average common shares outstanding. The net loss for 1999, after inclusion of the special, restructuring and nonrecurring charges, was $0.7 million or $0.09 per common share - diluted. Capital Resources and Liquidity Cash at September 25, 1999 was $3.3 million as compared to $5.0 million at December 26, 1998. Cash provided by operating activities was $12.6 million and the Company has generated EBITDA of $41.2 million for the thirty-nine week period. Availability under the Company's $100.0 million revolving line of credit was $47.8 million and the Company was in compliance with all covenants as of September 25, 1999. The Company has spent a total of $3.9 million to purchase 445,932 shares of its common stock in the thirty-nine weeks ended September 25, 1999. Since October 1998 the Company has purchased a total of 763,632 shares at a total cost of $6.3 million. The average cost per share repurchased is $8.20/share. The Company believes its 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. 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 has finalized its evaluation of its Year 2000 readiness (the "Project"). The Project reviewed the readiness 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 Project covered the following phases: (i) identification of all IT and non IT systems (completed), (ii) assessment of the repair or replacement requirements (completed), (iii) repair or replacement (in process), (iv) testing (in process), (v) implementation (in process) and (vi) creation of contingency plans in the event of year 2000 failures (completed). 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 $0.5 million to $1.0 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 finalized its Year 2000 contingency plan. 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. Outlook Some of the opportunities and strategic initiatives planned for the remainder of 1999 and beyond are as follows: * As of November 1999 the Selfix-Seymour and Tamor consolidation plan is on schedule and it is still anticipated that the restructuring will result in annual pre-tax savings of $3.0 to $4.0 million, beginning in the second half of 1999. * In conjunction with the restructuring program, the Company also announced the creation of a new national brand name - HOMZ. Beginning in the first quarter of 2000, all products from the Company, except servingware products, will be marketed under this new brand name. * Due to the seasonal nature of the Company's product lines, fourth quarter sales are expected to be below sales in the second and third quarters. Additionally, it is also anticipated that margins will be lower in the fourth quarter due to unfavorable absorption of fixed overhead costs. * The cost of plastic resin, a significant raw material for the company, has been increasing compared to prior quarters in 1999 and this trend is anticipated to continue throughout the remainder of 1999. * The Company has begun construction of a 400,000 square foot manufacturing and warehouse facility in El Paso, TX which should be completed in mid 2000. This facility will be leased by the Company and should be available for occupancy in January 2000, but will not begin production until spring 2000. This facility will enable the Company to tap into markets located in the Southwest which were previously cost prohibitive to enter. * Throughout the remainder of 1999 the Company will allocate resources to focus upon new product development (the Company's goal is 10% annual growth from new products and product line improvements), expansion of manufacturing capacity and organic sales growth. * The Company opperates on a 52/53 week year ending on the Saturday closest to the end of the calendar year. Fiscal 1999 will be a 53 week year. * The Company will continue to explore acquisitions that will be accretive to earnings. Management intends to pursue acquisitions at attractive multiples of cash flow and achieve operational and distribution efficiencies through integration of complementary businesses. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk For the thirty-nine week period ended September 25, 1999, the Company did not experience any material changes in market risk exposure that affect the quantitative and qualitative disclosures presented in the Company's Annual Report on Form 10-K for the 52 week period ended December 26, 1998. Forward Looking Statements This quarterly report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Year 2000 Compliance", "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 anticipated effects of the Third Quarter 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 (vii) competitive conditions in the Company's markets; (viii) the seasonal nature of the Company's business; (ix) the Company's ability to execute its acquisition strategy; (x) fluctuations in the stock market; (xi) the extent to which the Company is able to retain and attract key personnel; (xii) relationships with retailers; and (xiii) the impact of federal, state and local environmental requirements (including the impact of current or future environmental claims against the Company). As a result, the Company's operating results may fluctuate, especially when measured on a quarterly basis. 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 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 27.1 Financial Data Schedule (only filed electronically with the SEC). (a) Reports on Form 8-K. - None issued in the period SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOME PRODUCTS INTERNATIONAL, INC. By: /s/ James E .Winslow James E. Winslow Executive Vice President Chief Financial Officer Dated: November 9, 1999