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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FIFTY TWO WEEKS ENDED DECEMBER 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 incorporation
or organization) (I.R.S. Employer Identification No.)
4501 WEST 47TH STREET
CHICAGO, ILLINOIS 60632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (773) 890-1010.
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED TITLE OF EACH CLASS
--------------------- -------------------
None Common Stock, Par Value $0.01 Per Share
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Shares of common stock, par value $0.01 outstanding at February 25,
2000 -- 7,260,860. Aggregate market value of such shares held by non-affiliates
as of that date -- $41,795,644.
DOCUMENTS INCORPORATED BY REFERENCE.
Home Products International, Inc. definitive proxy statement dated April
12, 2000 for the 2000 Annual Meeting ("Proxy Statement") -- Part III
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
Home Products International, Inc. (the "Company" or "HPI") through its
wholly owned subsidiaries designs, manufactures and markets a broad range of
quality consumer houseware products. The Company is a leading supplier to large
national retailers of value-priced laundry management products, general storage
products, disposable servingware products, closet storage products, bathware
products, kitchen storage products and juvenile products. The Company holds a
significant market share in the United States in each of its key product
categories. The Company's products are sold in the United States through most of
the large national retailers, including Wal-Mart, Sam's Club, Target, Kmart,
Home Depot, Toys 'R Us, Walgreens and Bed Bath & Beyond. The Company generated
$294.0 million in net sales for 1999, which makes HPI one of the largest
companies in the fragmented U.S. consumer housewares industry.
On February 18, 1997, the Company became the holding company for, and
successor registrant under the Securities Exchange Act of 1934 (the "Exchange
Act") to Selfix, Inc. ("Selfix") and Selfix became a wholly owned subsidiary of
the Company through a holding company reorganization under the General
Corporation Law of Delaware.
The Company was originally founded as Selfix in 1952 as a privately held
manufacturer of plastic hooks. Selfix became a public company following an
initial public offering of its Common Stock in fiscal 1988.
Currently, the Company is the parent to one operating subsidiary - Home
Products International -- North America, Inc. ("HPNA"). Effective December 26,
1999, all of the Company's operating subsidiaries were merged into HPNA.
The following table presents significant acquisitions within fiscal 1997,
1998 and 1999:
ENTITY DATE ACQUIRED
------ ------------------
Tamor Plastics Corporation and its affiliated product
distribution company Houseware Sales, Inc................. January 1, 1997
Seymour Sales Corporation and its wholly owned subsidiary
Seymour Housewares Corporation............................ December 30, 1997
Tenex Corporation's consumer product storage line........... August 14, 1998
Prestige Plastics, Inc. (AHP and PI)........................ September 8, 1998
Epic product lines.......................................... May 12, 1999
TAMOR ACQUISITION
Effective January 1, 1997, the Company acquired Tamor Plastics Corporation,
a privately held company founded in 1947, and its affiliated product
distribution company, Houseware Sales, Inc. (the "Tamor Acquisition"). Tamor
Plastics Corporation and Houseware Sales, Inc. were merged to form Tamor
Corporation, a Massachusetts corporation and are collectively referred to herein
as "Tamor". Tamor designs, manufactures and markets quality plastic housewares
products within the general storage, closet storage and juvenile product
categories. Tamor was merged into HPNA effective December 26, 1999.
SEYMOUR ACQUISITION
Effective December 30, 1997, the Company acquired Seymour Sales Corporation
and its wholly owned subsidiary, Seymour Housewares Corporation, (collectively,
"Seymour"), a privately held company originally founded in 1942 (the "Seymour
Acquisition"). Seymour is a leading designer, manufacturer, and marketer of
consumer laundry care products. Seymour produces a full line of
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ironing boards, ironing board covers and pads and numerous laundry related
accessories. Seymour was merged into HPNA effective December 26, 1999.
TENEX ASSET ACQUISITION
Effective August 14, 1998 the Company acquired certain assets (inventory
and molds) which comprised Tenex Corporation's consumer product storage line
(the "Tenex Asset Acquisition"). This product line consisted of plastic storage
bins and containers, rolling carts and stacking drawer systems.
NEWELL ASSET ACQUISITION
Effective September 8, 1998 the Company acquired the assets and assumed
certain liabilities comprising the businesses of Anchor Hocking Plastics ("AHP")
and Plastics, Inc. ("PI"), and is referred to herein as the "Newell Asset
Acquisition". AHP is a leading supplier of food storage containers and PI is a
leading supplier of disposable plastic servingware. Prestige Plastics, Inc. (the
company created to facilitate the acquisition of AHP and PI) was merged into
HPNA effective December 26, 1999.
1999 ACQUISITION
Effective May 12, 1999 the Company acquired certain assets (primarily
inventory and molds) from Austin Products, Inc. which were sold under the Epic
brand name (the "1999 Acquisition"). The product lines obtained included the
following plastic housewares products: laundry baskets, tote caddys, crates,
bins and utility buckets.
(b) Financial information about segments.
Based upon the requirements of Statement of Financial Accounting Standards
("SFAS") No. 131, management of the Company has determined that HPI operates
within in a single segment -- Housewares. As such, the required information for
this section is contained in the Consolidated Financial Statements as included
in Part II, Item 8 of this Form 10-K.
(c) Narrative description of business.
HOUSEWARES SEGMENT PRODUCTS -- HISTORICAL GROSS SALES BY PRODUCT CATEGORY
The following table sets forth the amounts and percentages of the Company's
historical gross sales by product categories within the housewares segment for
the periods indicated. As a result of realignment of the Company's product
categories in 1998, certain prior year amounts have been reclassified,(in
thousands, except percentages).
1999 1998 1997
--------------- --------------- ---------------
SALES % SALES % SALES %
-------- --- -------- --- -------- ---
Laundry management.................. $ 98,274 30% $100,671 37% $ -- --%
General storage..................... 89,122 28% 58,837 21% 47,275 34%
Servingware......................... 35,277 11% 12,584 4% -- --%
Closet storage...................... 34,431 11% 38,109 14% 46,390 34%
Bathware............................ 28,515 9% 26,686 10% 24,428 18%
Kitchen storage..................... 27,108 8% 13,053 5% -- --%
Juvenile............................ 9,711 3% 15,780 6% 11,652 8%
Shutters............................ -- --% 8,252 3% 8,385 6%
-------- --- -------- --- -------- ---
Total Gross Sales......... $322,438 100% $273,972 100% $138,130 100%
Allowances.......................... (28,437) (21,543) (8,806)
-------- -------- --------
Total Net Sales........... $294,001 $252,429 $129,324
======== ======== ========
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Laundry Management products. The Company offers a significant variety of
ironing boards (approximately 185 individual SKU's) and management believes that
the Company commands a majority of the U.S. market share. Key products in this
category include the EasyBoard (perforated board), SureFoot (vented, four-leg
board), ReadyPress (over-the-door) and IP2000 (vented, four-leg with hanger
rack). The Company is also the leading manufacturer of ironing board covers and
pads, and also holds a majority of the U.S. market share. The Company offers a
variety of different types of covers and pads in a multitude of different
designs that fit not only its own ironing boards, but all regular size boards.
The Company's covers are known for their scorch resistance and it is the only
company that sells form fitting ironing board covers with 3M Scotchguard
coating, Elasticord(TM) drawstrings and Cordlock(TM)fasteners. Additionally, the
Company is a leading U.S. producer of laundry accessories. Key products within
this category include: wood and metal drying racks, laundry bags, hampers and
sorters, clotheslines, and clothes pins.
General storage. The Company offers a variety of plastic storage
containers, rolling carts and stacking drawer systems. The storage containers
range in size from shoe boxes to jumbo (50 gallon) totes, and include specialty
containers sold during the winter holiday season. Storage containers contain a
variety of product attributes, including removable wheels and dome-top lids,
which increase storage capacity. The rolling carts and stacking drawer systems
come in a wide range of sizes and number of shelving units. In response to
demand for larger storage units, the Company recently introduced The Workspace
Rolling Storage line, a versatile drawer system for the home or office.
Servingware products. This is a new product category which was acquired in
1998. Products in this category include a wide range of upscale, plastic
disposable beverage and food servingware product lines. The primary products are
Scrollware(R), Prestige(R) and Beverageware(TM). Scrollware(R) consists of clear
plastic plates, bowls, trays and mugs. The products are clear to resemble
crystal and are etched with a baroque design. Prestige(R) products include
plates, bowls, tray and drinkware in three colors; white, black and clear.
Beverageware(TM) products are offered in a variety of shapes and sizes, and come
in three colors; clear, red and green. Each of the products are targeted at
price points above paper, foam and thermofoam plastic alternatives, but below
glass and china options.
Closet storage products. This category is comprised primarily of plastic
clothes hangers. Due to the commodity nature of the hanger segment, margins in
this category are inherently lower, while unit volumes are substantially higher.
Management believes that the Company has a leading U.S. market share in plastic
clothes hangers, and that its broad product offering gives it a competitive
advantage over other hanger manufacturers. Also included in this category are
other plastic organizers, closet and clothing organization products.
Bathware products. The Company markets a broad line of value-priced
plastic bath accessories and organizers. These include shower organizers,
etageres, plastic towel bars, shelves, soap dishes, portable shower sprays, and
fog-free shower mirrors. The Company believes it is a leading producer of
opening price-point plastic bath accessories. In addition, the Company recently
introduced its Dura Chrome Steel Bath Hardware(TM) line of metal accessories
ranging from towel bars to toothbrush tumblers.
Kitchen storage products. With the 1998 acquisition of AHP, the Company
established a strong position in the food storage arena. Food storage products
are the backbone of the kitchen storage product line. The primary food storage
products sold within this group are StowAways(R), Pop-Top Storables(R), and
Klear Stor(R) and Klear Por(R). All products are approved for use in contact
with food by the United States Food & Drug Administration. The StowAway(R) line
includes 34 individual food storage products each consisting of a clear base and
a colored lid. StowAways(R) are primarily sold in value packs ranging in size
from two to thirty-six piece sets. Pop-Top-Storables(R) products consist of a
clear rigid base and a color lid with a patented "pop top" button to the side.
The unique look of the base and the patented lid differentiate the line from the
competition. Pop-Top-Storables(R) are sold in value packs ranging from two to
sixty piece sets. Klear Stor(R) and Klear Por(R) are plastic storage products
that are clear like glass. There are over 30 variations of these products within
the Company's
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catalog ranging in sizes from eight ounces to one gallon. Also included in this
product line are sinkware and wire organization products.
Juvenile products. The Company markets a line of quality children's
organization products, under the brand names Tidy Kids(R), Kidtivity(R) and Lil'
Helpers(TM). These products include closet extenders, hook racks, storage cubes,
clothes hangers, and under-the-bed storage trolleys. These products are sold in
the juvenile or housewares departments of its core customers, and also through
specialty juvenile retailers like Toys R Us and Babies R Us. The Company
believes it created a market niche of children's organization products in the
development and successful sales of its Tidy Kids(R) and Lil Helpers(TM)
products, and that it offers the premier children's organization program in the
industry.
DEPENDENCE UPON A SINGLE CUSTOMER OR FEW CUSTOMERS
The Company is dependent upon a few customers for a large portion of its
revenues. In 1999 three customers each accounted for more than 10% of
consolidated net sales. The company's top three customers, Wal-Mart, Kmart, and
Target accounted for 18.2%, 15.0% and 11.4% of net sales respectively in 1999.
These same three customers accounted for 18.5%, 12.1% and 8.7% respectively in
1998. The loss of one of these customers could have a material effect on the
Company. No other customer accounted for more than 10% of consolidated net sales
in 1999 or 1998.
MARKETING AND DISTRIBUTION
The Company's products are sold through national and regional discounters,
hardware/home centers, food/drug stores, juvenile stores, specialty stores and
to hotels. The Company sells directly to major retail customers through its
sales management personnel and through manufacturers' representatives.
Management believes that one of its greatest opportunities is to fully
leverage the Company's long-standing relationships with these customers to gain
additional market share in its core product lines and to successfully introduce
new and enhanced product lines.
The Company's primary marketing strategy is to design innovative products
with consumer features and benefits, and focus on marketing the product to its
retail selling partners. Management believes that one of its competitive
advantages is prompt and reliable product delivery of value-priced high-volume
products, allowing its retail partners to maintain minimal inventories. The
Company believes that the customer specific merchandising programs it offers
enable retailers to achieve a higher return on its products than the products of
many of its competitors. To that end, the Company provides its customers with a
variety of retail support services, including customized merchandise
planogramming, small shipping packs, point-of-purchase displays,
Electronic-Data-Interchange (EDI) order transmission, and just-in-time (JIT)
product delivery.
The Company's marketing efforts also include advertising, promotional and
differentiated packaging programs. Promotions include cooperative advertising,
customer rebates targeted at the Company's value added feature products and
point-of-purchase displays.
PRODUCT RESEARCH AND DEVELOPMENT
The Company's Product Research and Development department uses
computer-aided design (CAD) systems to enhance its product development efforts.
Although the Company's historical accounting records do not separately present
research and development expenses, the Company estimates that for 1999, 1998 and
1997, expenses associated with research and development were $0.5 million, $0.7
million and $0.4 million respectively.
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FOREIGN AND EXPORT SALES INFORMATION
The Company's 1999 sales outside the United States accounted for
approximately 5% of its total net sales. The Company uses a sales representative
to sell its products in Canada. Total sales to this representative for 1999
accounted for approximately 2% of total net sales.
SEASONALITY
Sales of the Company's houseware products are generally higher in the
second and third quarter of the calendar year. This seasonality is primarily
attributable to the spring and summer wedding season, increased home buying
during the spring and summer months, and the back to school season. Laundry
management products, general and kitchen storage products are gifts typically
given at bridal showers which are held during spring -- fall wedding season. The
surge in home buying during the spring and summer months increases the demand
for new houseware products. The back-to-school season, including college
students moving out of the house for the first time also contributes to an
increase in demand. Finally, sales of servingware products tend to be higher in
the third and fourth quarters due to holiday events in November and December.
COMPETITION
The housewares industry is highly fragmented and management believes that
no single supplier accounts for more than 10% of total market sales. The Company
competes with a significant number of companies, some which have greater
name-brand recognition, larger customer bases and/or significantly greater
resources than the Company. The Company's key competitors include Newell
Rubbermaid and Sterilite. There are no regulatory or other barriers to entry of
new competitors into the Company's markets.
The Company believes that large national retailers are continuing to reduce
the number of suppliers of housewares products with which they do business to
improve margins and operating efficiencies. These retailers are forming key
relationships with suppliers that can provide complete product lines within
product categories, profitable fast-turning products, timely delivery and
merchandising support. With its numerous product lines and strong relationships
with these retailers, the Company believes that it is well positioned to
continue to meet their needs.
PATENTS, TRADEMARKS AND LICENSES
Subsidiaries of the Company own a number of trademarks and patents relating
to various products and manufacturing processes. The Company believes that in
the aggregate its patents enhance its business, in part by discouraging
competitors from adopting patented features of its products. The Company
believes; however, that there are no patents, trademarks or licenses material to
its business.
RAW MATERIALS AND PRODUCTION
The Company manufactures the majority of its products at its various
manufacturing facilities in the United States and Mexico. In certain instances
the Company has contracted with outside custom molders to produce various
plastic products due to capacity and or time constraints.
The primary raw material used in the Company's plastic injection molding
operations is plastic resin, primarily polypropylene. The Company expects to use
in excess of 150 million pounds of resin in 2000. Resin is a spot commodity with
pricing parameters tied to supply and demand characteristics beyond the
Company's control. The Company is able to purchase some of its resin through
brokers in a secondary market. This enables the Company to buy significant
quantities at a discount. Plastic resin is utilized by a number of different
industries, many of which are quite different from the Company's housewares
business. For example, the automobile and housing industries are very large
users of plastic resin. As such, demand changes in the automobile industry or
the number of new housing starts can have an impact on plastic resin pricing.
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There is no efficient futures market for plastic resin. As such, the
Company cannot lock in its costs without purchasing significant quantities
beyond its immediate manufacturing needs. Management has determined that it will
purchase resin in quantities that best fit its manufacturing needs and ability
to store such purchases.
The primary raw materials used in the Company's laundry management
operations are cold rolled steel and greige fabric. The Company purchases
approximately 22,000 tons of cold rolled steel annually, typically at spot
prices. Greige fabric, purchased from brokers, is a cotton based product with
pricing tied to the world cotton markets. Purchases of greige fabric approximate
7 million yards annually.
The Company's production processes utilize automated machinery and systems
where appropriate. Certain laundry management facilities employ the use of an
automated manufacturing production line to produce ironing boards. Additionally,
automated cutting and layout machines are used to maximize the usage of greige
fabric. The Company also performs all printing and coating of the ironing board
covers and pads in-house.
ENVIRONMENT
An environmental report obtained in connection with the Tamor Acquisition
indicated that certain remedial work relating to ground contamination of Tamor's
Leominster, Massachusetts facility was required. The former shareholders of
Tamor placed $1.1 million in escrow to pay for, among other things, any required
remediation at the Leominster facility. The Company completed certain
remediation projects at the Leominster facility in 1998. Although there can be
no assurances, the Company believes that the costs that may be required in the
future plus the amount incurred already will not exceed the amount in escrow.
Except as described above, the Company believes that compliance with
federal, state or local provisions relating to protection of the environment is
not expected to have a material effect on the Company's capital expenditures,
earnings or competitive position.
EMPLOYEES
As of December 25, 1999 the Company employed approximately 1,576 persons in
the United States and Mexico. Approximately 87 are hourly employees at its
Leominster, Massachusetts facility, covered by a collective bargaining agreement
which expires in April, 2002; 101 are hourly employees at its Chicago, Illinois
facilities, covered by a collective bargaining agreement which expires in
January, 2001; 251 are hourly employees at its Reynosa, Mexico facility covered
by a collective bargaining agreement which expires in December, 2000; and 173
are hourly employees at its Eagan, Minnesota facility covered by a collective
bargaining agreement which expires in November, 2000.
The Company utilizes the services of approximately 392 temporary workers in
its injection molding operations for assembly and in certain warehouses.
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ITEM 2. PROPERTIES
The Company currently owns/leases a total of 11 manufacturing facilities
and considers all of its facilities to be in good operating condition.
Currently, all of the Company's manufacturing facilities, with the exception of
the El Paso, TX facility (it opened in March 2000) are operating at or near full
capacity. The Company uses public warehouse space for storage and distribution
of certain servingware products. These warehouses are located in California,
Illinois, Minnesota and New Jersey. The amount of square footage used at the
public warehouses varies from month to month.
The following table summarizes the principal physical properties, both
owned and leased, used by the Company in its operations:
SIZE
FACILITY USE (SQUARE FEET) OWNED/LEASED
-------- --- ------------- ------------
Manufacturing/Distribution
Thomasville, GA................. Storage 45,000 Owned
Thomasville, GA................. Distribution/Storage 31,000 Leased
Bollingbrook, IL................ Distribution/Storage 220,000 Leased
Manufacturing/Distribution
Chicago, IL..................... Storage 286,000 Leased
Chicago, IL..................... Distribution/Storage 113,500 Leased
Seymour, IN
East Plant.................... Manufacturing 70,000 Owned
Manufacturing/Distribution
West Plant.................... Storage 142,000 Owned
Logistics Center.............. Distribution/Storage 105,000 Owned
Logistics Center.............. Distribution/Storage 100,000 Leased
Fitchburg, MA................... Distribution/Storage 320,000 Leased
Leominster, MA.................. Manufacturing 100,000 Owned
Leominster, MA.................. Administration 17,000 Leased
Leominster, MA.................. Storage 38,000 Leased
Leominster, MA.................. Distribution/Storage 120,000 Leased
Louisiana, MO................... Manufacturing/Distribution 340,000 Owned
Manufacturing/Distribution
Eagan, MN....................... Storage 312,000 Leased
Manufacturing/Distribution
Coon Rapids, MN................. Storage 75,000 Owned
Shakopee, MN.................... Distribution/Storage 127,000 Leased
Mooresville, NC................. Manufacturing/Distribution 72,500 Leased
Manufacturing/Distribution
El Paso, TX..................... Storage 400,000 Leased
Reynosa, Mexico................. Manufacturing/Storage 80,000 Owned
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceedings against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages and
principal positions as of February 25, 2000, are as follows:
NAME AGE POSITION
---- --- --------
James R. Tennant........................... 46 Chairman of the Board and Chief Executive
Officer
James E. Winslow........................... 45 Executive Vice President, Chief Financial
Officer and Secretary
Jeffrey R. Dolan........................... 43 President and General Manager, HPI North
America, Inc.
James R. Tennant joined the Company as Chairman of the Board and Chief
Executive Officer in April, 1994. Mr. Tennant was elected a Director of the
Company in December, 1992 and was a member of the Company's Compensation
Committee until April, 1994. From 1982 to 1994, Mr. Tennant was Division
President of True North Communications, an international marketing services
company.
James E. Winslow was named Executive Vice President in October, 1996. Mr.
Winslow joined the Company as Chief Financial Officer and Senior Vice President
in November, 1994. In 1994, Mr. Winslow was Executive Vice President and Chief
Financial Officer of Stella Foods, Inc. From 1983 to 1994, Mr. Winslow was
employed by Wilson Sporting Goods Co. in various capacities, his final position
being Vice President and Chief Financial Officer.
Jeffrey R. Dolan joined the Company in 1995 as Senior Vice President of
Sales for Selfix, Inc. In 1996 he was appointed Senior Vice President Sales and
Marketing for Selfix, a position he held until January 1998, when he assumed the
same position for the newly created Selfix-Seymour Housewares Corporation. In
June 1998, Mr. Dolan was promoted to President and General Manager of Selfix-
Seymour and held that position until June 1999 when he was named President and
General Manager of HPI - North America. Prior to joining Selfix in 1995, Mr.
Dolan spent 17 years with Rubbermaid, with his final position being Vice
President, National Accounts in the Home Products Division.
Officers serve at the discretion of the Board of Directors, except as
provided in the employment agreement of Mr. Tennant.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The NASDAQ National Markets(SM)
under the symbol "HPII". The Company believes that as of February 25, 2000 there
were approximately 275 holders of record and in excess of 1,000 beneficial
holders of the Company's common stock.
The Company has never paid a cash dividend on its common stock and
currently anticipates that all of its earnings will be retained for use in the
operation and expansion of its business.
The following table sets forth for the periods indicated the high and low
sales prices for the Common Stock as reported on The NASDAQ National Market(SM).
HIGH LOW
------ ------
Fifty-two weeks ended December 25, 1999:
First Quarter............................................. $11.75 $ 8.63
Second Quarter............................................ $ 9.56 $ 8.19
Third Quarter............................................. $11.88 $ 7.50
Fourth Quarter............................................ $11.00 $ 8.38
Fifty-two weeks ended December 26, 1998:
First Quarter............................................. $16.50 $10.75
Second Quarter............................................ $16.63 $10.00
Third Quarter............................................. $11.69 $ 8.00
Fourth Quarter............................................ $10.75 $ 6.88
WARRANTS
On February 27, 1997, the Company issued to General Electric Capital
Corporation ("GECC") a warrant to purchase 79,204 shares of HPII Common Stock at
a purchase price of $5.80 per share. The warrant became exercisable on August 1,
1997, and terminates on February 27, 2007. The warrant was issued in connection
with a prior credit agreement between the Company and GECC. This transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $294,001 $252,429 $129,324 $38,200 $41,039
Cost of goods sold.................... 195,301 169,213 88,888 22,992 25,678
Special charges....................... 8,589 -- -- -- --
-------- -------- -------- ------- -------
Gross profit................ 90,111 83,216 40,436 15,208 15,361
Operating expenses.................... 59,889 52,566 27,688 13,843 17,385
Restructuring and other expenses...... 5,966 -- -- -- --
Other nonrecurring expenses........... 445 -- -- -- --
Restructuring charge.................. -- -- -- -- 2,051
-------- -------- -------- ------- -------
Operating profit (loss)..... 23,811 30,650 12,748 1,365 (4,075)
Interest expense...................... 20,271 15,568 5,152 707 896
Other income, net..................... 542 269 70 148 688
-------- -------- -------- ------- -------
Earnings (loss) before income taxes
and extraordinary charge............ 4,082 15,351 7,666 806 (4,283)
Income tax expense (benefit).......... 2,072 6,601 346 -- (273)
-------- -------- -------- ------- -------
Net earnings (loss) before
extraordinary charge................ $ 2,010 $ 8,750 $ 7,320 $ 806 $(4,010)
======== ======== ======== ======= =======
Net earnings (loss) before
extraordinary charge per common
share -- basic...................... $ 0.27 $ 1.11 $ 1.35 $ 0.21 $ (1.11)
======== ======== ======== ======= =======
Net earnings (loss) before
Extraordinary charge per common
share -- diluted.................... $ 0.26 $ 1.07 $ 1.29 $ 0.21 $ (1.11)
======== ======== ======== ======= =======
AS OF FISCAL YEAR END
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS)
BALANCE SHEET AND CASH FLOW DATA:
Working capital....................... $ 33,012 $ 27,677 $ 8,263 $ 7,152 $ 6,712
Property, plant and equipment, net.... 67,258 60,200 28,380 7,934 8,453
Intangible assets..................... 172,177 181,952 29,391 2,527 2,693
Total assets.......................... 343,906 340,043 99,343 24,705 24,976
Long-term obligations (less current
maturities)......................... 221,334 219,536 30,700 6,184 7,022
Stockholders' equity.................. 56,622 58,001 42,216 11,709 10,847
Cash provided by operating
activities.......................... 14,615 20,693 878 1,823 2,575
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reports on a 52-53 week year. References to the fiscal years
1999, 1998 and 1997 are for the fifty-two weeks ended December 25, 1999,
December 26, 1998 and December 27, 1997.
1999 SPECIAL, RESTRUCTURING AND OTHER NON RECURRING CHARGES
In July 1999, the Company began implementation of a restructuring plan
which was undertaken to further maximize the Company's marketing and operational
productivity and to 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 departments. These steps
will help solidify the Company's commitment to become a "one brand , one
Company" supplier to its customers.
As disclosed in Note 2 to the Consolidated Financial Statements, the
Company recorded charges (pre tax) totaling $15.0 million during the third and
fourth quarters. The charges were comprised of (i) inventory reserves related to
discontinued products and packaging, (ii) write off of molds that were used to
make these products, (iii) employee related costs such as severance and
relocation, (iv) reserves for assets and computer systems made obsolete due to
the consolidation of departments and (v) transaction costs related to the
implementation of the national branding strategy and the consolidation of
departments. The result of the departmental consolidation will be annual pre tax
cash savings in excess of $2.0 million. Excluding these charges the gross margin
would have been 33.6%, earnings before interest and taxes (EBIT) would have been
$39.2 million, earnings before interest, taxes, depreciation and amortization
(EBITDA) would have been $55.4 million and earnings before taxes (EBT) would
have been $19.1 million. Diluted EPS would have been $1.45 for 1999 as compared
to 1998 (before extraordinary charge) of $1.07.
1999 ACQUISITION
The Company made one acquisition in its 1999 fiscal year. In May 1999 the
Company acquired certain assets (primarily inventory and molds) from Austin
Products, Inc. (the "1999 Acquisition"). Operating results from the 1999
Acquisition have been combined with the Company's since the acquisition date.
The product lines obtained included the following plastic housewares products:
laundry baskets, tote caddys, crates, bins and utility buckets. The 1999
Acquisition was completed for approximately $6.0 million in cash. 1999 sales of
the acquired product line were approximately $8.5 million.
1998 ACQUISITIONS
The Company made three acquisitions in its 1998 fiscal year (all three
combined are referred to herein as the "1998 Acquisitions") and the actual
operating results from each acquisition have been combined with the Company's
since their respective acquisition date.
Effective December 30, 1997 the Company acquired all of the outstanding
common stock of Seymour Sales Corporation and its wholly owned subsidiary,
Seymour Housewares Corporation (collectively, "Seymour"), a leading designer,
manufacturer and marketer of consumer laundry care products. Seymour
manufactures and markets a full line of ironing boards, ironing board covers and
pads and numerous laundry related accessories. Seymour was acquired for a total
purchase price of $100.7 million, consisting of $16.4 million in cash, $14.3
million in common stock (1,320,000 shares) and the assumption of $70.0 million
of debt.
Effective August 14, 1998 the Company acquired certain assets (inventory
and molds) which comprised Tenex Corporation's consumer product storage line
(the "Tenex Asset Acquisition"). This product line consisted of plastic storage
bins and containers, rolling carts and stacking drawer systems. The Tenex Asset
Acquisition was completed for $16.4 million in cash.
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Effective September 8, 1998 the Company acquired assets and assumed certain
liabilities from Newell Co. (consisting of the businesses of Anchor Hocking
Plastics ("AHP") and Plastics, Inc ("PI") and are referred to herein as the
"Newell Asset Acquisition"). AHP is a leading supplier of food storage
containers and PI is a leading supplier of disposable plastic servingware. The
Newell Asset Acquisition was completed for $78.0 million in cash.
FISCAL YEAR 1999 AS COMPARED TO FISCAL YEAR 1998
The following discussion and analysis compares the actual historical
results of 1999 and 1998:
FIFTY-TWO WEEKS FIFTY-TWO WEEKS
ENDED ENDED
DECEMBER 25, 1999 DECEMBER 26, 1998
----------------- -----------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net sales............................................. $294,001 100.0% $252,429 100.0%
Cost of goods sold.................................... 195,301 66.4% 169,213 67.0%
Special charges....................................... 8,589 2.9% -- --
-------- ----- -------- -----
Gross profit........................................ 90,111 30.7% 83,216 33.0%
Operating expenses.................................... 59,889 20.4% 52,566 20.8%
Restructuring and other charges....................... 5,966 2.0% -- --
Other nonrecurring charges............................ 445 0.2% -- --
-------- ----- -------- -----
Operating profit.................................... 23,811 8.1% 30,650 12.2%
Interest expense...................................... 20,271 6.9% 15,568 6.1%
Other income.......................................... 542 0.2% 269 --
-------- ----- -------- -----
Earnings before income taxes and extraordinary
charge.............................................. 4,082 1.4% 15,351 6.1%
Income tax expense.................................... 2,072 0.7% 6,601 2.6%
-------- ----- -------- -----
Net earnings before extraordinary charge.............. $ 2,010 0.7% $ 8,750 3.5%
Extraordinary charge, net of tax...................... -- --% 5,107 2.0%
-------- ----- -------- -----
Net earnings.......................................... $ 2,010 0.7% $ 3,643 1.5%
======== ========
Net earnings per common share-basic................... $ 0.27 $ 0.46
======== ========
Net earnings per common share-diluted................. $ 0.26 $ 0.45
======== ========
Net Sales. Net sales of $294.0 million were up $41.6 million or 16.5% from
the prior year. The 1999 Acquisition contributed $8.5 million to the increase
and a full year of sales from the 1998 Acquisitions contributed an additional
$43.0 million as compared to 1998. Sales from new products and or product line
extensions contributed $18.5 million to the increase over 1998. Negatively
impacting 1999 net sales was the divestiture of Shutters, Inc. in early 1999 and
the loss of sales to Caldor, a regional retailer in the northeast, due to their
bankruptcy liquidation. The combination of these two events generated a decrease
in net sales of $18.4 million. Also negatively impacting sales was management's
elimination in 1998 and prior years of numerous low margin stock keeping units
(sku's). The sku's eliminated had the effect of reducing 1999 sales by
approximately $10.0 million.
Laundry Management Products. Net sales in the laundry management category
of $89.6 million in 1999 decreased $3.6 million or 3.9% from 1998. The primary
contributor to the decrease was the elimination of approximately $2.0 million in
low margin sku's and the loss of sales to Caldor which had contributed
approximately $3.0 million to 1998 sales. Off setting these items was an
increase in sales volume as the product line grew at the retail level.
General Storage Products. Net sales in the general storage category of
$81.3 million in 1999 increased $27.4 million or 50.8% from 1998. The primary
contributor to the increase was a full year of sales from the Tenex Asset
Acquisition, the 1999 Asset Acquisition and new product development.
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Servingware Products. Net sales in the servingware category of $32.2
million in 1999 increased $20.9 million or 184.7% from 1998. The increase is the
result of a full year of sales, as this product category was added through the
September 1998 acquisition of PI.
Closet Storage Products. Net sales in this product category of $31.4
million experienced a $3.6 million decline, or 10.3% as compared to 1998. The
decline was primarily the result of management's continued elimination of low
margin sku's and management's selective exit of certain unprofitable customer
relationships.
Bathware Products. Net sales in this product category of $26.0 million,
increased $1.6 million or 6.6% from 1998. The primary contributor to the
increase was additional shelf space secured for the Company's Spaceworks
products. Negatively impacting 1999 sales were the elimination of certain under
performing sku's.
Food Storage Products. Net sales in the food storage category of $24.7
million in 1999 increased $12.7 million or 106.0% from 1998. The increase is the
result of a full year of sales, as this product category was added through the
September 1998 acquisition of AHP.
Juvenile Storage Products. Net sales in this product category of $8.9
million decreased $5.7 million, or 39.4% as compared to 1998. The primary factor
for the decrease was the discontinuance of the child safety and safety gate
product lines. These product lines were sold in mid 1999.
Shutters Products. The Company disposed of this product line on December
27, 1998. Sales in 1998 were $8.0 million.
Gross Profit. As indicated in Note 2 to the Consolidated Financial
Statements, the Company recorded a Special Charge in the amount of $8.6 million
in connection with the consolidation of two wholly-owned subsidiaries (the
"Consolidation") and the implementation of a national branding strategy. The
primary components of the $8.6 million Special Charge include inventory reserves
for discontinued products and packaging and the write off of molds that were
used to make these products. In connection with the Consolidation the Company
has performed an extensive product line review resulting in the decision to
eliminate approximately one-third of the Company's total sku's. The sku's
scheduled to be eliminated represent approximately 1% of consolidated 1999
sales.
Gross Profit before Special Charge. The Company's gross profit of $98.7
million, before the Special Charge, represents an increase of $15.5 million, or
18.6% from the prior year. Gross profit margin experienced an increase to 33.6%
in 1999 from 33.0% in 1998. The improvement in gross margin was generated from
several sources. First, the Company experienced favorable purchase price
variances on steel and fabric, the primary raw materials in the laundry
management product lines. Secondly improved factory utilization (added capacity
in Chicago and Georgia) generated favorable absorption for the year. Third, a
full year of margin on the PI products which typically have higher margins than
other product lines. Finally, margin improvement was generated through the
elimination of under performing and low margin product lines, including the
divestiture of Shutters in early fiscal 1999. Negatively impacting margins in
1999 were price fluctuations in plastic resin. In the first half of 1999 resin
prices were falling as compared to 1998. As a result of competitive pressures
the Company was forced to reduce its selling prices. However, as the price of
resin began to climb in the second half of 1999, the Company was unable to
increase its selling prices. The inability to increase selling prices on plastic
resin based products in the second half of 1999 negatively impacted margins.
Operating Expenses. As indicated in Note 2 to the Consolidated Financial
Statements, the Company recorded a Restructuring and Other Charge in the amount
of $6.0 million and an Other Nonrecurring Charge of $0.4 million in 1999 in
connection with the Consolidation and the implementation of a national branding
strategy. The primary components of these charges are for employee related costs
such as severance and relocation, reserves established for assets made obsolete
due to the Consolidation, transaction costs to implement the Consolidation, the
cost of the national branding strategy and the write off of intangibles related
to discontinued product lines.
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Operating Expenses before Restructuring and Other Nonrecurring Charges.
Operating expenses, including selling, administrative and amortization of
intangibles decreased from 20.8% to 20.4% as a percentage of net sales from 1998
to 1999. Selling expenses increased from 12.4% of net sales in 1998 to 13.3% in
1999. The major contributor to the increase was the 1998 Acquisitions which were
included for a full 52 weeks in 1999. This resulted in an increase in variable
expenses such as commissions, freight and warehousing costs. Slightly offsetting
these increases was the positive impact from the Consolidation. Administrative
expenses decreased from 6.3% of net sales in 1998 to 5.2% in 1999 and actual
spending decreased from $15.8 million in 1998 to $15.4 million in 1999. The
decline is primarily the result of the Consolidation which generated workforce
reductions across all departments. Amortization of intangibles decreased from
2.1% in 1998 to 1.8% in 1999.
Interest Expense. Interest expense increased to $20.3 million in 1999 from
$15.6 million in 1998. The increase is directly attributable to the increased
debt incurred from the Tenex Asset Acquisition and the Newell Asset Acquisition.
Additionally, debt associated with the 1999 Acquisition and the Company's
repurchase of 763,632 shares of its common stock (between October 1998 and
December 1999) both contributed to the increase in interest expense from 1998 to
1999.
Income Taxes. The effective tax rate for 1999 was 42.3% (before the
Special, Restructuring and Other Nonrecurring Charges) as compared to 43% for
1998 (before impact of the extraordinary item). The largest component of the
variance from statutory rates in each year was non deductible goodwill
associated with certain prior year acquisitions.
Earnings per share - diluted. Diluted earnings per share for 1999 before
the Special, Restructuring and Other Nonrecurring Charges was $1.45 as compared
to 1998 of $1.07 before effects of the 1998 extraordinary item. Diluted earnings
per share for 1999 after impact of the Special, Restructuring and Other
Nonrecurring Charges was $0.26 as compared to 1998 of $0.45 after effects of the
extraordinary item. The weighted shares outstanding decreased from 8,176,000 in
1998 to 7,610,000 in 1999. The decrease in weighted shares outstanding was the
result of 445,932 shares repurchased by the Company in 1999.
Diluted earnings per share excluding amortization expense and the impact of
the Special, Restructuring and Other Nonrecurring Charges for 1999 was $1.93
(assumes a tax rate of 40%). Diluted earnings per share excluding amortization
expense and the impact of the extraordinary item for 1998 was $1.53 (assumes a
tax rate of 40%).
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FISCAL YEAR 1998 AS COMPARED TO FISCAL YEAR 1997
The following discussion and analysis compares the actual historical
results of 1998 and 1997:
FIFTY-TWO WEEKS ENDED FIFTY-TWO WEEKS ENDED
DECEMBER 26, 1998 DECEMBER 27, 1997
---------------------- ----------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net sales.......................................... $252,429 100.0% $129,324 100.0%
Cost of goods sold................................. 169,213 67.0% 88,888 68.7%
-------- ------ -------- ------
Gross profit..................................... 83,216 33.0% 40,436 31.3%
Operating expenses................................. 52,566 20.8% 27,688 21.5%
-------- ------ -------- ------
Operating profit................................. 30,650 12.2% 12,748 9.8%
Interest expense................................... 15,568 6.1% 5,152 4.0%
Other income....................................... 269 -- 70 0.1%
-------- ------ -------- ------
Earnings before income taxes and extraordinary
charge........................................... 15,351 6.1% 7,666 5.9%
Income tax expense................................. 6,601 2.6% 346 0.2%
-------- ------ -------- ------
Net earnings before extraordinary charge........... $ 8,750 3.5% $ 7,320 5.7%
Extraordinary charge, net of tax................... 5,107 2.0% -- --
-------- ------ -------- ------
Net earnings....................................... $ 3,643 1.5% $ 7,320 5.7%
======== ========
Net earnings before extraordinary charge per common
share-basic...................................... $ 1.11 $ 1.35
======== ========
Net earnings before extraordinary charge per common
share-diluted.................................... $ 1.07 $ 1.29
======== ========
Net Sales. Net sales of $252.4 million were up $123.1 million or 95.2%
from the prior year. The increase was primarily driven by the 1998 Acquisitions,
which combined to generate $129.8 million of net sales in 1998. The elimination
of low margin and under performing products along with management's continued
sku rationalization efforts negatively impacted 1998 net sales.
Laundry Management Products. This is a new product category for the
Company in 1998, which was added through the 1998 acquisition of Seymour.
Laundry management products contributed $93.2 million, or 36.9% of 1998 net
sales.
General Storage Products. Net sales in the general storage category of
$53.9 million in 1998 increased $10.4 million or 23.9% from 1997. The primary
contributor to the increase was the Tenex Asset Acquisition coupled with new
product development. New product introductions, including drawer systems (which
include the Tenex Asset Acquisition) contributed $17.4 million to 1998 net
sales. 1998 net sales of storage totes experienced a $7.0 million decline as
retailers more heavily promoted the new drawer systems.
Servingware Products. This is a new product category for the Company,
which was added through the 1998 acquisition of PI. Net sales in this category
since the acquisition were $11.3 million, or 4.5% of 1998 net sales.
Closet Storage Products. Net sales in this product category of $35.0
million experienced a $9.2 million decline, or 20.8% as compared to 1997. The
decline was the result of management's continued elimination of under performing
and low margin sku's. Also included within this category are plastic hangers
which experienced a slight decrease as compared to 1997 due to the elimination
of several low margin customers.
Bathware Products. Net sales in this product category of $24.4 million,
increased $1.1 million or 4.7% from 1997. The primary contributor to the
increase was additional shelf space for the Company's Suction Lock products.
This increase was slightly off set by the continued elimination of low margin
and under performing sku's.
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Food Storage Products. This is a new product category for the Company,
which was added through the 1998 acquisition of AHP. Net sales in this category
since the acquisition were $12.0 million, or 4.7% of total 1998 net sales.
Juvenile Storage Products. Net sales in this product category of $14.6
million increased $4.4 million, or 43.1% as compared to 1997. The primary factor
for the increase was the 1998 acquisition of Seymour which contributed $4.0
million to 1998 net sales.
Shutters Products. Net sales for 1998 of $8.0 million were flat as
compared to 1997.
Gross Profit. Gross profit of $83.2 million, increased $42.8 million, or
105.8% from the prior year. Gross profit margin experienced an increase from
31.3% in 1997 to 33.0% in 1998. A contributor to the margin improvement from the
prior year was the decline in prices for one of the Company's primary raw
materials, plastic resin. The average cost per pound of plastic resin dropped
from 1997 to 1998; however, much of the savings from the decline in resin prices
were passed along to customers. This was done to maintain shelf space in
response to competitive pressures. Also contributing to the margin improvement
was the introduction of higher margin products, primarily within the general
storage category and the favorable impact generated from the elimination of
under performing and low margin sku's across all of the Company's product lines.
Offsetting some of the margin improvement was a change in the Company's product
mix. In general, product lines acquired as a result of the 1998 Acquisitions had
lower margins than the Company's mix of products in 1997. This was particularly
true of the products acquired in the Tenex Asset Acquisition and AHP products.
Capacity constraints forced the Company to outsource production of the products
acquired in the Tenex Asset Acquisition at a higher cost as compared to in-house
manufacturing. The AHP products have a lower margin due to excess manufacturing
capacity and too much emphasis on deal pricing. Management intends to address
the capacity issue in 1999 and will also focus on new product development within
the food storage category.
Operating Expenses. Operating expenses, including selling, administrative
and amortization of intangibles decreased from 21.5% to 20.8% as a percentage of
net sales from 1997 to 1998. Selling expenses decreased from 14.3% of net sales
in 1997 to 12.4% in 1998. Administrative expenses decreased from 6.5% of net
sales in 1997 to 6.3% in 1998. The Company's acquisition integration strategy
focuses on combining acquired entities into existing operating platforms. In
this way, fixed expenses are effectively leveraged and minimized. The decline in
selling, marketing and administration expenses as a percentage of net sales is a
direct result of this effort. Amortization of intangibles increased from .7% in
1997 to 2.1% in 1998. The increase in amortization expense is the result of
goodwill created from the 1998 Acquisitions.
Interest Expense. Interest expense in 1998 was $15.6 million, as compared
to $5.2 million for 1997. The primary contributor to the increase over 1997 was
the result of $180.8 million of debt added related to the 1998 Acquisitions.
Also contributing to the increase was a slightly higher effective interest rate
on the high yield bonds, which was partially offset by a lower incremental
borrowing rate due to the May 1998 refinancing of the Company's senior debt
agreements.
Income Taxes. Income tax expense increased from $0.3 million in 1997 to
$6.6 million in 1998 (before benefit from extraordinary charges). Income tax
expense increased because of a change in the Company's tax paying position. In
1997, the Company was able to use net operating loss carryforwards and the
elimination of a valuation allowance against deferred tax assets to eliminate
the federal tax expense. By the end of fiscal 1997, the net operating losses had
been fully utilized. As such, the Company was in a tax paying position in 1998.
Extraordinary Charge, net of tax. An extraordinary charge in the amount of
$5.1 million, net of tax, for the early retirement of debt, or $0.62 per common
share -- diluted was recorded in 1998. To fund the Seymour Acquisition,
increased financing facilities were obtained to replace and augment existing
facilities as of December 27, 1997. The financing change required the write-off
of $1.7 million, net of tax, of capitalized costs incurred to obtain the
replaced credit facilities. In addition, in May, 1998
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the Company refinanced its existing debt and incurred an extraordinary charge of
$3.4 million, net of tax, for the write-off of previously capitalized costs
relating to the previous credit agreement as well as penalties for early
repayment of debt.
Earnings per share before extraordinary charge -- diluted. Diluted earnings
per share, before extraordinary charge, for 1998 was $1.07 as compared to $1.29
in 1997. The weighted shares outstanding increased from 5,682,000 in 1997 to
8,176,000 in 1998. The increase in weighted average shares outstanding was the
result of 1,320,000 shares issued in the Seymour Acquisition, the June 1997
secondary stock offering of 2,280,000 shares outstanding for the entire period,
stock options exercised during the year and shares issued under the Company's
employee stock purchase plan. Offsetting some of the increase in shares were
treasury stock purchases made in 1998.
As noted the above, the Company's tax position has significantly changed
since 1997. If the Company had been in a full tax paying position a year ago,
diluted earnings per share before extraordinary charge would have been $0.77 as
compared to the fully taxed earnings per share in 1998 of $1.07.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at December 25, 1999 were $5.0 million, unchanged
from a year ago. The Company's total debt increased from $223.1 million a year
ago to $226.9 million at December 25, 1999. The increase in debt is attributable
to several factors, including increased working capital, capital spending and
the Company's stock buyback program.
The Company's working capital, excluding cash and short term debt,
increased from $26.2 million in 1998 to $33.7 million at year end 1999. The
increase was largely due to higher accounts receivable from customers. Customers
slowed down payments in the fourth quarter to meet their own purposes. The
increase in receivables is not the result of collection issues.
Capital spending of $14.7 million in 1999 primarily consisted of $5.3
million to expand existing facilities in Chicago and Mexico, $3.6 million
related to new computer systems (including the cost of installation) and $2.4
million to support new product development. The Company's capital spending needs
in 2000 are expected to be $12-18 million. Capital projects expected for 2000
include molds to support new product development and sales growth, outfitting of
the El Paso facility and new injection molding machines to improve productivity.
As in the past, management will pursue alternative means of financing including
leasing. During 1999, off balance sheet financing totaling $6.6 million was
obtained through operating leases of machinery and equipment. The Company has
entered into a 10 year lease for the El Paso facility. The lease includes a
purchase option prior to the end of the lease term.
During 1999, the Company spent $3.9 million to buy back 446,000 shares of
its publicly issued stock. The shares were purchased at an average price of
$8.71 per share.
Management believes its existing financing facilities together with its
cash flow from operations will provide sufficient capital to fund operations,
make required debt repayments and meet anticipated capital spending needs.
YEAR 2000 COMPLIANCE
The Company did not experience any system problems due to the Y2K
situation. All significant systems were converted and or upgraded prior to
December 31, 1999. Total costs incurred related to the Y2K situation were
approximately $0.5 million. The Company will continue to monitor Y2K issues
during the year. Contingency plans are in place to cover any issues that may
arise at a later date.
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MANAGEMENT OUTLOOK AND COMMENTARY
In 1999, management took many steps to ensure continued growth in earnings
and shareholder value. The most significant actions taken were the following:
- Completed the integration of the various brands the company had acquired
over the past few years into one brand: HOMZ. Under this brand, the
company presents one consistent appearance in its retail offerings.
- With the decision to move to a "one brand, one Company" philosophy,
management quickly began the process of consolidating all operating
functions and eliminating duplicative processes. The result of the
consolidation will be annual pre tax cash savings of over $2.0 million.
- The Company broke ground on a new 400,000 square foot facility in El
Paso, Texas. This facility will manufacture both ironing board and
storage products as well as provide a launching point for improved
western distribution. The facility opened for production and distribution
in March 2000.
- With the consolidation of the retail product lines under the HOMZ brand,
management took the opportunity to eliminate over 1600 stock keeping
units (SKU's). Most of the products eliminated were duplicative or in
unpopular colors. While this step will result in the elimination of about
1% of the Company's 1999 sales, it will provide opportunities for
improved operating efficiencies and margin improvement. Higher margin new
products will replace the eliminated sales.
- A uniform computer platform was installed for the HOMZ product lines and
facilities resulting in the consolidation of three separate computer
systems.
- The Company acquired molds and inventory from a storage products company,
significantly expanding the Company's product offering in general storage
items.
- 18 new injection molding machines were added to the Company's Chicago
facility. This provided additional capacity and improved productivity
through reduced cycle times and energy use.
- During 1999, the Company executed its plans to balance production levels
between manufacturing facilities. The Chicago facility was expanded to a
24/7 operation from a 5-day, 2-shift operation. Additionally, the
Minnesota molding facility acquired in 1998 was better utilized by adding
general storage and closet items to its existing kitchen storage
production.
- The Company added over 300,000 square feet of warehousing for its storage
product lines. The additional warehousing is needed to accommodate the
Company's growing presence with the Company's big 3 retailers: Kmart,
Wal-Mart and Target.
During 2000, the Company will concentrate on revenue growth from existing
product lines. The Company will also continue to seek every opportunity to
maintain its position as a low cost producer. Some of these plans, together with
assorted factors that may influence the performance of the Company in 2000 and
beyond are as follows:
- The Company will aggressively seek sales growth from existing product
lines:
- The El Paso facility provides an opportunity to expand distribution with
customers in the western half of the United States. Previously, the
Company was hampered in its western distribution by the higher freight
costs incurred to reach western customers from the Company's eastern and
midwestern facilities. The proximity of the El Paso facility will
provide distribution improvements and sales opportunities for both
existing and new customers. The facility began production in March 2000.
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- The 1999 introduction of the HOMZ brand will provide sales growth
opportunities. Several retailers have already committed to HOMZ ad
events that will provide increased sales as well as increased awareness
of the brand.
- A major retailer has announced its intention to consolidate its general
storage vendor base from 35 vendors to less than 10. The Company has
been selected to participate in the smaller vendor base. Management
expects this development will result in 3-5% sales growth with the
customer.
- The opening of the El Paso facility will not only enhance the Company's
sales growth, it should favorably impact margins. This facility will have
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 a very favorable labor market that can
provide needed manpower at a reasonable rate.
- 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. Other than plastic resin
(see discussion below), management does not expect to see a significant
change in the cost of these materials as compared to 1999. However the
cost of these items is affected by many variables outside the control of
the company and changes to the current perceived trends are possible.
- Plastic resin represents about 20-25% of the Company's cost of goods
sold. During 1999, the cost of plastic resin increased significantly.
This occurred after a several year period of declining plastic resin
costs during which selling prices also declined in response to
competitive pressures. In the last 6 months of 1999, resin returned to
cost levels of 2 years ago. Now that plastic resin costs have increased,
the Company's ability to pass along this increase to its customers is
hampered by both the nature of the retail customer environment and other
competitive factors. As a result of the plastic resin cost increase and
the inability to raise selling prices, management expects gross margins
in the first half of 2000 to be below the gross margins achieved in 1999.
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, oil prices and the overall
health of the economy. Any of these factors could have a positive or
negative impact on plastic resin costs.
- Management's 1999 decision to consolidate its operating functions will
save money for the Company. Operating expense reductions as compared to
1999 will be achieved in the first half of 2000 but will decline as the
year proceeds. Operating expenses as a percent of sales are expected to
be lower in 2000 than in 1999.
- The full utilization of computer systems installed in 2000 will provide
opportunities for productivity and earnings improvements. The new systems
will allow management to better monitor product and customer
profitability, manufacturing performance and customer service levels.
Forecasting tools expected to be implemented in 2000 will provide for
better visibility to customer trends and will enhance inventory
management.
- The Company has financed previous acquisitions primarily with debt. As a
result, the Company is highly leveraged with total debt representing
about 80% of the Company's book capitalization, or a 4:1 debt to capital
ratio. As a result, earnings could be materially impacted by changes in
interest rates. Furthermore, the financial and operating covenants
related to the debt agreements place some restrictions on the operations
of the Company. During 1999, the Company was well within its financial
and operating covenants and expects to operate safely within the
covenants in 2000.
- HPI has been a successful consolidator within the housewares industry.
Most of the Company's growth since 1996 has come from its acquisition
activity. Management had believed that the continued profitable growth of
the Company would provide momentum for an increasing stock
20
21
price. Management's strategy was to use the higher stock price to raise
additional capital, pay down debt and acquire additional businesses.
Unfortunately, the market has not recognized the increased value of the
Company. Further, management does not believe it would be prudent to
pursue additional acquisitions of a significant size financed solely with
more debt. Accordingly, the Board of Directors has retained investment
bankers to assist management in addressing its capital needs including
ways to raise additional capital to fund further acquisitions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks from changes in interest rates and
commodity based raw materials (resin, steel and fabric).
Interest Rate Risk. The Company's Revolver and Term Loan are LIBOR-based
and are subject to interest rate movements. A 10% increase or decrease in the
average cost of the Company's variable rate debt would result in a change in
pretax interest expense of approximately $762, based upon borrowings outstanding
at December 25, 1999.
Commodity Risk. The Company is subject to fluctuations in commodity type
raw materials such as plastic resin, steel and griege fabric. See Item 1 -- Raw
Materials, which is incorporated by reference to this section, for further
details.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including "General Development of
Business," "Properties," "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains
forward-looking statements within the meaning of the "safe-harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from those
described in the forward-looking statements. Such factors and uncertainties
include, but are not limited to: (i) the anticipated effect of the 1999
Acquisition and the 1998 Acquisitions on the Company's sales and earnings; (ii)
the impact of the level of the Company's indebtedness; (iii) restrictive
covenants contained in the Company's various debt documents; (iv) general
economic conditions and conditions in the retail environment; (v) the Company's
dependence on a few large customers; (vi) price fluctuations in the raw
materials used by the Company, particularly plastic resin; (vii) competitive
conditions in the Company's markets; (viii) the seasonal nature of the Company's
business; (ix) the Company's ability to execute its consolidation strategy; (x)
fluctuations in the stock market; (xi) the extent to which the Company is able
to retain and attract key personnel; (xii) relationships with retailers; and
(xiii) the impact of federal, state and local environmental requirements
(including the impact of current or future environmental claims against the
Company). As a result, the Company's operating results may fluctuate, especially
when measured on a quarterly basis.
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Listed below are the financial statements and supplementary data included
in this part of the Annual Report on Form 10-K:
(a) Financial Statements
PAGE NO.
--------
Report of Independent Public Accountants................... F-1
Consolidated Balance Sheets at December 25, 1999 and
December 26, 1998........................................ F-2
Consolidated Statements of Operations For 1999, 1998 and
1997..................................................... F-3
Consolidated Statements of Stockholders' Equity for 1999,
1998 and 1997............................................ F-4
Consolidated Statements of Cash Flows for 1999, 1998 and
1997..................................................... F-5
Notes to Consolidated Financial Statements................. F-6
(b) Supplementary Data
Summary of Quarterly Financial Information................. F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers is included under
Part I of this Form 10-K.
Information set forth under "Election of Directors" in the Proxy Statement
is incorporated herein by reference. The information set forth under "Executive
Officers of the Registrant" in Part I of this Annual Report on Form 10-K is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Compensation of Executive Officers" and
"Employment Agreements" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the "Security Ownership of Principal
Stockholders and Management" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Listed below are the financial statements, additional financial
information, reports and exhibits included in this part of the Annual Report on
Form 10-K:
(a) 1. Financial Statements
The financial statements and notes to the consolidated financial statements
are referred to in Item 8.
2. Additional Financial Information
PAGE NO.
--------
Reports of Independent Public Accountants on Schedule II... S-1
Schedule II -- Valuation and Qualifying Accounts........... S-2
(b) Reports Filed on Form 8-K
There were no Reports filed on Form 8-K in the fourth quarter of 1999.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
23
24
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
2.1 -- Agreement and Plan of Merger, dated as of February 13, 1997,
by and among Selfix, Inc., HPI Merger, Inc. and Home
Products International, Inc. Incorporated by reference from
Exhibit 2.1 to Form 8-B Registration Statement filed on
February 20, 1997.
2.2 -- Stock Purchase Agreement, made as of January 1, 1997,
between the Company, Leonard J. Tocci, Richard M. Tocci,
Lawrence J. Tata, Michael P. Tata and Barbara L. Tata.
Incorporated by reference from Exhibit 2.2 to Form 8-K dated
February 28, 1997.
2.3 -- Agreement and Plan of Merger, dated as of January 1, 1997,
by and among the Company, Houseware Sales, Inc. and the
individual shareholders of Houseware Sales, Inc.
Incorporated by reference from Exhibit 2.1 to Form 8-K dated
February 28, 1997.
2.4 -- Amended and Restated Agreement, dated December 30, 1997, by
and among the Company, Seymour Sales Corporation, Seymour
Housewares Corporation, and Chase Venture Capital Associates
(majority shareholder of Seymour Sales Corporation).
Incorporated by reference from Exhibit 2.1 to Form 8-K dated
January 13, 1998, which was subsequently modified as stated
in Item 2 to Form 8-K/A dated March 16, 1998.
2.5 -- Form of Escrow Agreement (Exhibit 2.8 from Amended and
Restated Agreement, dated December 30, 1997 by and among the
Company, Seymour Sales Corporation, Seymour Housewares
Corporation, and Chase Venture Capital Associates (majority
shareholder of Seymour Sales Corporation)) by and among
HPII, the security holders of Sales, Majority Shareholder,
and LaSalle. Incorporated by reference from Form 10-K filed
on March 27, 1998, Exhibit No. 2.6.
2.6 -- Asset Purchase and Sale Agreement among Plastics, Inc and
Home Products International, Inc. and Newell Co. dated as of
July 31, 1998. Incorporated by Reference to Form 8-K/A filed
on November 6, 1998.
2.7 -- Asset Purchase Agreement among Tenex Corporation, and Home
Products International, Inc., dated July 24, 1998.
Incorporated by reference to Form 10-Q filed on November 10,
1998.
*2.8 -- Asset Purchase Agreement among Austin Products, Inc. d/b/a
Epic, and Tamor Corporation, dated May 12, 1999.
*2.9 -- Stock Purchase Agreement between Recore Industries
Corporation and Home Products International, Inc. for the
sale of Shutter, Inc., effective December 27, 1998.
3.1 -- Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on February 7, 1997.
Incorporated by reference from Exhibit 3.1 to Form 8-B
Registration Statement filed on February 20, 1997.
3.2 -- By-laws of the Company. Incorporated by reference from
Exhibit 3.2 to Form 8-B Registration Statement filed on
February 20, 1997.
4.1 -- Form of Rights Agreement dated as of May 21, 1997, between
Home Products International, Inc. and ChaseMellon
Shareholder Services L.L.C., as Rights Agent, which includes
as Exhibit B thereto the Form of Right Certificate.
Incorporated by reference from Exhibit 4.2 to Form S-2
Registration Statement (File No. 333-25871) filed on April
25, 1997.
10.1 -- The Company's 1994 Stock Option Plan. Incorporated by
reference from Exhibit A of the Company's Proxy Statement
for its 1994 Annual Meeting.**
10.2 -- The Company's 1991 Stock Option Plan. Incorporated by
reference from Exhibit A of the Company's Proxy Statement
for its 1991 Annual Meeting.**
24
25
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.3 -- The Company's 1987 Stock Option Plan Incorporated by
reference from Exhibit 10.8 to Form S-1 Registration
Statement No. 33-23881.**
10.4 -- Lease, dated July 24, 1980, among Selfix as Tenant and NLR
Gift Trust and MJR Gift Trust as Landlord concerning
Selfix's facility in Chicago, Illinois. Incorporated by
reference from Exhibit 10.9 to Form S-1 Registration
Statement No. 33-23881.
10.5 -- $150,000,000 Amended and Restated Credit Agreement among
Home Products International, Inc, as Borrower, the Several
Lenders from time to time parties thereto, and The Chase
Manhattan Bank as Administrative Agent dated September 8,
1998. Incorporated by reference to Form 8-K/A filed on
November 6, 1998.
10.6 -- Assignment and Assumption Agreement by and between Home
Products International, Inc. and Prestige Plastics, Inc.
Incorporated by reference to Form 8-K/A filed on November 6,
1998.
10.7 -- Loan Agreement dated September, 1990 between Selfix and
Illinois Development Finance Authority in connection with
Selfix's Industrial Revenue Bond. Incorporated by reference
from the Company's Form 10-K for the fifty-two weeks ended
December 28, 1991.
10.8 -- Credit Agreement dated as of December 30, 1997 among Selfix,
Inc., Tamor Corporation, Seymour Housewares Corporation, and
Shutters, Inc., as Borrowers, the Company, General Electric
Capital Corporation, as Agent and Lender, and other Lenders
signatory hereto from time to time. Incorporated by
reference from Form 10-K filed on March 27, 1998, Exhibit
No. 10.10.
10.9 -- Note Purchase Agreement dated as of December 30, 1997, among
Selfix, Inc., Tamor Corporation, Shutters, Inc., and Seymour
Housewares Corporation, Home Products International, Inc.,
(referred to herein as Joint Issuers) and General Electric
Capital Corporation individually, and as Agent for itself
and other Note Purchasers signatory hereto. Incorporated by
reference from Form 10-K filed on March 27, 1998, Exhibit
No. 10.11.
10.10 -- $5,000,000 Senior Subordinated Note -- General Electric
Capital Corporation, due December 30, 2006. Incorporated by
reference from Form 10-K filed on March 27, 1998, Exhibit
No. 10.12.
10.11 -- $5,000,000 Senior Subordinated Note -- Archimedes Funding,
L.L.C. due December 30, 2006. Incorporated by reference from
Form 10-K filed on March 27, 1998, Exhibit No. 10.13.
10.12 -- Subordinated Note Security Agreement dated December 30, 1997
among Selfix, Inc., Tamor Corporation, Shutters, Inc., and
Seymour Housewares Corporation, Home Products International,
Inc., (collectively referred to herein as Grantors) in favor
of General Electric Capital Corporation. Incorporated by
reference from Form 10-K filed on March 27, 1998, Exhibit
No. 10.14.
10.13 -- Employment Agreement dated January 1, 1997 between the
Company and James R. Tennant, Chairman of the Board and
Chief Executive Officer. Incorporated by reference from
Exhibit 10.10 to Form 8-B Registration Statement filed on
February 20, 1997.**
10.14 -- Employment Agreement dated January 5, 1998 between the
Company and Stephen R. Brian, President and Chief Operating
Officer. Incorporated by reference from Form 10-K filed on
March 27, 1998, Exhibit No. 10.16.**
10.15 -- Reimbursement Agreement by and among Selfix, Shutters, Inc.
and LaSalle National Bank dated as of April 12, 1996
relating to letter of credit issued in connection with the
Series 1990 Bonds. Incorporated by reference from Exhibit
10.11 to Form 8-B Registration Statement filed on February
20, 1997.
25
26
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.16 -- Description of the 1998 Executive Incentive Bonus Plan.
Incorporated by reference to the Compensation Committee
Report contained in Form Pre 14A dated April 13, 1998.**
10.17 -- Description of the 1998 Management Incentive Bonus Plan.
Incorporated by reference to the Compensation Committee
Report contained in Form Pre 14A dated April 13, 1998.**
10.18 -- The Company's 1999 Performance Incentive Plan. Incorporated
by reference from the Company's Proxy Statement for its 1999
Annual Meeting.**
10.19 -- The Company's 1999 Directors Restricted Stock Plan.
Incorporated by reference from the Company's Proxy Statement
for its 1999 Annual Meeting.**
11.1 -- Statement Regarding Computation of Earnings Per Share is
included in the Notes to the Consolidated Financial
Statements referred to in Item 8 hereof.
*21.1 -- List of Subsidiaries
*23.1 -- Consent of Arthur Andersen LLP.
*27.1 -- Financial Data Schedule.
- ---------------
* Filed herewith, exhibits not marked with an asterisk are incorporated by
reference.
** Indicates an employee benefit plan, management contract or compensatory plan
or arrangement in which a named executive officer and/or a director
participates.
26
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Home Products International, Inc.:
We have audited the accompanying consolidated balance sheets of Home
Products International, Inc. (a Delaware corporation) and subsidiaries as of
December 25, 1999 and December 26, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three
fifty-two week periods ended December 25, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Home Products International,
Inc. and subsidiaries as of December 25, 1999 and December 26, 1998, and the
results of their operations and their cash flows for each of the three fifty-two
week periods ended December 25, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 18, 2000
F-1
28
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FISCAL YEAR END
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,861 $ 4,986
Accounts receivable, net of allowance for doubtful
accounts of $10,158 at December 25, 1999 and $7,196 at
December 26, 1998...................................... 59,571 50,238
Inventories, net.......................................... 24,064 25,296
Prepaid expenses and other current assets................. 7,558 6,880
-------- --------
Total current assets.............................. 96,054 87,400
-------- --------
Property, plant and equipment -- at cost.................... 98,678 87,854
Less accumulated depreciation and amortization.............. (31,420) (27,654)
-------- --------
Property, plant and equipment, net.......................... 67,258 60,200
-------- --------
Deferred income taxes....................................... 8,417 10,491
Intangible and other assets................................. 172,177 181,952
-------- --------
Total assets...................................... $343,906 $340,043
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............... $ 5,571 $ 3,549
Accounts payable.......................................... 23,820 20,510
Accrued liabilities....................................... 33,651 35,664
-------- --------
Total current liabilities......................... 63,042 59,723
-------- --------
Other long term liabilities................................. 2,908 2,783
Long-term obligations -- net of current maturities.......... 221,334 219,536
Stockholders' equity:
Preferred stock -- authorized, 500,000 shares, $.01 par
value; none issued..................................... -- --
Common stock -- authorized 15,000,000 shares, $.01 par
value; 8,068,863 shares issued at December 25, 1999 and
8,024,123 shares issued at December 26,1998............ 81 80
Additional paid-in capital................................ 48,800 48,455
Retained earnings......................................... 14,269 12,259
Common stock held in treasury -- at cost (822,394 shares
at December 25, 1999 and 376,462 at December 26,
1998).................................................. (6,528) (2,642)
Currency translation adjustments.......................... -- (151)
-------- --------
Total stockholders' equity........................ 56,622 58,001
-------- --------
Total liabilities and stockholders' equity........ $343,906 $340,043
======== ========
The accompanying notes are an integral part of the financial statements.
F-2
29
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.................................................. $294,001 $252,429 $129,324
Cost of goods sold......................................... 195,301 169,213 88,888
Special charges............................................ 8,589 -- --
-------- -------- --------
Gross profit............................................. 90,111 83,216 40,436
Operating expenses
Selling.................................................. 39,036 31,262 18,332
Administrative........................................... 15,428 15,796 8,474
Amortization of intangible assets........................ 5,425 5,508 882
Restructuring and other charges.......................... 5,966 -- --
Other nonrecurring charges............................... 445 -- --
-------- -------- --------
66,300 52,566 27,688
-------- -------- --------
Operating profit......................................... 23,811 30,650 12,748
-------- -------- --------
Other income (expense)
Interest income.......................................... 170 236 50
Interest (expense)....................................... (20,271) (15,568) (5,152)
Other income............................................. 372 33 20
-------- -------- --------
(19,729) (15,299) (5,082)
-------- -------- --------
Earnings before income taxes and extraordinary charge...... 4,082 15,351 7,666
Income tax (expense)....................................... (2,072) (6,601) (346)
-------- -------- --------
Earnings before extraordinary charge....................... $ 2,010 $ 8,750 $ 7,320
Extraordinary charge for early retirement of debt, net of
tax benefits of $3,633................................... -- (5,107) --
-------- -------- --------
Net earnings............................................... $ 2,010 $ 3,643 $ 7,320
======== ======== ========
Earnings before extraordinary charge, per common share --
basic.................................................... $ 0.27 $ 1.11 $ 1.35
Extraordinary charge for early retirement of debt, net of
tax...................................................... -- (0.65) --
-------- -------- --------
Net earnings per common share -- basic..................... $ 0.27 $ 0.46 $ 1.35
======== ======== ========
Earnings before extraordinary charge, per common share --
diluted.................................................. $ 0.26 $ 1.07 $ 1.29
Extraordinary charge for early retirement of debt, net of
tax...................................................... -- (0.62) --
-------- -------- --------
Net earnings per common share -- diluted................... $ 0.26 $ 0.45 $ 1.29
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-3
30
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON
CURRENCY STOCK
ADDITIONAL TRANSLATION HELD IN
PREFERRED COMMON PAID-IN RETAINED ADJUSTMENTS TREASURY
STOCK STOCK CAPITAL EARNINGS AND OTHER AT COST TOTAL
--------- ------ ---------- -------- ----------- -------- -------
(IN THOUSANDS)
Balance at December 28, 1996............ -- 39 10,839 1,296 (201) (264) 11,709
Net earnings.......................... -- -- -- 7,320 -- -- 7,320
Issuance of 19,560 shares in
connection with employee stock
purchase plan....................... -- -- 107 -- -- -- 107
Issuance of 480,000 shares of common
stock in connection with Tamor
Acquisition......................... -- 5 2,395 -- -- -- 2,400
Issuance of 2,280,000 shares of common
stock in connection with secondary
public offering..................... -- 23 20,148 -- -- -- 20,171
Issuance of Warrant................... -- -- 400 -- -- -- 400
Stock options exercised............... -- -- 67 -- -- -- 67
Translation adjustments............... -- -- -- -- 42 -- 42
---- --- ------- ------- ----- ------- -------
Balance at December 27, 1997............ $ -- $67 $33,956 $ 8,616 $(159) (264) $42,216
==== === ======= ======= ===== ======= =======
Net earnings.......................... -- -- -- 3,643 -- -- 3,643
Issuance of 20,695 shares in
connection with employee stock
purchase plan....................... -- -- 196 -- -- -- 196
Issuance of 1,320,000 shares of common
stock in connection with acquisition
of Seymour Housewares Corporation... -- 13 14,254 -- -- -- 14,267
Stock options exercised............... -- -- 49 -- -- -- 49
Treasury stock purchased at cost...... -- -- -- -- -- (2,378) (2,378)
Translation adjustment................ $ -- -- -- -- 8 -- 8
---- --- ------- ------- ----- ------- -------
Balance at December 26, 1998............ $ -- $80 $48,455 $12,259 $(151) $(2,642) $58,001
==== === ======= ======= ===== ======= =======
Net earnings.......................... -- -- -- 2,010 -- -- 2,010
Issuance of 41,238 shares in
connection with exercise of stock
options and various stock plans..... -- 1 345 -- -- -- 346
Treasury stock purchased at cost...... -- -- -- -- -- (3,886) (3,886)
Translation adjustment................ -- -- -- -- 151 -- 151
---- --- ------- ------- ----- ------- -------
Balance at December 25, 1999............ $ -- $81 $48,800 $14,269 $ -- $(6,528) $56,622
==== === ======= ======= ===== ======= =======
The accompanying notes are an integral part of the financial statements.
F-4
31
HOME PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR
-------------------------------
1999 1998 1997
-------- --------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings................................................ $ 2,010 $ 3,643 $ 7,320
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Write off of fixed and other assets included in the
Special and Restructuring Charges....................... 3,940 -- --
Depreciation and amortization............................. 16,241 14,731 5,687
Extraordinary charge on early retirement of debt.......... -- 8,739 --
Changes in assets and liabilities:
Increase in accounts receivable......................... (10,302) (11,933) (5,428)
Decrease (increase) in inventories...................... 1,119 6,644 (2,280)
Decrease (increase) in prepaids and other current
assets................................................ (713) (6,452) (328)
Decrease (increase) in net deferred tax asset........... 2,074 2,096 (3,466)
Increase (decrease) in accounts payable................. 3,716 4,163 (4,695)
(Decrease) increase in accrued liabilities.............. (1,836) (1,315) 5,060
Other, net................................................ (1,634) 377 (992)
-------- --------- --------
Net cash provided by operating activities................... 14,615 20,693 878
-------- --------- --------
INVESTING ACTIVITIES:
Proceeds on sale of business, net........................... 4,092 -- --
Proceeds on sale of building................................ 977 -- --
1999 Acquisition............................................ (5,962) -- --
Tamor Acquisition, net of cash acquired..................... -- -- (27,876)
Seymour Acquisition, net of cash acquired................... -- (84,882) --
Tenex Asset Acquisition..................................... -- (16,725) --
Newell Asset Acquisition, net of cash acquired.............. 571 (78,321) --
Capital expenditures, net................................... (14,698) (11,933) (8,382)
-------- --------- --------
Net cash used by investing activities....................... (15,020) (191,861) (36,258)
-------- --------- --------
FINANCING ACTIVITIES:
Borrowings under revolving line of credit, net.............. 4,250 44,000 3,355
Additions to capital lease obligation....................... 3,137 -- --
Borrowings, net -- Senior Subordinated Notes................ -- 120,809 --
Borrowings, net -- $50,000 Term Loan........................ -- 49,460 --
Borrowings, net -- 12/30/97 Facility........................ -- 117,538 --
Borrowings, net -- term loans and warrant................... -- -- 44,158
Payments -- $50,000 Term Loan............................... (3,000) -- --
Payments on Industrial Revenue Bonds........................ (400) (2,400) (800)
Payment of capital lease obligation......................... (167) (335) (164)
Payments on borrowings...................................... -- (148,076) (33,809)
Prepayment penalty on early retirement of debt.............. -- (3,282) --
Purchase of treasury stock.................................. (3,886) (2,378) --
Net proceeds from secondary stock offering.................. -- -- 20,171
Exercise of common stock options and issuance of common
stock under various stock plans........................... 346 235 174
-------- --------- --------
Net cash provided by financing activities................... 280 175,571 33,085
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (125) 4,403 (2,295)
Cash and cash equivalents at beginning of year.............. 4,986 583 2,878
-------- --------- --------
Cash and cash equivalents at end of year.................... 4,861 4,986 $ 583
======== ========= ========
Supplemental disclosures:
Cash paid during the year for:
Interest.................................................... $ 19,864 $ 11,436 $ 3,568
-------- --------- --------
Income taxes, net........................................... $ 3,485 $ 3,458 $ 1,255
-------- --------- --------
The accompanying notes are an integral part of the financial statements.
F-5
32
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Products International, Inc. (the "Company"), based in Chicago, is a
leading designer, manufacturer and marketer of a broad range of value-priced,
quality consumer houseware products. The Company's products are marketed
principally through mass market trade channels in the United States and
internationally.
PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of the Company
and its subsidiary companies. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES.
Inventories are stated at the lower of cost or net realizable value with
cost determined on a first in, first out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT.
Property, plant and equipment are stated at cost. Depreciation is charged
against results of operations over the estimated service lives of the related
assets.
Improvements to leased property are amortized over the life of the lease or
the life of the improvement, whichever is shorter. For financial reporting
purposes, the Company uses the straight-line method of depreciation. For tax
purposes, the Company uses accelerated methods where permitted.
The Company periodically re-evaluates carrying values and estimated useful
lives of long lived assets to determine whether current facts and circumstances
warrant adjustment.
The Company capitalized certain costs related to the purchase and
development of software used in the business. Such assets are amortized over
their estimated useful lives, ranging from 2 to 5 years.
The estimated service lives of the fixed assets are as follows:
Buildings................................................... 30 years
Land and building under capital lease....................... lease term
Machinery, equipment and vehicles........................... 3-8 years
Tools, dies and molds....................................... 5 years
Furniture, fixtures and office equipment.................... 2-8 years
Leasehold improvements...................................... lease term
F-6
33
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION.
The Company recognizes revenue as products are shipped to customers.
INTANGIBLE ASSETS.
Goodwill, which represents the excess of the purchase price over the fair
value of net assets acquired, is amortized on a straight-line over a period not
to exceed forty years. Covenants not to compete are amortized on a straight-line
basis over the terms of the respective agreements. Patents, royalty rights,
trademarks acquired and licensing agreements are amortized over their estimated
useful lives ranging from five to ten years. The Company reviews goodwill and
other intangibles for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. As part of an sku
rationalization in 1999, (described further in Note 2) the Company wrote off
$537 of intangibles associated with a discontinued product line.
INCOME TAXES.
Deferred tax assets and liabilities are determined at the end of each
fiscal period, based on differences between the financial statement bases of
assets and liabilities and the tax bases of those same assets and liabilities,
using the currently enacted statutory tax rates.
NET EARNINGS PER COMMON SHARE.
The following reconciles earnings per share from continuing operations for
1999, 1998 and 1997:
1999 1998 1997
------ ------ ------
Net income from continuing operations....................... $2,010 $8,750 $7,320
====== ====== ======
Weighted average common shares outstanding -- basic......... 7,389 7,898 5,436
Stock options and warrants.................................. 221 278 246
------ ------ ------
Weighted average common shares outstanding -- diluted....... 7,610 8,176 5,682
====== ====== ======
Earnings per common share -- basic.......................... $ 0.27 $ 1.11 $ 1.35
====== ====== ======
Earnings per common share -- diluted........................ $ 0.26 $ 1.07 $ 1.29
====== ====== ======
BENEFIT PLANS.
The Company provides a profit sharing and savings plan (including a 401(k)
plan) to which both the Company and eligible employees may contribute. Company
contributions to the savings plan are voluntary and at the discretion of the
Board of Directors. The Company matches the employee 401(k) plan contributions
with certain limitations. The total Company contributions to both plans are
limited to the maximum deductible amount under the Federal income tax law.
The Company provides retirement plans for its employees covered under
collective bargaining agreements. The amount of the Company contribution is
determined by the respective collective bargaining agreement.
The contributions to all the profit sharing, savings, and retirement plans
for 1999, 1998 and 1997, were $1,597, $725, and $414, respectively.
F-7
34
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS.
The Company considers all highly liquid, short-term investments with an
original maturity of three months or less, to be cash equivalents.
CONCENTRATION OF CREDIT RISK.
The Company is dependent upon a few customers for a large portion of its
revenues. In 1999 three customers each accounted for more than 10% of
consolidated net sales. The company's top three customers, Wal-Mart, Kmart, and
Target accounted for 18.2%, 15.0% and 11.4% of net sales respectively in 1999.
These same three customers accounted for 18.5%, 12.1% and 8.7% respectively in
1998. The loss of one of these customers could have a material effect on the
Company. No other customer accounted for more than 10% of consolidated net sales
in 1999 or 1998.
FISCAL YEAR.
The Company reports on a 52-53 week year. References to the fiscal years
1999, 1998 and 1997 are for the fifty-two weeks ended December 25, 1999,
December 26, 1998 and December 27, 1997.
RELATED PARTIES.
A director of the Company is the executor and co-trustee of certain estates
and trusts (the "Trusts") which lease facilities to the Company as discussed in
Note 10. In addition, this director is a partner in a law firm which is the
Company's general counsel.
RECLASSIFICATIONS.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
NEW ACCOUNTING STANDARDS.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The standard establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company had no derivative instruments or hedging transactions in 1999 or 1998.
The Company will be required to adopt this standard in 2000, and the adoption is
not anticipated to have a material impact on the financial statements.
F-8
35
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SPECIAL, RESTRUCTURING AND OTHER NONRECURRING CHARGES
EXPECTED NON-CASH
CASH CHARGE CHARGE TOTALS
----------- -------- -------
COST OF GOODS SOLD:
Special charge:
SKU reduction and inventory adjustments................ $2,782 $4,909 $ 7,691
Discontinued molds..................................... -- 898 898
------ ------ -------
Total charge to cost of goods sold................ 2,782 5,807 8,589
OPERATING EXPENSES:
Restructuring and other charges:
Employee related costs................................. 1,417 -- 1,417
Elimination of obsolete assets......................... 115 3,753 3,868
Transaction costs...................................... 576 105 681
------ ------ -------
Subtotal............................................. 2,108 3,858 5,966
Other nonrecurring charges:
Employee related costs................................. 293 -- 293
HOMZ branding strategy................................. 152 -- 152
------ ------ -------
Subtotal............................................. 445 -- 445
------ ------ -------
Total charge to operating expense................. 2,553 3,858 6,411
------ ------ -------
Total charges............................................... $5,335 $9,665 $15,000
Tax benefit -- 40%.......................................... (6,000)
-------
Net charge.................................................. $ 9,000
=======
In 1999, the Company recorded a $15,000 pretax charge, comprised of an
$8,589 Special Charge and a $6,411 Restructuring and Other Nonrecurring Charge,
(the two together are 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 primary components of the $8,589 Special Charge include $7,691 for
inventory reserves for discontinued products and packaging and $898 for reserves
for molds that were used to make these products. The Company has performed an
extensive product line review which has resulted in the decision to eliminate
approximately one-third of the Company's total stock keeping units (sku's). The
eliminated sku's represent approximately 1% of consolidated 1999 sales.
The primary components of the $6,411 Restructuring and Other Nonrecurring
Charges include $1,710 for employee related costs such as severance and
relocation costs due to consolidation of the selling, marketing and
administrative functions of two of the Company's wholly-owned subsidiaries,
$3,868 for reserves relating to assets made obsolete by the consolidation and
$152 for the implementation of the Company's national branding strategy.
The Company has identified 49 selling, marketing or administrative
employees that will be terminated in accordance with the consolidation plan. As
of December 25, 1999 approximately 40 of these employees have been terminated.
The Company began to implement the restructuring plan in the third quarter
of 1999 and accordingly the Charges were originally recorded at that time. Due
to additional information which became available in the fourth quarter of 1999,
the Company revised certain components of the
F-9
36
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Charges. The additional charges and the reversal of reserves no longer required
are listed in the table below (before tax benefit):
AS
ORIGINALLY
RECORDED IN ADDITIONAL REVERSAL OF ADJUSTED
Q3 - 1999 CHARGE RESERVES TOTALS
----------- ---------- ----------- --------
COST OF GOODS SOLD:
Special Charge:
SKU reduction and inventory adjustments............ $ 7,070 $2,004 $(1,383) $ 7,691
Production and distribution facilities............. 979 -- (979) --
Discontinued molds................................. 898 -- -- 898
------- ------ ------- -------
Total charge to cost of goods sold......... 8,947 2,004 (2,362) 8,589
OPERATING EXPENSES:
Restructuring and Other Charges:
Employee related costs............................. 1,369 48 -- 1,417
Elimination of obsolete assets..................... 3,723 145 -- 3,868
Transaction costs.................................. 518 163 -- 681
------- ------ ------- -------
Subtotal........................................ 5,610 356 -- 5,966
Other nonrecurring charges
Employee related costs............................. 293 -- -- 293
HOMZ branding strategy............................. 150 2 -- 152
------- ------ ------- -------
Subtotal........................................ 443 2 -- 445
------- ------ ------- -------
Total charge to operating expense.......... 6,053 358 -- 6,411
------- ------ ------- -------
Total charge......................................... $15,000 $2,362 $(2,362) $15,000
======= ====== ======= =======
The Company recorded an additional charge in the fourth quarter of 1999 in
the amount of $2,362 and reversed $2,362 of reserves which were no longer
needed. Of the total new charge, $2,004 was recorded as a Special Charge and
$358 was recorded as a Restructuring and Other Nonrecurring Charge.
The $2,004 increase to the Special Charge includes modifications to certain
original reserve calculations as well as additional reserves established for
carrying costs such as warehouse and logistics expenses related to certain
discontinued inventory. The $2,362 decrease to the original reserve is primarily
related to Management's decision to keep open a manufacturing and distribution
facility which was scheduled for closure as well as modifications to certain
original reserve calculations.
The $358 increase to the Restructuring and Other Nonrecurring Charges was
the result of modifications to certain original reserve calculations.
F-10
37
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1999 utilization of the reserve established in connection with the
Charges was as follows:
ADJUSTED RESERVE
BEGINNING ACTIVITY IN ACTIVITY IN BALANCE AT
BALANCE Q3 1999 Q4 1999 12/25/99
--------- ----------- ----------- ----------
Inventory.............................................. $ 7,691 $ 806 $1,892 $4,993
Molds.................................................. 898 402 -- 496
Plant and facilities................................... -- -- -- --
Elimination of obsolete assets......................... 3,868 3,150 383 335
Employee costs......................................... 1,710 631 164 915
Other.................................................. 833 224 209 400
------- ------ ------ ------
$15,000 $5,213 $2,648 $7,139
======= ====== ====== ======
The total activity charged against the accrual in 1999 was $7,861. The
total non cash cost of these charges was $4,463.
NOTE 3. 1999 ACQUISITION
On May 12, 1999 the Company acquired certain assets (inventory and molds)
from Austin Products, Inc. which were sold under the Epic brand name , (the
"1999 Acquisition"). The assets were acquired for $5,962 in cash. This product
line consists of plastic laundry baskets, tote caddys, crates, bins and utility
buckets. The acquisition was accounted for as a purchase. The purchase price was
equal to the fair value of the assets acquired. Results of operations have been
included in the Consolidated Statement of Operations since the date of
acquisition.
NOTE 4. 1998 ACQUISITIONS
Effective December 30, 1997, the Company acquired all of the outstanding
common stock of Seymour Sales Corporation and its wholly owned subsidiary,
Seymour Housewares Corporation, (collectively, "Seymour" and the acquisition is
referred to herein as the "Seymour Acquisition"). Seymour, headquartered in
Seymour, Indiana, is an industry leading manufacturer and marketer of consumer
laundry care products, including a full line of ironing boards, ironing board
covers and pads, and numerous laundry related accessories. The acquisition was
accounted for as a purchase and as such, the excess of the purchase price over
the estimated fair value of the acquired net assets, which approximated $27,000,
was recorded as goodwill and is being amortized over forty years. Total
consideration for the acquisition was $100,700, consisting of approximately
$16,400 in cash, $14,300 in common stock (1,320,700 shares) and the assumption
of $70,000 of debt. Results of Seymour's operations have been included in the
Consolidated Statement of Operations since the date of acquisition.
On September 8, 1998 the Company acquired from Newell Co. certain assets
and assumed certain liabilities comprising the businesses of Anchor Hocking
Plastics, a leading supplier of food storage containers, and Plastics, Inc., a
leading supplier of disposable plastic servingware, for $78,000 in an all cash
transaction (the "Newell Asset Acquisition"). Based upon provisions in the
purchase agreement, the Company received $571 from Newell in 1999 as an
adjustment to the purchase price. Results of operations have been included in
the Consolidated Statement of Operations since the date of acquisition. The
acquisition was accounted for as a purchase, and as such, the excess of the
purchase price over the estimated fair value of the acquired net assets, which
approximated $57,200, was recorded as goodwill and is being amortized over forty
years.
F-11
38
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited proforma information presents a summary of
consolidated results of operations as if the Seymour Acquisition and the Newell
Asset Acquisition each occurred on December 29, 1996:
1998 1997
-------- --------
Net sales................................................... $294,219 $291,143
Net income before extraordinary charge...................... 9,207 4,652
Net income before extraordinary charge per
share -- diluted.......................................... $ 1.13 $ 0.66
These unaudited proforma results have been presented for comparative
purposes only and include certain adjustments, such as additional goodwill
amortization expense and increased interest expense on acquisition debt. The
proforma results do not purport to be indicative of the results of operations
that actually would have resulted had the combination occurred on December 29,
1996, or of future results of operations of the consolidated entities.
On August 14, 1998 the Company acquired certain assets (inventory and
molds) which comprised Tenex Corporation's consumer product storage line for
$16,400 in an all cash transaction, (the "Tenex Asset Acquisition"). Based upon
an earn out provision in the contract, the Company must pay Tenex Corporation an
additional amount based upon 1999 sales of the products acquired. This amounted
to $705 for 1999. A similar provision is in place for 2000 sales, with a minimum
due of zero and a maximum amount due of $1,000 if certain predetermined sales
targets are met. This product line consists of plastic storage bins and
containers, rolling carts and stacking drawer systems. The acquisition was
accounted for as a purchase, and as such, the excess of the purchase price over
the estimated fair value of the acquired net assets, which approximated,
$14,200, was recorded as goodwill and is being amortized over a period of twenty
years. Results of operations have been included in the Consolidated Statement of
Operations since the date of acquisition.
The Seymour Acquisition, the Tenex Asset Acquisition and the Newell Asset
Acquisition are collectively referred to herein as the "1998 Acquisitions".
NOTE 5. SHUTTERS, INC. DIVESTITURE
Effective December 27, 1998 (fiscal 1999) the Company sold Shutters, Inc.
("Shutters") its home improvement products division for approximately $5,000 in
cash and notes receivable. The Company recorded a gain in the amount of $196
(pre tax) on the sale. Shutters' 1998 net sales were approximately 3% of 1998
consolidated net sales.
NOTE 6. INVENTORIES
The components of the Company's inventory were as follows:
1999 1998
------- -------
Finished goods.............................................. $15,890 $15,771
Work-in-process............................................. 2,168 3,487
Raw materials and supplies.................................. 6,006 6,038
------- -------
Inventory................................................. $24,064 $25,296
======= =======
F-12
39
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows:
1999 1998
-------- --------
Buildings and land.......................................... $ 14,881 $ 15,364
Land and building under capital lease....................... 6,011 2,535
Machinery, equipment and vehicles........................... 37,944 37,354
Tools and dies.............................................. 30,606 25,519
Furniture, fixtures and office equipment.................... 5,070 5,447
Leasehold improvements...................................... 4,166 1,635
-------- --------
98,678 87,854
Less accumulated depreciation and amortization.............. (31,420) (27,654)
-------- --------
$ 67,258 $ 60,200
======== ========
NOTE 8. INTANGIBLES AND OTHER ASSETS
Intangible and other assets consist of the following:
1999 1998
-------- --------
Goodwill, net of accumulated amortization of $10,815 on
December 25, 1999, and $6,016 on December 26, 1998........ $164,503 $172,651
Covenants not to compete, net of accumulated amortization of
$868 on December 25, 1999, and $452 on December 26,
1998...................................................... 2,094 2,511
Industrial Revenue Bond fees, net of accumulated
amortization of $331 on December 25, 1999, and $315 on
December 26, 1998......................................... 72 88
Patents, net of accumulated amortization of $1,646 on
December 25, 1999, and $1,626 on December 26, 1998........ 723 910
Licensing agreement, net of accumulated amortization of $61
on December 26, 1998...................................... -- 134
Deferred financing fees, net of accumulated amortization of
$1,253 on December 25, 1999 and $507 on December 26,
1998...................................................... 4,675 5,421
Other assets................................................ 110 237
-------- --------
$172,177 $181,952
======== ========
NOTE 9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1999 1998
------- -------
Compensation and other benefits............................. $ 8,616 $ 6,540
Sales incentives and commissions............................ 13,244 11,288
Plant relocation and consolidation.......................... -- 4,863
Income taxes payable........................................ 1,890 1,075
Restructuring............................................... 2,263 --
Interest payable............................................ 1,892 2,659
Other....................................................... 5,746 9,239
------- -------
$33,651 $35,664
======= =======
F-13
40
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1999 1998
-------- --------
Revolving credit facility, variable rate, due September 8,
2003...................................................... $ 48,250 $ 44,000
Term Loan, variable rate, due September 8, 2004............. 47,000 50,000
Senior Subordinated Notes, 9.625%, due 2008................. 125,000 125,000
Illinois Development Finance Authority (IDFA) variable rate
demand Industrial Development Revenue Bonds (Selfix, Inc.
Project) Series 1990, due September 1, 2005............... 1,600 2,000
Capital lease obligations................................... 5,055 2,085
-------- --------
226,905 223,085
Less current maturities..................................... (5,571) (3,549)
-------- --------
$221,334 $219,536
======== ========
In June 1999 the Company expanded its Chicago manufacturing and
distribution facility by adding 100,000 square feet of warehouse space. The
building addition was recorded as a capital lease obligation as the construction
was financed by the Trusts. See below for additional information on capital
lease obligations.
On May 14, 1998, the Company issued $125,000 of 9.625% Senior Subordinated
Notes due 2008 (the "Notes") in a public offering. Interest on the Notes is
payable semi-annually on May 15, and November 15. The Notes are guaranteed by
the Company's subsidiaries (see Note 14). The Notes may not be redeemed prior to
May 15, 2003. Subsequent to such date, at the option of the Company, the Notes
may be redeemed at various amounts as set forth in the Notes, but not at a price
less than 100% of par value. Upon the occurrence of a Change in Control, as
defined in the Notes, the holders of the Notes have the right to require the
Company to repurchase their Notes at a price equal to 101% of par value plus
accrued interest. The Notes contain certain restrictions that, among other
things, will limit the Company's ability to (i) incur additional indebtedness
unless certain financial ratios are met, (ii) pay dividends, (iii) make certain
asset dispositions, or (iv) merge with another corporation. The Company was in
compliance with all covenants related to the Notes as of December 25, 1999. The
Notes are due in a single payment on May 14, 2008.
In conjunction with the offering of the Notes, on May 14, 1998 the Company
entered into a five year $100,000 revolving credit agreement (the "Revolver")
with Chase Manhattan Bank, as administrative agent, and several lenders as
parties thereto. The Revolver also contains sub-limits of up to $15,000 for
letters of credit. Borrowings under the Revolver will bear interest at an annual
rate, at the option of the Company, of either (i) prime plus .75%, or (ii) LIBOR
plus a floating rate which is determined based upon certain financial ratios.
This floating rate is adjusted quarterly, and was 1.75% as of December 25, 1999
and December 26, 1998. The Revolver contains certain affirmative and negative
covenants and will require the Company to maintain certain financial covenants
including interest coverage ratios and maximum leverage ratios. The Company was
in compliance with all covenants related to the Revolver as of December 25, 1999
and December 26, 1998. The Company must pay a quarterly fee ranging from .0375%
to .05%, based upon the unused portion of the revolving commitments.
Availability under the Revolver at December 25, 1999 was approximately $48,000.
On September 8, 1998, in connection with the Newell Asset Acquisition, the
Company amended and restated the Revolver to add among other items, a $50,000
term loan, (the "Term Loan"). The terms and conditions of the amended and
restated Revolver were substantially the same as those established on May 14,
1998. The Term Loan is payable in twenty-four quarterly installments
F-14
41
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increasing from $750 to $2,250 per quarter and a final payment due in the amount
of $13,250 on September 8, 2004. In 2000, a total of $5,000 will become due. The
Term Loan bears interest at the same optional rates as the Revolver.
The IDFA variable rate demand Industrial Development Bonds (Selfix Project)
Series 1990, were issued in September 1990, and mature on September 1, 2005.
Interest is calculated based upon a weekly variable rate, and is paid monthly.
Principal is payable in annual installments, due on December 1. The variable
rate at December 25, 1999 was 5.13%, and at December 26, 1998 was 4.2%.
Capital lease obligations include; (i) a lease agreement between one of the
Company's subsidiaries and the Trusts for a manufacturing and warehouse facility
as well as the Company's corporate offices; and (ii) various equipment lease
agreements. Lease payments to the Trusts for buildings were $578, $533 and $519,
in 1999, 1998 and 1997, respectively, and lease payments for machinery and
equipment in 1999, 1998 and 1997 were $67, $160 and $140 respectively.
The following schedule shows future minimum lease payments together with
the present value of the payments for all capital lease obligations.
Years ending:
2000................................................... $ 992
2001................................................... 978
2002................................................... 944
2003................................................... 923
2004................................................... 923
Thereafter............................................. 12,106
--------
16,866
Less amount representing interest...................... (11,811)
--------
Present value of minimum lease payments................ $ 5,055
========
Long-term portion...................................... $ 4,884
Current portion........................................ 171
--------
$ 5,055
========
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing, warehouse and office space as
well as manufacturing equipment under non cancelable operating leases, expiring
at various dates through 2009.
Future annual minimum lease payments under all non cancelable operating
leases as of December 25, 1999, are as follows:
Years ending:
2000................................................... $ 5,517
2001................................................... 4,866
2002................................................... 4,180
2003................................................... 3,832
2004................................................... 2,961
Thereafter............................................. 8,077
--------
Total minimum lease payments........................... $ 29,433
========
Rent expense totaled $5,974, $1,985 and $1,184 for 1999, 1998 and 1997,
respectively.
F-15
42
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. INCOME TAXES
As of December 25, 1999 the Company had $1,537 of income tax refunds
receivable. In addition, the Company had $2,500 of 1999 overpayments applied
towards its 2000 tax liability. These two items are classified in the prepaid
expenses and other current assets caption in the December 25, 1999 Consolidated
Balance Sheet. The tax refund receivable and overpayments are a result of
changes during 1999 in the Company's full year estimated tax liability. The
changes in estimated tax liabilities were largely the result of the third
quarter Special, Restructuring and Other Nonrecurring changes (see Note 2).
Significant components of the Company's deferred tax items as of December 25,
1999 and December 26, 1998 are as follows:
1999 1998
------- -------
DEFERRED TAX ASSETS
Inventory reserves and overhead capitalized for tax
purposes............................................... $ 5,543 $ 4,160
Employee benefit expenses and other accruals.............. 3,662 2,319
Accounts receivable reserve............................... 4,926 3,194
Capitalized lease treated as operating lease for tax
purposes............................................... 341 358
Accrued advertising, volume rebates and reserves for
returns................................................ 3,144 2,700
Other accrued liabilities................................. 1,392 3,929
Net operating loss carryforward........................... 4,628 4,568
------- -------
Gross deferred tax assets................................... 23,636 21,228
------- -------
DEFERRED TAX LIABILITIES
Depreciation and amortization............................. 10,430 6,450
Other..................................................... 532 30
------- -------
Gross deferred tax liabilities.............................. 10,962 6,480
------- -------
Deferred tax assets net of deferred liabilities............. 12,674 14,748
Valuation allowance......................................... (4,257) (4,257)
------- -------
Net deferred tax asset...................................... $ 8,417 $10,491
------- -------
In connection with the various acquisitions in 1998 deferred tax assets and
liabilities were recorded through purchase accounting. Additionally, a valuation
allowance in the amount of $4,257 was recorded through purchase accounting
against a majority of the net operating loss obtained in the Seymour
Acquisition. The valuation allowance is necessary due to the limited amount of
the net operating loss carryforward that can be utilized each year.
F-16
43
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) is as follows:
1999 1998 1997
------- ------- -------
Current -- before benefit from extraordinary charge
U.S. federal............................................ $ 691 $ 3,998 $ 1,721
State................................................... 286 1,075 346
------- ------- -------
977 5,073 2,067
------- ------- -------
Deferred
U.S. federal............................................ 1,095 1,528 1,422
Increase (decrease) in valuation allowance.............. -- -- (3,143)
------- ------- -------
1,095 1,528 (1,721)
------- ------- -------
Income tax expense before benefit from extraordinary
charge.................................................. $ 2,072 $ 6,601 $ 346
======= ======= =======
Current benefit from extraordinary charge for the early
retirement of debt...................................... -- (3,633) --
------- ------- -------
Total income tax expense........................ $ 2,072 $ 2,968 $ 346
======= ======= =======
Income tax expense before benefit from extraordinary charge differs from
amounts computed based on the U.S. federal statutory tax rate applied to
earnings before tax as follows:
1999 1998 1997
-------- ------ -------
Computed at statutory U.S. federal income tax rate........ $ 1,428 $5,219 $ 2,683
State income taxes, net of U.S. federal tax benefit....... 188 709 383
Foreign sales corporation benefit......................... (167) (100) --
Non deductible goodwill................................... 388 678 62
Other..................................................... 235 95 361
Change in valuation allowance............................. -- -- (3,143)
-------- ------ -------
$ 2,072 $6,601 $ 346
======== ====== =======
NOTE 13. STOCK OPTIONS
On May 19, 1999 the shareholders of the Company approved the 1999
Performance Incentive Plan (the "1999 Plan"). In addition to allowing the grant
of stock options the 1999 Plan has provisions for granting key employees and
certain key nonemployees stock appreciation rights, restricted stock,
performance grants and other stock based grants. Only stock options were granted
pursuant to the 1999 Plan in 1999. The 1999 Plan provides for the issuance of a
maximum of 1,000,000 shares of the Company's Common Stock.
Under the 1987, 1991, and 1994 stock option plans as amended, and the 1999
Plan, (collectively, the "Stock Option Plan") key employees and certain key
nonemployees were granted options to purchase shares of the Company's common
stock. All stock option grants are authorized by the Compensation Committee of
the Board of Directors, which is comprised of outside directors.
All options granted subsequent to December 1997, with the exception of
those granted to the Chief Executive Officer and a specific grant to Senior
Executives, vest within a four year period. Options granted prior to December
1997 vest over a five year period. The options granted to the Chief Executive
Officer vest on an accelerated schedule in accordance with his employment
contract. A certain option grant to Senior executive officers in 1999, including
the Chief Executive Officer, vested immediately upon grant. All options granted
expire ten years from the date of grant.
F-17
44
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
With shareholder approval of the 1999 Plan, the maximum number of shares of
common stock which may be granted under the Stock Option Plan increased by
1,000,000 to a maximum of 2,475,000. Shares available for future grant amounted
to 711,455, 11,612 and 132,681 in 1999, 1998 and 1997, respectively.
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages
companies to adopt a fair value approach to valuing stock-based compensation
that would require compensation cost to be recognized based upon the fair value
of the stock-based instrument issued. The Company has elected, as permitted by
SFAS No. 123, to apply the provisions of APB Opinion 25 "Accounting for Stock
Based Compensation" and the related interpretations in accounting for stock
option awards under the Stock Option Plan. Under APB Opinion 25, compensation
expense is recognized if the market price on the date of grant exceeds the grant
price. All options granted by the Company have been granted at market price on
the date of grant, accordingly, no compensation cost has been recognized in the
Company's financial statements. As required by SFAS 123, the Company has
computed, for pro forma disclosure purposes, the value of options granted during
fiscal years 1999 and 1998 using an option pricing model.
Had compensation cost for the Company's 1999, 1998 and 1997 grants been
determined using the fair values and considering the applicable vesting periods,
the Company's reported results would have been reduced by $330 or $0.04 diluted
earnings per share in 1999, by $138 or $0.01 diluted earnings per share in 1998
and by $600 or $0.11 diluted earnings per share in 1997. The average fair value
of options granted in 1999 was $4.61, in 1998 was $2.85 and in 1997 was $3.95.
The fair value of the options granted was determined using the Black-Scholes
option pricing model based upon the weighted average assumptions of: (i) a
dividend yield of 0% for 1999, 1998 and 1997; (ii) expected volatility of the
market price of the Company's common stock of 46% for 1999, 44% for 1998 and 43%
for 1997; (iii) a weighted-average expected life of the options of approximately
five years, and (iv) weighted average risk free interest rates of 5.2% for
fiscal 1999, 6.0% for fiscal 1998 and 6.3% for 1997.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock based compensation plan.
A summary of the transactions in the option plans is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- --------
BALANCE AT DECEMBER 28, 1996................................ 781,987 $ 6.21
Options granted........................................... 497,900 10.17
Options exercised......................................... (13,288) 4.58
Options cancelled/forfeited............................... (45,100) 10.38
--------- ------
BALANCE AT DECEMBER 27, 1997................................ 1,221,499 7.70
Options granted........................................... 193,000 9.99
Options exercised......................................... (8,457) 6.28
Options cancelled/forfeited............................... (71,931) 5.58
--------- ------
BALANCE AT DECEMBER 26, 1998................................ 1,334,111 8.15
Options granted........................................... 554,850 8.70
Options exercised......................................... (3,535) 5.98
Options cancelled/forfeited............................... (254,693) 9.39
--------- ------
BALANCE AT DECEMBER 25, 1999................................ 1,630,733 $ 8.09
========= ======
F-18
45
HOME PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. SUBSIDIARY GUARANTEES OF SENIOR SUBORDINATED NOTES
The Company is a holding company with no assets or operations other than
its investment in its subsidiaries. The $125,000 9.625% Senior Subordinated
Notes due 2008 (the "Notes") are guaranteed by all subsidiaries other than
inconsequential subsidiaries (the "Subsidiary Guarantors"). The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint and
several. There are no restrictions on the ability of the Company's subsidiaries
to declare and pay dividends or other distributions to the Company.
ITEM 8(b). QUARTERLY FINANCIAL INFORMATION -- UNAUDITED (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
1999 MARCH 27 JUNE 26 SEPTEMBER 25 DECEMBER 25
- ---- -------- -------- ------------ -----------
Net sales.......................................... $67,799 $72,567 $79,737 $73,898
Gross profit....................................... 22,622 26,517 17,873 23,099
Net earnings (loss)................................ $ 1,059 $ 3,659 $(5,413) $ 2,705
Net earnings per common share -- basic............. $ 0.14 $ 0.49 $ (0.74) $ 0.37
Net earnings per common share -- diluted........... $ 0.13 $ 0.48 $ (0.74) $ 0.36
------- ------- ------- -------
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
1998 MARCH 28 JUNE 27 SEPTEMBER 26 DECEMBER 26
- ---- -------- -------- ------------ -----------
Net sales.......................................... $52,408 $54,985 $68,243 $76,793
Gross profit....................................... 15,953 18,879 22,369 26,015
Earnings before extraordinary charge............... $ 1,246 $ 3,029 $ 3,114 $ 1,361
Net earnings (loss)................................ $ (491) $ (341) $ 3,114 $ 1,361
Net earnings before extraordinary charge per common
share -- basic................................... $ 0.16 $ 0.38 $ 0.39 $ 0.18
Net earnings before extraordinary charge per common
share -- diluted................................. $ 0.15 $ 0.37 $ 0.38 $ 0.17
Net earnings (loss) per common share -- basic...... $ (0.06) $ (0.04) $ 0.39 $ 0.18
Net earnings (loss) per common share -- diluted.... $ (0.06) $ (0.04) $ 0.38 $ 0.17
------- ------- ------- -------
F-19
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE II
To the Board of Directors and Shareholders of,
Home Products International Inc.
We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of Home Products
International, Inc. as of and for the fifty-two week periods ended December 25,
1999 and December 26, 1998 included in this Form 10-K, and have issued our
report thereon dated February 18, 2000. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The financial statement
schedule listed in Item 14(b) is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 18, 2000
S-1
47
SCHEDULE II
HOME PRODUCTS INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 25, 1999,
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 26, 1998,
FOR THE FIFTY-TWO WEEKS ENDED DECEMBER 27, 1997
ADDITIONS
----------------------- DEDUCTIONS
BALANCE AT CHARGED TO (NET BALANCE
BEGINNING BALANCES COSTS AND WRITE-OFFS/ AT END
OF PERIOD ACQUIRED EXPENSES RECOVERIES) OF PERIOD
---------- ---------- ---------- ----------- ---------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 25, 1999........................... $7,196 $ -- $ 4,734 $(1,772) $10,158
December 26, 1998........................... 1,716 4,104 2,169 (793) 7,196
December 27, 1997........................... 901 659 499 (343) 1,716
S-2
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOME PRODUCTS INTERNATIONAL, INC.
By /s/ JAMES R. TENNANT
------------------------------------
James R. Tennant, Chief Executive
Officer
Date March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES R. TENNANT
- -----------------------------------------------------
James R. Tennant Chairman of the Board and March 24, 2000
Director
/s/ JAMES E. WINSLOW
- -----------------------------------------------------
James E. Winslow Executive Vice President, March 24, 2000
Chief Financial Officer and
Secretary
/s/ CHARLES R. CAMPBELL
- -----------------------------------------------------
Charles R. Campbell Director March 24, 2000
/s/ JOSEPH GANTZ
- -----------------------------------------------------
Joseph Gantz Director March 24, 2000
/s/ STEPHEN P. MURRAY
- -----------------------------------------------------
Stephen P. Murray Director March 24, 2000
/s/ MARSHALL RAGIR
- -----------------------------------------------------
Marshall Ragir Director March 24, 2000
/s/ JEFFREY C. RUBENSTEIN
- -----------------------------------------------------
Jeffrey C. Rubenstein Director March 24, 2000
/s/ DANIEL B. SHURE
- -----------------------------------------------------
Daniel B. Shure Director March 24, 2000
/s/ JOEL D. SPUNGIN
- -----------------------------------------------------
Joel D. Spungin Director March 24, 2000
II-1