Item 1. Business (Dollars in thousands unless otherwise indicated)
General Housewares Corp. (hereinafter referred to as the "Company") manufactures and markets consumer durable goods. The Company concentrates on product categories in which, through market share, product innovation or brand image, it is considered a leader. Through the acquisition and/or development of products that "delight and excite" the consumer (i.e., deliver unexpected value, simplify and enhance a task or redefine a task), the Company believes that it is able to establish such a leadership position. The Company currently pursues such a position in the following product categories: cookware, cutlery, kitchen/household tools and precision cutting tools. Cookware, cutlery and kitchen/household tools are grouped into the Housewares reportable segment, while precision cutting tools also constitute a reportable segment. For financial information related to the two reportable segments, see Note 13 in the financial statements included in this report.
HOUSEWARES SEGMENT
Approximately 62.2% of this segment's products sold by the Company during 1996 were produced domestically in factories owned and operated by the Company.
The remaining products are obtained from 10 foreign sources (some of which buy from sub-contractors) primarily located in the Far East. The Company believes that a loss of any individual foreign source would not have a material impact on future results of operations.
COOKWARE
In 1996, the Company was a large domestic manufacturer and marketer of cookware, distributing its products throughout the United States, Canada and selected European markets. The Company's collection of brand name cookware products has enabled it to deliver, to both retailers and consumers, products which satisfy a complete range of functional, aesthetic and value requirements. The Company competed in four main cookware product categories throughout much of 1996, covering a broad range of materials, designs, colors and prices. The categories included cast aluminum, cast iron, stamped and spun aluminum and enamelware.
In January of 1996, the Company announced its intention to exit the cast aluminum and cast iron product categories ("Sidney Division") in an effort to focus on faster growing, more profitable product categories. An agreement to sell the assets of the Sidney Division, effective August 1, 1996, was executed pursuant to which the Company received consideration of $4,000 in the form of a cash payment of $450,a note receivable of $3,000 and the purchaser's assumption of certain liabilities in exchange for certain assets of the Sidney Division (including the manufacturing facility located in Sidney, Ohio) as well as brand names and trademarks. The cast iron and cast aluminum product lines included Magnalite(R), Magnalite Professional(R), Magnalite Professional(R) with Eclipse(R), and Wagner's(R) 1891 Original Cast Iron. Gross revenues derived from the exited categories were $4,714 in 1996.
Effective October 1, 1996, the Company sold the brand names, trademarks and certain assets related to its stamped and spun aluminum cookware line. This cookware line consisted of heavy gauge, large capacity stamped and spun aluminum products that were marketed under the brand name Leyse Professional(TM) and distributed through department stores, mass merchants and specialty shops. Leyse products were purchased from a domestic manufacturer. Gross revenues derived from this category were $1,333 in 1996.
The remaining cookware line is enamelware. The Company is the only domestic manufacturer of enamelware and has developed a leading market share. Ceramic on Steel(TM) cookware products produced by the Company are sold under the Columbian and Granite Ware (TM) brand names. As of September 1, 1994, the Company acquired the Normandy line of enamelware from National Housewares, Inc. Normandy enamelware products, similar to the Company's Ceramic on Steel(TM) cookware products, were, at the time, manufactured in Mexico. In 1995, the Normandy line of enamelware was discontinued and sourcing to service the Normandy customers was transitioned to the Company's Ceramic on Steel (TM) manufacturing operations. Enamelware is in demand because of its easy cleanup and popular price. It is particularly popular for roasting and specialty top-of-stove uses (e.g., spaghetti cookers and vegetable steamers). Products in this category are primarily sold in discount stores, mass merchandise outlets and warehouse clubs. Gross revenues derived from enamelware were $18,047 in 1996.
The total United States market for cookware, defined as metal pots and pans used for top-of-stove and oven cooking, is estimated by the Cookware Manufacturers Association at approximately $1.8 billion in terms of annual sales. Domestic industry unit sales have remained relatively flat during the past five years and, as a result, domestic manufacturers have lost market share to imports, which the Association estimates have grown from 49% of the market in 1991 to 50% in 1996. Imported merchandise, principally from Korea, Taiwan, Mexico and the Peoples Republic of China, has been successful in penetrating the market through comparable quality products at lower prices.
CUTLERY AND ASSOCIATED PRODUCTS
The Company is a manufacturer and marketer of quality kitchen cutlery with the leading domestic brand name (Chicago Cutlery(R)) and market share in its industry. The Company markets, under the Chicago Cutlery(R) brand umbrella, four complete lines of kitchen knives for consumers, sharpening tools, storage units and cutting boards. Its most popular household cutlery line is The Walnut Tradition(R), which features a solid American walnut handle with a Taper Grind(R) edge on the blade. For the consumer that prefers a synthetic handled knife, the Company manufactures and sells the Metropolitan(R) product line which features a durable high-impact plastic handle and a Taper Grind(R) edge. The Company introduced The Classic Collection(TM) in 1996, a line of heavy duty work knives for hunters, fishermen, ranchers, gourmet chefs and collectors of fine cutlery. This cutlery line features a heavier gauge of steel, poly infused wood handles, nickel silver rivets and a Taper Grind (TM) edge. The Company also manufactures and sells a popular priced knife under the Cherrywood(TM) brand name.
All Chicago Cutlery(R) blades are made from high carbon stainless steel that resists rusting, pitting and staining. The Taper Grind(R) edge provides a uniform and smooth taper, thereby facilitating the blade's movement through the object being cut.
The Company also sells a line of promotional priced cutlery. These products compete in both the fine edge and "never-needs-sharpening" segments of the cutlery industry and are purchased from suppliers in the Far East. Promotional cutlery consists of five separate cutlery brands, three of which (Premier(TM), Basics(TM) and American Carver(R)) are sold exclusively through department stores, and the remaining lines (TechChoice(R) and Classic Chef(R)) are distributed through department stores, mass merchandisers and catalog showrooms.
While the overall market for kitchen cutlery in the United States has remained relatively unchanged in recent years, foreign products, including the Company's promotional priced imported cutlery, have made significant inroads. The Company believes that imports in 1996 accounted for more than half of domestic sales in dollars and 75% of domestic sales in units. As a result of its widely recognized brand name and reputation for high quality at a good price, the Company has gained market share in the kitchen cutlery industry by marketing a combination of the promotional priced imports and the traditional Chicago Cutlery(R) products.
The Company also manufactures a full line of knives for the commercial poultry processing market. These molded handle knives are designed to meet the special needs of professionals and have specialized blade shapes for specific cutting jobs. The handles are textured to be slip-resistant and feature a finger guard for safety, as well as, in some cases, ergonomic handles.
Under the Idaho Woodworks(TM) and Chicago Cutlery(R) names, the Company manufactured and marketed during 1996 cutting boards made of wood, polyethylene, and combinations of wood and acrylic, marble or polyethylene. In January of 1997, the Company decided to exit the cutting board category during the year.
Gross revenues derived from cutlery and associated products were $36,718 in 1996, of which $1,209 related to the cutting board category.
KITCHEN/HOUSEHOLD TOOLS
Effective October 1, 1992, the Company purchased all of the partnership interests in OXO International L.P. ("OXO"), a New York limited partnership engaged in marketing a broad line of kitchen tools under the Good Grips(R), SoftWorks(TM), Prima(R), Plus(TM) and Basics brand names. The purchase price was $6,250 and consisted of a cash payment of $5,500 and Subordinated Promissory Note in the principal amount of $750 bearing interest at 8% per annum. The OXO products are primarily made, by manufacturers located in the Far East, according to OXO's designs and specifications. Subsequent to the acquisition, the line was extended to include products designed for use outside of the kitchen (i.e.,household tools). The kitchen/household tools sold by OXO generally utilize a proprietary handle which is covered by patents owned by the Company which run through 2002. OXO kitchen/household tools are distributed primarily in the United States through department stores, gourmet and specialty outlets and mass merchandisers. OXO also sells a line of garden tools that utilizes its proprietary handle. Garden tools are primarily distributed through specialty outlets. The OXO product category has experienced significant growth since acquisition.
The market in which the Company's kitchen/household tool product category competes is a large market encompassing many types of tools and gadgets. As such, the Company is not able to define its market share, but believes that its share is minimal.
Gross revenues derived from the kitchen/household tool category were $22,776 in 1996.
PRECISION CUTTING TOOLS SEGMENT
Effective October 1, 1994, the Company purchased certain assets of Walter Absil Company Limited and Olfa Products Corp. (collectively referred to as the "Olfa Products Group"). The purchase price was $13,576 and consisted of a cash payment of $6,843, Subordinated Promissory Notes in the principal amount of $2,233 bearing interest at 6% per annum and 400,000 restricted shares (valued at $4,500) of the Company's common stock. The Olfa Products Group is the exclusive distributor, in the United States and Canada, of precision cutting tools and accessories manufactured by Olfa Corporation of Osaka, Japan. The Company believes that relations with Olfa Corporation are strong and that a long-term relationship will continue. Products of the Olfa Products Group are sold to industrial users and both through distributors and direct, to hobby, craft, hardware and fabric stores.
The North American hobby and craft market is both large and diverse with sales exceeding $11 billion. Products distributed through the Olfa Products Group compete in small selected segments in this market. Typically, these products compete on the basis of performance and value.
Gross revenues derived from the precision cutting tool segment were $16,938 in 1996.
DISTRIBUTION
Housewares products are sold by the Company to most major retail and wholesale distribution organizations in the United States and Canada through its direct sales force and through independent commissioned sales representatives. The Olfa Products Group also utilizes a combination of a direct sales force and independent commissioned sales representatives.
In addition, the Company sells products through a chain of "manufacturers' retail outlet" stores operating under the name "Chicago Cutlery etc., Inc." Gross revenues derived from the stores were $9,471 in 1996.
MAJOR CUSTOMERS
During 1996, the ten largest customers of the Company accounted for 41% of the Company's gross sales -- no single customer accounted for more than 10% of total sales. The Company has had good long-term relationships with its major customers.
EMPLOYEES
The Company employs approximately 600 persons, of whom approximately 330 are involved in manufacturing with the balance serving in sales, general and administrative capacities. The Company believes that its relations with employees are good.
Approximately 185 employees are represented by one labor organization, which has a contract expiring March 14, 1999.
EXPORT SALES
Exports account for less than 10% of the Company's total sales.
RAW MATERIALS
The principal raw materials used in manufacturing the Company's housewares products are steel, ceramic compounds, plastic compounds and hardwood products. All of these materials are generally available from numerous suppliers, and the Company believes that the loss of any one supplier would not have a significant impact on its operations. The Company's precision cutting tool products are imported as finished goods.
SEASONALITY
Shipments of cookware, cutlery and kitchen tools are higher in the second half of the year, and highest in the fourth quarter, due to the seasonality of housewares retail sales. Shipments of precision cutting tools vary little from quarter to quarter.
WORKING CAPITAL
The future competitive position of the Company will become increasingly dependent upon its ability to meet rapid delivery requirements from customers. The Company believes that increased technological and supply chain initiatives will position it well for the heightened customer requirements, while maintaining an optimal level of inventory. Inventories at year end were reduced by $8,354 from 1995 to 1996 due to (i) the disposition of the Sidney Division and the stamped and spun aluminum cookware product line, (ii) the Company's emphasis on sales forecasting and (iii) an inventory reduction program.
While the Company normally sets payment terms at net 30 days, industry practice has dictated an occasional extension of such terms. Accordingly, certain customers have been given extensions of payment terms.
FOREIGN OPERATIONS
The Company operates a wholly owned subsidiary located in Montreal, Canada. Revenues, Operating Income and Assets of the subsidiary were, in each case, less than 10% of total Company Revenues, Operating Income and Assets for the years ended December 31, 1995 and 1994. Gross Revenues, Operating Income and Identifiable Assets of the subsidiary were $6,295, $1,401 and $6,207 for the year ended December 31, 1996.
Item 2.
Item 2. Properties
The following table sets forth the location and size of the Company's principal properties.
OPERATING FACILITIES
Property Owned
APPROXIMATE FLOOR AREA LOCATION NATURE OR USE OF PROPERTY (Square Feet)
HOUSEWARES SEGMENT:
Terre Haute, IN Manufacturing, distribution and 469,000 administrative (Ceramic on Steel(TM) cookware and distribution of cutlery and kitchen/household tool products)
Wauconda, IL Manufacturing (cutlery) 65,000
Property Leased: APPROXIMATE EXPIRATION NATURE OR FLOOR AREA DATE LOCATION USE OF PROPERTY (Square Feet) OF LEASE
HOUSEWARES SEGMENT:
Sidney, OH Warehouse (Sub-leased to third party) 32,000 July 31, 1999 Terre Haute, IN Warehouse 172,800 July 1, 1998 New York, NY Administrative 25,000 September 30, 1998 Antioch, IL Manufacturing 50,000 May 1, 1998 (cutlery associated products)
PRECISION CUTTING TOOL SEGMENT:
St. Laurent, Administrative Quebec, CD and Warehouse 16,230 Nov. 30, 1997 Plattsburgh, NY Warehouse 27,700 Oct. 1, 1997
In addition, the Company leases an average of 2,700 square feet of retail space in 26 factory outlet malls with initial lease terms ranging from 3 to 7 years.
In the opinion of the Company's management, the properties and plants described above are in good condition and repair and are adequate for the particular operations for which they are used.
NON-OPERATING FACILITIES
Property Owned: (Reported as "other assets" in the financial statements in this Report)
APPROXIMATE FLOOR AREA LOCATION NATURE OF USE OF PROPERTY (Square Feet)
New Hope, MN Manufacturing/ Distribution facility (leased to third parties) 65,280
New Hope, MN Manufacturing/ Distribution facility (leased to third party) 21,500
Antrim, NH Manufacturing facility 55,400
Item 3.
Item 3. Legal Proceedings
The Company and its wholly owned subsidiary, Chicago Cutlery, Inc., instituted an action on February 2, 1995, against the personal representatives of the Estate of Ronald J. Gangelhoff in the United States District Court for the District of Minnesota, Fourth Division. The action was instituted in order to comply with Minnesota probate practices for settling claims against estates. The action sought indemnity and/or contribution for all losses and expenses suffered and incurred, and to be suffered and incurred, by the plaintiffs arising from the New Hampshire Department of Environmental Services mandated clean-up of hazardous substances generated at the Antrim, New Hampshire, manufacturing site owned by Chicago Cutlery, Inc. and arising from the remediation of the site and the landfill at which some of the substances were disposed. The action also sought a declaratory judgment that the defendants were liable to the Company. The action was brought on the basis of the breach of representations and warranties in the 1988 Stock Purchase Agreement pursuant to which the Company purchased the stock of Chicago Cutlery, Inc. from Ronald J. Gangelhoff. It was also brought under the provisions of the Comprehensive Environmental Response, Compensation, and Liability Act, the provisions of the New Hampshire Hazardous Waste Clean-up and Contribution statutes and under common law causes of action. It is the opinion of the Company's in-house legal counsel that adequate support exists in favor of the Company in the case. Because the Company has fully offset all amounts expended to mandated remediation of hazardous substances at the Antrim, New Hampshire facility (the "Antrim Site") and believes this remedy is sufficient and fully defensible, the action against the Estate of Ronald J. Gangelhoff was voluntarily dismissed in October of 1996.
Before the death of Mr. Gangelhoff, Chicago Cutlery, Inc. had instituted an action on October 8, 1993, against David D. Hurlin in the United States District Court for the District of New Hampshire, seeking damages and a declaratory judgment that Mr. Hurlin was liable to plaintiff for losses and expenses suffered and incurred, and to be suffered and incurred, arising from the mandated clean-up of hazardous substances generated at the Antrim Site, during the period it was owned by Goodell Company and arising from remediation of the site. The basis of the action against Mr. Hurlin was that as chief executive officer, a director and substantial stockholder of the Goodell Company he was in control of, or in a position to control and direct, hazardous substances handling and disposal practices at the site when hazardous substances were improperly released to the environment. The action was brought under the provisions of the Comprehensive Environmental Response, Compensation, and Liability Act, the provisions of the New Hampshire Hazardous Waste Clean-up and Contribution statutes and under common law causes of action. This action was settled in October of 1996 and Mr. Hurlin paid the Company $350 in exchange for a release from liability for the mandated remediation of the Antrim Site.
For information concerning various environmental matters with which the Company is involved, see Note 12 to the Consolidated Financial Statements included in this Report.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company, each of whom will serve in the capacities indicated until May 13, 1997, or until the election and qualification of a successor.
Name Position with Company Age
Paul A. Saxton Chairman of the Board, President, 58 and Chief Executive Office
John C. Blackwell Vice President, Sales and Marketing 59
Gordon H. Brown Vice President, Supply Chain 57 Management and Logistics
Stephen M. Evans Vice President, Administration 55
Robert L. Gray Vice President, Corporate Development 46 and Chief Financial Officer
William V. Higdon Vice President, Chief Information 52 Officer
Raymond J. Kulla Vice President, Secretary and 50 General Counsel
Mark S. Scales Vice President, Corp. Controller 37
Messrs. Saxton, Evans and Gray have been executive officers of the Company for more than five years. Mr. Kulla has been employed with the Company since November 14, 1995, and an executive officer since January 1, 1996. Prior thereto, he was Vice President, General Counsel and Secretary of AXIA Incorporated. Mr. Blackwell has been employed with the Company and an executive officer since March 20, 1995. Prior thereto, he served as Vice President, Sales and Marketing, for EMX Corporation, Executive Vice President, Sales and Marketing of Moulinex Appliances, Inc. and President and General Manager of Oster Housewares, a division of Sunbeam/Oster Company. Mr. Brown has been employed with the Company and an executive officer since July 3, 1995. Prior thereto, he served as Managing Director of Bottom Line Logistics, a management consulting firm. Mr. Scales has been employed with the Company and an executive officer since July 10, 1995. Prior thereto, he served as Controller at Cosco, Inc. and Hoosier Energy Rural Electric Cooperative, Inc. and as a Senior Audit Manager at Price Waterhouse. Mr. Higdon has been employed with the Company and an executive officer since December 2, 1996. Prior thereto, he served as Director of Information Systems and Logistics at Merillat Cabinet, a division of Masco.
PART II
Item 5.
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The market on which the Company's Common Stock is traded is the New York Stock Exchange, Inc. The high and low sales prices of the Company's Common Stock and the cash dividends declared for each quarterly period during the last two fiscal years is disclosed in quarterly financial information presented in Item 8.
The approximate number of holders of Common Stock as of March 17, 1997, including beneficial owners of shares held in nominee accounts of whom the Company is aware, was 1,000.
Item 6.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, 1996 1995 1994 1993 1992 (in thousands except per share amounts)
Net sales $105,479 $119,340 $97,729 $88,529 $81,593 Operating income (loss) (107) 7,080 6,637 6,415 8,342 Interest expense, net 2,751 3,115 1,699 1,299 1,319 Income (loss) before income taxes and extraordinary item (2,858) 3,965 4,938 5,116 7,023 Income taxes (benefit) (842) 1,679 2,188 2,080 2,599 Income (loss) before extraordinary item (2,016) 2,286 2,750 3,036 4,424 Extraordinary item, net of income tax benefit 619 - - - - Net income (loss) $ (2,635) $ 2,286 $ 2,750 $ 3,036 $ 4,424 Average number of common shares outstanding including common stock equivalents 3,768 3,769 3,440 3,340 3,295 Income (loss) before extraordinary item per common share $ (0.54) $ 0.61 $ 0.80 $ 0.91 $ 1.34 Extraordinary item, net of income tax benefit per common share $ (0.16) $ - $ - $ - $ - Net income (loss) per common share $ (0.70) $ 0.61 $ 0.80 $ 0.91 $ 1.34 Dividends per common share $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32 Financial Summary: Total assets $ 95,279 $104,610 $98,358 $72,017 $72,001 Total debt 32,765 39,201 34,313 17,000 20,053 Net worth 48,490 51,848 50,255 43,929 41,696
VALUATION AND QUALIFYING ACCOUNTS (in thousands except per share amounts)
Additions Balance at Charged to Deductions Balance beginning costs and net of at end Description of period expenses recoveries of period - ------------------------------------------------------------------------------
Reserves deducted from assets to which they apply:
Allowances for possible losses and discounts - accounts receivable:
Years Ended December 31,:
1996: $4,029 $9,409 $9,863 $3,575
1995: $5,312 $8,908 $10,191 $4,029
1994: $3,379 $7,649 $5,716 $5,312
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in Thousands Except per Share Amounts)
Year Ended December 31, 1996 versus 1995
Net sales for 1996 were $105,479, a decrease of 11.6% from net sales in 1995 of $119,340. This decrease was caused primarily by the sale of the assets of the Company's cast iron and cast aluminum cookware businesses ("Sidney Division") effective August 1, 1996, which resulted in a $12,725 net sales reduction from 1995 to 1996. Sales of the Company's remaining cookware businesses were $5,764 less in 1996 than in 1995, due primarily to non-recurring, initial orders shipped in 1995 that resulted from the 1994 acquisition of the assets of Normandy, enamel on steel cookware business of National Housewares, Inc. and less shelf space dedicated to enamelware products in 1996 by two major retailers. Increased sales of kitchen tools partially offset the reduction in sales of the Company's cookware businesses. Pricing changes had minimal impact on the change in sales from 1995 to 1996. Gross profit decreased from $40,312 in 1995 to $37,177 in 1996 due to decreased sales volume and the Company's inventory reduction program which resulted in decreased production levels, causing higher fixed overhead costs to be recorded in the Company's Consolidated Statement of Operations. Gross profit was favorably impacted by the reversal of a LIFO reserve associated with the sale of the assets of the Sidney Division and favorable foreign currency experience related to purchases of precision cutting tools. As a percentage of net sales, gross profit increased to 35.2% in 1996 from 33.8% in 1995 due primarily to the LIFO reserve reversal, the favorable foreign currency experience and favorable change in sales mix. Selling, general and administrative expenses increased to $37,284 in 1996 from $33,232 in 1995. As a percentage of net sales, selling, general and administrative expenses were 35.3% in 1996 and 27.8% in 1995. The loss on the sale of the assets of the Sidney Division accounted for most of the increase in selling, general and administrative expenses.
Operating income(loss) was $(107) in 1996, a reduction of $7,187 from operating income in 1995 of $7,080. Interest expense decreased from $3,115 in 1995 to $2,751 in 1996 due to a reduction in working capital that resulted primarily from the Company's inventory reduction program and the sale of the assets of the Sidney Division. The loss before extraordinary item of $2,016, or $0.54 per share, in 1996 compares to income before extraordinary item of $2,286, or $0.61 per share, in 1995. The extraordinary charge in 1996 is due to the partial prepayment $(10,000) of 8.41% Senior Notes payable to a group of institutional investors and the execution of a new bank credit agreement. The charge is comprised of the prepayment penalty and the write-off of unamortized debt issuance costs. This charge, net of applicable income taxes, amounted to $619, or $0.16 per share. The net loss for 1996 was $(2,635), or $(0.70) per share, as compared to net income of $2,286, or $0.61 per share, in 1995.
Year Ended December 31, 1995 versus 1994
Net sales for 1995 were $119,340, an increase of 22% over net sales of $97,729 in 1994. The increase resulted primarily from acquisitions made in the third and fourth quarters of 1994, as well as market penetration in the Company's kitchen tools product line. Revenue increases resulting from acquisitions represented approximately $14,660 or 15% of the growth in total sales. The sales increase in the kitchen tool product line was driven primarily by volume with modest price increases also a contributing factor. Gross profit increased from $35,010 in 1994 to $40,312 in 1995 as a result of increased sales volume. As a percentage of net sales, gross profit decreased 2% from 1994. Gross profit percentage was adversely affected by an increased cost of aluminum, an unfavorable change in sales mix as well as inventory balancing that resulted in adjustments to inventory and cost of sales.
Selling, general and administrative expenses increased to $33,232 from $28,373 in 1994. As a percentage of sales, selling, general and administrative expenses decreased from 29.0% in 1994 to 27.8% in 1995. Of the gross dollar increase, approximately $3,500 is directly attributable to 1994 acquisitions. In addition, significant personnel changes were made in 1995 resulting in approximately $450 of increased severance and employment costs. Increases in contractual incentive payments to the former owners of the kitchen tool product line and royalty payments related to the design of the kitchen tool product line driven by increased sales accounted for $516 of the increase. A restructuring of distribution activities and the move of a manufacturing facility resulted in an increase of $269. The decrease as a percentage of sales was a result of increased sales activity covering fixed selling, general and administrative costs.
Operating income for 1995 was $7,080, representing a $443 increase over operating income of $6,637 in the prior year. Interest expense increased from $1,699 in 1994 to $3,115 in 1995. Increased debt related to the 1994 acquisitions and working capital needs to support improved customer service were primarily responsible for the increases in interest expense. Net income for the year was $2,286 as compared to $2,750 in 1994; related earnings per share dropped from $0.80 in 1994 to $0.61 in 1995. Earnings per share were calculated on 3,769 weighted average shares as compared to 3,440 for 1994, reflecting additional shares issued in connection with the 1994 acquisition activity.
Seasonality
Sales are higher in the second half of the year (and highest in the fourth quarter) due to the seasonality of housewares retail sales.
Capital Resources and Liquidity
Inventories decreased from $26,867 in 1995 to $18,513 in 1996. Approximately 40% of the decrease was due to the sale of the assets of the Sidney Division. The remaining reduction in inventories resulted from the Company's emphasis on sales forecasting and an inventory reduction program, the combination of which will allow the Company to deal effectively with customer service and also optimize inventory levels. Inventories increased from $20,841 in 1994 to $26,867 in 1995. The increase was due to Company-wide goals of improving customer service coupled with a soft retail holiday buying season that resulted in below forecast sales in the fourth quarter of 1995.
On November 30, 1994, the Company completed a financing package consisting of a $30,000 three-year bank credit agreement and the private placement of $20,000 of 8.41% Senior Notes payable to a group of institutional investors. Proceeds from the new financing package were used to refinance existing bank loans incurred to support working capital requirements and for acquisitions. On November 13, 1996, the Company entered into a new bank credit agreement, resulting in increased borrowing capacity. The new bank credit agreement provides for $45,000 of borrowing capacity and expires on December 31, 1999. The Company used proceeds from the new bank credit agreement to prepay $10,000 of 8.41% Senior Notes on November 15, 1996. As a result of the restructuring of its financing in 1996, the Company believes that it has sufficient liquidity to fund existing operations and to continue to make acquisitions.
Substantially all of the expenditures made by the Company to comply with environmental regulations were for the remediation of previously contaminated sites. The Company has established a reserve to cover such expenses (see Note 12 to the Consolidated Financial Statements). In addition to the amounts provided for in the reserve, the Company may be required to make certain capital expenditures which, in aggregate, are not expected to be material. Subsequent to the completion of the remediation contemplated in setting the reserve, the Company believes that the ongoing costs of compliance with environmental regulation, including the cost of monitoring, pollution abatement and disposal of hazardous materials, will not be material.
Effect of Inflation
For the years ended December 31, 1996 and 1994, there were no significant effects related to price increases. For the year ended December 31, 1995, price increases in certain commodities used by the Company (e.g., aluminum ingot (44%), steel (5%) and packaging materials (10%)) had an adverse effect on the operations of the Company. The impact of the aluminum ingot increase adversely impacted operating income by approximately $800. As a result of the sale of the Sidney Division's assets, the Company does not have future exposure related to aluminum ingot price increases.
Item 8.
Item 8. Financial Statements and Supplementary Data
Financial Statements:
Report of Independent Accountants
Consolidated Statement of Operations for the three years ended December 31, 1996
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996
Consolidated Balance Sheet at December 31, 1996 and
Consolidated Statement of Cash Flows for the three years ended December 31, 1996
Notes to Consolidated Financial Statements
Quarterly Financial Information
Financial Statement Schedule: For the three years ended December 31, 1996 VII - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
To the Board of Directors and Stockholders of General Housewares Corp. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of General Housewares Corp., and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP Indianapolis, Indiana January 31, 1997
CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1996 1995 1994 (in thousands except per share amounts)
Net sales $105,479 $119,340 $97,729 Cost of goods sold 68,302 79,028 62,719 Gross profit 37,177 40,312 35,010 Selling, general and administrative expenses 37,284 33,232 28,373 Operating income (loss) (107) 7,080 6,637 Interest expense, net 2,751 3,115 1,699 Income (loss) before income taxes and extraordinary item (2,858) 3,965 4,938 Income tax expense (benefit) (842) 1,679 2,188 Income (loss) before extraordinary item (2,016) 2,286 2,750 Extraordinary item, net of income tax benefit 619 - - Net income (loss) $ (2,635) $ 2,286 $ 2,750 Earnings (loss)per common share primary and fully diluted: Income (loss) before extraordinary item, per common share $ (0.54) $ 0.61 $ 0.80 Extraordinary item, net of income tax benefit per common share $ (0.16) $ - $ - Net income (loss) per common share $ (0.70) $ 0.61 $ 0.80 See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Common Capital in Cumulative Balances Stock Stock Excess of Translation (in thousands) Shares Amount Par Value Adjustment
December 31, 1993 3,567 $1,189 $18,034 $ - Restricted stock activity (23) (5) 82 - Shares issued upon exercise of options 16 5 141 - Shares issued for employee stock purchase plan 7 2 70 - Tax benefit from exercise of stock options - - 14 - Shares issued for acquisition 400 133 4,367 - Translation adjustments - - - (215) Minimum pension liability - - - - Dividends - - - - Net Income - - - -
December 31, 1994 3,967 1,324 22,708 (215) Restricted stock activity 11 4 72 - Shares issued upon exercise of options 21 7 205 - Shares issued for employee stock purchase plan 4 1 67 - Shares issued to treasury 34 11 422 - Tax benefit from exercise of stock options - - 54 - Translation adjustments - - - 176 Minimum pension liability - - - - Dividends - - - - Net Income - - - -
December 31, 1995 4,037 1,347 23,528 (39) Restricted stock activity 15 5 211 - Shares issued upon exercise of options 18 5 139 - Shares issued for employee stock purchase plan 11 4 84 - Tax benefit from exercise of stock options - - 14 - Translation adjustments - - - (56) Minimum pension liability - - - - Dividends - - - - Net Income (loss) - - - -
December 31, 1996 4,081 $1,361 $23,976 $(95)
Minimum Retained Treasury Pension Earnings Stock Liability Total
December 31, 1993 $28,368 $(3,216) $( 446) $43,929
Restricted stock activity - - - 77 Shares issued upon exercise of options - - - 146 Shares issued for employee stock purchase plan - - - 72 Tax benefit from exercise of stock options - - - 14 Shares issued for acquisition - - - 4,500 Translation adjustments - - - (215) Minimum pension liability - - 71 71 Dividends (1,089) - - (1,089) Net income 2,750 - - 2,750
December 31, 1994 30,029 (3,216) (375) 50,255 Restricted stock activity - - - 76 Shares issued upon exercise of options - - - 212 Shares issued for employee stock purchase plan - - - 68 Shares issued to treasury - ( 433) - - Tax benefit from exercise of stock options - - - 54 Translation adjustments - - - 176 Minimum pension liability - - ( 83) ( 83) Dividends (1,196) - - (1,196) Net Income 2,286 - - 2,286
December 31, 1995 31,119 (3,649) ( 458) 51,848 Restricted stock activity - - - 216 Shares issued upon exercise of options - - - 144 Shares issued for employee stock purchase plan - - - 88 Tax benefit from exercise of stock options - - - 14 Translation adjustments - - - (56) Minimum pension liability - - 76 76 Dividends (1,205) - - (1,205) Net Income (loss) (2,635) - - (2,635)
December 31, 1996 $27,279 $(3,649) $( 382) $48,490
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
December 31, 1996 1995 (in thousands)
ASSETS Current assets: Cash and cash equivalents $ 1,981 $ 3,414 Accounts receivable, less allowances of $3,575 ($4,029 in 1995) 15,823 16,152 Inventories 18,513 26,867 Deferred tax assets 3,831 2,743 Other current assets 932 661 Total current assets 41,080 49,837 Note receivable 2,707 - Property, plant and equipment, net 13,420 14,613 Other assets 6,479 7,565 Patents and other intangible assets 4,195 3,830 Cost in excess of net assets acquired 27,398 28,765 ------ ------ $ 95,279 $104,610
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Short-term debt $ - $ 12,000 Current maturities of long-term debt 2,190 2,163 Accounts payable 3,932 3,579 Salaries, wages and related benefits 1,671 2,487 Accrued liabilities 3,288 1,957 Income taxes payable 379 1,312 Total current liabilities 11,460 23,498 Long-term debt 30,575 25,038 Deferred liabilities 4,754 4,226 Commitments and contingent liabilities (Note 12) Stockholders' Equity: Preferred stock - $1.00 par value: Authorized - 1,000,000 shares Common stock - $.33-1/3 par value: Authorized - 10,000,000 shares Outstanding - 1996 - 4,080,736 and 1995 - 4,036,334 shares 1,361 1,347 Capital in excess of par value 23,976 23,528 Treasury stock at cost - 1996 and 1995 - 277,760 shares (3,649) (3,649) Retained earnings 27,279 31,119 Cumulative translation adjustment (95) (39) Minimum pension liability (382) (458) Total stockholders' equity 48,490 51,848 ------- ------- $95,279 $104,610
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996 1995 1994 (in thousands) Operating activities:
Net income (loss) $(2,635) $2,286 $2,750 Adjustments to reconcile net income (loss) to net cash provided by operating activities - Depreciation and amortization 4,853 4,486 3,623 Loss on sale of assets 2,335 - - Foreign exchange loss (gain) 21 85 (95) Compensation related to stock awards 215 77 76 Increase in deferred income taxes (1,531) (452) (546) (Increase) decrease in operating assets: Accounts receivable 322 713 (2,636) Inventory 5,311 (5,985) (2,761) Other assets (476) 34 (482) Increase (decrease) in operating liabilities: Accounts payable 819 (1,094) 1,585 Salaries, wages and related benefits, accrued and deferred liabilities 545 542 109 Income taxes payable (930) 171 408 ------ ------ ------ Net cash provided by operating activities 8,849 863 2,031
Investing activities:
Additions to property, plant and equipment, net (4,236) (4,345) (2,545) Payment for acquisitions - - (8,643) Proceeds from sale of assets 1,750 - - ------- ------- ------- Net cash used for investing activities (2,486) (4,345) (11,188)
Financing activities:
Collection (issuance) of notes receivable (370) - 1,018 Long-term debt (repayment) borrowings 3,541 4,803 (8,783) Issuance (repayment) of senior notes (10,000) - 20,000 Proceeds from stock options and employee stock purchases 246 280 219 Dividends paid (1,205) (1,196) (1,089) ------ ------ ------ Net cash provided by (used for) financing activities (7,788) 3,887 11,365 Net increase (decrease)in cash and cash equivalents (1,425) 405 2,208 Cash and cash equivalents at beginning of year 3,414 2,993 785 Effect of exchange rate on cash (8) 16 - ------ ------ ------ Cash and cash equivalents at end of year $1,981 $3,414 $2,993
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except per share amounts)
1. Nature of Operations
The Company manufactures and markets consumer durable goods with principal lines of business consisting of housewares (cookware, cutlery, and kitchen tools) and precision cutting tools. In addition, the Company sells products through a chain of manufacturer's retail outlet stores. The majority of the Company's sales are derived from the housewares line.
2. Accounting Policies
Principles of Consolidation - The Consolidated Financial Statements include the accounts of General Housewares Corp. and its subsidiaries, all of which are wholly-owned. All intercompany transactions and balances are eliminated in consolidation.
Inventories - Inventories are stated at the lower of cost or market and at December 31 were comprised of the following:
1996 1995
Raw Materials $ 2,873 $ 4,678 Work in Process 953 2,910 Finished Goods 15,629 21,348 ------- ------- 19,455 28,936 LIFO Reserve ( 942) ( 2,069 ------- ------- $18,513 $26,867
Cost, at December 31, 1996, is determined on a last-in, first-out (LIFO) basis for approximately 76% (74% at December 31, 1995) of the Company's inventories. The remaining inventories are costed on a first-in, first-out (FIFO) basis.
Property, Plant and Equipment - Property, plant and equipment is recorded at cost and depreciated using the straight-line method based on useful lives of 20 to 30 years for buildings and 3 to 15 years for machinery and equipment.
Property, Plant and Equipment is as follows:
1996 1995
Land $ 648 $ 684 Buildings 6,890 6,615 Machinery and Equipment 23,519 28,558 ------- ------- 31,057 35,857 Depreciation (17,637) (21,244) ------- ------- $13,420 $14,613
Other Current Assets - Included in other current assets at December 31, 1996 and 1995, is a receivable related to an anticipated recovery of $150 of estimated environmental costs and other miscellaneous receivables and prepaid expenses.
Other Assets - Included in other assets at December 31, 1996, are two manufacturing facilities (Land and Buildings - cost of $3,717 with accumulated depreciation of $933) that the Company no longer operates. These facilities are currently being leased to unaffiliated third parties under non-cancelable leases. Income generated by these leases is not significant to the consolidated results of operations of the Company. Each of these facilities is being depreciated over its estimated useful life using the straight-line method. Other assets also include prepaid pension expense.
Intangible Assets - The cost in excess of net assets acquired is amortized using the straight-line method over periods ranging from 10 to 40 years. Other intangible assets arising from acquisitions are included in patents and other intangible assets and are amortized using the straight-line method over periods of 5 to 15 years. Amortization of intangible assets was approximately $1,789 in 1996 ($1,793 in 1995 and $1,179 in 1994) and accumulated amortization was $8,350 and $6,561 at December 31, 1996 and 1995, respectively. The Company assesses the recoverability of costs in excess of net assets acquired based on undiscounted future cash flows. No write-downs to such costs were incurred for the periods ended December 31, 1996, 1995, or 1994. At December 31, 1996 and 1995, the Company recognized an intangible asset related to the recording of a minimum pension liability in accordance with Statement of Financial Accounting Standards ("FAS") No. 87.
Advertising - The Company participates in cooperative advertising programs with certain customers related to products being promoted. In addition, the Company conducts consumer advertising programs designed to highlight product features and build brand awareness. Advertising expense related to the programs is expensed as incurred and was $3,644, $3,675, and $5,366 for the periods ended December 31, 1996, 1995, and 1994, respectively.
Deferred Liabilities - Deferred liabilities include a minimum pension liability, deferred income taxes, and deferred compensation.
Earnings per Share - Earnings per share are computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the year.
Sales to Significant Customers - During 1995 and 1994, the Company had gross sales to a single customer of $12,980 and $13,278, respectively, which represented approximately 10% and 13% of total sales for 1995 and 1994, respectively. During 1996, there were no sales to a single customer that exceeded 10% of total sales.
Accounts Receivable - Substantially all accounts receivable are uncollateralized and arise from sales to the retail industry. Accounts receivable allowances include reserves for doubtful accounts, returns, adjustments, and cooperative advertising allowances to customers.
Reclassification - Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation.
Cash Equivalents - The Company considers all highly liquid temporary cash investments with low interest rate risk to be cash equivalents. Temporary cash investments are stated at cost, which approximates market value.
Currency Translation - The net assets of foreign operations are translated into U.S. dollars using year-end exchange rates. Revenue and expenses are translated at average exchange rates during the reporting period.
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 and 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.
3. Restructuring Charges
On January 4, 1996, the Company announced its intention to exit its cast iron and cast aluminum businesses ("Sidney Division"). A purchase agreement to sell the assets of the Sidney Division, effective August 1, 1996, was executed whereby the Company received consideration of $4,000 in the form of a cash payment of $450, a note receivable of $3,000, and the purchaser's assumption of certain liabilities. The consideration was received in exchange for certain assets of the Sidney Division, as well as associated brand names and trademarks. The note receivable has been discounted to a net present value of $2,707 and will be paid with a $1,000 initial payment on July 31, 1999 and quarterly payments of $125 commencing October 31, 1999, through July 31, 2003. As a result of this agreement, the Company has recorded, as a component of selling, general and administrative expenses, a charge against earnings of $3,198 ($400 of which relates to loss on curtailment of the Sidney Division defined benefit pension plans). A benefit of $928 was recorded in cost of sales as a result of the reversal of the Sidney Division LIFO reserve offset by other inventory loss reserves. Approximately $1,200 of the selling, general and administrative charge remains as a component of accrued liabilities and as a reduction to non-current assets at December 31, 1996, representing future warranty and pension payments to be made by the Company. Net sales of the Sidney Division were $4,159, $16,884, and $17,298 in 1996, 1995, and 1994, respectively. The income (loss) from operations (including cooperative advertising, warehousing, and direct marketing expenses, but excluding restructuring charges and allocation of corporate overhead expenses) of the Sidney Division was $(1,496), $820, and $525 in 1996, 1995, and 1994, respectively.
In addition to the foregoing, the Company closed three manufacturer's retail outlet stores, sold certain assets associated with its stamped and spun aluminum cookware product line and incurred a charge related to the write-down of certain production equipment to net realizable value in 1996. The results of operations of these stores and the stamped and spun aluminum cookware product line, the charges incurred as a result of their disposition and the aforementioned write-down related to production equipment amounted to approximately $530 for the year ended December 31, 1996.
On January 17, 1996, the Company sold a non-operating facility located in Hyannis, Massachusetts. The Company received cash of $1,300 for the facility which represented an amount slightly greater than net book value.
4. Acquisitions
Effective October 1, 1994, the Company purchased the assets of Walter Absil Company Limited and Olfa Products Corp. (collectively referred to as "Olfa Products Group"). The Olfa Products Group is the exclusive distributor, for the United States and Canada, of precision cutting tools and accessories manufactured by Olfa Corporation of Osaka, Japan. Assets acquired included accounts receivable, inventories, and equipment.
The purchase price was $13,576 and consisted of a cash payment of $6,843, Subordinated Promissory Notes in the principal amount of $2,233 bearing interest at 6% per annum, and 400,000 restricted shares (valued at $4,500) of the Company's common stock. The common stock issued in connection with this acquisition is restricted as to both sale and voting rights. All such restrictions will expire no later than September 30, 1999.
The acquisition was accounted for as a purchase and the net assets and results of operations are included in the Company's Consolidated Financial Statements beginning October 1, 1994. The purchase price was allocated to the assets acquired and liabilities assumed of the Olfa Products Group based on their estimated respective fair values. Cost in excess of net assets acquired was $6,349 and is being amortized over 20 years.
In connection with the issuance of restricted common stock related to the acquisition of Olfa Products Group, the Company has agreed, under certain circumstances, to make payments of up to $600 to the former owners upon sale of the restricted common stock. In addition, the Company has agreed to make payments of up to approximately $3,565 to the management of the Olfa Products Group based upon the achievement of a specific aggregate financial target for the three-year period ending December 31, 1997.
Effective September 1, 1994, the Company purchased the assets of Normandy, the enamel on steel cookware business of National Housewares, Inc., for a cash consideration of $1,800 and deferred payments equal to $3,767 plus an incentive payment of $382 based upon operational performance for the remainder of 1994. The cash payment was equivalent to the fair market value of the inventories acquired. Cost in excess of net assets acquired was $4,149 and is being amortized over 10 years.
The following unaudited pro forma information combines the consolidated results of operations of the Company, the Olfa Products Group, and Normandy as if the acquisitions had occurred at the beginning of 1994. The pro forma information is not necessarily indicative of the results of operations which would have actually occurred during such periods.
(Unaudited)
Net sales $114,184 Income before taxes 5,831 Net income 3,277 Earnings per average common share $ 0.88
5. Debt
Long-term and short-term debt includes the following:
December 31, 1996 1995
Bank Credit Agreement $18,000 $12,000 8.41% Senior Notes payable in equal annual installments commencing 1998 through 2004 10,000 20,000 12% subordinated note payable in equal annual installments commencing 1996 through 2000 3,211 4,368 Deferred payment obligation due in quarterly installments of $125 from January, 1995 through September, 1998 (discounted at 6%) 825 1,363 6% subordinated notes payable in equal annual installments commencing 1995 through 1997 729 1,470 ------- ------- 32,765 39,201 Less current maturities and short-term debt 2,190 14,163 ------- ------- Long-term debt $30,575 $25,038
At December 31, 1996, and 1995, all of the Company's debt outstanding was unsecured.
The bank debt outstanding at December 31, 1996, relates to a Credit Agreement with three banks, dated November 13, 1996, consisting of an aggregate commitment of $45,000 of which $3,046 was reserved for letters of credit at December 31, 1996. This Credit Agreement expires on December 31, 1999, and replaced a similar agreement with two banks which consisted of an aggregate commitment of $30,000. The Credit Agreement may be renewed, under certain circumstances, for two additional one-year periods. Drawings under the Credit Agreement are priced at the banks' Prime or LIBOR with spreads based on an incentive formula. At December 31, 1996, the Company could borrow under the Credit Agreement at Prime of 8.25% or LIBOR + 1.0%. The interest rate on outstanding amounts at December 31, 1996, was 6.62%. Commitment fees of .25% of the unused balance on the line of credit are included in interest expense. The amounts outstanding under the previous Credit Agreement at December 31, 1995, were classified as short-term debt as the Company intended to, and subsequently did, repay such amounts from current working capital.
During 1994, the Company sold $20,000 of 8.41% Senior Notes payable to a group of institutional investors. On November 15, 1996, the Company prepaid $10,000 of the 8.41% Senior Notes with proceeds from the Credit Agreement. The Company incurred a prepayment penalty of $799 related to this transaction. In addition, the Company incurred a write-off of unamortized debt issuance costs of $89 related to this transaction and the replacement of the aforementioned Credit Agreement. In accordance with FAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", the prepayment penalty and the write-off of unamortized debt issuance costs have been reflected as an extraordinary item, net of applicable income tax benefit of $269, in the Consolidated Financial Statements.
Terms of the Credit Agreement and the Senior Notes require, among other things, that the Company maintain certain minimum financial ratios. In addition, the agreements provide for limits on dividends, certain investments, and lease commitments. At December 31, 1996, the Company was in compliance with all covenants contained in the Credit Agreement and the Senior Notes. One of the covenants contained in the Credit Agreement is a fixed charges coverage ratio calculated on a rolling four quarter basis (commencing with the quarter ended September 30, 1996) at the end of each calendar quarter. Due to the seasonality of the Company's operations (substantially all of the Company's earnings occur in the last two quarters of the year) and the Extraordinary Item recorded in the fourth quarter of 1996, the Company believes it is likely that it will not be in compliance with the fixed charges coverage ratio as of the next measurement date (March 31, 1997). The Company expects to be in compliance with this covenant at December 31, 1997. The Company expects that it will be able to obtain waiver of any noncompliance if such noncompliance occurs in 1997 relative to this covenant. The Company also expects to be in compliance with all other covenants contained in the Credit Agreement and the Senior Notes during 1997.
The 12% subordinated note payable is due the estate of the former principal owner of Chicago Cutlery, Inc., a wholly-owned subsidiary of the Company. The estate is a significant stockholder of the Company. The principal balance of the note was reduced by $157 and $632 in 1996 and 1995, respectively, as an offset to payments made with regard to the environmental remediation program discussed in Note 12.
The deferred payment obligation was incurred in connection with the acquisition of the assets of the Normandy enamel on steel cookware business of National Housewares, Inc. In addition to the obligation listed in the above table, the Company had additional obligations related to the transaction of $2,382, all of which were paid in January, 1995.
Terms of the Deferred Payment Obligation and all of the Subordinated Notes provide for the right of offset upon the occurrence of certain events.
Aggregate principal payments for the five years subsequent to December 31, 1996, are as follows:
1997 $ 2,190 1998 2,793 1999 20,429 2000 1,640 2001 1,429 Later years 4,284
Cash paid during 1996 for interest, net of cash received, was $2,538 (1995 - $2,798; 1994 - $1,614). Of this amount, $579, $562, and $450 consisted of amounts paid to related parties in 1996, 1995, and 1994, respectively.
6. Common Stock and Rights
Common stock reserved at December 31, 1996, included 322,286 shares reserved for outstanding stock options.
In February, 1989, the Company effected a dividend distribution of one Right for each outstanding share of common stock. Under certain circumstances, each Right may be exercised to purchase 1/100th of a share of Series A Junior Participating Preferred Stock, at a purchase price of $25, subject to adjustment to prevent dilution. Each preferred share fraction is designed to be equivalent in voting and dividend rights to one share of common stock. The Rights may only be exercised after a person acquires, or has the right to acquire, 21% or more of the common stock or makes an offer for 30% or more of the common stock. The Rights, which do not have voting rights and do not entitle the holder to dividends, expire on February 27, 1999, and may be redeemed by the Company prior to their being exercisable at a price of $.01 per Right.
7. Stock Plans
At December 31, 1996, the Company had two stock plans which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan and its stock purchase plan. Had compensation cost for the Company's stock plans been determined based, on the fair value at the grant dates for transactions under those plans consistent with the method of FAS No. 123, "Accounting for Stock Based Compensation", the Company's net loss and net loss per share for 1996 and net income and net income per share for 1995 would have been adjusted to the pro forma amounts indicated below: 1996 1995 (Loss) income from continuing operations: As reported $(2,016) $2,286 Pro forma ( 2,152) 2,238 (Loss) income per share from continuing operations: As reported $(0.54) $ 0.61 Pro forma (0.57) 0.59
The risk-free rate used in pro forma calculations is the yield, on the grant date, of a U.S. Treasury Strip with a maturity date equal to the expected term of the option. The expected life of vested stock options used in the calculation is five years with no assumed forfeiture. The volatility assumption utilized (36.22% and 34.28% in 1995 and 1996, respectively) was developed using the Company's historical stock price with future dividend activity assumed to be consistent with 1996 activity.
The Company maintains a fixed stock plan for key employees which provides for the granting of options or awards of restricted stock until January 31, 2003.
All stock options vest within three years of the date of grant with a maximum option term of seven years. A summary of transactions under the plan follows:
Restricted Stock Stock Options Shares Shares Wtd. Avg. Price
Outstanding December 31, 1993 38,000 253,738 $11.34 Granted during 1994 10,500 5,000 13.75 Canceled during 1994 (34,000) (11,035) 13.06 Released or exercised during 1994 (4,000) (16,299) 9.00 Outstanding December 31, 1994 10,500 231,404 11.50 Granted during 1995 10,500 106,000 12.84 Canceled during 1995 - (13,000) 13.01 Released or exercised during 1995 (3,500) (20,634) 10.40 Outstanding December 31, 1995 17,500 303,770 11.98 Granted during 1996 15,268 44,500 10.39 Canceled during 1996 - ( 7,550) 13.12 Released or exercised during 1996 (9,500) (18,434) 7.84 Outstanding December 31, 1996 23,268 322,286 $11.97
Options granted under the plan provide for the issuance of common stock at not less than 100% of the fair market value on the date of grant. When options are exercised, proceeds received are credited to common stock and capital in excess of par value. Stock options were exercised at prices ranging from $7.125 to $11.000 per share in 1996. Of the Options Outstanding at December 31, 1996, 112,667 were granted at prices ranging from $7.125 to $10.375 per share while 209,619 were granted at prices ranging from $11.000 to $14.000 per share. The weighted average remaining contractual life for the ranges is 3.81 years and 5.18 years, respectively. Options for 194,467 shares were exercisable at December 31, 1996.
Restricted stock granted under the plan is subject to restrictions relating to earnings targets of the Company and/or continuous employment or other relationships.
On July 1, 1992, the Company introduced its Employee Stock Purchase Plan. The plan, administered by a Committee appointed by the Board of Directors, is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code. The Employee Stock Purchase Plan provides that shares of the Company's Common Stock will be purchased at the end of each calendar quarter with funds deducted from the payroll of eligible employees. Employees receive a bargain purchase price equivalent to 90% of the lower of the opening or closing stock price of each calendar quarter. Dividends paid to the Employee Stock Purchase Plan fund are reinvested in the fund to buy additional shares. At December 31, 1996, the balance in the plan consisted of 22,569 shares of General Housewares Corp. Common Stock (17,951 shares in 1995).
8. Employee Benefit Plans
The Company sponsors four defined benefit pension plans (two of which cover union employees at the Sidney Division) which cover substantially all salaried and hourly employees. Pension benefit formulas are related to final average pay or fixed amount per year of service. It is the Company's policy to fund at least the minimum amounts required by applicable regulations. Effective August 1, 1996, the Sidney Division's plans no longer accrue service cost due to the 1996 sale of the assets of the Division.
Net periodic pension cost included the following components:
1996 1995 1994 Service cost-benefits earned during the period $ 544 $ 459 $ 458 Interest cost on projected benefit obligation 1,302 1,226 1,166 Actual return on plan assets (1,991) (2,632) (34) Net amortization and deferral 819 1,561 (919) ----- ----- ----- Net periodic pension cost $ 674 $ 614 $ 671
The funded status of the plans as of December 31 was as follows:
1996 1995 Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets
Accumulated benefit obligation
vested $12,383 $7,166 $14,193 $2,650 non vested 195 20 304 51 ------ ------ ------- ------ 12,578 7,186 14,497 2,701
Effect of projected salary increases 1,592 - 1,220 - ------ ------ ------ ------ Projected benefit obligation 14,170 7,186 15,717 2,701 Plan assets at fair value 13,758 6,881 15,677 2,395 ------ ------ ------ ------ Plan assets less than projected benefit obligation (412) (305) (40) (306) Unrecognized net transition (asset) liability (415) (270) (823) 95 Unrecognized net loss from experience differences 2,240 1,154 2,246 793 Unrecognized prior service cost 290 1,193 814 311 Adjustment to recognize minimum liability - (1,803) - (1,199) ------ ------ ------ ------ Prepaid (accrued) pension cost recognized in balance sheet $ 1,703 $( 31) $ 2,197 $(306)
In accordance with the provisions of Statement of FAS No. 87 - "Employers' Accounting for Pensions", the Company has recorded an additional minimum liability at December 31, 1996 and 1995, representing the excess of the accumulated benefit obligation over the fair value of plan assets and prepaid pension asset. The minimum liability for plans with accumulated benefits in excess of assets of $1,803 and $1,199 at December 31, 1996 and 1995, respectively, has been included in the Company's Consolidated Balance Sheet as a deferred liability with an offset in other intangible assets and equity. In addition, as of December 31, 1996, a deferred tax asset of $227 ($336 as of December 31, 1995) has been recognized for the minimum liability charge to equity.
The actuarial present value of the projected benefit obligation at December 31, 1996 and 1995, was determined using a weighted average discount rate of 7.25% and a rate of increase in future compensation levels of 4%. The weighted average expected long-term rate of return on assets was 9% at December 31, 1996 and 1995. As of December 31, 1996, approximately 31% (1995 - - 32%) of the plan's assets were invested in fixed income funds.
In addition to the defined benefit plans described above, the Company also sponsors a 401(K) plan for all full-time employees. The Company matches a portion of each employee contribution. The Company's contribution expense was $297 in 1996 ($316 in 1995 and $302 in 1994).
The Company maintains a non-qualified, unfunded deferred compensation plan for certain key executives providing payments upon retirement. The present value of the deferred compensation is included in deferred liabilities.
9. Income Taxes
The components of the provision for income taxes were as follows:
1996 1995 1994 Current income tax expense (benefit): Federal $ 134 $1,624 $2,382 State 90 251 352 Foreign 471 219 - ----- ----- ----- Total current income tax expense (benefit) 695 2,094 2,734 Deferred income tax expense (benefit): Federal (1,390) (389) (546) State (141) (57) - Foreign (6) 31 - ----- ----- ----- Total income tax expense (benefit) before extraordinary item: $(842) $1,679 $2,188
Current income tax benefit on extraordinary item: $(269) - - ------ ------ ------
Total income tax (benefit) expense $(1,111) $1,679 $2,188
A reconciliation between taxes from continuing operations computed at the federal statutory tax rate and the Company's consolidated effective tax rate is as follows:
1996 1995 1994 Computed tax at federal statutory rate ( 972) 1,348 1,679 State income taxes, net of federal income tax benefit (99) 128 232 Amortization of excess purchase price 199 199 199 Miscellaneous items 30 4 78 ----- ----- ----- Total income tax expense (benefit) before extraordinary item ( 842) 1,679 2,188
Deferred tax assets (liabilities) are comprised of the following at December 31:
1996 1995 Gross deferred tax assets: Accounts receivable allowances $ 761 $ 1,079 Inventory reserves 934 487 Vacation 149 240 Self-insurance 75 117 Environmental reserve 147 150 Foreign tax credit 361 - Restructuring 373 - Other, miscellaneous 810 449 ----- ----- Gross deferred tax assets $3,610 $2,522
Gross deferred tax liabilities: Property, plant and equipment $(787) $(1,239) Pension ( 813) ( 552) Other current receivables ( 56) ( 56) Other, miscellaneous ( 100) ( 250) ------- ------- Gross deferred tax liabilities $(1,756) $(2,097) ------- -------- Net deferred tax assets $1,854 $ 425
Cash paid for income taxes during 1996 was $87 (1995 - $318; 1994 - $1,659).
The Company reached a settlement with the Internal Revenue Service in 1995 relating to a review of the Company's tax returns for the years ended December 31, 1991, 1992, and 1993. The settlement did not have a significant impact on the results of operations for the year ended December 31, 1995.
The Internal Revenue Service is reviewing the Company's tax returns for the years ended December 31, 1994 and 1995. The Company does not expect this review to have a significant impact on future results of operations.
10. Operating Leases
The Company leases warehouses, administrative offices, computer equipment, and retail outlet store space. Certain of the retail store leases provide for contingent rental payments, generally based on the sales volume of the applicable retail unit. All leases in which the Company is engaged are classified as operating leases.
Future minimum annual lease payments under these operating leases, the majority of which have initial or remaining non-cancelable lease terms in excess of one year, were as follows at December 31, 1996:
1997 $1,652 1998 983 1999 560 2000 271 2001 154 Later Years 60
Certain leases require payments of real estate taxes, insurance, repairs, and other charges. Total rental expense was $1,797 in 1996 (1995 - $2,098; 1994 - $1,455).
11. Fair Value of Financial Instruments
FAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of information about the fair value of certain financial instruments for which it is practical to estimate that value. The Company has performed fair value calculations on its financial instruments (principally debt obligations) and has determined that fair value approximates carrying value.
12. Commitments and Contingent Liabilities
The Company is currently involved in the review and evaluation, or remediation, of six sites posing potential or identified environmental contamination problems. Based on information currently available, management's best estimate of probable remediation costs, recorded as a liability, is $394 at December 31, 1996 ($403 at December 31, 1995), which aggregate amount management believes will be paid out during the course of the next five years. Within a range of reasonably possible environmental cleanup liabilities established on the basis of current information, the recorded liability represents substantially all of the currently estimable maximum loss that has been identified by the Company and its environmental advisors. Based on provisions in the stock purchase agreement related to the acquisition of Chicago Cutlery, Inc., the Company has recovered approximately $1,100 previously expended by the Company on the mandated remediation of hazardous wastes generated at the Antrim, New Hampshire, manufacturing site (the "Antrim Site") owned by Chicago Cutlery, Inc. through an offset to amounts owed to the holders of the 12% subordinated note (see Note 5). Based on the opinion of legal counsel, the Company considers it probable that it will retain such amounts. The holders of the 12% subordinated note have not agreed to such offset. In addition, the Company instituted an action against David D. Hurlin, former chief executive officer, director and substantial stockholder of the Goodell Company, a previous owner of the Antrim Site. The action sought to recover amounts expended due to the mandated remediation at the Antrim Site. This case was settled on October 18, 1996, and the Company has received payment from David D. Hurlin in the amount of $350. While neither the timing nor the amount of the ultimate costs associated with environmental matters can be accurately determined, management does not expect that these matters will have a material effect on the Company's consolidated financial position, results of operation, and cash flow.
13. Segment Information
The Company's principal business involves the manufacture and marketing of consumer durable goods. These operations are classified into two reportable segments:
Housewares - Included in this segment are the Company's cookware, cutlery, and kitchen tool products, as well as a chain of manufacturer's retail outlet stores with sales derived primarily from these products. These products are used primarily in commercial and residential food preparation and are distributed primarily through mass merchandisers, department stores, and specialty shops.
Precision Cutting Tools - Included in this segment is the Company's Olfa Products Group. Products in this segment are designed and marketed for diverse commercial and residential use including hobby, craft, sewing, and construction. The goods are sold both directly and through distributors, primarily to hardware stores, and sewing/hobby/craft stores.
Financial information by reportable segments is as follows:
Precision Housewares Cutting Tools
Net sales $ 89,248 $16,231 Operating income (loss) (2,600) 2,493 Identifiable assets 87,092 8,187 Depreciation and amortization 4,496 357 Capital expenditures, net 4,210 26
Net sales $ 103,370 $15,970 Operating income 5,606 1,474 Identifiable assets 97,254 7,285 Depreciation and amortization 4,135 351 Capital expenditures, net 4,325 20
Net sales $ 93,973 $ 3,756 Operating income 6,613 24 Identifiable assets 93,314 5,044 Depreciation and amortization 3,530 93 Capital expenditures, net 2,545 -
The Precision Cutting Tools segment was added in October of 1994 as a result of an acquisition of assets. As such, 1994 results for this segment represent only three months of activity. As discussed in Note 3, the Company sold the assets of its Sidney Division, effective August 1, 1996.
During 1995 and 1994, the Company had gross sales to one customer of $12,577 and $13,046, representing 11% and 14% of total Housewares segment gross sales. During 1996, there were no sales to a single customer that exceeded 10% of a segment's sales.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the 1996 and 1995 unaudited interim financial information:
(in thousands of dollars except per share amounts)
Quarter Ended Dec. 31, Sep. 30, June 30, Mar. 31, 1996 1996 1996 1996
Net sales $32,858 $26,406 $21,613 $24,602 Gross profit 13,265 9,698 6,575 7,639 Income (loss) before extraordinary item 2,327 60 (2,174) (2,229) Extraordinary item, net of income tax benefit (619) - - - Net income (loss) $ 1,708 $ 60 $(2,174) $(2,229) Earnings per common share: Income (loss) before extraordinary item per common share $ 0.61 $ 0.02 $ (0.57) $ (0.59) Extraordinary item, net of income tax benefit per common share $ (0.16) $ - $ - $ - Net income (loss) per common share $ 0.45 $ 0.02 $ (0.57) $ (0.59) Dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08 Market price range: High 10-7/8 12-5/8 14-1/8 11-3/4 Low 8-3/8 9 11 7-7/8
Quarter Ended Dec. 31, Sep. 30, June 30, Mar. 31, 1995 1995 1995 1995
Net sales $36,467 $30,630 $24,882 $27,361 Gross profit 11,715 10,006 8,898 9,693 Net income 1,342 605 127 212 Earnings per common share: Net income $ 0.36 $ 0.16 $ 0.03 $ 0.06 Dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08 Market price range: High 11-5/8 14 14 16-3/8 Low 8-1/2 10-7/8 11-3/8 11-1/4
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of General Housewares Corp.
Our audits of the consolidated financial statements referred to in our report dated January 31, 1997 appearing in this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP Indianapolis, Indiana January 31, 1997
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no changes in or disagreements with the Company's independent accountants on accounting and financial disclosure.
PART III
The information required by Part III, Items 10, 11, 12 and 13 with respect to the directors and executive officers of the Company has been omitted because this information appears on pages 1 to 9 of the Company's definitive proxy statement which the Company expects to file with the Securities and Exchange Commission on or prior to March 31, 1997, and which is incorporated herein by reference, except with respect to the identification and business experience of executive officers required by Item 10, which is set forth under the caption "Executive Officers of the Company" in Part I of this Report. The Report of the Compensation Committee and the Performance Graph, which begin on page 9 and on page 12, respectively, of the Company's definitive proxy statement, are not incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements - See item 8 - index to financial statements.
(a) 2. Financial Statement Schedule - See item 8 - index to financial statements.
(a) 3. Exhibits
3. (i) Restated Certificate of Incorporation, filed May 7, 1987 (filed as Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
(ii) By-laws as amended November 12, 1996 (filed as Form 8-K on December 4, 1996, and incorporated herein by reference).
5. Rights Agreement dated as of February 22, 1989 (filed with the Securities and Exchange Commission as an Exhibit 2a Registration Statement on Form 8-A, and incorporated herein by reference).
10. Material Contracts
10.1 Note Purchase Agreement, dated November 30, 1994 among the Company and certain institutional investors (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference).
10.2 Credit Agreement, dated November 13, 1996, between the Company and Harris Trust and Savings Bank as agent, The First National Bank of Chicago, and The Northern Trust Company (filed as Form 8-K on December 4, 1996, and incorporated herein by reference).
*10c. Compensation Agreement, dated August 7, 1987, between the Company and Paul A. Saxton relating to retirement and termination agreements (filed as Exhibit 10c to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference).
*10e. Employment Agreement, dated April 12, 1990, between the Company and Robert L. Gray, relating, among other matters, to termination arrangements (filed as Exhibit 10e to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference).
*10f. The Company's Severance Compensation Plan, as amended and restated August 6, 1985, in which all of the named executive officers participate, and form of designation of participation (filed as Exhibit 10f to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference).
*10g. Employment Agreement, dated March 20, 1995, between the Company and John C. Blackwell, relating, among other matters, to retirement and termination agreements.
*10h. Employment Agreement, dated July 3, 1995, between the Company and Gordon H. Brown, relating, among other matters, to retirement and termination agreements.
*10i. Employment Agreement, dated November 11, 1995, between the Company and Raymond J. Kulla, relating, among other things, to retirement and termination agreements.
*10j. Employment Agreement, dated December 2, 1996, between the Company and William V. Higdon relating, among other matters, to retirement and termination agreements.
11. Computation of primary earnings per share.
21. Subsidiaries of the registrant.
23. Consent of Price Waterhouse, independent accountants, to the incorporation by reference constituting part of Registration Statements on Form S-8 (Nos. 33-33328, 2-77798 and 33-48336) of their report dated January 31, 1997.
99. Audited financial statements of the Company's Employee Stock Purchase Plan.
(b) Reports on Form 8-K
Form 8-K was filed during the last quarter of 1996 documenting the credit agreement, dated November 13, 1996, between the Company and Harris Trust and Savings Bank as agent, The First National Bank of Chicago and The Northern Trust Company.
* Represents a contract, plan or arrangement pursuant to which compensation or benefits are provided to certain Executive Officers or Directors of the Company.
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.
GENERAL HOUSEWARES CORP.
By /s/ Robert L. Gray 3/17/97 Robert L. Gray Date Vice President, Corporate Development, Chief Financial Officer, and Treasurer
By /s/ Mark S. Scales 3/17/97 Mark S. Scales Date Vice President, Controller and Principal Accounting Officer
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.
/s/ Paul A. Saxton 3/17/97 Paul A. Saxton Date Chairman of the Board President and Chief Executive Officer
/s/ Thomas G. Belot 3/17/97 Thomas G Belot - Director Date
/s/ Charles E. Bradley 3/17/97 Charles E. Bradley - Director Date
/s/ John S. Crowley 3/17/97 John S. Crowley - Director Date
/s/ Thomas L. Francis 3/17/97 Thomas L. Francis - Director Date
/s/ Joseph Hinsey IV 3/17/97 Joseph Hinsey IV - Director Date
/s/ Richard E. Lundin 3/17/97 Richard E. Lundin - Director Date
/s/ Ann Manix 3/17/97 Ann Manix - Director Date
/s/ Phillip A. Ranney 3/17/97 Phillip A. Ranney - Director Date
INDEX TO EXHIBITS
Exhibit No.
10j. Employment Agreement
11. Computation of primary earnings per share
21. Subsidiaries of the registrant
23. Consent of Price Waterhouse
27. Financial Data Schedule
99. Financial statements of the Company's Employee Stock Purchase Plan