UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
-------------
OR
[ ] 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 022-28646
WKI HOLDING COMPANY, INC.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1403318
-------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11911 FREEDOM DRIVE, SUITE 600, RESTON, VA 20190
-------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 703-456-4700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to the filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
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:
Number of shares of $0.01 par value common stock outstanding as of August 8,
2003: 5,752,184 shares
WKI HOLDING COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Unaudited Consolidated Statements of Operations for the
quarter and six months ended June 29, 2003 (Successor
Company) and for the quarter and six months ended June
30, 2002 (Predecessor Company) 3
Consolidated Balance Sheets at June 29, 2003 (unaudited) and
December 31, 2002 4
Unaudited Consolidated Statements of Cash Flows for the
quarter and six months ended June 29, 2003 (Successor
Company) and for the quarter and six months ended June
30, 2002 (Predecessor Company) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 34
Certifications 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| PREDECESSOR | PREDECESSOR
SUCCESSOR | COMPANY SUCCESSOR | COMPANY
COMPANY | FOR THE COMPANY | FOR THE SIX
FOR THE | QUARTER ENDED FOR THE SIX | MONTHS ENDED
QUARTER ENDED | JUNE 30, 2002 MONTHS ENDED | JUNE 30, 2002
JUNE 29, 2003 | (AS RESTATED) JUNE 29, 2003 | (AS RESTATED)
--------------- | --------------- --------------- | ---------------
Net sales $ 123,092 | $ 146,918 $ 251,677 | $ 300,869
Cost of sales 97,044 | 110,409 192,291 | 219,896
--------------- | --------------- --------------- | ---------------
Gross profit 26,048 | 36,509 59,386 | 80,973
| |
Selling, general and administrative expenses 30,657 | 45,069 68,561 | 88,447
Other expense, net 1,280 | 325 1,408 | 2,469
--------------- | --------------- --------------- | ---------------
| |
Operating loss (5,889) | (8,885) (10,583) | (9,943)
Interest expense, net 7,290 | 13,693 15,748 | 30,355
--------------- | --------------- --------------- | ---------------
| |
Loss before reorganization items, income taxes, | |
minority interest and cumulative effect of | |
change in accounting principle (13,179) | (22,578) (26,331) | (40,298)
Reorganization items, net -- | 14,285 -- | 14,285
--------------- | --------------- --------------- | ---------------
| |
Loss before income taxes, minority interest and | |
cumulative effect of change in accounting | |
principle (13,179) | (36,863) (26,331) | (54,583)
Income tax expense 987 | 119 2,334 | 434
--------------- | --------------- --------------- | ---------------
| |
Loss before minority interest and cumulative | |
effect of change in accounting principle (14,166) | (36,982) (28,665) | (55,017)
Minority interest in earnings of subsidiary (38) | (30) (77) | (65)
--------------- | --------------- --------------- | ---------------
| |
Net loss before cumulative effect of change | |
in accounting principle (14,204) | (37,012) (28,742) | (55,082)
Cumulative effect of change in accounting | |
principle -- | -- -- | (202,089)
--------------- | --------------- --------------- | ---------------
| |
Net loss (14,204) | (37,012) (28,742) | (257,171)
Preferred stock dividends -- | 2,919 -- | 7,142
--------------- | --------------- --------------- | ---------------
| |
Net loss applicable to common stock $ (14,204) | $ (39,931) $ (28,742) | $ (264,313)
=============== | =============== =============== | ===============
| |
Basic and diluted loss before cumulative | |
effect of change in accounting principle | |
per common share $ (2.47) | $ (0.58) $ (5.00) | $ (0.90)
=============== | =============== =============== | ===============
Basic and diluted loss per common share $ (2.47) | $ (0.58) $ (5.00) | $ (3.84)
=============== | =============== =============== | ===============
| |
Weighted average number of common | |
shares outstanding during the period 5,752,184 | 68,910,716 5,752,184 | 68,910,716
=============== | =============== =============== | ===============
The accompanying notes are an integral part of these statements.
3
WKI HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(UNAUDITED)
JUNE 29, 2003 DECEMBER 31, 2002
--------------- ------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,944 $ 40,117
Accounts receivable (less allowances of $9,444 and
$10,932 in 2003 and 2002, respectively) 66,077 76,198
Inventories, net 145,712 146,593
Prepaid expenses and other current assets 15,640 15,578
--------------- ------------------
Total current assets 229,373 278,486
Other assets 38,954 29,387
Property, plant and equipment, net 116,523 89,773
Other intangible assets, net 116,795 84,600
Goodwill 182,095 260,527
--------------- ------------------
TOTAL ASSETS $ 683,740 $ 742,773
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 22,259 $ 35,844
Current portion of long-term debt 2,692 3,218
Other current liabilities 84,551 121,926
--------------- ------------------
Total current liabilities 109,502 160,988
Long-term debt 381,290 364,889
Pension and post-employment benefit obligations 82,255 81,370
Other long-term liabilities 1,962 1,737
--------------- ------------------
Total liabilities 575,009 608,984
--------------- ------------------
Minority interest in subsidiary 1,566 1,488
--------------- ------------------
STOCKHOLDERS' EQUITY
Common stock - $0.01 par value; 15,000,000 shares
authorized; 5,752,184 shares issued and outstanding 58 58
Additional paid-in capital 132,243 132,243
Accumulated deficit (28,742) --
Accumulated other comprehensive gain 3,606 --
--------------- ------------------
Total stockholders' equity 107,165 132,301
--------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 683,740 $ 742,773
=============== ==================
The accompanying notes are an integral part of these statements.
4
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| PREDECESSOR
SUCCESSOR | COMPANY
COMPANY | FOR THE SIX MONTHS
FOR THE SIX MONTHS | ENDED
ENDED | JUNE 30, 2002
JUNE 29, 2003 | (AS RESTATED)
-------------------- | --------------------
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net loss $ (28,742) | $ (257,171)
Adjustments to reconcile net loss to net cash used in |
operating activities: |
Depreciation and amortization 18,080 | 18,110
Amortization of deferred financing fees 228 | 1,845
Noncash reorganization items -- | 14,076
Impairment loss on intangible assets -- | 202,089
Provision for rationalization charges -- | 1,935
Cash paid for rationalization charges -- | (4,125)
Cash paid for restructuring charges -- | (9,972)
Other (895) | 906
Changes in operating assets and liabilities: |
Accounts receivable 9,189 | 18,784
Inventories 3,259 | 6,400
Prepaid expenses and other current assets 29 | (3,049)
Accounts payable and other current liabilities (48,796) | (6,498)
Provision for post-retirement benefits, net of cash paid 679 | 1,788
Other assets and liabilities 1,308 | (356)
-------------------- | --------------------
NET CASH USED IN OPERATING ACTIVITIES (45,661) | (15,238)
-------------------- | --------------------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Capital expenditures (11,790) | (8,198)
Net proceeds from sale of assets 6,304 | --
Increase in restricted cash (556) | (1,159)
-------------------- | --------------------
NET CASH USED IN INVESTING ACTIVITIES (6,042) | (9,357)
-------------------- | --------------------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Borrowings on Successor revolving credit facility 17,000 | --
Repayment of Predecessor revolving credit facility -- | (6,900)
Repayment of long-term debt, other than revolving |
credit facility (1,125) | (157)
Payment of deferred financing fees (2,345) | (1,525)
-------------------- | --------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 13,530 | (8,582)
-------------------- | --------------------
|
Decrease in cash and cash equivalents (38,173) | (33,177)
Cash and cash equivalents - beginning of period 40,117 | 66,805
-------------------- | --------------------
|
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,944 | $ 33,628
==================== | ====================
The accompanying notes are an integral part of these statements.
5
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
SUCCESSOR | PREDECESSOR
COMPANY | COMPANY
FOR THE SIX | FOR THE SIX
MONTHS ENDED | MONTHS ENDED
JUNE 29, 2003 | JUNE 30, 2002
-------------- | ---------------
SUPPLEMENTAL DATA: |
|
Cash paid during the period for: |
- -------------------------------- |
|
Interest $ 9,800 | $ 23,539
Income taxes, net of refunds 1,759 | 1,448
|
Non-cash activity: |
- ------------------ |
|
Preferred stock dividends $ -- | $ 7,142
The accompanying notes are an integral part of these statements.
6
WKI HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
WKI Holding Company Inc. (the "Company" or "WKI") is a leading manufacturer and
marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop
cookware and cutlery products. 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 and
Australia. 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 outlet stores. In the
international market, the Company has established its presence on a wholesale
basis through an international sales force coupled with localized distribution
and marketing capabilities.
The market for the Company's products is highly competitive and the housewares
industry is trending towards consolidation. Competition in the marketplace is
affected not only by domestic manufacturers but also by the large volume of
foreign imports. A number of factors affect competition in the sale of the
Company's products, including, but not limited to, quality, price and
merchandising parameters established by various distribution channels. Shelf
space is a key factor in determining retail sales of bakeware, dinnerware and
rangetop cookware products. Other important competitive factors include new
product introductions, brand identification, style, design, packaging and
service levels.
Seasonal variation is a factor in the Company's business in that there is
generally an increase in sales demand in the second half of the year, driven by
consumer spending in the holiday shopping season. This causes the Company to
adjust its purchasing schedule to ensure proper inventory levels in support of
second half of the year programs.
The Company currently manufactures a portion of its finished goods and also
purchases finished goods from various vendors in Asia and Europe. Reliance on
finished goods suppliers could give rise to certain risks, such as interruptions
in supply and quality issues that are outside the Company's control. In
addition, significant increases in the cost of energy, transportation or
principal raw materials could have an adverse effect on results of operations.
The Company's first, second and third fiscal quarters end on the Sunday nearest
to the end of the calendar quarter and the fourth quarter ends on December 31.
The Company's second fiscal quarter in fiscal 2003 and fiscal 2002 ended on June
29, 2003 and June 30, 2002, respectively. The unaudited 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 are unaudited
and should be read in conjunction with the Company's financial statements for
the year ended December 31, 2002, which were filed on Form 8-K on May 14, 2003.
Certain 2002 amounts have been reclassified to conform to the 2003 presentation.
As a consequence of the implementation of Fresh Start Reporting (See Note 2)
effective December 31, 2002, the financial information presented in the
unaudited consolidated statement of operations and the corresponding statement
of cash flows for the six months ended June 29, 2003 is generally not comparable
to the financial results for the six months ended June 30, 2002. Any financial
information herein labeled "Predecessor Company" refers to periods prior to the
adoption of Fresh Start Reporting, while those labeled "Successor Company" refer
to periods following the Company's reorganization. The lack of comparability in
the accompanying unaudited consolidated financial statements relates primarily
to the Company's capital structure (outstanding shares used in earnings per
share calculations), debt related costs, and depreciation and amortization
7
related to adjusting property, plant and equipment and other intangible assets
and liabilities to their fair value.
(2) BANKRUPTCY REORGANIZATION AND FRESH START REPORTING
REORGANIZATION
On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in
the United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). The reorganization was jointly administered under the caption "In re
World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257."
During the period from the Filing Date until January 31, 2003 (the "Effective
Date"), the Debtors operated the business as debtors-in-possession under Chapter
11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were
not Debtors and did not reorganize.
On November 15, 2002, the Debtors filed their second amended joint plan of
reorganization (the "Plan") with the Court, which was confirmed on December 23,
2002 (the "Confirmation Date"). All material conditions precedent to the Plan
becoming binding were resolved, for accounting purposes, on or prior to December
31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh
Start Reporting as of that date. On the Effective Date, the Debtors legally
emerged from their bankruptcy proceedings. At December 31, 2002, the Company
recorded a $577.2 million reorganization gain reflecting the cancellation of
debt pursuant to the Plan and to adjust the historical carrying value of its
assets and liabilities to fair market value.
The Company's reorganization value of approximately $500 million, defined as
post-emergence debt and equity ("Reorganization Value"), was determined based on
an independent valuation by financial valuation experts after consideration of
several factors and assumptions and by using various valuation methods including
cash flow multiples, price/earnings ratios and other relevant industry
information.
On or about the Effective Date, with the effects reported herein on December 31,
2002, the following principal provisions of the Plan occurred:
1. The Company's old common and preferred stock were cancelled for no
consideration. New Common Stock in the amount of 5,752,184 shares was
to be issued ("New Common Stock") to certain creditors, pursuant to
the Plan, as described below.
2. The Company's senior secured debt of approximately $577.1 million was
discharged in return for the payment of $27.8 million in cash and the
issuance of $240.1 million of new senior secured term loans, $123.2
million of new senior subordinated secured notes ("Senior Subordinated
Notes") and the right to receive 4,528,196 shares (approximately 79%)
of New Common Stock.
3. The Company's $25 million revolving credit facility due to Borden
Chemical, Inc. (the "Borden Credit Facility"), an affiliate of the
Company's primary stockholder (Kohlberg, Kravis, Roberts & Co. L.P.
("KKR")), was converted into the right to receive 615,483 shares
(approximately 11%) of New Common Stock.
4. The Company's 9-5/8% Notes in the amount of $211.1 million were
converted into the right to receive 608,500 shares (approximately 10%)
of New Common Stock.
5. The Company agreed to pay $2.9 million to settle in full the 9-1/4%
Series B Senior Notes ("9-1/4 Notes") issued by EKCO Group Inc. and
certain of its subsidiaries.
6. The Company reinstated $4.9 million of pre-existing Industrial Revenue
Bond claims (the "Reinstated IRB claims").
8
7. The Debtors' $50 million debtor in possession financing was repaid in
full and terminated, and the Company entered into a new Revolving
Credit Agreement providing up to $75 million.
8. The Company became obligated to pay approximately $20.9 million of
pre-petition liabilities to its vendors and other general unsecured
creditors. Under the terms of the Debtors' Plan, general unsecured
creditors of the Company will be paid 8.8% of the allowable claim
amount. General unsecured creditors of the Company's operating
subsidiaries will be paid 60% of the allowable claim amount. These
payments will be made as prescribed by the Court at various
distribution dates as claims are reconciled or otherwise resolved.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting"). The Company adopted Fresh Start
Reporting because holders of outstanding voting shares of the Company's capital
stock immediately before the Chapter 11 filing and confirmation of the Plan
received less than 50% of the common stock distributed under the Plan, and the
Company's Reorganization Value was less than the Debtors' post-petition
liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141"),
which requires a reorganized entity to record its assets and liabilities at
their fair value. The Company used its newly determined Reorganization Value
to define the fair value of debt and equity at December 31, 2002. The resulting
reorganized equity value of $132.3 million was allocated to individual assets
and liabilities using the principles of SFAS No. 141. The difference between
the reorganized equity value described above and the resulting fair value of
assets and liabilities was recorded as goodwill. The Company has used
independent valuation experts where necessary to estimate the fair value of
major components of the balance sheet including trademarks, patents, customer
relationships and property, plant and equipment. The Fresh Start Reporting
adjustments recorded in the first half of 2003 resulted in an additional
reduction to goodwill of $78.7 million.
Fair valuation adjustments for certain trademarks and exclusive beneficial
license and distribution agreements were recorded as of January 1, 2003, and
were determined using the excess income and relief from royalty approaches. The
Company's trademarks and exclusive beneficial license and distribution
agreements were valued at $71.3 million, resulting in a reduction of $13.1
million to the carrying value at January 1, 2003.
The Company's trademarks are recognizable household names and exclusive licenses
are renewable solely at the discretion of the Company; as such, they were
determined to have indefinite lives and are not amortized, but will be tested
for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset(s) might be impaired. An exclusive
distribution agreement valued at $7.1 million was determined to have a definite
life based on the term of the governing contract and is amortized over the
remaining estimated useful life of 8.7 years.
Fair valuation adjustments for certain customer relationships were recorded as
of January 1, 2003, and were determined using the excess income approach for
significant customers within our mass merchandising distribution channels and
the cost approach for certain other distribution channels. The Company's
customer relationships were valued at $24.8 million. Significant customers
within our mass merchandising distribution channels will be amortized over their
estimated remaining useful lives of 10 years and certain other distribution
channels will be amortized over their estimated useful lives of 9 years using
the double declining balance method.
9
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approaches. The Company's patents were valued at $23.0 million with estimated
remaining useful lives ranging from 4 to 18 years based on the expiration of the
patent under federal law.
Fair valuation adjustments for property, plant and equipment were also recorded
as of January 1, 2003. The fair value of the Company's property, plant, and
equipment was determined to be $29.2 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6
million for buildings, and $12.0 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated useful lives.
The Company used market data to determine the fair value of the Company's
precious metals, principally platinum and rhodium. During the first quarter of
2003, the Company increased its precious metals balance by $14.9 million to
reflect the fair value at December 31, 2002. Precious metals are classified as
other assets on the Consolidated Balance Sheet.
10
The effect of the Plan and implementation of Fresh Start Reporting on the
consolidated balance sheet was as follows:
Predecessor Successor
Company Fresh Start Reporting Company
-------------- ---------------------------------- -----------
As of Additional
December 31, Reorganization December 31, Adjustments January 1,
2002 Adjustments 2002 (A) 2003
-------------- ---------------- -------------- ------------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 40,117 $ -- $ -- $ -- $ 40,117
Accounts receivable, net 76,198 -- -- -- 76,198
Inventories, net 146,593 -- -- -- 146,593
Prepaid expenses and other current
assets 15,578 -- -- -- 15,578
-------------- ---------------- -------------- ------------- -----------
Total current assets 278,486 -- -- -- 278,486
Other assets 35,038 -- (5,651) G 14,902 44,289
Property, plant and equipment, net 89,773 -- -- 29,334 119,107
Other intangible assets, net 84,600 -- -- 34,196 118,796
Goodwill 55,985 -- 204,542 H (78,432) 182,095
-------------- ---------------- -------------- ------------- -----------
TOTAL ASSETS $ 543,882 $ -- $ 198,891 $ -- $ 742,773
============== ================ ============== ============= ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 47,281 $ -- $ -- $ -- $ 47,281
Current portion of long-term debt - 3,218 C -- -- 3,218
B,
Other current liabilities 56,400 54,089 C, D -- -- 110,489
-------------- ---------------- -------------- ------------- -----------
Total current liabilities 103,681 57,307 -- -- 160,988
Liabilities subject to compromise 887,340 (887,340) E -- -- --
Long-term debt -- 364,889 C -- -- 364,889
Pension and post-employment benefit
obligations 77,737 -- 3,633 G -- 81,370
Other long-term liabilities 1,737 -- -- -- 1,737
-------------- ---------------- -------------- ------------- -----------
Total liabilities 1,070,495 (465,144) 3,633 -- 608,984
Minority interest in subsidiary 1,488 -- -- -- 1,488
Stockholders' Equity (Deficit)
Old Preferred stock 98,142 (98,142) F -- -- --
Old Common stock 696 (696) F -- -- --
New Common stock -- 58 C -- -- 58
Common stock held in treasury (2,155) 2,155 F -- -- --
Contributed capital 607,783 -- (607,783) I -- --
Additional paid-in capital -- 132,243 C -- -- 132,243
Accumulated deficit (1,201,287) 429,526 E 771,761 I -- --
Accumulated other comprehensive
loss (31,280) -- 31,280 I -- --
-------------- ---------------- -------------- ------------- -----------
Total stockholders' equity (deficit) (528,101) 465,144 195,258 -- 132,301
-------------- ---------------- -------------- ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 543,882 $ -- $ 198,891 $ -- $ 742,773
============== ================ ============== ============= ===========
A. As of December 31, 2002, the Company was still in the process of
evaluating the fair value of certain assets for allocation of the
reorganization value. Additional adjustments were recorded as of
January 1, 2003.
B. Estimated payables at December 31, 2002 associated with the effects of
the Plan were $53.5 million. Of this amount, $27.2 million was paid on
the Effective Date.
11
C. In accordance with the Plan, Allowed Bank Loan Claims under the
Prepetition Credit Facility in the amount of $552.1 million were
converted into $104.1 million in New Common Stock, $240.1 million in
principal amount of new Senior Secured Term Loans and $123.2 million
in principal amount of the new Senior Subordinated Notes. The
remaining $2.7 million was paid on the Effective Date and is included
in accounts payable.
D. Certain tax claims were reinstated as part of the Plan.
E. Estimated settlement of liabilities subject to compromise and other
transactions in connection with the Plan. As a result of the
consummation of the Plan, the Company recognized an estimated gain on
the reorganization. This gain was recorded in the Predecessor
Company's statement of operations as a component of net reorganization
items.
Gain on discharge of prepetition liabilities:
Bank Loan Claims $ 82,002
Borden Claim 12,044
9-5/8% Notes 197,080
Unsecured Claims 14,082
Elimination of Old Stock 122,951
Surrender of Hamilton, Ohio property in
satisfaction of certain IRB Claims 1,367
---------
Gain on discharge of prepetition liabilities $ 429,526
=========
F. Old WKI Common Stock and Old WKI Preferred Stock and accrued but
unpaid dividends and any related interest were cancelled on the
Effective Date for no consideration.
G. Fair value adjustments as of December 31, 2002, in accordance with
Fresh Start Reporting.
H. Excess reorganization value over the fair value of the Company's
assets and liabilities.
I. Elimination of accumulated deficit, accumulated other comprehensive
loss and contributed capital in accordance with Fresh Start Reporting.
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
Under this standard, goodwill and intangible assets with indefinite useful lives
are no longer amortized, but are to be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset(s)
might be impaired. Accordingly, the Company ceased amortization of its existing
goodwill and its trademark assets on January 1, 2002.
In accordance with SFAS No. 142, the Company performed transitional impairment
tests of its goodwill and trademark assets as of January 1, 2002. The Company
engaged third party valuation experts to determine the fair value of its
reporting units, as defined by SFAS No. 142, and determined that some of the
value of its goodwill was impaired. The fair value of all reporting units used
in the transitional goodwill impairment test was performed using the income
approach and equaled the $500 million Reorganization Value. Based on this
analysis, the Company recorded an impairment loss of $144.3 million relating to
goodwill as of January 1, 2002. Determinations of the fair value of the
trademark assets were also performed by third party valuation experts using the
income and relief from royalty approaches. The fair value determinations were
made after considering a variety of indicators including the deterioration in
the business climate and a change in the manner in which the impairment of an
asset is evaluated under the new standard. Based on this analysis, the Company
recorded an impairment loss of $57.8 million relating to trademark assets as of
January 1, 2002. The combined impairment loss of $202.1 million is recorded as
a cumulative effect of a change in accounting principle in the accompanying
Consolidated Statements of Operations.
12
At December 31, 2002, pursuant to Fresh Start Reporting, the Company increased
goodwill by $204.5 million, which represents the excess of the reorganized
equity value over the fair value of the Company's assets and liabilities.
Subsequent Fresh Start Reporting valuations allocated $78.7 million of goodwill
to other assets and liabilities (see Note 2). The Company will test remaining
goodwill of $182.1 million and indefinite-lived trademarks and exclusive
licenses of $64.2 million for impairment at least annually in accordance with
SFAS No. 142.
Intangible assets with finite lives at June 29, 2003 are summarized as follows
(in thousands):
GROSS ACCUMULATED
BALANCE AMORTIZATION NET BALANCE
-------- ------------- ------------
Patents $ 23,000 $ 1,170 $ 21,830
Customer Relationships 24,750 1,089 23,661
Distribution Agreement 7,100 210 6,890
These assets are classified as other intangible assets on the Consolidated
Balance Sheet and their related amortization expense is recorded as other
expenses in the Consolidated Statement of Operations.
(4) SUPPLEMENTAL BALANCE SHEET DATA
Inventories at June 29, 2003 and December 31, 2002 consisted of the following:
INVENTORIES
(IN THOUSANDS): JUNE 29, 2003 DECEMBER 31, 2002
-------------- ------------------
Finished and in-process goods $ 119,060 $ 117,401
Raw materials and supplies 26,652 29,192
-------------- ------------------
$ 145,712 $ 146,593
============== ==================
The Company increased the value of its precious metals by $14.9 million to
reflect the fair value at December 31, 2002. The Company used published market
data to determine the fair value of the Company's precious metals, principally
platinum and rhodium. Other assets at June 29, 2003 and December 31, 2002
consisted of the following:
OTHER ASSETS
(IN THOUSANDS): JUNE 29, 2003 DECEMBER 31, 2002
-------------- ------------------
Precious metals $ 20,656 $ 10,829
Other assets 18,298 18,558
-------------- ------------------
$ 38,954 $ 29,387
============== ==================
Fair valuation adjustments for property, plant and equipment were also recorded
as of January 1, 2003. The fair value of the Company's property plant, and
equipment was determined to be $29.2 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6
million for buildings, and $12.0 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated useful lives.
Property, plant and equipment at June 29, 2003 and December 31, 2002 consisted
of the following:
13
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS): JUNE 29, 2003 DECEMBER 31, 2002
-------------- ------------------
Land $ 7,661 $ 3,145
Buildings 27,551 15,249
Machinery and Equipment 91,972 71,379
-------------- ------------------
127,184 89,773
Accumulated Depreciation 10,661 --
-------------- ------------------
$ 116,523 $ 89,773
============== ==================
Other liabilities at June 29, 2003 and December 31, 2002 consisted of the
following:
OTHER CURRENT LIABILITIES
(IN THOUSANDS): JUNE 29, 2003 DECEMBER 31, 2002
-------------- ------------------
Wages and employee benefits $ 17,582 $ 16,820
Accrued advertising and promotion 18,118 17,380
Accrued interest 9,680 3,982
Reorganization accruals 18,787 64,974
Other accrued expenses 20,384 18,770
-------------- ------------------
$ 84,551 $ 121,926
============== ==================
(5) RELATED PARTY TRANSACTIONS
SUCCESSOR COMPANY
Interest Expense and Debt Issuance Fees
Upon emergence from bankruptcy, certain creditors of the Predecessor Company
became principal owners of the Successor Company. During the six months ended
June 29 2003, the Company recorded $4.0 million in interest expense and paid
$1.0 million in debt issuance fees, collectively, to these principal owners.
See Note 6 for further information on the Company's debt agreements.
PREDECESSOR COMPANY
Interest Expense
Pursuant to a Credit Agreement dated as of August 24, 2000, as amended and
restated as of April 12, 2001 (and as further amended from time to time
thereafter), between the Predecessor Company and Borden, the Predecessor Company
obtained from Borden a temporary $50 million revolving credit facility (the
"Borden Credit Facility"), from which $40 million was initially made available,
and which was reduced, in accordance with its terms, on August 16, 2001 to a $25
million revolving credit facility. During the six months ended June 30, 2002,
the Predecessor Company recorded $0.8 million in interest expense related to the
Borden Credit Facility and paid $0.7 million through the Filing Date. Interest
expense related to the Borden Credit Facility was accrued during the Chapter 11
process and $1.3 million was paid in full on the Effective Date. The Borden
Credit Facility was secured with an interest on the Predecessor Company's assets
that was second in priority behind the interests securing the Amended and
Restated Credit Agreement with certain bank lenders (the "Predecessor Senior
Credit Facility"). In accordance with the Plan, the Borden Credit Facility
principal balance of $25 million was converted into 615,483 shares of New Common
Stock with an aggregate value of approximately $14.2 million, constituting
approximately 10.7% of the outstanding shares of the Successor Company
14
(excluding the impact of shares reserved for issuance pursuant to the Management
Stock Plan).
An affiliate of the Predecessor Company and KKR purchased 9 5/8% Notes
previously issued by the Predecessor Company in the open market or by other
means. As of June 30, 2002, affiliates had purchased an aggregate of $80.5
million of 9 5/8% Notes in open market transactions. In accordance with the
Plan, the affiliates' balance on the Filing Date of $80.5 million of 9 5/8%
Notes was converted into 128,193 shares of New Common Stock, which constitutes
approximately 2.2% of the outstanding shares of the Successor Company (excluding
shares reserved for issuance pursuant to the Management Stock Plan). On the
Effective Date, the affiliates' balance of $36.7 million in face amount of loans
under the Predecessor Company's Senior Credit Facility was discharged in return
for it's pro rata share of 1) $2.75 million, 2) 4,528,192 shares of New Common
Stock, 3) $240.05 million in principal amount of Term Loans and 4) $123.15
million in principal amount of Senior Subordinated Notes.
Preferred dividends
Prior to April 1, 1998, the Predecessor Company operated as a wholly-owned
subsidiary of Corning Incorporated ("Corning"). In connection with the
recapitalization of the Predecessor Company on April 1, 1998 (the
"Recapitalization"), the Predecessor Company issued $30.0 million in 12%
cumulative junior pay-in-kind stock to CCPC Acquisition Corp ("CCPC
Acquisition"). The cumulative junior preferred stock consisted of 1.2 million
shares with each share having a liquidation preference of $25. The cumulative
junior preferred stock provided for the payment of dividends in cash, additional
shares of junior preferred stock or a combination thereof of $0.75 per share per
calendar quarter, if and when declared by the Predecessor Company's board of
directors. The Predecessor Company stopped accruing dividends on the Filing
Date and as of that date had accrued but not paid $19.1 million in preferred
stock dividends, of which $2.4 million was expensed during the six months ended
June 30, 2002. As the dividends were expected to be settled by issuing
additional shares of preferred stock, the dividends were recorded in preferred
stock in the Predecessor Company balance sheets. In connection with the Plan,
the preferred stock, including any accrued dividends thereon, was canceled for
no consideration on the Effective Date.
In the fourth quarter of 1999, the Predecessor Company issued $50.0 million in
16% cumulative junior preferred stock to Borden. The cumulative junior
preferred stock consisted of two million shares with each share having a
liquidation preference of $25. The cumulative junior preferred stock provided
for the payment of cash dividends of $1.00 per share per quarter whether or not
declared by the Predecessor Company if certain financial ratios were satisfied.
The Predecessor Company stopped accruing dividends on the Filing Date and as of
that date had accrued but not paid $25.3 million in preferred stock dividends,
of which $4.8 million was expensed during the six months ended June 30, 2002.
As the dividends were expected to be paid in cash, the dividends payable were
recorded as other long-term liabilities in the Predecessor Company balance
sheets. In connection with the Plan, the preferred stock, including accrued
dividends thereon, were canceled for no consideration on the Effective Date.
Services provided by Corning, Inc.
In connection with the Recapitalization, Corning and the Predecessor Company
entered into several agreements whereby Corning would provide certain goods and
services to the Company and would share certain facilities at terms specified in
the agreements. Management believes that the methodology used by Corning to
charge these costs was reasonable, but may not necessarily be indicative of the
costs that would have been incurred had these functions been performed by the
Company. For the six months ended June 30, 2002, the Predecessor Company
incurred $1.1 million in services provided by Corning. Upon the Effective Date,
all of the common stock held by Corning was canceled as part of the bankruptcy
reorganization and Corning ceased to be a related party.
15
Management Fees
In connection with the Recapitalization, the Predecessor Company and Borden
entered into an agreement pursuant to which Borden provided certain management,
consulting and financial services to the Predecessor Company. During the six
months ended June 30, 2002, the Predecessor Company incurred $0.2 million in
services and expensed $1.3 million under the management agreement. This
agreement was canceled on the Effective Date and amounts owing Borden were
settled in accordance with the Plan.
(6) BORROWINGS
Debt outstanding as of June 29, 2003 and December 31, 2002 and weighted average
rates over the six-month period ended June 29, 2003 and year ended December 31,
2002 are as follows (in thousands):
JUNE 29, 2003 DECEMBER 31, 2002
--------------------- ---------------------
DUE WITHIN DUE WITHIN
LONG-TERM ONE YEAR LONG-TERM ONE YEAR
---------- --------- ---------- ---------
Senior secured term loan, at an average
rate of 4.8%, due January 2008 $ 237,050 $ 2,401 $ 237,649 $ 2,401
12% senior subordinated notes due
January 2010 123,150 -- 123,150 --
Revolver at an average rate of 4.3% 17,000 -- -- --
Industrial Revenue Bonds, at an average
rate of 5.79% and 5.83% 4,090 291 4,090 817
---------- --------- ---------- ---------
Total Debt $ 381,290 $ 2,692 $ 364,889 $ 3,218
========== ========= ========== =========
In connection with the bankruptcy reorganization, the Company entered into a new
Revolving Credit Agreement (the "Revolver") with a group of lenders. The new
facility provides for a revolving credit loan facility and letters of credit, in
a combined maximum principal amount equal to the lesser of $75 million or a
specified borrowing base, which is based upon eligible receivables and eligible
inventory, with a maximum issuance of $25 million for letters of credit. The
Revolver is secured by a first priority lien on substantially all assets of the
Company and its domestic subsidiaries, as well as on the stock of most of the
Company's subsidiaries (with the latter, in the case of the Company's non-U.S.
subsidiaries, being limited to 65% of their capital stock) (collectively, the
"Collateral"). The Company is required to reduce its direct borrowings,
excluding letters of credit, on the Revolver to zero for a period of 15
consecutive days in fiscal year 2004 and for a period of 30 consecutive days in
each fiscal year thereafter. The rate of interest charged is adjusted quarterly
based on a pricing grid, which is a function of the ratio of the Company's total
debt to Adjusted EBITDA, as defined in the loan documents. The credit facility
provides the Company the option of borrowing at a spread over the base rate (as
defined) for base rate loans or the Adjusted London Interbank Offered Rate
(LIBOR) for Eurodollar loans. In addition, the Company pays a quarterly
commitment fee of 0.50% on the average daily unused amount. As of August 1,
2003, the Company had $23.4 million available under the Revolver after
consideration of borrowing base limits at that date.
Pursuant to the Plan, on the Effective Date, the Company entered into a senior
secured term loan with certain secured lenders in the aggregate principal amount
of $240.1 million (the "Term Loan") and issued Senior Subordinated Notes in the
16
aggregate principal amount of $123.2 million, in partial satisfaction of its
prepetition secured lenders' claims against the Predecessor Company.
Under the Term Loan, interest accrues at the Company's election at either
JPMorgan Chase's prime rate plus 2.5%, the Federal Funds Effective Rate plus
3.0% or LIBOR times the Statutory Reserve Rate (as defined in the Credit
Agreement) plus 3.5%. The Term Loan is secured by a second priority lien on the
Collateral. The Term Loan requires quarterly principal payments of
approximately $0.6 million beginning April 4, 2003 through December 31, 2007
with a remaining balloon payment of approximately $228 million due on March 31,
2008. The Company is required to prepay outstanding obligations under the Term
Loan upon certain conditions or events as specified in the related loan
documents.
The Revolver and Term Loan agreements contain usual and customary restrictions
including, but not limited to, limitations on dividends, redemptions and
repurchases of capital stock, prepayments of debt (other than the Revolver),
additional indebtedness, capital expenditures, mergers, acquisitions,
recapitalizations, asset sales, transactions with affiliates, changes in
business and the amendment of material agreements. Additionally, the Revolver
and Term Loan contain customary financial covenants relating to minimum levels
of EBITDA and maximum leverage ratios and fixed charge coverage ratios. The
Company is currently in compliance with all of the financial restrictions and
financial covenants of the new Revolver.
Although the Company believes the provisions of its loan agreements are not
restrictive to normal operations, significant continuing economic pressures
could impact the Company's short term ability to borrow required amounts as a
result of the borrowing base restrictions related to receivables and inventory
and to meet specified EBITDA levels. Therefore, in the second quarter
management negotiated an amendment to the Revolver that 1) increases the
inventory advance in the calculation of the Company's borrowing base from 125%
to 175% of eligible accounts receivable during the period from July 1, 2003,
through November 1, 2003, and 2) decreases the required minimum consolidated
EBITDA to levels close to those in the Term Loan for the second, third and
fourth quarters of 2003.
The Senior Subordinated Notes are collateralized by a third priority lien on the
Collateral, and pay interest of 12%, semi-annually on each January 31 and July
31. The Senior Subordinated Notes have no sinking fund requirement, and are
redeemable, in whole or in part, at the option of the Company beginning January
31, 2008 upon payment of a redemption premium.
Pursuant to the Plan, $4.9 million in industrial revenue bonds were reinstated
on the Effective Date. Certain of these bonds with remaining principal of $0.3
million as of June 29, 2003 and $0.9 million on the Effective Date, bear
interest at 3% and mature in September 2003 and September 2004. The balance of
the bonds have remaining principal of $4.0 million as of June 29, 2003, bear
interest at 6.25% and mature August 2005.
(7) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a defendant or plaintiff in various claims and lawsuits arising
in the normal course of business. As a result of the bankruptcy proceedings,
holders of litigation claims that arose prior to May 31, 2002 retain all rights
to proceed against the Company under certain limitations of the Court. 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 these proceedings and actions is unlikely
to have a material adverse effect on the Company's financial statements. It is
possible, however, that some matters could be decided unfavorably to the Company
and could require the Company to pay damages or make other expenditures in
amounts that could be material but cannot be estimated as of June 29, 2003.
17
Environmental Matters
The Company's facilities and operations are subject to certain federal, state,
local and foreign laws and regulations relating to environmental protection and
human health and safety, including those governing wastewater discharges, air
emissions, and the use, generation, storage, treatment, transportation and
disposal of hazardous and non-hazardous materials and wastes and the remediation
of contamination associated with such disposal. Because of the nature of its
business, the Company has incurred, and will continue to incur, capital and
operating expenditures and other costs in complying with and resolving
liabilities under such laws and regulations.
It is the Company's policy to accrue for remediation costs when it is probable
that such costs will be incurred and when a range of loss can be reasonably
estimated. The Company has accrued approximately $1.2 million as of June 29,
2003 for probable environmental remediation and restoration liabilities. Based
on currently available information and analysis, the Company believes that it is
possible that costs associated with such liabilities or as yet unknown
liabilities may exceed current reserves in amounts or a range of amounts that
could be material but cannot be estimated as of June 29, 2003. There can be no
assurance that activities at these or any other facilities or future facilities
may not result in additional environmental claims being asserted against the
Company or additional investigations or remedial actions being required.
Letters of Credit
In the normal course of business and as collateral for performance, the Company
is contingently liable under standby and import letters of credit totaling $12.7
million and $13.6 million as of June 29, 2003 and December 31, 2002,
respectively.
(8) SEGMENT INFORMATION
The Company manages its business on the basis of one reportable segment-the
worldwide manufacturing and marketing of consumer kitchenware products. The
Company believes its operating segments have similar economic characteristics
and meet the aggregation criteria of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
(9) COMPREHENSIVE LOSS
For the periods ended June 29, 2003 and June 30, 2002, total comprehensive loss
was as follows (in thousands):
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
COMPANY | COMPANY COMPANY | COMPANY
FOR THE | FOR THE FOR THE SIX | FOR THE SIX
QUARTER ENDED | QUARTER ENDED MONTHS ENDED | MONTHS ENDED
JUNE 29, 2003 | JUNE 30, 2002 JUNE 29, 2003 | JUNE 30, 2002
--------------- | --------------- --------------- | ---------------
Net loss $ (14,204) | $ (37,012) $ (28,742) | $ (257,171)
Foreign currency | |
translation gain 3,098 | 295 3,606 | 724
Derivative fair value | |
adjustment -- | (71) -- | 129
--------------- | --------------- --------------- | ---------------
Comprehensive loss $ (11,106) | $ (36,788) $ (25,136) | $ (256,318)
=============== | =============== =============== | ===============
18
WKI HOLDING COMPANY, INC.
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 of the Company for the periods ended June 29, 2003 and June
30, 2002, and related notes to the Consolidated Financial Statements included
elsewhere herein.
BACKGROUND
WKI Holding Company Inc. (the "Company," "WKI," "we," or "our") is a leading
manufacturer and marketer of consumer bakeware, dinnerware, kitchen and
household tools, rangetop cookware and cutlery products. We have strong
positions in major channels of distribution for our products in North America
and have also achieved a significant presence in certain international markets,
primarily Asia and Australia. In North America, we sell both on a wholesale
basis to mass merchants, department stores, specialty retailers, and grocery
chains and on a retail basis, through Company-operated factory outlet stores.
Our top five customers accounted for over 38.1% of gross sales in the first half
of 2003, with our largest customer being Wal-Mart. In the international market,
we have established its presence on a wholesale basis through an international
sales force coupled with localized distribution and marketing capabilities.
The market for our products is highly competitive and the housewares industry is
trending toward consolidation. Competition in the marketplace is affected not
only by domestic manufacturers but also by the large volume of foreign imports.
A number of factors affect competition in the sale of our products, including,
but not limited to, quality, price and merchandising parameters established by
various distribution channels. Shelf space is a key factor in determining
retail sales of bakeware, dinnerware and rangetop cookware products. Other
important competitive factors include new product introductions, brand
identification, style, design, packaging and service levels. As part of our
strategic commitment to consolidate our focus, reduce costs, leverage our brands
and gain new distribution opportunities, from time to time we review our brands,
product lines and distribution arrangements and evaluate them in light of
strategic initiatives and competitive factors.
Seasonal variation is a factor in our business in that there is generally an
increase in sales demand in the second half of the year, driven by consumer
spending in the holiday shopping season. This causes us to adjust our
purchasing schedule to ensure proper inventory levels in support of second half
of the year programs.
Currently we manufacture a portion of our finished goods and also purchase
finished goods from various vendors in Asia and Europe. Reliance on finished
goods suppliers could give rise to certain risks, such as interruptions in
supply and quality issues that are outside our control. In addition,
significant increases in the cost of energy, transportation or principal raw
materials could have an adverse effect on results of operations.
In the first quarter of 2003, weak economic conditions and global uncertainties
impacted our operations as customers responded to poor fourth quarter 2002
consumer demand by managing their inventory levels. This slowdown compared to
the prior year continued into the second quarter. Net sales for the six months
ended June 29, 2003, were significantly below prior year levels with our
operating loss comparable to the prior year. We currently expect net sales for
the second half of 2003 to be comparable to the prior year even including the
impact of closed retail outlets, due to increased levels of new product
introductions, marketing support, and promotional programs. Second half
operating income is currently expected to show modest improvement versus the
prior year as a result of manufacturing cost reductions. We historically
achieve better gross margins in the second half of the year as compared to our
19
first half as a result of higher volumes. Consumer confidence in the economy
heavily impacts customer demand for our products. The upturn in the second half
versus the first half of 2003 will be heavily dependent upon this consumer
demand. The uncertain economic climate and continued competitive pressures make
it difficult to predict volumes in the second half of the year. If the economy
does not improve, and customers continue to manage inventory levels, this may
have an adverse impact on our outlook.
REORGANIZATION
On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in
the United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). The reorganization was jointly administered under the caption "In re
World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257."
During the period from the Filing Date until January 31, 2003 (the "Effective
Date"), the Debtors operated the business as debtors-in-possession under Chapter
11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were
not Debtors and did not reorganize.
On November 15, 2002, the Debtors filed their second amended joint plan of
reorganization (the "Plan") with the Court, which was confirmed on December 23,
2002 (the "Confirmation Date"). All material conditions precedent to the Plan
becoming binding were resolved, for accounting purposes, on or prior to December
31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh
Start Reporting as of that date. On the Effective Date, the Debtors legally
emerged from their bankruptcy proceedings. At December 31, 2002, the Company
recorded a $577.2 million reorganization gain reflecting the cancellation of
debt pursuant to the Plan and to adjust the historical carrying value of its
assets and liabilities to fair market value.
The Company's reorganization value of approximately $500 million, defined as
post-emergence debt and equity ("Reorganization Value"), was determined based on
an independent valuation by financial valuation experts after consideration of
several factors and assumptions and by using various valuation methods including
cash flow multiples, price/earnings ratios and other relevant industry
information.
On or about the Effective Date, with the effects reported herein on December 31,
2002, the following principal provisions of the Plan occurred:
1. The Company's old common and preferred stock were cancelled for no
consideration. New Common Stock in the amount of 5,752,184 shares was
to be issued ("New Common Stock") to certain creditors, pursuant to
the Plan, as described below.
2. The Company's senior secured debt of approximately $577.1 million was
discharged in return for the payment of $27.8 million in cash and the
issuance of $240.1 million of new senior secured term loans, $123.2
million of new senior subordinated secured notes ("Senior Subordinated
Notes") and the right to receive 4,528,196 shares (approximately 79%)
of New Common Stock.
3. The Company's $25 million revolving credit facility due to Borden
Chemical, Inc. (the "Borden Credit Facility"), an affiliate of the
Company's primary stockholder (Kohlberg, Kravis, Roberts & Co. L.P.
("KKR")), was converted into the right to receive 615,483 shares
(approximately 11%) of New Common Stock.
4. The Company's 9-5/8% Notes in the amount of $211.1 million were
converted into the right to receive 608,500 shares (approximately 10%)
of New Common Stock.
5. The Company agreed to pay $2.9 million to settle in full the 9-1/4%
Series B Senior Notes ("9-1/4 Notes") issued by EKCO Group Inc. and
certain of its subsidiaries.
6. The Company reinstated $4.9 million of pre-existing Industrial Revenue
Bond claims (the "Reinstated IRB claims").
20
7. The Debtors' $50 million debtor in possession financing was repaid in
full and terminated, and the Company entered into a new Revolving
Credit Agreement providing up to $75 million.
8. The Company became obligated to pay approximately $20.9 million of
pre-petition liabilities to its vendors and other general unsecured
creditors. Under the terms of the Debtors' Plan, general unsecured
creditors of the Company will be paid 8.8% of the allowable claim
amount. General unsecured creditors of the Company's operating
subsidiaries will be paid 60% of the allowable claim amount. These
payments will be made as prescribed by the Court at various
distribution dates as claims are reconciled or otherwise resolved.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting"). The Company adopted Fresh Start
Reporting because holders of outstanding voting shares of the Company's capital
stock immediately before the Chapter 11 filing and confirmation of the Plan
received less than 50% of the common stock distributed under the Plan, and the
Company's Reorganization Value was less than the Debtors' post-petition
liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141"),
which requires a reorganized entity to record its assets and liabilities at
their fair value. The Company used its newly determined Reorganization Value
to define the fair value of debt and equity at December 31, 2002. The resulting
reorganized equity value of $132.3 million was allocated to individual assets
and liabilities using the principles of SFAS No. 141. The difference between
the reorganized equity value described above and the resulting fair value of
assets and liabilities was recorded as goodwill. The Company has used
independent valuation experts where necessary to estimate the fair value of
major components of the balance sheet including trademarks, patents, customer
relationships and property, plant and equipment. The Fresh Start Reporting
adjustments recorded in the first half of 2003 resulted in an additional
reduction to goodwill of $78.7 million.
Fair valuation adjustments for certain trademarks and exclusive beneficial
license and distribution agreements were recorded as of January 1, 2003, and
were determined using the excess income and relief from royalty approaches. The
Company's trademarks and exclusive beneficial license and distribution
agreements were valued at $71.3 million, resulting in a reduction of $13.1
million to the carrying value at January 1, 2003.
The Company's trademarks are recognizable household names and exclusive licenses
are renewable solely at the discretion of the Company; as such, they were
determined to have indefinite lives and are not amortized, but will be tested
for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset(s) might be impaired. An exclusive
distribution agreement valued at $7.1 million was determined to have a definite
life based on the term of the governing contract and is amortized over the
remaining estimated useful life of 8.7 years.
Fair valuation adjustments for certain customer relationships were recorded as
of January 1, 2003, and were determined using the excess income approach for
significant customers within our mass merchandising distribution channels and
the cost approach for certain other distribution channels. The Company's
customer relationships were valued at $24.8 million. Significant customers
within our mass merchandising distribution channels will be amortized over their
estimated remaining useful lives of 10 years and certain other distribution
channels will be amortized over their estimated useful lives of 9 years using
the double declining balance method.
21
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approaches. The Company's patents were valued at $23.0 million with estimated
remaining useful lives ranging from 4 to 18 years based on the expiration of the
patent under federal law.
Fair valuation adjustments for property, plant and equipment were also recorded
as of January 1, 2003. The fair value of the Company's property, plant, and
equipment was determined to be $29.2 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6
million for buildings, and $12.0 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated useful lives.
The Company used market data to determine the fair value of the Company's
precious metals, principally platinum and rhodium. During the first quarter of
2003, the Company increased its precious metals balance by $14.9 million to
reflect the fair value at December 31, 2002. Precious metals are classified as
other assets on the Consolidated Balance Sheet.
22
RESULTS OF OPERATIONS
- ---------------------
The following commentary and tables discuss and analyze the comparative results
of our operations and financial condition for the periods covered. We manage
our business on the basis of one reportable segment - the worldwide
manufacturing and marketing of consumer kitchenware products - and believe that
our operating segments have similar economic characteristics and meet the
aggregation criteria of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Our first, second and third fiscal
quarters end on the Sunday nearest to the end of the calendar quarter and the
fourth quarter ends on December 31. Our second fiscal quarter in fiscal 2003
and fiscal 2002 ended on June 29, 2003 and June 30, 2002, respectively. Results
for the quarter and six months ended June 29, 2003 and June 30, 2002, were
prepared using generally accepted accounting principles in the United States
(GAAP).
Successor Company | Predecessor Company Successor Company | Predecessor Company
------------------------ | ------------------------ ------------------- | --------------------
| % of Six months % of | Six months
Quarter ended % of net | Quarter ended net ended June net | ended June % of net
June 29, 2003 sales | June 30, 2002 sales 29, 2003 sales | 30, 2002 sales
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
Net sales $ 123,092 100.0% | $ 146,918 100.0% $ 251,677 100.0% | $ 300,869 100.0%
Cost of sales 97,044 78.8 | 110,409 75.2 192,291 76.4 | 219,896 73.1
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
Gross profit 26,048 21.2 | 36,509 24.8 59,386 23.6 | 80,973 26.9
| |
Selling, general and | |
administrative | |
expenses 30,657 24.9 | 45,069 30.7 68,561 27.2 | 88,447 29.4
Other expenses, net 1,280 1.1 | 325 0.2 1,408 0.6 | 2,469 0.8
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
| |
Operating loss (5,889) (4.8) | (8,885) (6.1) (10,583) (4.2) | (9,943) (3.3)
Interest expense 7,290 5.9 | 13,693 9.3 15,748 6.3 | 30,355 10.1
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
| |
Loss before | |
reorganization items (13,179) 10.7 | (22,578) (15.4) (26,331) (10.5) | (40,298) (13.4)
Reorganization items, net -- -- | 14,285 9.7 -- -- | 14,285 4.8
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
| |
Loss before income | |
taxes (13,179) (10.7) | (36,863) (25.1) (26,331) (10.5) | (54,583) (18.2)
Income tax expense 987 0.8 | 119 0.1 2,334 0.9 | 434 0.1
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
| |
Loss before minority | |
interest (14,166) (11.5) | (36,982) (25.2) (28,665) (11.4) | (55,017) (18.3)
Minority interest in | |
subsidiary (38) -- | (30) -- (77) -- | (65) --
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
| |
Net loss before | |
cumulative effect of | |
change in accounting | |
principle (14,204) (11.5) | (37,012) (25.2) (28,742) (11.4) | (55,082) (18.3)
Cumulative effect of | |
change in accounting | |
principle -- -- | -- -- -- -- | (202,089) (67.2)
-------------- ------- | --------------- ------- ---------- ------- | ---------- -------
Net loss $ (14,204) (11.5)% | $ (37,012) (25.2)% $ (28,742) (11.4)% | $(257,171) (85.5)%
============== ======= | =============== ======= ========== ======= | ========== =======
23
NET SALES
Net sales for the second quarter of 2003 were $123.1 million, a decrease of
$23.8 million or 16.2% from the same period in 2002. Net sales for the six
months ended June 29, 2003 were $251.7 million, a decrease of $49.2 million or
16.3% from the six months ended June 30, 2002. The declines for both the quarter
and the year were driven by the following key factors:
Key retailers continue to manage inventories downward as they did in the first
quarter of 2003, awaiting a return of a stronger economic environment and
related consumer buying. We estimate that over half of the net sales decline in
the quarter and over one third of the decline for the year to date basis can be
attributed to customers who are taking across the board inventory reductions in
certain categories and departments as they await signals of an economic
recovery. In addition, we have been impacted by the loss of market share,
largely in our rangetop, metal bakeware and kitchenware categories, which has
reduced both our base and promotional volumes. These market share declines were
precipitated in part by increasing competitive pricing pressure at mass
merchants, which has forced us to give up volume at key accounts as the Company
focuses on maintaining profitable business. In addition, the Company believes
that our market share decline versus last year was impacted by senior
management's focus on an expedited exit from bankruptcy, the lack of new product
introductions in certain categories and lower advertising and promotional
spending in the second half of 2002. These effects have been partially offset
by continued successful new product introductions in our OXO line. Lastly, we
have closed a net of fifty six retail outlets since June, 2002 including the
twenty nine stores closed in 2003 as part of our bankruptcy reorganization,
which accounts for over 25% of the net sales decline in the quarter and 17% of
the decline on a year to date basis.
GROSS PROFIT
Gross profit for the second quarter of 2003 was $26.0 million, a decrease of
$10.5 million when compared to gross profit of $36.5 million for the second
quarter of 2002. As a percentage of net sales, gross profit in the second
quarter of 2003 was 21.2%, a decline of 3.6% from the second quarter of 2002.
On a year to date basis, gross profit of $59.4 million was $21.6 million below
gross profit of $81.0 million in 2002. As a percentage of net sales, gross
profit for the six months ended June 29, 2003 was 23.6%, a decline from 26.9% in
the six months ended June 30, 2002.
The quarter and year to date declines were largely attributable to performance
in our retail outlets including the closure of twenty-nine unprofitable retail
outlets in April 2003, in connection with our reorganization. In an effort to
expedite the store closures and reduce inventory held for the retail outlets,
certain inventory was consigned to a third party liquidator who sold it at close
to cost. Absent the impact of our retail outlets, gross profit margins were
slightly below the prior year for the quarter and flat on a year to date basis.
Better margins in our international and OXO categories and lower manufacturing
costs related to our outsourcing initiatives were offset by higher trade
promotional spending and fixed absorption costs related to production
curtailments in response to lower first half of year sales demand. In addition,
we were impacted by higher freight and distribution costs as customers reduced
order size as they attempted to manage inventory levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for the quarter and six
months ended June 29, 2003 were $30.7 million and $68.6 million, respectively,
compared to the quarter and six months ended June 30, 2002 of $45.1 million and
$88.4 million, respectively. As a percentage of net sales, SG&A expenses were
24.9% in the second quarter of 2003 as compared to 30.7% in the second quarter
of 2002. On a year to date basis, 2003 SG&A was 27.2% of sales versus 29.4% of
sales in the prior year.
24
The decrease in overall SG&A continues to be driven largely by lower retail
outlet overhead expense as a result of retail store closures and reduced
employee costs. As part of our program to improve profitability of our retail
stores, fifty-six under performing stores were closed between June 2002 and June
2003. During the six months ended June 29, 2003, we recorded a severance charge
of $1.7 million related to the elimination of employees at certain closed retail
outlets, as well as other reductions in force, and $1.2 million of expense
related to the key employee retention program, which was put in place according
to a Court order during the Bankruptcy proceedings. During the six months ended
June 30, 2002, SG&A included $4.5 million of professional and consulting fees
related to the development of the bankruptcy reorganization strategy prior to
the Filing and rationalization charges of $2.6 million related to our 2001
restructuring activities.
OTHER EXPENSE, NET
Other operating expenses were $1.3 million and $1.4 million in the quarter and
six months ended June 29, 2003, respectively, compared to $0.3 million and $2.5
million for the same periods of 2002. On a year to date basis, we recorded $2.5
million in amortization expense relating to patents, customer relationships and
exclusive licenses that were recorded as of January 1, 2003 as a Fresh Start
Reporting Adjustment. These expenses were offset by foreign exchange gains and
gains on the sale of precious metals recovered from certain decommissioned
manufacturing equipment. The expenses in the six months ended June 30, 2002,
consisted largely of expense related to a settlement of a vendor claim.
INTEREST EXPENSE
Interest expense was $7.3 million and $15.7 million for the quarter and six
months ended June 29, 2003, respectively, compared to $13.7 million and $30.4
million for the quarter and six months ended June 30, 2002, respectively. The
decrease in interest expense from the prior year of $6.4 million for the quarter
and $14.6 million for the six months was attributable to significantly decreased
debt levels, as the Predecessor Company's debt was reduced by more than $420
million upon our emergence from bankruptcy.
REORGANIZATION ITEMS, NET
Reorganization charges of $14.3 million were incurred in the quarter ended June
30, 2002 to write-off $14.1 million of the Predecessor Company's deferred
financing fees and for an additional $0.2 million in legal, accounting and other
professional fees related to the initial filing and administration of
proceedings under Chapter 11.
INCOME TAX EXPENSE
Income tax expense in the quarter and six months ended June 29, 2003, amounted
to $1.0 million and $2.3 million, respectively, compared to $0.1 million in the
quarter and $0.4 million in the six months ended June 30, 2002. After our
emergence from bankruptcy, we expect to be subject to the alternative minimum
tax for federal income tax purposes. As a result, we recorded $1.5 million of
federal income tax expense in 2003. Remaining 2003 and 2002 income tax expense
is primarily attributable to foreign income taxes. We provided a full valuation
allowance on the income tax benefit relating to the current and prior period's
pre-tax losses.
NET LOSS
As a result of the factors discussed above, we had a net loss of $14.2 million
and $28.7 million for the quarter and six months ended June 29, 2003 compared to
a net loss of $37.0 million and $257.2 million for the same periods in 2002.
25
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
FINANCIAL CONDITION
Our capital requirements have arisen principally in connection with financing
working capital needs, servicing debt obligations, funding reorganization,
restructuring and rationalization costs and funding capital expenditures.
During 2003 we expect to spend approximately $60 to $65 million for bankruptcy
reorganization costs and prepetition claim payments, of which approximately $48
million was paid through June 29, 2003.
In connection with the bankruptcy reorganization, we entered into a new
revolving credit agreement (the "Revolver") with a group of lenders. The new
facility provides for a revolving credit loan facility and letters of credit, in
a combined maximum principal amount equal to the lesser of $75 million or a
specified borrowing base, which is based upon eligible receivables and eligible
inventory, with a maximum issuance of $25 million for letters of credit. The
Revolver is secured by a first priority lien on substantially all of our assets
and our domestic subsidiaries, as well as on the stock of most of our
subsidiaries (with the latter, in the case of our non-U.S. subsidiaries, being
limited to 65% of their capital stock) (collectively, the "Collateral"). We are
required to reduce our direct borrowings, excluding letters of credit, on the
Revolver to zero for a period of 15 consecutive days in fiscal year 2004 and for
a period of 30 consecutive days in each fiscal year thereafter. The Revolver
and other loan agreements contain usual and customary restrictions including,
but not limited to, limitations on dividends, redemptions and repurchases of
capital stock, prepayments of debt (other than the Revolver), additional
indebtedness, capital expenditures, mergers, acquisitions, recapitalizations,
asset sales, transactions with affiliates, changes in business and the amendment
of material agreements. Additionally, the Revolver and other loan agreements
contain customary financial covenants relating to minimum levels of operating
EBITDA and maximum leverage ratios and fixed charge coverage ratios (all as
defined in the Revolver agreement). As of August 1, 2003, we had $23.4 million
available under the Revolver after consideration of borrowing base limits at
that date. We are currently in compliance with all of the financial
restrictions and financial covenants of the new Revolver.
Although we believe the provisions of our loan agreements are not restrictive to
normal operations, significant continuing economic pressures could impact our
short term ability to borrow required amounts due to the borrowing base
restrictions related to receivables and inventory and to meet specified EBITDA
levels. Therefore, in the second quarter we negotiated an amendment to the
Revolver that 1) increases the inventory advance in the calculation of our
borrowing base from 125% to 175% of eligible accounts receivable during the
period from July 1, 2003, through November 1, 2003, and 2) decreases the
required minimum consolidated EBITDA to levels close to those in the Term Loan
for the second, third and fourth quarters of 2003.
In connection with the Reorganization, we entered into an agreement with the
Pension Benefit Guaranty Corporation ("PBGC"), which, among other things,
requires certain additional minimum funding contributions and accelerated
contributions to be made to our pension plan. Total enhanced contributions of
$2 million, $2.5 million and $2.5 million are required to be paid in addition to
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 over the pension plan years 2003, 2005 and 2006, respectively.
Additionally, the agreement requires us to provide a letter of credit in the
amount of $15 million to the PBGC by January 31, 2008. In April 2003, we paid
$2.3 million in contributions to our pension plan and anticipate total
contributions in 2003 to be $8.7 million.
OPERATING ACTIVITIES
In the six months ended June 29, 2003, net cash used in operating activities was
$45.7 million compared to $15.2 million of cash used in operating activities in
26
the six months ended June 30, 2002. In 2003, we spent approximately $48 million
on bankruptcy reorganization cost and prepetition claim payments. In 2002, we
spent $14.1 million related to restructuring and rationalization programs,
primarily for employee severance. There were no payments related to these
programs during the six months ended June 29, 2003. Excluding the effects of
2003 bankruptcy and 2002 restructuring related charges, net cash used in
operating activities improved by approximately $5 million.
Cash flows from accounts receivable decreased $9.6 million in the six months
ended June 29, 2003 compared to the six months ended June 30, 2002 as a result
of lower sales. Days sales outstanding improved by a day to 54.6 days during
the six months ended June 29, 2003 compared to 55.6 days during the six months
ended June 30, 2002. The change in inventory in the six months ended June 29,
2003 was unfavorable to the six months ended June 30, 2002 by $3.1 million due
to lower 2003 sales. Our accounts payable and accrued liabilities also declined
$42.3 million as we paid approximately $48 million in bankruptcy reorganization
cost and prepetition claim payments.
INVESTING ACTIVITIES
Cash used for investing activities was $6.0 million in the six months ended June
29, 2003 compared to $9.4 million in the six months ended June 30, 2002. The
decrease is attributable to higher capital expenditures offset by proceeds from
the sale of assets. We spent $3.6 million of additional capital expenditures
in the six months ended June 29, 2003 compared to the six months ended June 30,
2002, and we anticipate cash outlays in total of approximately $20.0 million for
capital expenditures in 2003.
Investing activities in the six months ended June 29, 2003 include proceeds from
the sale of precious metals recovered from decommissioned manufacturing
equipment of $5.6 million. In June 2003, we sold land and buildings at our
Waynesboro, Virginia facility that closed in 2002 as part of our 2001
restructuring program. Net proceeds from the sale were $0.7 million.
In connection with the payment of certain claims under our Plan of
Reorganization, we fund, from time to time, a third party distribution agent to
pay claimants. As of June 29, 2003, $0.9 million was held for payment on
resolved prepetition claims but not yet disbursed to prepetition claimants.
These escrows are recorded as restricted cash in the accompanying financial
statements.
FINANCING ACTIVITIES
Net cash provided by financing activities totaled $13.5 million in the six
months ended June 29, 2003 compared to net cash used in financing activities of
$8.6 million in the six months ended June 30, 2002. We borrowed $17.0 million
to fund payment of prepetition liabilities and capital expenditures in the first
six months of 2003. During the six months ended June 30, 2002, we repaid $7.1
million in debt.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States.
The application of these principles requires that in certain instances we make
estimates and assumptions regarding future events that impact the reported
amount of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Predicting future events is inherently an imprecise activity and as such
requires the use of judgment. On an ongoing basis, we review the basis for its
estimates and will make adjustments based on historical experience, current and
anticipated economic conditions, accepted actuarial valuation methodologies or
27
other factors that we consider to be reasonable under the circumstances. There
can be no assurance that actual results will not differ from those estimates.
We consider the following policies to be important in understanding the
judgments involved in preparing our financial statements and the uncertainties
that could affect our financial condition, results of operations or cash flows.
Fresh Start Reporting and Intangible Assets
Upon confirmation of the Plan, we adopted the provisions of Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh Start Reporting"). Fresh Start Reporting adjustments
reflect the application of Statement of Financial Accounting Standard No. 141
"Business Combinations" ("SFAS No. 141"), which requires a reorganized entity to
record its assets and liabilities at their fair value. We used our newly
determined Reorganization Value to define the fair value of our debt and equity
at December 31, 2002. The resulting reorganized equity value of $132.3 million
was allocated to individual assets and liabilities using the principles of SFAS
No. 141. The difference between the reorganized equity value described above
and the resulting fair value of assets and liabilities was recorded as goodwill.
We have used independent valuation experts where necessary to appraise the major
components of the balance sheet including trademarks, patents, customer
relationships and property, plant and equipment. The determination of fair
value of assets and liabilities required significant estimates and judgments
made by management and results may differ under different assumptions or
conditions. In accordance with SFAS No. 142, we will test goodwill and other
intangible assets with indefinite useful lives for impairment at least annually
and test all intangible assets for impairment if events or changes in
circumstances indicate that the asset(s) might be impaired.
As a consequence of the implementation of Fresh Start Reporting, the financial
information presented in the unaudited consolidated statement of operations and
the corresponding statement of cash flows for the six months ended June 29, 2003
is generally not comparable to the financial results for the six months ended
June 30, 2002. Any financial information herein labeled "Predecessor Company"
refers to periods prior to the adoption of Fresh Start Reporting, while those
labeled "Successor Company" refer to periods following our reorganization. The
lack of comparability in the accompanying consolidated financial statements
relates primarily to our capital structure (outstanding shares used in earnings
per share calculations), debt related costs, and depreciation and amortization
related to adjusting property, plant and equipment and other intangible assets
to their fair value.
Sales returns and allowances, bad debts
The estimation of product returns and deductions for customer allowances,
including rebates, incentives and other promotional payments, requires that we
make estimates regarding the amount and timing of future returns and deductions.
These estimates are based on historical return rates, current economic trends
and changes in customer demand and product acceptance. Significant management
judgment is used in establishing accruals for sales returns and other allowances
in any given accounting period. In addition, we use estimates in determining
the collectibility of our accounts receivable and must rely on our evaluation of
historical bad debts, customer concentration, customer credit ratings, current
economic trends and changes in customer payment terms to arrive at appropriate
reserves. Material differences may result in the amount and timing of earnings
if actual experience differs significantly from management estimates.
28
Excess and obsolete inventory reserves
We record inventory on a first-in, first-out basis and record adjustments to the
value of this inventory in situations where it appears that we will not be able
to recover the cost of the product. This lower of cost or market analysis is
based on our estimate of forecasted demand by customer by product. A decrease
in product demand due to changing customer tastes, consumer buying patterns or
loss of shelf space to competitors could significantly impact our evaluation of
our excess and obsolete inventories.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States. There are also areas in which our judgment in selecting
an available accounting alternative would not produce a materially different
result. Our accounting policies are more fully described in Note 3 of the
Company's financial statements for the year ended December 31, 2002, which were
filed with the Securities and Exchange Commission on Form 8-K.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- -----------------------------------------
The factors discussed below, among others, could cause actual results to differ
materially from those contained in forward-looking statements, as described in
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, made in this report, including without limitation, in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
our 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," "plan" 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 our 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 us in light of our experience and our
perception of historical trends, current conditions and expected future
developments, as well as other factors we believe 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, including:
- general economic factors, including, but not limited to, a continuance
of the global economic slowdown, continuing weakness in the retail
sector; and changes in interest rates, foreign currency translation
rates, and consumer confidence;
- changes in demand for our products and the highly competitive market
for our products, including from foreign imports;
- dependence on significant customers and increasing concentration in
the retail industry;
- reliance on third party manufacturers, particularly in Asia;
- changes in the operating environment in our major non-US markets,
including new and different legal and regulatory requirements, export
or import duties;
- drastic and unforeseen price pressures on our products or significant
cost increases that cannot be recovered through price increases or
productivity improvements;
- acceptance of product changes by the consumer and unpredictable
difficulties or delays in the development of new product programs
(including product line extensions and renewals);
- cost and availability of raw materials, labor and natural and other
resources;
- technological shifts away from our technologies and core competencies;
- environmental issues relating to unforeseen events;
29
- availability of financing for us or certain of our customers;
- loss of any material intellectual property rights; and
- any difficulties in obtaining or retaining the management or other
human resource competencies that we need to achieve our business
objectives.
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 us will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on us and our subsidiaries or our business or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We primarily have market risk in the areas of foreign currency and floating rate
debt. We invoice a significant portion of our international sales in U.S.
dollars, minimizing the effect of foreign exchange gains or losses on our
earnings. As a result, our foreign sales are affected by currency fluctuations
versus U.S. dollar invoicing. Our costs are predominantly denominated in U.S.
dollars. With respect to sales conducted in foreign currencies, increased
strength of the U.S. dollar decreases our reported revenues and margins in
respect of such sales to the extent we are unable or determine not to increase
local selling prices.
From time to time we reduce 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. As of June 29,
2003, we had no forward foreign currency exchange contracts outstanding.
We enter 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, we agree 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. Under the
Revolver and Term Loan we are required to enter into interest rate protection
agreements, as agreed by the administrative agent, the effect of which is to fix
or limit the interest cost. As of June 29, 2003, we had no such contracts
outstanding. On August 6, 2003, we entered into a $145 million notional amount
interest rate swap, which expires on March 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days prior to the filing date of this quarterly report on
Form 10-Q (the "Evaluation Date"). Based on that evaluation, our
management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that the design and operation of these disclosure
controls and procedures were effective. Our management, including our Chief
Executive Officer and our Chief Financial Officer, recognizes that any set
of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives.
(b) Changes in Internal Controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect our
internal controls subsequent to the Evaluation date.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 31, 2002, the Company and eleven of our U.S. subsidiaries (collectively,
the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of
the federal bankruptcy code in the United States Bankruptcy Court for the
Northern District of Illinois. The reorganization was jointly administered
under the caption "In re World Kitchen, Inc., a Delaware Corporation, et al.,
Case No. 02-B21257." The Plan of reorganization was confirmed by the Bankruptcy
Court on December 23, 2002, and became effective January 31, 2003. During the
period from May 31, 2002 until January 31, 2003, the Debtors operated their
businesses as debtors-in-possession under Chapter 11. Our non-U.S. subsidiaries
did not file voluntary petitions, were not Debtors and did not reorganize. In
connection with the Plan, certain subsidiaries of the Predecessor Company were
merged into other subsidiaries. The remaining Debtors continue to reconcile
and, once reconciled or resolved, pay claims in the bankruptcy.
Litigation
We have been engaged in, and anticipate we will continue to be engaged in, the
defense of product liability claims related to products we manufacture or sell.
We maintain product liability coverage, subject to certain deductibles and
maximum coverage levels, that we believe is adequate and in accordance with
industry standards.
In addition to product liability claims, from time to time we are a defendant in
various other claims and lawsuits arising in the normal course of business. We
believe, based upon information currently available, and taking into account
established reserves for estimated liabilities and our insurance coverage, that
the ultimate outcome of these proceedings and actions is unlikely to have a
material adverse effect on our financial statements. It is possible, however,
that some matters could be decided unfavorably to us and could require us to pay
damages, or make other expenditures in amounts that could be material but cannot
be estimated as of June 29, 2003.
Environmental Matters
Our facilities and operations are subject to certain federal, state, local and
foreign laws and regulations relating to environmental protection and human
health and safety, including those governing wastewater discharges, air
emissions, and the use, generation, storage, treatment, transportation and
disposal of hazardous and non-hazardous materials and wastes and the remediation
of contamination associated with such disposal. Because of the nature of its
business, we have incurred, and will continue to incur, capital and operating
expenditures and other costs in complying with and resolving liabilities under
such laws and regulations.
It is our policy to accrue for remediation costs when it is probable that such
costs will be incurred and when a range of loss can be reasonably estimated. We
have accrued approximately $1.2 million as of June 29, 2003 for probable
environmental remediation and restoration liabilities. Based on currently
available information and analysis, we believe that it is possible that costs
associated with such liabilities or as yet unknown liabilities may exceed
current reserves in amounts or a range of amounts that could be material but
cannot be estimated as of June 29, 2003. There can be no assurance that
activities at these or any other facilities or future facilities may not result
in additional environmental claims being asserted against us or additional
investigations or remedial actions being required.
31
ITEM 2. CHANGES IN 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No. Description of Exhibit
- --- ----------------------
3.1.1+ Amended and Restated Certificate of Incorporation of WKI Holding
Company, Inc.
3.1.2+ Amended and Restated Certificate of Incorporation of World Kitchen,
Inc.
3.1.3+ Certificate of Formation of EKCO Group, LLC.
3.1.4+ Amended and Restated Certificate of Incorporation of EKCO Housewares,
Inc.
3.1.5+ Amended and Restated Certificate of Incorporation of EKCO
Manufacturing of Ohio, Inc.
3.1.6+ Certificate of Formation of WKI Latin America Holding, LLC.
3.1.7+ Certificate of Formation of World Kitchen (GHC), LLC.
3.2.1+ Amended and Restated Bylaws of WKI Holding Company, Inc.
3.2.2+ Amended and Restated Bylaws of World Kitchen, Inc.
3.2.3+ Limited Liability Company Agreement of EKCO Group, LLC.
3.2.4+ Amended and Restated Bylaws of EKCO Housewares, Inc.
3.2.5+ Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc.
3.2.6+ Limited Liability Company Agreement of WKI Latin America Holding, LLC.
3.2.7+ Limited Liability Company Agreement of World Kitchen (GHC), LLC.
4.1+ Stockholders' Agreement, dated as of January 31, 2003, by and among
WKI Holding Company, Inc., the Senior Lenders, the Subordinated
Lenders, the Borden Entities party thereto, the Management Members
party thereto and the New Directors party thereto.
32
4.2+ Indenture, dated as of January 31, 2003, among WKI Holding Company,
Inc., the Subsidiary Guarantors party thereto, and U.S. Bank National
Association, as trustee, relating to 12% Senior Subordinated Notes due
2010.
10.1* Amendment to the Revolving Credit Agreement dated as of June 30, 2003
among WKI Holding Company, Inc., JPMorgan Chase Bank, as
administrative agent and collateral agent, J.P. Morgan Securities
Inc., as arranger, and the lenders party thereto.
10.2(a)* WKI Holding Company, Inc. Long-Term Incentive Plan
10.2(b)* WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for
May 29, 2003 through December 31, 2005 Award Term (OXO Guidelines)
10.2(c)* WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for
May 29, 2003 through December 31, 2005 Award Term (WKI Guidelines)
10.3* Employment Agreement, dated June 18, 2003, between WKI Holding
Company, Inc. and Douglas S. Arnold
10.4* Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Alexander Lee
10.5* Amended and Restated Employment Agreement, dated July 31, 2003,
between WKI Holding Company, Inc. and James A. Sharman
10.6* Amended and Restated Employment Agreement, dated July 31, 2003,
between WKI Holding Company, Inc. and Joseph W. McGarr
________
* Filed herewith.
+ Incorporated by reference to the corresponding exhibit number to the
Quarterly Report on Form 10-Q for the period ended March 30, 2003.
33
- --------------------------------------------------------------------------------
SIGNATURES
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.
WKI HOLDING COMPANY, INC.
-------------------------
(Registrant)
Date: August 8, 2003 By:/s/ James A. Sharman
-------------------------------
James A. Sharman
President and Chief Executive Officer
Date: August 8, 2003 By:/s/ Joseph W. McGarr
--------------------
Joseph W. McGarr
Chief Financial Officer
34
- --------------------------------------------------------------------------------
CERTIFICATIONS
I, James A. Sharman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WKI Holding
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 8, 2003 By:/s/ James A. Sharman
-------------------
James A. Sharman
President and Chief Executive Officer
35
I, Joseph W. McGarr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WKI Holding
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 8, 2003 By:/s/ Joseph W. McGarr
--------------------
Joseph W. McGarr
Chief Financial Officer
36