Our principal liquidity requirements are to service our debt and meet our working capital and capital expenditure needs. Subject to our performance, which, if adversely affected, could adversely affect the availability of funds, we expect to be able to meet our liquidity requirements for the foreseeable future through cash provided by operations and through borrowings available under our senior credit facility. We cannot assure you, however, that this will be the case.
Cash used in operating activities for the twenty-six weeks ended March 26, 2005 was $27.7 million, compared to a cash use of $30.1 million for the period ended March 27, 2004. During our first two quarters of the fiscal year, we typically use our revolving loan facility to fund our seasonal build of inventory. Cash used in investing activities of $3.5 million and $2.1 million for the twenty-six week periods ended March 26, 2005 and March 27, 2004, respectively, was due primarily to the purchase of fixed assets. Cash provided by financing activities was $30.4 million and $31.9 million for the twenty-six week periods ended March 26, 2005 and March 27, 2004, respectively. During the period ended March 26, 2005, the proceeds were due to the borrowings under the revolving credit facility and the result of the issuance of the Senior Floating Rate Notes, which included the repayment of the
Term Loan B under the Senior Secured Credit Facility and the payment of debt issuance costs. During the period ended March 27, 2004, the proceeds were due primarily to debt borrowings under revolving credit facility, partially offset by repayments of long-term debt.
Debt and Other Obligations
Senior Secured Credit Facility
On June 28, 2004, we entered into a $215.0 million senior credit facility with various banks, financial institutions and other lenders. The senior credit facility consists of a $140.0 million term loan B facility, which matures on June 28, 2011, and a $75.0 million revolving credit facility, which matures on June 28, 2010. On January 14, 2005, simultaneously with the completion of the offering of the Senior Floating Rate Notes referred to below, we repaid the term loan in full and entered into an amendment (the "Amendment") to the terms of the senior credit facility. As of March 26, 2005, we had a draw on the revolving portion of our senior credit facility of $31.3 million, with $1.6 million of letters of credit outstanding. At March 26, 2005, based on the borrowing base calculation, the revolver limit was $75.0 million, with $42.1 million available under the revolving credit facility. The weighted average interest rate for the revolving credit facility at March 26, 2005 was 5.97%.
The interest rates applicable to the senior credit facility as of March 26, 2005 (other than in respect of swing-line loans) were the Eurodollar Rate plus the Applicable Rate, or at our option, the Alternate Base Rate plus the Applicable Rate. The "Alternate Base Rate" means the higher of (i) the floating rate of interest announced from time to time by Bank of America N.A as its "prime rate" or (ii) the Federal Funds rate plus 50 basis points per annum. The "Eurodollar Rate" means the rate per annum equal to the rate determined by the administrative agent to be the offered rate that appears on the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in dollars. With respect to the revolving credit facility (including swing line loans), the "Applicable Rate" means (i) until December 28, 2004, 3.00% per annum, in the case of Eurodollar Rate loans, and 2.00% per annum, in the case of Alternate Base Rate advances, and (ii) thereafter, a percentage per annum to be determined in accordance with a pricing grid based on the leverage ratio. With respect to the term loan B, the Applicable Rate means 2.75% per annum in the case of a LIBOR-rate loan, and 1.75% per annum in the case of an Alternate Base Rate loan.
Certain customary fees would have been payable to the lenders and the agents under the senior secured credit facility, including without limitation, a commitment for our revolving credit facility and letter of credit fees. The senior credit facility contained various affirmative and negative covenants customary for similar credit facilities (subject to customary exceptions and certain existing obligations and liabilities), including, but not limited to, restrictions on: liens, loans, acquisitions, mergers, sales, transfers, dividends, distributions, changes in the nature of our business, transactions with affiliates and capital expenditures. In addition, the Senior Secured Credit Facility, as amended, requires that the Company meet certain financial covenant tests, including without limitation: the maintenance of a minimum EBITDA of $41.0 million and the maintenance of a minimum fixed charge coverage ratio (defined as EBITDA less capital expenditures to cash taxes plus cash interest expense plus scheduled principal payments and prepayments plus dividends and distributions on equity) of 1.00:1.00.
Pursuant to the Amendment, availability under the senior credit facility is restricted to the lesser of $75.0 million and the borrowing base amount, which is equal to (a) 85% of the amount of eligible receivables, plus (b) the lower of (i) 55% of the cost or fair market value of eligible inventory and (ii) if an inventory appraisal has been performed, 80% of the orderly liquidation value of our inventory, plus (c) a percentage of eligible equipment or real property determined by Bank of America, N.A., as administrative agent, and not objected to by the required lenders. In addition, the Senior Secured Credit Facility, as amended, requires that we meet certain financial covenant tests, including without limitation, the maintenance of minimum EBITDA and minimum fixed charge coverage ratio, as defined by the amended Credit Agreement.
As of March 26, 2005, we were in compliance with all of our financial covenants. The senior secured credit facility contains customary events of default (subject to customary exceptions,
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thresholds and grace periods), including, without limitation: nonpayment of principal, interest, fees and failure to perform or observe certain covenants.
Senior Subordinated Notes
On June 28, 2004, we completed a private offering of $150.0 million in aggregate principal amount at maturity of 10% Senior Subordinated Notes due July 15, 2012. The Senior Subordinated Notes are fully and unconditionally guaranteed by our parent, ATT Holding Co., on a senior subordinated basis. On August 10, 2004, we filed a registration statement with respect to new notes having substantially identical terms as the original notes, as part of an offer to exchange registered notes for the privately issued original Senior Subordinated Notes. The new notes evidence the same debt as the original Senior Subordinated Notes, are entitled to the benefits of the indenture governing the original Senior Subordinated Notes and are treated under the indenture as a single class with the original notes. The exchange offer was completed on November 24, 2004.
The Senior Subordinated Notes are unsecured senior subordinated obligations and rank behind all of our existing and future senior debt, including borrowings under the senior credit facility, equally with any of our future senior subordinated debt, ahead of any of our future debt that expressly provides for subordination to the Senior Subordinated Notes and effectively behind all of the existing and future liabilities of our subsidiaries, including trade payables.
We pay interest on the Senior Subordinated Notes semi-annually in cash, in arrears, on January 15 and July 15 at an annual rate of 10.0%. The indenture governing Senior Subordinated Notes contains various affirmative and negative covenants, subject to a number of important limitations and exceptions, including but not limited to those limiting our ability and the ability of our restricted subsidiaries, to borrow money, guarantee debt or sell preferred stock, create liens, pay dividends on or redeem or repurchase stock, make certain investments, sell stock in our restricted subsidiaries, restrict dividends or other payments from restricted subsidiaries, enter into transactions with affiliates and sell assets or merge with other companies.
The indenture governing the Senior Subordinated Notes contains various events of default, including but not limited to those related to non-payment of principal, interest or fees; violations of certain covenants; certain bankruptcy-related events; invalidity of liens; non-payment of certain legal judgments; and cross defaults with certain other indebtedness. We may redeem the Senior Subordinated Notes on or after July 15, 2008, except we may redeem up to 35% of the Senior Subordinated Notes prior to July 15, 2007 with the proceeds of one or more public equity offerings. We are required to redeem the Senior Subordinated Notes under certain circumstances involving changes of control.
Senior Floating Rate Notes
On January 14, 2005, we completed the offering of $150.0 million principal amount at maturity of our Senior Floating Rate Notes Due 2012, which was issued at a 0.5% discount, in an unregistered offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States pursuant to Regulation S under the Securities Act. Net proceeds for the offering were used to repay our term loan B in full, repay a portion of our revolving credit facility and pay related fees and expenses. The Senior Floating Rate Notes are fully and unconditionally guaranteed by our parent on a senior unsecured basis.
The Senior Floating Rate Notes are unsecured, unsubordinated obligations and are effectively subordinated to all of our existing and future secured debt, to the extent of the assets securing such debt, including borrowings under the senior secured credit facility, pari passu with all future senior unsecured indebtedness, senior in right of payment to all existing and future senior subordinated debt, including our Senior Subordinated Notes due 2012, and effectively behind all of the existing and future liabilities of our subsidiaries, including trade payables.
We pay interest on the Senior Floating Rate Notes quarterly in cash, in arrears, on January 15, April 15, July 15 and October 15 at a rate per annum, reset quarterly, equal to LIBOR plus 4.0%,
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starting on April 15, 2005. The indenture governing the Senior Floating Rate Notes contains various affirmative and negative covenants, subject to a number of important limitations and exceptions, including but not limited to those limiting our ability and the ability of our restricted subsidiaries to borrow money, guarantee debt or sell preferred stock, create liens, pay dividends on or redeem or repurchase stock, make specified types of investments, sell stock in our restricted subsidiaries, restrict dividends or other payments from restricted subsidiaries, enter into transactions with affiliates and sell assets or merge with other companies.
The indenture governing the Senior Floating Rate Notes contains various events of default, including but not limited to those related to non-payment of principal, interest or fees; failure to perform or observe certain covenants; inaccuracy of representations and warranties in any material respect, cross defaults with certain other indebtedness, certain bankruptcy related events, monetary judgment defaults and material non-monetary judgment defaults, ERISA defaults and change of control. We can redeem the Senior Floating Rate Notes, in whole or in part, at any time on or after January 15, 2007. In addition, we may up to 35% of the Senior Floating Rate Notes prior to January 15, 2007 with the net proceeds of one or more public equity offerings. We are required to redeem the Senior Floating Rate Notes under certain circumstances involving changes of control.
In connection with the offering of the Senior Floating Rate Notes, we entered into a registration rights agreement with the initial purchasers (the "Registration Rights Agreement"), pursuant to which we and our parent agreed to conduct a registered exchange offer for the Notes (the "Exchange Offer") or to cause to become effective a shelf registration statement providing for resales of the Senior Floating Rate Notes. We are required (i) to file a registration statement (the "Registration Statement") for the exchange offer as soon as practicable, but in no event later than 90 days after January 14, 2005, (ii) to use our best efforts to cause such Registration Statement to become effective at the earliest possible time, but in no event later than 180 days after January 14, 2005, and (iii) to cause the Registration Statement to be effective continuously and to keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws; provided, however, that in no event shall such period be less than 30 days after the date notice of the Exchange Offer is mailed to the holders of the Senior Floating Rate Notes. If we fail to comply with certain of our obligations under the Registration Rights Agreement, we will be required to pay liquidated damages to the holders of the Senior Floating Rate Notes.
On March 25, 2005 we filed a registration statement with respect to new notes having substantially identical terms as the original notes, as part of an offer to exchange registered notes for the privately issued original Senior Floating Rate Notes. The new notes evidence the same debt as the original Senior Floating Rate Notes, are entitled to the benefits of the indenture governing the original Senior Floating Rate Notes and are treated under the indenture as a single class with the original notes. We expect the exchange offer to be completed during our third quarter, which ends on June 25, 2005.
Interest Rate Swaps
In connection with the offering of the Senior Floating Rate Notes, on January 11, 2005, we entered into interest rate swaps (the "Swaps") with Bank of America, N.A. and Wachovia Bank, N.A. Pursuant to the Swap with Bank of America, N.A., which becomes effective on January 17, 2006, we will swap 3 month LIBOR rates for fixed interest rates of 4.31% on a notional amount of $100 million for the period from January 17, 2006 through January 15, 2008, approximately $66.7 million for the period from January 15, 2008 to January 15, 2009 and approximately $33.3 million for the period from January 15, 2009 through January 15, 2010.
Pursuant to the Swap with Wachovia Bank, N.A., effective January 15, 2006, we will swap 3 month LIBOR rates for fixed interest rates of 4.29% for a notional amount of $50 million for the period from January 15, 2006 through January 15, 2008, approximately $33.3 million for the period from January 15, 2008 to January 15, 2009 and approximately $16.7 million for the period from January 15, 2009 through January 15, 2010.
The interest rate swaps are accounted for in accordance with Statement of Financial Accounting Standard ("SFAS") No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended
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by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized as either assets or liabilities at fair value. As of March 26, 2005, the interest rates swaps were recorded as an asset of $1.9 million. The swaps are accounted for as cash flow hedges, therefore, we have recorded changes in fair value in accumulated other comprehensive income of $1.2 million, net of deferred tax of $0.7 million.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs, an amendment of ARB No. 43 Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." as defined in ARB No. 43. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are in the processing of reviewing SFAS 151 and have not determined the effects on the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's cash flows and earnings are subject to fluctuations resulting from changes in interest rates, foreign currency exchange rates and raw material costs. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.
We are subject to changes in interest rates, foreign currency exchange rates and certain commodity prices. Our primary market risk is interest rate exposure with respect to our floating rate debt. The initial interest rate of the Senior Floating Rate Notes at closing was 6.64%. In connection with the offering of the Senior Floating Rate Notes, we entered into two interest rate swaps. These swaps effectively fix the interest rate of the Senior Floating Rate Notes at notional amounts of $150.0 million for two years beginning January 15, 2006, subsequently amortizing at a rate of $50.0 million per year until the maturity in 2010. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsDebt and Other ObligationsSenior Floating Rate Notes" and "Interest Rate Swaps."
We conduct foreign operations in Canada and Ireland and utilize international suppliers and manufacturers. As a result, we are subject to risk from changes in foreign exchange rates. These changes result in cumulative translation adjustments, which are included in accumulated other comprehensive income (loss). We do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates, as of March 26, 2005 to be material.
We purchase certain raw materials such as resin, steel, and wood that are subject to price volatility caused by unpredictable factors. Where possible, we employ fixed rate raw material purchase contracts and customer price adjustments to help us to manage this risk. We do not currently use derivatives to manage raw materials risk.
Item 4. Controls and Procedures
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and
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operation of our disclosure controls and procedures as of the end of the period covered by this report, and based on their evaluation, the principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no changes in our internal controls that have affected or are reasonably likely to affect our internal control over financial reporting.
PART II. OTHER INFORMATION AND SIGNATURE
Item 1. Legal Proceedings
From approximately 1993 through 1999, we manufactured and sold 647,000 wheelbarrows with poly wheel hubs. Various claims were submitted, and lawsuits filed, to recover for injuries sustained while inflating tires on these wheelbarrows. In 2002, we participated in a voluntary "fast track" recall of these wheelbarrows with the Consumer Product Safety Commission. We again voluntarily recalled these wheelbarrows in June 2004 in cooperation with the Consumer Product Safety Commission. However, less than 1% of the total products sold were returned, leaving an unknown number in service. To date, we have received 28 claims involving this product, of which 25 claims have been resolved. Of the three remaining open claims, we have not been named as a defendant in any lawsuits. This action is being defended by a former owner in accordance with the indemnification provisions of the purchase agreement pursuant to which the Predecessor was purchased. Although we believe that we have sufficient insurance coverage in place to cover this lawsuit, an adverse finding against us may exceed the limits of our coverage.
On August 3, 2004, Jacuzzi Brands filed a complaint in the Court of Common Pleas of Cumberland County, Pennsylvania against us, our parent and several Castle Harlan and Wind Point entities. The complaint alleges that, in connection with the acquisition of our parent by affiliates of Castle Harlan, we failed to provide notice to Jacuzzi Brands and to obtain its consent to such acquisition, as allegedly required by the provisions of a leasehold mortgage granted to Jacuzzi Brands on our distribution center in Carlisle, Pennsylvania. The complaint asserts causes of action against us for breach of contract, civil conspiracy and common law fraud. In the complaint, Jacuzzi Brands seeks an unspecified amount of damages, that a letter of credit be posted to secure our remaining rental obligations under the lease for the distribution center and other injunctive relief. Upon the filing of the complaint, Jacuzzi Brands moved for a preliminary injunction, which, following a hearing, the court denied by order dated August 23, 2004. We, our parent and the Castle Harlan defendants have since answered the complaint, and the Wind Point defendants filed preliminary objections seeking to dismiss the claims asserted against them. By order dated December 9, 2004, the court denied Wind Point's preliminary objections to the complaint. On January 6, 2005, Jacuzzi Brands served interrogatories and document demands upon all the defendants. We believe that the complaint is without merit and intend to continue to contest the action vigorously.
We are involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of any of these actions will have a material adverse effect on our consolidated financial position, results of operations, liquidity or capital resources.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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Item 6. Exhibits
 | |
| Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| Exhibit 31.2 | Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| Exhibit 32.1 | Certification of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 |
| |
| Exhibit 32.2 | Certification of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 |
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AMES TRUE TEMPER, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AMES TRUE TEMPER, INC. |
Date: May 9, 2005
| Judy Schuchart
Chief Financial Officer
(Principal Financial Officer
and Authorized Signatory) |
AMES TRUE TEMPER, INC.
EXHIBIT INDEX
| | | | | | |
| Exhibit | | Description |
| 31.1 | | Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934![[ ]](https://capedge.com/proxy/10-Q/0000950136-05-002632/ebox.gif){kind=small}
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934