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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2001
------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission file number 333-57099
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WKI HOLDING COMPANY, INC.
-------------------------
(Registrant)
DELAWARE 16-1403318
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
ONE PYREX PLACE, ELMIRA NEW YORK 14902
-------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-377-8000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
67,410,716 shares of WKI Holding Company, Inc.'s, $0.01 Par Value, were
outstanding as of August 13, 2001.
1
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands, except share and per share amounts)
FOR THE 91 FOR THE 91 FOR THE 182 FOR THE 184
DAYS ENDED DAYS ENDED DAYS ENDED DAYS ENDED
JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000
-------------- -------------- -------------- --------------
Net sales $ 162,842 $ 174,293 $ 333,639 $ 362,150
Cost of sales 120,572 122,393 242,806 249,698
Selling, general and administrative expenses 41,760 53,678 91,032 106,115
Provision for restructuring and rationalization
costs 14,994 -- 37,125 --
Integration related expenses -- 9,464 -- 14,088
Other expense 3,246 3,560 6,008 6,399
-------------- -------------- -------------- --------------
Operating loss (17,730) (14,802) (43,332) (14,150)
Interest expense 18,867 19,291 37,467 36,169
-------------- -------------- -------------- --------------
Loss before taxes on income (36,597) (34,093) (80,799) (50,319)
Income tax expense (benefit) 425 -- 1,114 (6,049)
-------------- -------------- -------------- --------------
Loss before minority interest (37,022) (34,093) (81,913) (44,270)
Minority interest in earnings of subsidiary (39) (66) (77) (109)
-------------- -------------- -------------- --------------
Net loss (37,061) (34,159) (81,990) (44,379)
-------------- -------------- -------------- --------------
Preferred stock dividends (3,792) (3,284) (7,449) (6,452)
-------------- -------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON STOCK $ (40,853) $ (37,443) $ (89,439) $ (50,831)
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.61) $ (0.56) (1.33) (0.76)
============== ============== ============== ==============
Weighted average number of common shares
outstanding during the period 67,410,716 66,857,143 67,405,273 66,857,143
The accompanying notes are an integral part of these statements.
2
CONSOLIDATED BALANCE SHEETS
WKI HOLDING COMPANY, INC.
(In thousands)
JULY 1,
2001 DECEMBER 31,
(UNAUDITED) 2000
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,384 $ 7,913
Accounts receivable (net of allowances of $24,079 in 2001
and $25,567 in 2000) 94,750 146,040
Inventories:
Finished and in-process goods 191,061 188,011
Raw materials and supplies 20,690 18,571
Other current assets 20,273 17,017
---------- ----------
Total current assets 332,158 377,552
---------- ----------
OTHER ASSETS
Other assets (net of accumulated amortization of $29,359 in
2001 and $23,399 in 2000) 54,235 55,706
---------- ----------
54,235 55,706
---------- ----------
PROPERTY AND EQUIPMENT
Land 4,076 4,076
Buildings 86,527 89,789
Machinery and equipment 295,881 305,576
---------- ----------
386,484 399,441
---------- ----------
Less accumulated depreciation (271,186) (257,985)
---------- ----------
115,298 141,456
---------- ----------
INTANGIBLES
Trademarks and patents (net of accumulated amortization
of $12,870 in 2001 and $9,852 in 2000) 145,690 148,708
Goodwill (net of accumulated amortization of $17,125 in
2001 and $14,373 in 2000) 202,796 205,798
---------- ----------
348,486 354,506
---------- ----------
TOTAL ASSETS $ 850,177 $ 929,220
========== ==========
The accompanying notes are an integral part of these statements.
3
CONSOLIDATED BALANCE SHEETS
WKI HOLDING COMPANY, INC.
(In thousands, except share and per share amounts)
JULY 1, DECEMBER 31,
2001 2000
LIABILITIES AND STOCKHOLDERS' DEFICIT (UNAUDITED)
------------ --------------
CURRENT LIABILITIES
Accounts payable $ 45,627 $ 62,418
Note payable to Borden 9,296 6,100
Debt payable within one year 3,307 3,635
Reserve for restructuring and rationalization 15,646 --
Other current liabilities 82,485 104,085
------------ --------------
156,361 176,238
------------ --------------
OTHER LIABILITIES
Note payable to Borden 22,704 --
Long-term debt 763,298 766,528
Non-pension post-employment benefit obligations 43,168 42,545
Other long-term liabilities 24,848 17,041
------------ --------------
854,018 826,114
------------ --------------
MINORITY INTEREST IN SUBSIDIARY 1,296 1,219
STOCKHOLDERS' DEFICIT
Preferred Stock - 5,000,000 shares authorized;
3,200,000 shares issued 94,056 91,527
Common Stock - $0.01 par value, 80,000,000 shares authorized;
68,147,145 and 67,397,028 shares issued in 2001 and 2000,
respectively 681 674
Treasury Stock (736,429 and 280,000 shares held in treasury in
2001 and 2000, respectively) (2,105) (940)
Contributed capital 606,604 604,911
Accumulated deficit (857,023) (767,584)
Accumulated other comprehensive income (3,711) (2,939)
------------ --------------
Total stockholders' deficit (161,498) (74,351)
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 850,177 $ 929,220
============ ==============
The accompanying notes are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands)
FOR THE 182 FOR THE 184
DAYS ENDED DAYS ENDED
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES: JULY 1, 2001 JULY 2, 2000
-------------- --------------
Net loss $ (81,990) $ (44,379)
Adjustments to reconcile net loss to net cash (Used in)
Provided by operating activities:
Depreciation and amortization 25,348 23,098
Amortization of deferred financing fees 1,597 1,082
Minority interest in income of subsidiary 77 110
Deferred tax provision -- (8,552)
Provision for restructuring and rationalization costs,
net of cash paid 33,123 --
Sale of accounts receivable -- 50,000
Provision for post-retirement benefits, net of cash
paid 4,693 --
Changes in operating assets and liabilities:
Accounts receivable 51,290 53,223
Inventories (5,619) (42,674)
Prepaid expenses and other current assets (3,256) (3,683)
Accounts payable and accrued expenses (33,767) (37,338)
Other assets/liabilities (1,027) 10,639
-------------- --------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (9,531) 1,526
-------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property and equipment and other assets (11,251) (28,743)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (11,251) (28,743)
-------------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings on Borden revolving credit facility, net 25,900 --
Borrowing on revolving credit facility -- 27,900
Repayment of long-term debt, other than revolving
credit facility (3,558) (3,335)
Issuance of common stock 1,700 --
Treasury stock purchases (1,165) (630)
Deferred financing fees (4,624) --
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,253 23,935
-------------- --------------
Net change in cash and cash equivalents (2,529) (3,282)
Cash and cash equivalents at beginning of year 7,913 8,368
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,384 $ 5,086
============== ==============
The accompanying notes are an integral part of these statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
WKI HOLDING COMPANY, INC.
(In thousands)
FOR THE 182 FOR THE 184
DAYS ENDED DAYS ENDED
JULY 1, 2001 JULY 2, 2000
------------- -------------
SUPPLEMENTAL DATA:
Cash paid during the year for:
Income taxes, net $ 2,463 $ 1,521
Interest 42,334 34,906
Non-cash activity:
Preferred stock dividends $ 7,449 $ 6,452
The accompanying notes are an integral part of these statements.
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (UNAUDITED)
WKI HOLDING COMPANY, INC.
(In thousands)
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON TREASURY CONTRIBUTED ACCUMULATED COMPREHENSIVE STOCKHOLDERS
STOCK STOCK STOCK CAPTIAL DEFICIT INCOME DEFICIT
---------- ------- ---------- ------------- ------------- --------------- --------------
BALANCE, DECEMBER 31, 2000 $ 91,527 $ 674 $ (940) $ 604,911 $ (767,584) $ (2,939) $ (74,351)
NET LOSS (81,990) (81,990)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (255) (255)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS (189) (189)
DERIVATIVE FAIR VALUE (328) (328)
--------------
ADJUSTMENT
TOTAL COMPENSATIVE INCOME (82,762)
--------------
ISSUANCE OF COMMON STOCK 7 1,493 1,500
COLLECTION OF RECEIVABLE FOR 200 200
STOCK SOLD
REPURCHASE OF COMMON STOCK (1,165) (1,165)
PREFERRED STOCK DIVIDENDS 2,529 (7,449) (4,920)
---------- ------- ---------- ------------- ------------- --------------- --------------
BALANCE, JULY 1, 2001 $ 94,056 $ 681 $ (2,105) $ (606,604) $ (857,023) $ (3,711) $ 161,498
========== ======= ========== ============= ============= =============== ==============
The accompanying notes are an integral part of these statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WKI HOLDING COMPANY, INC.
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
WKI Holding Company, Inc. (the Company or WKI) is a leading manufacturer and
marketer of housewares, including bakeware, dinnerware, rangetop cookware,
kitchen and household products, cutlery and precision cutting tools. The
Company believes that its brands, including Corningware(R), Pyrex(R),
Corelle(R), Revere Ware(R), Visions(R), EKCO(R), Via(R), Baker's Secret(R),
Chicago Cutlery(R), OLO(R), OXO(R), Grilla Gear(R), Farberware(R), and
Cuisinart(R), constitute one of the broadest and best recognized collection of
brands in the housewares industry.
Pursuant to Regulation 15(d) of the Securities Act of 1934, WKI is filing herein
its quarterly report on Form 10-Q, which includes the second fiscal quarter of
the year ended December 31, 2001. The consolidated financial statements reflect
all adjustments, which, in the opinion of management, are necessary for a fair
statement of the results of operations and financial position for the interim
periods presented. All such adjustments are of a normal recurring nature. The
consolidated financial statements have been compiled without audit and are
subject to such year-end adjustments as may be considered appropriate by the
registrant and should be read in conjunction with the Company's Form 10-K for
the year ended December 31, 2000 which has been filed with the Securities and
Exchange Commission.
Certain 2000 amounts have been reclassified to conform with 2001 presentation.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in
connection with the Purchase or Promotion of the Vendor's Products." This issue
requires that consideration paid from a vendor to a purchaser be classified as a
reduction of revenue in the vendor's income statement unless it can be
determined that an identifiable benefit will be received by the vendor and the
fair value of the benefit exceeds the consideration provided to the purchaser.
In that case, the consideration should be characterized as a cost. This EITF is
effective for quarters beginning after December 15, 2001. The Company is in the
process of determining the impact of this consensus but does not expect reported
financial results will be significantly impacted.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This standard requires that amortization of goodwill and other
intangible assets with indefinite lives be discontinued. Instead, goodwill and
other intangible assets with indefinite lives will be assessed, at least
annually, for impairment by applying a fair-value-based test. However, an
intangible asset acquired through contractual or other legal rights or that can
be sold, transferred, licensed, rented or exchanged will still be amortized over
its useful life, which is no longer capped at 40 years. SFAS No. 142 may have an
impact on the carrying value of goodwill and will be implemented as of January
1, 2002. The Company is in the process of determining the impact of
implementing SFAS No.142.
(3) RESTRUCTURING AND RATIONALIZATION
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations. The initiatives include the following:
(1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured.
(2) Consolidation of distribution operations at Waynesboro, Virginia into
the Company's existing distribution centers at Monee, Illinois and
Greencastle, Pennsylvania. Waynesboro is expected to cease operations
during the first quarter of 2002.
(3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
8
(4) Exit from the Wauconda, Illinois facility by the end of the year 2001,
where Chicago Cutlery(R) product lines are manufactured.
(5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
The initiatives have resulted in $37.1 million of expenses and $4.0 million of
cash paid through the second quarter of 2001.
Details of the program initiatives are presented below (in thousands):
ACCRUAL REMAINING IN
--------------------------------------------------
TOTAL
RESTRUCTURING OTHER
RESTRUCTURING RATIONALIZATION AND CASH FIXED CURRENT OTHER
CHARGE CHARGE RATIONALIZATION PAID INVENTORY ASSETS LIABILITIES LIABILITIES
-------------- ---------------- ---------------- --------- ---------- ---------- ------------ ------------
DISPOSAL OF $ 15,011 $ 4,318 $ 19,329 -- $ 450 $ 14,661 $ 4,218 --
ASSETS
EMPLOYEE 12,278 -- 12,278 820 -- -- 9,092 2,366
TERMINATION
OTHER EXIT 1,585 -- 1,585 404 -- -- 1,181 --
COSTS
BUSINESS -- 3,933 3,933 2,778 -- -- 1,155 --
REDESIGN COSTS
-------------- ---------------- ---------------- --------- ---------- ---------- ------------ ------------
$ 28,874 $ 8,251 $ 37,125 $ 4,002 $ 450 $ 14,661 $ 15,646 $ 2,366
============== ================ ================ ========= ========== ========== ============ ============
Disposal of Assets
- ------------------
As part of the restructuring initiative to close or streamline manufacturing,
distribution and administrative locations the tangible assets of the
Martinsburg, Waynesboro, Massillon, Wauconda and certain administrative
facilities have been written down to fair value. Management judgment is
involved in estimating the tangible assets' fair value; accordingly, actual
results could vary significantly from such estimates. Rationalization charges
primarily consist of environmental expenditures associated with the closure and
anticipated sale of Martinsburg. Management is continuing to evaluate the
necessity of additional asset disposals through additional restructuring
measures.
Employee termination
- --------------------
As part of the restructuring initiative approximately 500 employees have been
notified of their release from employment, generating a $12.3 million
restructuring charge through the second quarter of 2001. As of July 1, 2001
approximately 70 employees have been terminated. Included in the charge
is a net pension and post retirement benefit charge of $2.4 million, which
resulted from the terminations. Severance and other benefits are recorded once
the affected employees are notified of their status.
Other exit costs
- ----------------
Other exit costs primarily consist of legal costs associated with the closure
and anticipated sale of facilities.
Business redesign costs
- -----------------------
The Company is in the process of realigning its administrative, manufacturing
and sourcing strategies to be more competitive. The business redesign costs
primarily include consulting expenses associated with process redesign work
required to support the restructuring initiatives, and such costs are expensed
as incurred.
9
Restructuring and rationalization charges generated from these initiatives are
expected to increase to approximately $47.0 million by the end of 2001. In
addition, management is continuing to evaluate the necessity of additional
restructuring programs.
(4) SUPPLEMENTAL BALANCE SHEET DATA
(IN THOUSANDS)
JULY 1, 2001 DECEMBER 31, 2000
--------------- ------------------
Other current liabilities
Wages and employee benefits $ 22,863 $ 30,254
Accrued advertising and promotion 23,793 28,277
Accrued interest 9,728 11,601
Other accrued expenses 26,101 33,953
--------------- ------------------
$ 82,485 $ 104,085
=============== ==================
(5) BORROWINGS
On April 12, 2001, the Company entered into an amended and restated credit
agreement, which amended and restated the senior credit agreement dated April 9,
1998 (1998 Credit Agreement), under which $292.0 million of term loans remain
outstanding and the $275.0 million revolving credit facility remains in effect.
The Amended and Restated Credit Agreement also provides for the following
significant changes from the 1998 Credit Agreement: a first priority lien on
substantially all of the Company's assets and its subsidiaries' assets; a pledge
of 100% of the stock of all of the Company's domestic subsidiaries and 65% of
the stock of certain foreign subsidiaries; an additional secured revolving
credit facility of $25.0 million, maturing on March 31, 2004; amended financial
covenants; an additional financial covenant; increased pricing on the credit
facilities; and changes in the restrictions affecting indebtedness, investments,
acquisitions, dispositions and prepayment of subordinated indebtedness.
The Company's amended and restated credit agreement contains numerous financial
and operating covenants that limit the discretion of the Company's management
with respect to certain business matters. These covenants place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, pay dividends and other distributions, prepay
subordinated indebtedness, enter into sale and leaseback transactions, create
liens or other encumbrances, make capital expenditures, make certain investments
or acquisitions, engage in certain transactions with affiliates, sell or
otherwise dispose of assets and merge or consolidate with other entities and
otherwise restrict corporate activities. In addition, the credit facilities
also require the Company to meet certain financial ratios and tests, including a
minimum EBITDA, a ratio of debt to EBITDA and a ratio of EBITDA to cash interest
expense (where EBITDA represents adjusted cash flow as described more fully in
the credit facilities). The amended and restated credit agreement contains
customary events of default.
During the third quarter of 2000, the Company negotiated with Borden, Inc., an
affiliate of the Company's parent, to provide a $40.0 million temporary credit
facility to assist in meeting working capital requirements, capital
expenditures, interest payments and scheduled principal payments. The original
maturity date of the Borden agreement of December 31, 2000 was extended to
August 16, 2001, the date that is 91 days after the perfection of the collateral
under the Amended and Restated Credit Agreement. Effective July 2, 2001, Borden
increased its line of credit to the Company from $40.0 million to $50.0 million.
On August 16, 2001, Borden will provide to the Company a $25.0 million revolving
credit facility, maturing on March 30, 2004. This credit facility will have
substantially the same terms as the Borden credit facility dated as of August
25, 2000, and, in addition, will be secured by a security interest on the
Company's assets that is second in priority behind the security interests
10
securing the Amended and Restated Credit Agreement. At August 13, 2001, $6.3
million was available under the Borden credit facility.
(6) RELATED PARTY TRANSACTIONS
The following transactions with related parties are included in the consolidated
statements of operations for the quarters ended July 1, 2001 and July 2, 2000.
(IN THOUSANDS)
----------------------------------------------------------
FOR THE 91 FOR THE 91 FOR THE 182 FOR THE 184
DAYS ENDED DAYS ENDED DAYS ENDED DAYS ENDED
JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000
------------- ------------- ------------- -------------
Management fees and services $ 908 $ 625 $ 1,764 $ 1,250
to Borden
Interest expense to Borden 671 -- 1,062 --
The Company incurs management fees and expenses for services provided by Borden.
See Note 5 regarding the Company's line of credit with Borden.
During the first six months of 2001, the Company had accrued $7.4 million in
preferred stock dividends which are payable to Borden and the Company's parent
in the amounts of $4.9 million and $2.5 million, respectively. Dividends
payable to Borden are recorded in other long-term liabilities. The dividends
payable to the Company's parent will be paid in additional shares and are
accrued in preferred stock.
The Company and/or affiliates of the Company, including entities related to KKR,
from time to time have purchased, and may in the future purchase, depending on
market conditions, senior subordinated notes and other debt obligations
previously issued by the Company in the open market or by other means. As of
July 1, 2001, affiliates have purchased an aggregate of $76.7 million of senior
subordinated notes in open market transactions.
(7) COMMITMENTS
The Company is a defendant or plaintiff in various claims and lawsuits arising
in the normal course of business. The Company believes, based upon information
it currently possesses, and taking into account established reserves for
estimated liabilities and its insurance coverage, that the ultimate outcome of
the proceedings and actions is unlikely to have a material adverse effect on the
Company's financial statements.
(8) DERIVATIVES
Effective January 1, 2001, the Company adopted SFAS No. 133, 137 and 138 related
to "Accounting for Derivative Instruments and Hedging Activities". At that time
the Company had a $15 million notional amount interest rate swap with a fair
value of $(0.2) million. In accordance with these statements, the Company
recorded a transition adjustment to other comprehensive income and other
liabilities of $0.2 million. At July 1, 2001, the swap had a fair value of
$(0.5) million. Other comprehensive income and other liabilities have been
adjusted accordingly. A 1% increase or decrease in market interest rates would
result in a $0.3 million increase/(decrease) in the fair value of the interest
rate swap. The swap expires on July 29, 2003.
(9) SEGMENT INFORMATION
The Company believes its business units have similar economic characteristics
and that it meets the aggregation criteria of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information."
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
Background
- ----------
WKI Holding Company Inc. (WKI or the Company) is a leading manufacturer and
marketer of bakeware, rangetop cookware, kitchen and household tools, tabletop
dinnerware, cutlery, and precision cutting tools. The Company has strong
positions in major channels of distribution for its products in North America
and has also achieved a significant presence in certain international markets,
primarily Asia, Australia, Latin America and the United Kingdom. In North
America the Company sells both on a wholesale basis to retailers, distributors
and other accounts that resell the Company's products, and on a retail basis,
through Company-operated factory stores. In the international market the
Company has established its presence on a wholesale basis through an
international sales force along with localized distribution and marketing
capabilities.
In the first quarter of 2001, the Company began the process of realigning by
major product line and product category as part of an overall strategy to
improve financial and customer service performance. The product categories as
defined by the Company are Oven/Bakeware which includes the Corningware(R),
Pyrex(R), EKCO(R) metal bakeware, Farberware(R) and Cuisinart(R) brands;
Rangetop Cookware which includes the Revere(R), Visions(R) and EKCO(R) Cookware
brands; Kitchenware which includes kitchen tools and gadgets sold under the
EKCO(R) and Grilla Gear(R) brands; Tabletop which includes Corelle(R)
dinnerware; Cutlery which includes the Chicago Cutlery(R) and Regent Sheffield
brands; OXO(R) which includes kitchen and household tools under the OXO Good
Grips(R), OXO Softworks(TM), OXO Touchables(TM) and OXO Basics(TM) brand names;
and "Other" which includes cleaning products, precision cutting tools sold under
the OLFA and OLO(R) brands, and other kitchen accessories that are manufactured
by third parties and are sold primarily through the Company-operated factory
stores.
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations. The program will result in charges of approximately $47.0 million
and cash payments, including capital expenditures, of approximately $18.0
million in 2001. The program includes five major components:
(1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured.
(2) Consolidation of distribution operations at Waynesboro, Virginia into
the Company's existing distribution centers at Monee, Illinois and
Greencastle, Pennsylvania. Waynesboro is expected to cease operations
during the first quarter of 2002.
(3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
(4) Exit from the Wauconda, Illinois facility by the end of the year 2001,
where Chicago Cutlery(R) product lines are manufactured.
(5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
Management is continuing to evaluate the necessity of additional restructuring
measures.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
- ---------------------
SECOND QUARTER 2001 VERSUS SECOND QUARTER 2000
- ----------------------------------------------
(IN THOUSANDS)
FOR THE 91 FOR THE 91
DAYS ENDED % OF NET DAYS ENDED % OF NET
JULY 1, 2001 SALES JULY 2, 2000 SALES
-------------- ----------- -------------- ---------
Net Sales $ 162,842 100.0 % $ 174,293 100.0 %
Cost of sales 120,572 74.0 122,393 70.2
-------------- ----------- -------------- ---------
Gross profit 42,270 26.0 51,900 29.8
-------------- ----------- -------------- ---------
Selling, general and administrative 41,760 25.6 53,678 30.8
Restructuring and rationalization
expenses 14,994 9.2 -- --
Integration related expenses -- -- 9,464 5.4
Other expenses 3,246 2.0 3,560 2.0
-------------- ----------- -------------- ---------
Operating loss (17,730) (10.9) (14,802) (8.5)
Interest expense 18,867 11.6 19,291 11.1
-------------- ----------- -------------- ---------
Loss before taxes on income (36,597) (22.5) (34,093) (19.6)
Income tax expense 425 0.3 -- --
-------------- ----------- -------------- ---------
Loss before minority interest (37,022) (22.7) (34,093) (19.6)
Minority interest in subsidiary (39) -- (66) --
-------------- ----------- -------------- ---------
Net loss $ (37,061) (22.8)% $ (34,159) (19.6)%
============== =========== ============== =========
EBITDA (5,004) (3.1)% (3,512) (2.0)%
Integration related expenses -- -- 9,464 5.4
Provision for close-out of
inventories -- -- 2,900 1.7
Restructuring and rationalization
expenses 14,994 9.2 -- --
-------------- ----------- -------------- ---------
Adjusted EBITDA $ 9,990 6.1 % $ 8,852 5.1%
============== =========== ============== =========
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR TO DATE JULY 1, 2001 VERSUS YEAR TO DATE JULY 2, 2000
- ----------------------------------------------------------
(IN THOUSANDS)
FOR THE 182 FOR THE 184
DAYS ENDED % OF NET DAYS ENDED % OF NET
JULY 1, 2001 SALES JULY 2, 2000 SALES
-------------- ------------ -------------- ----------
Net Sales $ 333,639 100.0 % $ 362,150 100.0%
Cost of sales 242,806 72.8 249,698 68.9
-------------- ------------ -------------- ----------
Gross profit 90,833 27.2 112,452 31.1
-------------- ------------ -------------- ----------
Selling, general and administrative 91,032 27.3 106,115 29.3
Restructuring and rationalization
expenses 37,125 11.1 -- --
Integration related expenses -- -- 14,088 3.9
Other expenses 6,008 1.8 6,399 1.8
-------------- ------------ -------------- ----------
Operating loss (43,332) (13.0) (14,150) (3.9)
Interest expense 37,467 11.2 36,169 10.0
-------------- ------------ -------------- ----------
Loss before taxes on income (80,799) (24.2) (50,319) (13.9)
Income tax expense (benefit) 1,114 0.3 (6,049) (1.7)
-------------- ------------ -------------- ----------
Loss before minority interest (81,913) (24.6) (44,270) (12.2)
Minority interest in subsidiary (77) -- (109) --
-------------- ------------ -------------- ----------
Net loss $ (81,990) (24.6)% $ (44,379) (12.3)%
============== ============ ============== ==========
EBITDA (17,984) (5.4)% 8,948 2.5 %
Integration related expenses -- 14,088 3.9
Provisions for close-out inventories -- -- 2,900 0.8
Restructuring and rationalization
expenses 37,125 11.1 -- --
-------------- ------------ -------------- ----------
Adjusted EBITDA $ 19,141 5.7 % $ 25,936 7.2 %
============== ============ ============== ==========
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
NET SALES BY PRODUCT CATEGORIES:
(IN MILLIONS)
SECOND QUARTER
-------------------------------------------------
FOR THE 91 FOR THE 91
DAYS ENDED DAYS ENDED
JULY 1, 2001 JULY 2, 2000 $CHANGE % CHANGE
------------- ------------- -------- ---------
Oven Bakeware $ 48.9 $ 52.8 $ (3.9) (7.5) %
Tabletop 41.5 40.5 1.0 2.4
Rangetop Cookware 19.8 18.0 1.8 10.0
OXO 17.8 15.0 2.8 18.5
Kitchenware 17.2 15.4 1.8 11.2
Cutlery 7.3 5.8 1.5 26.5
Other 10.3 21.8 (11.5) (52.1)
------------- ------------- --------
Sub-Total 162.8 169.3 (6.5) (3.8)
------------- ------------- --------
Cleaning (1) -- 5.0 (5.0) (100.0)
------------- ------------- --------
Total $ 162.8 $ 174.3 $ (11.5) (6.6) %
============= ============= ========
YEAR-TO-DATE
-------------------------------------------------
FOR THE 182 FOR THE 184
DAYS ENDED DAYS ENDED
JULY 1, 2001 JULY 2, 2000 $CHANGE % CHANGE
------------- ------------- -------- ---------
Oven Bakeware $ 100.0 $ 115.1 $ (15.1) (13.1) %
Tabletop 82.5 83.4 (0.9) (1.1)
Rangetop Cookware 45.0 38.3 6.7 17.6
OXO 34.2 29.5 4.7 16.2
Kitchenware 33.0 29.6 3.4 11.5
Cutlery 14.7 12.3 2.4 19.9
Other 24.2 44.3 (20.1) (45.6)
------------- ------------- --------
Sub-Total $ 333.6 $ 352.5 $ (18.9) (5.4)
------------- ------------- --------
Cleaning (1) -- 9.7 (9.7) (100.0)
------------- ------------- --------
Total 333.6 362.2 (28.6) (7.9) %
============= ============= ========
<FN>
(1) The Company exited the cleaning products line in the third quarter of
2000.
NET SALES
Net sales for the second quarter of 2001 were $162.8 million, a decrease of
$11.5 million or 6.6% versus the second quarter of 2000 net sales of $174.3
million. Excluding the impact of exiting the cleaning products line, net sales
for the second quarter of 2001 declined $6.5 million or 3.8% versus the second
quarter of 2000.
Year to date net sales for the first half of 2001 were $333.6 million, a
decrease of $28.6 million or 7.9% versus the first half of 2000 net sales of
$362.2 million. Excluding the impact of exiting the cleaning products line, net
sales for the first half of 2001 declined $18.9 million or 5.4% versus the first
half of 2000.
15
Sales declines were primarily attributable to the exit of the cleaning product
line as well as lower volumes in certain international markets and the
factory stores.
Oven Bakeware
Net sales for the Oven Bakeware category in the second quarter of 2001 were
$48.9 million, a decrease of $3.9 million or 7.5% versus the second quarter of
2000 net sales of $52.8 million. Year to date net sales for the first half of
2001 for Oven Bakeware were $100.0 million, a decrease of $15.1 million or 13.1%
versus the first half of 2000 net sales of $115.1 million. These decreases are
primarily attributable to the loss of a Corningware original
equipment-manufacturing program, fewer promotional events in the Supermarket
channel and softness in certain International markets.
Tabletop
Net sales for the Tabletop category in the second quarter of 2001 were $41.5
million, an increase of $1.0 million or 2.4% over the second quarter of 2000 net
sales of $40.5 million. Year to date net sales for the first half of 2001 for
Tabletop were $82.5 million, a decrease of $0.9 million or 1.1% versus the first
half of 2000 net sales of $83.4 million. Strong sales growth in the
International and Canadian markets in the second quarter of 2001 offset the
first quarter of 2001 International sales decline resulting from a pipeline fill
in 2000. Successful new product introductions including the Corningware
Tabletop line, Corelle Coordinates and new Corelle patterns substantially offset
the reduction in overall sales due to competitive pressures.
Rangetop Cookware
Net sales for the Rangetop Cookware category in the second quarter of 2001 were
$19.8 million, an increase of $1.8 million or 10.0% versus the second quarter of
2000 net sales of $18.0 million. Year to date net sales for the first half of
2001 for Rangetop Cookware were $45.0 million, an increase of $6.7 million or
17.6% over the first half of 2000 net sales of $38.3 million. The increase is
primarily attributable to the successful introduction of the Martha Stewart
products at K-Mart and the introduction of the Magnalite(R) products at
Wal*Mart.
OXO
Net sales for OXO in the second quarter of 2001 were $17.8 million, an increase
of $2.8 million or 18.5% over the second quarter of 2000 net sales of $15.0
million. Year to date net sales for the first half of 2001 for OXO were $34.2
million, an increase of $4.7 million or 16.2% over the first half of 2000 net
sales of $29.5 million. The increase is attributable to successful new product
launches including the OXO SteeL line of stainless steel kitchen tools and
utensils, OXO Good Grips enamel tea kettles and extensions to OXO Good Grips
garden tools and cutlery products.
Kitchenware
Net sales for the Kitchenware category in the second quarter of 2001 were $17.2
million, an increase of $1.8 million or 11.2% over the second quarter of 2000
net sales of $15.4 million. Year to date net sales for the first half of 2001
for Kitchenware were $33.0 million, an increase of $3.4 million or 11.5% over
the first half of 2000 net sales of $29.6 million. The increase is primarily
attributable to the successful introduction of the Martha Stewart products at
K-Mart. In addition, 2001 net sales reflect the addition of the Kitchenware
product line to the Company-operated factory stores.
Cutlery
Net sales for the Cutlery category in the second quarter of 2001 were $7.3
million, an increase of $1.5 million or 26.5% over the second quarter of 2000
net sales of $5.8 million. Year to date net sales for the first half of 2001
16
for Cutlery were $14.7 million, an increase of $2.4 million or 19.9% over the
first half of 2000 net sales of $12.3 million. The increase is attributable to
successful new product introductions and additions to the Company's customer
base.
Other
Net sales for the "Other" category in the second quarter of 2001 were $10.3
million, a decrease of $11.5 million or 52.1% versus the second quarter of 2000
net sales of $21.8 million. Year to date net sales for the first half of 2001
for the "Other" category were $24.2 million, a decrease of $20.1 million or
45.6% versus the first half of 2000 net sales of $44.3 million. These decreases
are primarily attributable to the Company liquidating a significant portion of
kitchen accessories sold through Company-operated factory stores in the fourth
quarter of 2000 and the first half of 2001. The Company-operated factory stores
are in the process of replacing a portion of these products with EKCO
kitchenware and OXO products, which are included in the Kitchenware and OXO
product categories.
GROSS PROFIT
Gross profit for the second quarter of 2001 was $42.3 million, a decrease of
$9.6 million when compared to gross profit of $51.9 million for the second
quarter of 2000. As a percentage of net sales, gross profit decreased to 26.0%
in the second quarter of 2001 from 29.8% in the second quarter of 2000.
Gross profit for the first half of 2001 was $90.8 million, a decrease of $21.7
million when compared to $112.5 million the first half of 2000. As a percentage
of net sales, gross profit decreased to 27.2% in the first half of 2001 from
31.1% in the first half of 2000.
The decrease in gross profit in the first half of 2001 versus the first half of
2000 is attributable to several factors including; the decline in net sales;
program implementation in the first quarter of 2001 to discontinue a significant
number of stock-keeping units (SKU's) across all product lines to reduce
inventory and warehousing costs and to improve customer service-a substantial
portion of these discontinued products were liquidated in the first half of
2001; and a modest shift in channel mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter 2001 were
$41.8 million, a decrease of $11.9 million or 22.2% from $53.7 million in the
second quarter of 2000. As a percentage of net sales, selling, general and
administrative expenses decreased in the second quarter to 25.6% from 30.8% in
the second quarter of 2000.
Selling, general and administrative expenses for the first half of 2001 were
$91.0 million, a decrease of $15.1 million or 14.2% from $106.1 million for the
first half of 2000. As a percentage of net sales, selling, general and
administrative expenses decreased for the first half of 2001 to 27.3% compared
to 29.3% for the first half of 2000.
These favorable decreases are the direct result of management's emphasis on
reducing costs. Administrative expenses have been reduced due to significant
headcount reductions, and overall business realignment efforts including the
integration of the EKCO and GHC operations into the Company that was completed
by the end of 2000 and the restructuring and rationalization programs being
implemented in 2001. In addition, advertising costs have been reduced from
prior year.
17
RESTRUCTURING AND RATIONALIZATION
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations including the following:
1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured.
2) Consolidation of distribution operations at Waynesboro, Virginia into
the Company's existing distribution centers at Monee, Illinois and
Greencastle, Pennsylvania. Waynesboro is expected to cease operations
during the first quarter of 2002.
3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
4) Exit from the Wauconda, Illinois facility by the end of the year 2001,
where Chicago Cutlery(R) product lines are manufactured.
5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
Restructuring and rationalization expenses were $37.1 million for the first half
of 2001. The charges recorded consist of asset disposals of $19.3 million;
employee termination expenses of $12.3 million, other exit costs of $1.6 million
and business redesign expenses of $3.9 million.
INTEGRATION RELATED EXPENSES
The Company incurred costs relating to the integration of EKCO and GHC's
operations into WKI of $9.5 million for the second quarter of 2000 and $14.1
million for the first half of 2000. The integration costs primarily related to
systems implementations, employee compensation arrangements, consulting services
and other integration costs. The integration of EKCO and GHC was completed in
2000.
OTHER EXPENSE
Other operating expense for the second quarter of 2001 was $3.2 million versus
$3.6 million for the second quarter of 2000. Other operating expense for the
first half of 2001 was $6.0 million versus $6.4 million for the first half of
2000. The decline in other operating expense is primarily attributable to the
impact of foreign currency exchange rates.
INTEREST EXPENSE
Interest expense was $18.9 million in the second quarter of 2001 compared to
$19.3 million in the second quarter of 2000. A decrease in interest rates was
partially offset by higher debt balances in the second quarter of 2001 versus
the second quarter of 2000, and higher amortization of fees incurred as a result
of the renegotiated credit agreement.
Year-to-date interest expense for the first half of 2001 was $37.5 million
versus $36.2 million for the first half of 2000. The $1.3 million increase is
due to the higher average outstanding debt balance in the first half 2001 versus
2000 and higher amortization of fees incurred as a result of the renegotiated
credit agreement partially offset by lower average interest rates.
INCOME TAX
Income tax expense in the second quarter of 2001was $0.4 million versus no
charge for the second quarter of 2000. Income tax expense for the first half
of 2001 was $1.1 million compared to an income tax benefit of $6.0 million for
the first half of 2000. In the first quarter of 2000 the Company did recognize
an income tax benefit on pre-tax losses. In the third quarter of 2000, the
18
Company concluded that it was more likely than not that it would not generate
sufficient income to realize the net deferred tax assets. The 2001 income tax
expense is primarily attributable to foreign income taxes. The Company provided
a full valuation allowance on the domestic income tax benefit relating to the
current period pre-tax losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements arise principally in connection with
financing working capital needs, servicing debt obligations, funding
manufacturing restructuring costs, financing its recent acquisitions and
completing the integration of such acquisitions, and funding capital
expenditures. In the third quarter of 2000, the Company's existing $275.0
million revolving credit facility was fully utilized and the Company received a
temporary $40.0 million credit facility from Borden to meet its working capital
and liquidity requirements. Effective July 2, 2001, Borden increased its line
of credit to the Company from $40.0 million to $50.0 million. As of August 13,
2001, the Company had $6.3 million available under the Borden facility.
In order to meet its funding requirements and comply with its financial
covenants in the 1998 Credit Agreement, the Company amended and restated its
1998 Credit agreement effective April 12, 2001 (the Amended and Restated Credit
Agreement), providing for an additional $25.0 million of financing, which
becomes available on August 16, 2001, the date which is 91 days after perfection
of the collateral under the Amended and Restated Credit Agreement. The Company
also has extended its short-term line of credit from Borden until August 16,
2001 after which Borden will provide to the Company a $25.0 million revolving
credit facility. These actions have resulted in an additional $50.0 million in
long-term financing commitments, which expire on March 31, 2004. In addition,
the Company may elect, within the limitations of its current debt instruments,
to obtain additional financing commitments.
The Amended and Restated Credit Agreement also waived the defaults under the
coverage ratio and leverage ratios covenants for the quarter ended December 31,
2000 and amended the future financial covenants beginning March 31, 2001. In
addition, the Amended and Restated Credit Agreement provides for a first
priority lien on substantially all of the Company's assets and its subsidiaries'
assets; a pledge of 100% of the stock of all of the Company's domestic
subsidiaries and 65% of the stock of certain foreign subsidiaries; increased
pricing on the credit facilities; and changes in the restrictions affecting
indebtedness, investments, acquisitions, dispositions and prepayment of
subordinated indebtedness. The Company believes that these facilities and cash
generated from operations will be sufficient to fund operations and capital
expenditures. The Company's ability to fund its operations, capital
expenditures and debt service will depend upon its future financial, business
and other factors, some of which are beyond the Company's control.
The Company's credit facilities contain numerous financial and operating
covenants that limit the discretion of the Company's management with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional indebtedness,
pay dividends and other distributions, prepay subordinated indebtedness, enter
into sale and leaseback transactions create liens or other encumbrances, make
capital expenditures, make certain investments or acquisitions, engage in
certain transactions with affiliates, sell or otherwise dispose of assets and
merge or consolidate with other entities and otherwise restrict corporate
activities. In addition, the credit facilities also require the Company to meet
certain financial ratios and tests, including a minimum EBITDA, a ratio of debt
to EBITDA and EBITDA to cash interest expense (where EBITDA represents adjusted
cash flow as described more fully in the credit facilities). The credit
facilities and the indenture contain customary events of default.
CASH FLOWS
Through the second quarter of 2001 the Company's operating activities used cash
of $9.5 million compared to $1.5 million provided by operating activities
during the first half of 2000. Net cash provided by operations in 2000 includes
proceeds from the sale of accounts receivable to an affiliate totaling $50
19
million. No such transaction occurred in 2001. Increased inventory levels in
the first half of 2000 primarily offset the cash provided by the sale of
receivables. Cash used for restructuring in 2001 was $4.0 million.
Investing activities used cash of $11.3 million in the first half of 2001
compared to $28.7 million in the first half of 2000. The cash used for
investing activities in 2000 included costs associated with the systems
implementation in the newly acquired EKCO and GHC businesses as well as a
scheduled tank repair at the Company's primary dinnerware manufacturing
facility.
The net cash provided by financing activities totaling $18.3 million for the
first half of 2001 is comparable to the $23.9 million in the first half of 2000.
RESTRUCTURING
In 2001, the Company implemented an initiative to restructure and rationalize
several aspects of the Company's manufacturing, distribution and administrative
operations. The program will result in charges of approximately $47.0 million
and cash payments, including capital expenditures, of approximately $18.0
million in 2001. The program includes five major components:
(1) Exit from the Martinsburg, West Virginia facility by the end of the
first quarter of 2002, where the Corningware(R) and Visions(R) product
lines are manufactured.
(2) Consolidation of distribution operations at Waynesboro, Virginia into
the Company's existing distribution centers at Monee, Illinois and
Greencastle, Pennsylvania. Waynesboro is expected to cease operations
during the first quarter of 2002.
(3) Significant restructuring of metal bakeware manufacturing at
Massillon, Ohio to reduce costs.
(4) Exit from the Wauconda, Illinois facility by the end of the year 2001,
where Chicago Cutlery(R) product lines are manufactured.
(5) Business redesign activities associated with rationalizing processes
and headcount throughout the organization to improve overall
efficiency, effectiveness and responsiveness of the organization.
RISK MANAGEMENT
The Company primarily has market risk in the areas of foreign currency and fixed
rate debt. The Company invoices a significant portion of its international
sales in U.S. dollars, minimizing the effect of foreign exchange gains or losses
on its earnings. As a result, the Company's foreign sales are affected by
currency fluctuations versus U.S. dollar invoicing. The Company's costs are
predominantly denominated in U.S. dollars. With respect to sales conducted in
foreign currencies, increased strength of the U.S. dollar decreases the
Company's reported revenues and margins in respect of such sales to the extent
the Company is unable or determines not to increase local selling prices.
The Company reduces foreign currency cash flow exposure due to exchange rate
fluctuations by entering into forward foreign currency exchange contracts. The
use of these contracts protects cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contract. At July 1, 2001,
the Company had no forward foreign currency exchange contracts outstanding.
The Company enters into interest rate swaps to lower funding costs or to alter
interest rate exposures between fixed and floating rates on long-term debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed upon notional principal
amount.
20
Effective January 1, 2001, the Company adopted SFAS No. 133, 137 and 138 related
to "Accounting for Derivative Instruments and Hedging Activities". At that time
the Company had a $15 million notional amount interest rate swap with a fair
value of $(0.2) million. In accordance with these statements, the Company
recorded a transition adjustment to other comprehensive income and other
liabilities of $0.2 million. At July 1, 2001, the swap had a fair value of
$(0.5) million. Other comprehensive income and other liabilities have been
adjusted accordingly. A 1% increase or decrease in market interest rates would
result in a $0.3 million increase/(decrease) in the fair value of the interest
rate swap. The swap expires on July 29, 2003.
At July 1, 2001, the Company had $210.0 million in fixed rate debt outstanding.
The fair value of the Company's fixed rate debt at July 1, 2001, was $41.8
million.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in
connection with the Purchase or Promotion of the Vendor's Products." This issue
requires that consideration paid from a vendor to a purchaser be classified as a
reduction of revenue in the vendor's income statement unless it can be
determined that an identifiable benefit will be received by the vendor and the
fair value of the benefit exceeds the consideration provided to the purchaser.
In that case, the consideration should be characterized as a cost. This EITF is
effective for quarters beginning after December 15, 2001. The Company is in the
process of determining the impact of this consensus but does not expect reported
financial results will be significantly impacted.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This standard requires that amortization of goodwill and other
intangible assets with indefinite lives be discontinued. Instead, goodwill and
other intangible assets with indefinite lives will be assessed, at least
annually, for impairment by applying a fair-value-based test. However, an
intangible asset acquired through contractual or other legal rights or that can
be sold, transferred, licensed, rented or exchanged will still be amortized over
its useful life, which is no longer capped at 40 years. SFAS No. 142 may have an
impact on the carrying value of goodwill and will be implemented as of January
1, 2002. The Company is in the process of determining the impact of
implementing SFAS No.142.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The factors discussed below, among
others, could cause actual results to differ materially from those contained in
forward-looking statements made in this report, including without limitation, in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in the Company's related press releases and in oral statements made
by authorized officers of the Company. When used in this report, any press
release or oral statement, the words "looking forward," "estimate," "project,"
"anticipate," "expect," "intend," "believe" and similar expressions are intended
to identify a forward-looking statement. Forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors (many of which are beyond the Company's control) that could cause
actual results to differ materially from future results expressed or implied by
such forward-looking statements. The forward-looking statements regarding such
matters are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments, as well as other factors it
believes are appropriate in the circumstances. Whether actual results and
developments will conform with the Company's expectations and predictions,
however, is subject to a number of risks and uncertainties, in addition to the
risk factors discussed above, including: the Company's ability to comply with
the terms of its existing credit facilities, a global economic slowdown in any
one, or all, of the Company's sales categories; loss of sales as the Company
streamlines and focuses on strategic accounts; unpredictable difficulties or
delays in the development of new product programs; increasing reliance on third
party manufacturers, increased difficulties in obtaining a consistent supply of
21
basic raw materials such as sand, soda ash, steel or copper and energy inputs
such as electrical power or natural gas at stable pricing levels; development by
the Company of an adequate administrative infrastructure; technological shifts
away from the Company's technologies and core competencies; unforeseen
interruptions to the Company's business with its largest customers resulting
from, but not limited to, financial instabilities or inventory excesses; the
effects of extreme changes in monetary and fiscal policies in the United States
and abroad, including extreme currency fluctuations and unforeseen inflationary
pressures; drastic and unforeseen price pressures on the Company's products or
significant cost increases that cannot be recovered through price increases or
productivity improvements; significant changes in interest rates or in the
availability of financing for the Company or certain of its customers; loss of
any material intellectual property rights; any difficulties in obtaining or
retaining the management or other human resource competencies that the Company
needs to achieve its business objectives; and other factors, many of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Form 10-Q are qualified by these cautionary statements,
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company and
its subsidiaries or their business or operations.
22
PART II - OTHER INFORMATION
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
There are no pending legal proceedings, which are material in relation to the
consolidated financial statements of WKI.
WKI has been engaged in, and will continue to be engaged in, the defense of
product liability claims related to its products, particularly its bakeware and
cookware product lines. The Company maintains product liability coverage,
subject to certain deductibles and maximum coverage levels that the Company
believes is adequate and in accordance with industry standards.
In addition to product liability claims, from time to time the Company is
involved in various legal actions in the ordinary course of business. The
Company is not currently involved in any legal actions, which, in the belief of
management could have a material adverse impact on the Company's financial
statements.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibit
10.1 - Amendment dated July 2, 2001 to the credit facility between the
Company and Borden, Inc.
b) Reports on Form 8-K
On May 16, 2001, the registrant filed a report on Form 8-K under "Item 5-Other
Events" to announce a press release announcing its first quarter 2001 financial
results and a quarterly conference call with bondholders to review the financial
results.
23
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.
WKI HOLDING COMPANY, INC.
By /s/ Steven G. Lamb President and August 13, 2001
----------------------------- Chief Executive Officer
(Steven G. Lamb)
By /s/ Joseph W. McGarr Senior Vice President and August 13, 2001
----------------------------- Chief Financial Officer
(Joseph W. McGarr)
24