FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission file number 333-57099
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CCPC HOLDING COMPANY, INC.
(Registrant)
DELAWARE 16-1403318
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
E-Building, Houghton Park, Corning, New York 14831
- - -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-8605
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
24,000,000 shares of CCPC Holding Company, Inc.'s, $0.01 Par Value, were
outstanding as of November 1, 1998.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to consolidated financial statements of CCPC Holding Company, Inc.
filed as part of this report:
Page
----
Consolidated Statements of Operations for the nine months and
three months ended September 30, 1998 and 1997 3
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
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CCPC HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
REVENUES
Net sales $ 364,407 $ 399,180 $ 134,938 $ 145,277
DEDUCTIONS
Cost of sales 243,497 261,178 91,717 95,268
Selling, general and
administrative expenses 111,176 103,531 37,417 36,197
Other corporate administrative expenses -- 13,806 -- 4,602
Provision for restructuring costs 2,980 -- 2,980 --
Transaction related expenses 28,866 -- 255 --
Other, net 816 1,650 270 309
------------- ------------- ------------- -------------
Operating (loss) income (22,928) 19,015 2,299 8,901
Interest expense 23,605 6,369 11,176 2,282
------------- ------------- ------------- -------------
(Loss) income before taxes on income (46,533) 12,646 (8,877) 6,619
Income tax expense 2,120 5,257 402 2,831
------------- ------------- ------------- -------------
(Loss) income before minority interest (48,653) 7,389 (9,279) 3,788
Minority interest in subsidiary 302 (232) 187 (81)
------------- ------------- ------------- -------------
Net (loss) income (48,351) 7,157 (9,092) 3,707
Preferred stock dividends (1,827) -- (927) --
------------- ------------- ------------- -------------
NET (LOSS) INCOME APPLICABLE TO COMMON STOCK $ (50,178) $ 7,157 $ (10,019) $ 3,707
============= ============= ============= =============
BASIC AND DILUTED (LOSS) EARNINGS
PER COMMON SHARE $ (2.09) $ 0.30 $ (0.42) $ 0.15
============= ============= ============= =============
Weighted average number of common shares
outstanding during the period 24,000,000 24,000,000 24,000,000 24,000,000
The accompanying notes are an integral part of these statements.
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CCPC HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, December 31,
ASSETS 1998 1997
------ ------------ -----------
CURRENT ASSETS
Cash and cash equivalents $ 2,727 $ 4,345
Accounts receivable, net of allowances -
$7,081/1998; $7,304/year-end 1997 74,820 68,340
Inventories, net 154,493 136,138
Prepaid expenses and other current assets 9,035 8,695
Deferred taxes on income 8,019 8,633
----------- -----------
Total current assets 249,094 226,151
----------- -----------
PROPERTY AND EQUIPMENT, NET 140,584 153,332
DEFERRED TAXES ON INCOME 39,440 29,273
GOODWILL, NET OF ACCUMULATED AMORTIZATION
$7,942/1998; $6,663/year-end 1997 59,144 60,424
OTHER ASSETS 31,818 14,464
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TOTAL ASSETS $ 520,080 $ 483,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 81,526 $ 79,153
Due to Corning Incorporated -- 87,142
----------- -----------
Total current liabilities 81,526 166,295
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LONG-TERM DEBT 493,985 8,285
ACCRUED POSTRETIREMENT LIABILITY 30,540 59,641
OTHER LIABILITIES 3,772 18,243
MINORITY INTEREST IN SUBSIDIARY COMPANY 744 1,046
COMMITMENTS (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred Stock - 5,000,000 shares authorized; 1,200,000 shares issued 31,827 --
Common Stock - $0.01 par value/1998; $0.00 par value/year-end 1997
45,000,000 shares authorized; 24,000,000 shares issued 240 --
Contributed capital 454,949 274,070
Accumulated deficit (575,076) (42,138)
Cumulative translation adjustment (2,427) (1,798)
----------- -----------
Total stockholders' (deficit) equity (90,487) 230,134
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 520,080 $ 483,644
=========== ===========
The accompanying notes are an integral part of these statements.
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CCPC HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
-----------------------------------
September 30, September 30,
1998 1997
------------- -------------
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net (loss) income $ (48,351) $ 7,157
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 26,671 27,346
Amortization of deferred financing fees 2,764 --
Minority interest in (earnings) losses of subsidiary (302) 232
Loss on disposition of plant and equipment 141 1,119
Deferred tax assets 3,918 83
Provision for postretirement benefits, net of cash paid 2,897 2,816
Changes in operating assets and liabilities:
Accounts receivable 25 14,151
Inventories (18,355) (30,994)
Prepaid expenses and other current assets (3,825) (455)
Accounts payable and accrued expenses 10,286 (17,796)
Other liabilities 3,245 1,773
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NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (20,886) 5,432
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property and equipment and other assets (12,128) (18,615)
Other, net -- (162)
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NET CASH USED IN INVESTING ACTIVITIES (12,128) (18,777)
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CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of long-term debt 487,506 --
Repayment of long-term debt (1,806) (3,125)
Interim financing 471,600 --
Repayment of interim financing (471,600) --
Dividend to Corning Incorporated (482,760) --
(Decrease) increase in net amounts due to Corning Incorporated (87,142) 11,256
Shareholder capital contribution 103,324 --
Issuance of preferred stock 30,000 --
Issuance of common stock 240 --
Deferred financing fees (17,337) --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32,025 8,131
------------- -------------
Effect of exchange rates on cash (629) (444)
------------- -------------
Net change in cash and cash equivalents (1,618) (5,658)
Cash and cash equivalents at beginning of year 4,345 8,091
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,727 $ 2,433
============= =============
The accompanying notes are an integral part of these statements.
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CCPC HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Nine Months Ended
-------------------------------
September 30, September 30,
1998 1997
------------- -------------
SUPPLEMENTAL DATA:
Income taxes paid, net $ 1,024 $ 6,495
Interest paid $17,082 $ 8,245
Non-cash activity:
Transaction-related expenses to be reimbursed by Corning $ 6,505 $ --
Increase to deferred taxes resulting from the Recapitalization $13,471 $ --
Adjustment to postretirement liability for amounts assumed by Corning $31,998 $ --
Adjustment to pension liability for amounts assumed by Corning $17,669 $ --
Adjustment to accounts payable for liabilities retained by Corning $ 7,913 $ --
Preferred stock dividends $ 1,827 $ --
The accompanying notes are an integral part of these statements.
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CCPC HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
(1) BASIS OF PRESENTATION
Pursuant to Regulation 15(d) of the Securities Act of 1934, CCPC
Holding Company, Inc. (CCPC) is filing herein its quarterly report on
Form 10-Q which includes the first fiscal quarter subsequent to the
quarter reported upon in its Form S-4 registration statement as filed
with the Securities and Exchange Commission (SEC). The consolidated
financial statements reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results of
operations and financial position for the interim periods presented.
All such adjustments are of a normal recurring nature. The consolidated
financial statements have been compiled without audit and are subject
to such year-end adjustments as may be considered appropriate by the
registrant and should be read in conjunction with CCPC's Form S-4
registration statement filed September 16, 1998.
Subsequent to April 1, 1998, Corning Consumer Products Company changed
its name to CCPC Holding Company, Inc. The consolidated balance sheet
at September 30, 1998, the consolidated statements of operations for
the nine months ended September 30, 1998, and the consolidated
statement of cash flows for the nine months ended September 30, 1998,
reflect the Recapitalization (see Note 2). The consolidated balance
sheet at December 31, 1997, the consolidated statements of operations
for the nine and three months ended September 30, 1997, and the
consolidated statement of cash flows for the nine months ended
September 30, 1997, present CCPC as a wholly-owned subsidiary of
Corning Incorporated (Corning) prior to the Recapitalization.
(2) RECAPITALIZATION
On March 2, 1998, Corning, CCPC, Borden, Inc., and CCPC Acquisition
Corp. entered into a Recapitalization Agreement.
On March 16, 1998, the CCPC board of directors approved a 24,000-for-1
common stock split. This increased the common shares outstanding from
1,000 to 24,000,000. In addition, the Board of Directors approved an
increase in the number of authorized shares from 1,000 to 45,000,000
and an increase in the par value from $0.00 to $0.01 per share. Share
amounts have been restated for all periods presented.
On April 1, 1998, pursuant to the Recapitalization Agreement, CCPC
Acquisition Corp. acquired 22,080,000, or 92%, of the outstanding
shares of common stock of CCPC from Corning for $110,400. CCPC then
borrowed $471,600 and paid a cash dividend to Corning of $472,600.
Corning retained 1,920,000, or 8%, of the outstanding shares of common
stock of CCPC. Also on April 1, 1998, CCPC issued and sold 1,200,000
shares of junior preferred stock to CCPC Acquisition Corp. for $30,000.
CCPC paid an additional $10,200 to Corning in July 1998 relating to
certain provisions of the Recapitalization Agreement.
As a result of the Recapitalization, contributed capital increased by
$181,119. The net capital contribution consisted of certain
indebtedness, certain post-retirement medical and life insurance
liabilities, certain pension liability obligations, workers'
compensation, and product liability obligations.
(3) RESTRUCTURING
CCPC is continuing its efforts to further reduce manufacturing,
assembly, and distribution costs. As a result of these efforts, in the
third quarter of 1998, CCPC recorded a restructuring charge of $2,980
related to the restructuring of certain Asia operations and domestic
facilities.
-7-
(4) INVENTORIES
Inventories shown on the accompanying balance sheets were comprised of
the following:
September 30, December 31,
1998 1997
----------- ------------
Finished goods $ 69,994 $ 62,434
Work in process 61,735 56,684
Raw materials 12,571 5,030
Supplies and packing materials 11,341 14,100
----------- -----------
Total inventories 155,641 138,248
Decrease to LIFO valuation (1,148) (2,110)
----------- -----------
$ 154,493 $ 136,138
=========== ===========
(5) RELATED PARTY TRANSACTIONS
The following transactions with Corning are included in the
consolidated statements of income for the nine and three months ended
September 30, 1998 and 1997:
Nine Months Ended Three Months Ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Commission expense $ 1 $ 670 $ 3 $ 180
Interest expense from Corning 1,296 5,792 -- 1,705
Interest expense to Borden, Inc.
and an affiliate of Borden, Inc. 2,368 -- -- --
Centralized services 11,229 14,400 5,785 4,800
Other corporate administrative expenses -- 13,806 -- 4,602
Management fees to Corning 437 -- -- --
Management fees to Borden 750 -- 375 --
Sales are made by CCPC to certain Corning subsidiaries which
subsequently resell the products to third parties. CCPC pays these
subsidiaries a sales commission for sales made on CCPC's behalf.
Corning utilizes the CCPC Canada operations as a sales office and pays
commissions on Corning sales generated.
Amounts due to and from Corning as a result of the above and other
transactions bear interest at a rate based on the 30-day London
Interbank Offered Rate (LIBOR) plus 3/8%. Interest expense due to
Borden, Inc. and affiliates of Borden, Inc. relates to interim
financing of $471,600 at 9.5% which was borrowed and repaid during the
second quarter of 1998.
Corning provides certain administrative and operating support
(reflected above as centralized services) including financial
services, information systems support, risk management, purchasing,
transportation, benefit plans administration, and engineering services.
CCPC is charged for this support using various allocation bases
including number of employees, related payroll costs, and direct
efforts expended. These costs, which are included in cost of sales
and selling, general, and administrative expenses, as well as
certain corporate center costs, are charged to CCPC by Corning under a
transition service agreement at a rate agreed upon by the management of
CCPC. Management believes that the methodology used to allocate the
costs is reasonable, but may not necessarily be indicative of the costs
that would have been incurred had these functions been performed by
CCPC.
Other corporate administrative expense related to certain corporate
center costs such as administrative, tax, treasury, and technical
support provided by Corning to CCPC were charged out under a service
agreement at an overall rate agreed upon by the management of CCPC. In
1998, these services are charged out under the transition service
agreement and are included in selling, general, and administrative
expenses (reflected above as centralized services). CCPC paid Corning
$437 in management fees in the first quarter of 1998. Beginning in
the second quarter of 1998, CCPC pays Borden, Inc. a management fee
of $375 per quarter.
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(6) CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended
September 30,
1998
-----------
Preferred Stock:
Balance at beginning of year --
Issuance of preferred stock $ 30,000
Preferred stock dividends 1,827
-----------
Balance at end of period 31,827
-----------
Common Stock
Balance at beginning of year --
24,000-for-one stock split 240
-----------
Balance at end of period 240
-----------
Contributed Capital:
Balance at beginning of year 274,070
24,000-for-one stock split (240)
Capital contribution 181,119
-----------
Balance at end of period 454,949
-----------
Accumulated Deficit:
Balance at beginning of year (42,138)
Net loss (48,351)
Preferred stock dividends (1,827)
Dividend to Corning Incorporated (482,760)
-----------
Balance at end of period (575,076)
-----------
Cumulative Translation Adjustment:
Balance at beginning of year (1,798)
Translation adjustment (629)
-----------
Balance at end of period (2,427)
-----------
Stockholders' Equity $ (90,487)
===========
(7) BORROWINGS
CCPC incurred substantial indebtedness as a result of the
Recapitalization. On April 1, 1998, CCPC entered into an interim
financing agreement with Borden, Inc. and an affiliate of Borden, Inc.
providing $471,600 in financing at 9.5% maturing December 31, 1998.
The interim financing was repaid in May 1998 with the proceeds of
borrowings under senior credit facilities from a syndicate of banks
and other financial institutions and the issuance of senior
subordinated notes in a private placement. On October 23, 1998, CCPC
exchanged the privately placed senior subordinated notes for 9 5/8%
Series B Senior Subordinated Notes due 2008 which have been
registered under the Securities Act.
The senior credit facilities provide term loans of $200,000 and a
revolving credit facility of up to $275,000 of which $87,200 was
outstanding at September 30, 1998. The senior credit facilities provide
for nominal annual amortization of the term loans and final maturity in
2006. The senior credit facilities contain provisions under which
interest rates on the term loans, and the revolving credit loans, are
adjusted in increments based on the rate of consolidated total debt to
adjusted cash flow. At September 30, 1998, the term loan rate was at
7.53% and the weighted average interest rate for the revolving credit
facility was 7.34%. The commitments for revolving credit loans expire
in 2005. The 9 5/8% Series B senior subordinated notes carry a
principal amount of $200,000 and mature in 2008.
-9-
In addition, at September 30, 1998 and December 31, 1997, CCPC had
outstanding certain industrial development bonds bearing interest at an
average rate of 3.4% per annum and 4.0% per annum, respectively. The
bonds mature on various dates through 2005 and had an outstanding
aggregate balance of $8,400 and $10,300 at September 30, 1998 and
December 31, 1997, respectively.
In March 1997, CCPC consolidated certain outstanding notes and
debentures, which had previously been allocated to CCPC by Corning. The
notes and debentures were combined into CCPC's revolving credit
agreement which was increased to provide for borrowings of up to
$200,000 at a rate of 30-day LIBOR plus 3/8% due on demand. At December
31, 1997, the aggregate amount of intercompany debt outstanding was
$87,142.
(8) COMPREHENSIVE INCOME
As of January 1, 1998, CCPC implemented Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." This
pronouncement, which is solely a financial statement presentation
standard, requires CCPC to disclose non-owner changes included in
stockholders' equity but not included in net earnings. Comprehensive
income was computed as follows:
Nine Months Ended Three Months Ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net (loss) income $ (48,351) $ 7,157 $ (9,092) $ 3,707
Foreign currency translation adjustments (629) (444) (218) (67)
---------- ---------- ---------- ----------
Comprehensive income $ (48,980) $ 6,713 $ (9,310) $ 3,640
========== ========== ========== ==========
(9) COMMITMENTS
The company is a defendant or plaintiff in various claims and lawsuits
arising in the normal course of business. The company believes, based
upon information it currently possesses, and taking into account
established reserves for estimated liabilities and its insurance
coverage, that the ultimate outcome of the proceedings and actions is
unlikely to have a material adverse effect on the company's financial
position or results of operations.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
CCPC is a leading manufacturer and marketer of oven/bakeware, dinnerware and
rangetop cookware. The company has strong positions in major channels of
distribution for its products in the United States and has also achieved a
significant presence in certain international markets, primarily Canada, Asia,
Australia and Latin America. In the United States, CCPC 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 outlet stores.
In the international market, CCPC has established its presence through an
international sales force along with localized distribution and marketing
capabilities.
Three Months Ended Nine Months Ended
--------------------------------------------- ---------------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 Change 1998 1997 Change
------------- ------------- ------------- ------------- ------------- -------------
NET SALES
United States $ 112,213 $ 111,333 $ 880 $ 297,801 $ 292,981 $ 4,820
Asia 3,799 13,224 (9,425) 13,416 46,949 (33,533)
Other International 18,926 20,720 (1,794) 53,190 59,250 (6,060)
------------- ------------- ------------- ------------- ------------- -------------
Net Sales $ 134,938 $ 145,277 $ (10,339) $ 364,407 $ 399,180 $ (34,773)
============= ============= ============= ============= ============= =============
OPERATING INCOME*
United States $ 1,834 $ 517 $ 1,317 $ (330) $ (9,697) $ 9,367
Asia (2,917) 4,748 (7,665) (3,510) 17,333 (20,843)
Other International 3,637 3,636 1 9,778 11,379 (1,601)
------------- ------------- ------------- ------------- ------------- -------------
Operating Income* $ 2,554 $ 8,901 $ (6,347) $ 5,938 $ 19,015 $ (13,077)
============= ============= ============= ============= ============= =============
*excluding the impact of transaction related expenses. The discussion of
operating results below also excludes transaction related expenses.
Net sales for the third quarter and first nine months of 1998 totaled $134,938
and $364,407, respectively, compared to 1997 net sales of $145,277 and $399,180,
respectively. Operating income for the third quarter and first nine months of
1998, excluding the impact of transaction related expenses, totaled $2,554 and
$5,938, respectively, compared to 1997 operating income of $8,901 and $19,015,
respectively. Operating results for both periods in 1998 reflect the continued
effect of economic disruptions in Asia and the impact of temporary interruptions
of production resulting from an acclerated inventory reduction program in the
third quarter of 1998.
In the United States, net sales for the third quarter and first nine months of
1998 were up $880 and $4,820, respectively, compared to the same periods last
year. The increase in third quarter 1998 domestic net sales resulted from
increased shipments to mass merchants partially offset by declines in other
distribution channels. Sales at company-operated outlet stores for the third
quarter 1998 were even with the same period last year. The increase in domestic
sales for the first nine months of 1998 resulted from increased shipments to
mass merchants and higher sales at company-operated outlet stores offset by
declines in other distribution channels. International net sales for the third
quarter and first nine months of 1998 were down $11,219 and $39,593,
respectively, when compared to the same periods in 1997 due primarily to
declines in net sales in Asia.
Gross profit as a percentage of net sales for the third quarter and first nine
months of 1998 was 32% and 33%, respectively, compared to 34% and 35% for the
same periods in 1997. The decline in the gross profit percentage for both
-11-
periods was primarily attributable to the decline in higher margin Asian sales.
Selling, general, and administrative expenses and other corporate administrative
expenses as a percentage of net sales for the third quarter and first nine
months of 1998 was 28% and 31%, respectively, compared with 28% and 29% for the
same periods in 1997. For the third quarter and first nine months of
1998,company-operated outlet store expenses increased to support higher outlet
store sales. In the third quarter, these expenses were offset by a reduction in
administrative costs as a result of CCPC's separation from Corning.
Operating income in the United States increased in the third quarter by
$1,317 and the operating loss for the first nine months of 1998 declined by
$9,367 compared to the same periods in 1997 due primarily to cost savings
related to corporate administrative expenses as a result of the
Recapitalization and the increase in domestic sales. Prior to the
Recapitalization, CCPC received an allocation of corporate expenses from
Corning which was calculated as a percentage of budgeted sales per an
agreement between both companies. Beginning January 1, 1998, CCPC no longer
received the allocation of corporate expenses from Corning. Charges relating
to services previously performed by Corning have been classified as selling,
general, and administrative expenses in 1998 and were calculated using agreed
upon prices per a transition services agreement. International operating
results for the third quarter and first nine months of 1998 decreased $7,664
and $22,444, respectively, due primarily to a decline in operating results in
Asia. Economic disruptions in Asia are expected to continue to negatively
impact results for the remainder of the year.
Transaction related expenses primarily consist of cash and non-cash
compensation, financing costs and other cash expenses associated with the
Recapitalization (see Note 2 of Notes to Consolidated Financial Statements). In
the first nine months of 1998, CCPC recorded a charge of $28,866 for certain
cash and non-cash expenses, $17,400 of which were cash payments relating to
compensation that were reimbursed by Corning. These cash and non-cash
compensation expenses are associated with arrangements entered into by Corning
with certain current employees and union employees of Corning who accepted
employment with CCPC. The remaining transaction related expenses consist of
costs incurred in 1998 for fees and services related to the Recapitalization.
CCPC is continuing its efforts to further reduce manufacturing, assembly, and
distribution costs. As a result of this effort, in the third quarter of 1998,
CCPC recorded a restructuring charge of $2,980 related to the restructuring of
certain Asia operations and domestic facilities.
TAXES ON INCOME
CCPC's effective tax rate varies between years due to certain tax adjustments
which were made as a result of the Recapitalization . For the third quarter and
first nine months of 1998, CCPC recorded income tax expense of $402 and $2,120,
respectively, on net pretax losses for the same periods of $8,877 and $46,533,
respectively. Income tax expense for 1998 reflects certain non-deductible
expenses relating to the Recapitalization and an increase to the valuation
allowance for net operating loss carryforwards. The effective tax rate for the
third quarter and first nine months of 1997 was 42%. For periods prior to the
Recapitalization, CCPC was included in the consolidated federal income tax
return filed by Corning and maintained a tax sharing arrangement with Corning
which required CCPC to compute the provision for income taxes on a separate
return basis and pay to, or receive from, Corning the separate U.S. federal
income tax return liability or benefit, if any.
LIQUIDITY AND CAPITAL RESOURCES
CCPC incurred substantial indebtedness as a result of the Recapitalization.
On April 1, 1998, CCPC entered into an interim financing agreement with
Borden, Inc. and an affiliate of Borden, Inc. providing $471,600 in financing
at 9.5% maturing December 31, 1998. The interim financing was repaid in May
1998 with the proceeds of borrowings under senior credit facilities from a
syndicate of banks and other financial institutions and the issuance of
senior subordinated notes in a private placement. On October 23, 1998, CCPC
exchanged the privately placed senior subordinated notes for 9 5/8% Series B
Senior Subordinated Notes due 2008 which have been registered under the
Securities Act.
-12-
The senior credit facilities provide term loans of $200,000 and a revolving
credit facility of up to $275,000 of which $87,200 was outstanding at September
30, 1998. The senior credit facilities provide for nominal annual amortization
of the term loans and final maturity in 2006. The senior credit facilities
contain provisions under which interest rates on the term loans, and the
revolving credit loans, are adjusted in increments based on the rate of
consolidated total debt to adjusted cash flow. At September 30, 1998, the term
loan rate was at 7.53% and the weighted average interest rate for the revolving
credit facility was 7.34%. The commitments for revolving credit loans expire in
2005. The 9 5/8% Series B senior subordinated notes carry a principal amount of
$200,000 and mature in 2008.
In addition, at September 30, 1998 and December 31, 1997, CCPC had outstanding
certain industrial development bonds bearing interest at an average rate of 3.4%
per annum and 4.0% per annum, respectively. The bonds mature on various dates
through 2005 and had an outstanding aggregate balance of $8,400 and $10,300 at
September 30, 1998 and December 31, 1997, respectively.
In March 1997, CCPC consolidated certain outstanding notes and debentures, which
had previously been allocated to CCPC by Corning. The notes and debentures were
combined into CCPC's revolving credit agreement which was increased to provide
for borrowings of up to $200,000 at a rate of 30-day LIBOR plus 3/8% due on
demand. At December 31, 1997, the aggregate amount of intercompany debt
outstanding was $87,100.
In the first nine months of 1998, CCPC's operating activities used cash of
$20,886 compared to cash provided by operating activities of $5,432 during
the same period in 1997. The decline in operating cash flows is primarily
attributable to the decline in sales and operating income. Investing
activities used cash of $12,128 for the first nine months of 1998 compared to
$18,777 due to lower capital expenditures in 1998. Net cash provided by
financing operations totaled $32,025 for the first nine months of 1998
compared to $8,131 for the same period in 1997 due primarily to the
transactions associated with the Recapitalization.
The company's ability to fund its working capital needs, planned capital
expenditures, scheduled debt payments and lease payments and to comply with
all of the financial covenants under its debt agreements, depends on its
future operating performance and cash flow, which in turn are subject to
prevailing economic conditions and to financial, business, and other factors,
some of which are beyond the company's control. The credit facilities and
indentures relating to the notes contain numerous financial and operating
covenants. In addition, the credit facilities also require the company to
meet certain financial ratios and tests including a ratio of debt to EBITDA
and EBITDA to cash interest expense (where EBITDA represents adjusted cash
flow as described more fully in the credit facilities). The company is
currently in compliance with its covenants at September 30, 1998. Certain
covenant calculations include operating income from the previous four
quarters and therefore include the fourth quarter of 1997. Although
management believes that the Company will be in compliance with its covenants
as of year end, further deterioration in Asia or a downturn in the remainder
of the business could result in a failure to comply.
YEAR 2000
OVERVIEW
The year 2000 issue is the result of computer programs written using two
digits rather than four digits to define the applicable year. Any of CCPC's
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than year 2000. This could result in a
system failure or miscalculations causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. If not
addresses, the Year 2000 issue could have a material adverse impact on the
business operations and financial results of CCPC.
To address this issue, CCPC's year 2000 program is a risk-based plan divided
into three phases that are being executed by both internal and external
resources. These phases are: Phase I - an inventory of all systems,
assigning a business priority for each system and performing a preliminary
assessment of year 2000 susceptibility; Phase II - completion of a detailed
year 2000 susceptibility analysis and development of remediation plans and
contingency plans; and Phase III - implementation of the remediation plans,
and if necessary, contingency plans and completing final system testing.
The year 2000 efforts are divided into three areas that include, (1) systems
being replaced by new enterprise-wide system implementations; (2) systems
that will not be replaced by the new enterprise-wide system implementations,
including non-information technology systems such as plant process controls;
and (3) external suppliers and customers. A discussion of each area of
activity relative to the three phased approaches follows.
ENTERPRISE-WIDE SYSTEMS
CCPC is in the process of implementing a comprehensive enterprise resource
management system. This system will replace approximately 90% of CCPC's
business transaction systems. The remaining 10%, comprised of benefits
administration and payroll, will be outsourced to a year 2000 compliant
service bureau. Implementation of these new systems are underway with Phase
I and II complete except for the development of certain contingency plans.
Phase III has begun and is expected to be completed by April 1, 1999.
OTHER SYSTEMS
For the systems not to be replaced by enterprise-wide implementations, Phase
I is complete, Phase II is substantially complete, and Phase III remediation
has begun. CCPC plans to substantially complete in 1998 the remediation of
"mission critical" systems not to be replaced by the new enterprise-wide
systems. System remediation not completed in 1998 and all system testing
activities are planned to be completed by June 30, 1999, with the exception
of some isolated plant systems with "marginal" impact which will be done by
December 1999.
SUPPLIERS AND CUSTOMERS
CCPC is in Phase I of the plan to assess and address the risks related to
third party suppliers and customers. As a result of initial inquiries,
supplier responses have been received. These responses are
being evaluated and procedures are being performed to determine the extent to
which CCPC may be vulnerable to the failure of third parties to resolve their
own year 2000 issues. Customer assessments and actions are scheduled for the
first half of 1999. Efforts related to suppliers and customers, including
the development of contingency plans where appropriate, are targeted for
completion by June 30, 1999. Although CCPC's systems do not rely
significantly on systems of other companies, CCPC cannot provide assurance
that failure of third parties to address the year 2000 issue will not have an
adverse impact on the business operations and results.
COSTS
Significant investments in enterprise-wide information systems have been made
that will total approximately $16,500 by the year 2000. The cost to make the
remaining systems year 2000 compliant is estimated to be $600. As of
September 30, 1998, CCPC had incurred costs of approximately $4,500 for
enterprise-wide systems and approximately $238 for other systems and efforts.
RISKS
Due to the general uncertainty inherent in the year 2000 problem, including
the uncertainty associated with suppliers and customers, the potential effect
on the financial results and condition of CCPC has not been measured. CCPC
intends the year 2000 program to be completed on a timely basis so as to
significantly reduce the level of uncertainty and the impact on business
operations and financial results. CCPC will develop contingency plans to
reduce the impact of non-compliant customer and supplier transactions and to
remediate internal systems.
Readers are cautioned that Forward-looking statements contained in the year
2000 section should be read in conjunction with the disclosure under the
heading: "Forward-Looking and Cautionary Statements".
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FORWARD-LOOKING AND CAUTIONARY STATEMENTS
CCPC and its officers may, from time to time, make written or oral statements
regarding the future performance of the company, including statements contained
in the company's filings with the Securities and Exchange Commission. Investors
should be aware that these statements are based on currently available
financial, economic, and competitive data and on current business plans. Such
statements are inherently uncertain and investors should recognize that events
could cause the company's actual results to differ materially from those
projected in forward-looking statements made by or on behalf of the company.
Such risks and uncertainties are primarily in the areas of results of operations
by business unit, liquidity, legal liabilities, year 2000 compliance, and risk
management.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings which are material in relation to the
consolidated financial statements of CCPC.
CCPC has been engaged in, and will continue to be engaged in, the defense of
product liability claims related to its products, particularly its bakeware and
cookware product lines. The company maintains product liability coverage,
subject to certain deductibles and maximum coverage levels that the company
believes is adequate and in accordance with industry standards.
In addition to product liability claims, from time to time the company is
involved in various legal actions in the ordinary course of business. The
company is not currently involved in any legal actions which, in the belief of
management, could have a material adverse impact on the company.
On May 12, 1998, the company received a claim from Rubbermaid Incorporated
alleging that Corning Ware(R) Pop-ins(TM) infringe four patents owned by
Rubbermaid Incorporated. On October 29, 1998, the company and Rubbermaid
Incorporated reached a mutually agreed settlement of this issue. The settlement
will not have a material impact on CCPC's financial results for the current
year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index which is located on page 17.
Other items under Part II are not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CCPC HOLDING COMPANY, INC.
--------------------------
(Registrant)
November 11, 1998 /s/ PETER F. CAMPANELLA
- - ----------------- -----------------------
Date Peter F. Campanella
President and Chief Executive Officer
November 11, 1998 /s/ ANTHONY P. DEASEY
- - ----------------- ---------------------
Date Anthony P. Deasey
Senior Vice President-Finance
and Chief Financial Officer
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CCPC HOLDING COMPANY, INC.
EXHIBIT INDEX
This exhibit is numbered in accordance
with Exhibit Table I of Item 601 of Regulation S-K
Page number
in manually
Exhibit # Description signed original
- - --------- ----------- ---------------
12 Computation of ratio of earnings to combined
fixed charges and preferred dividends 18
27 Financial Data Schedule
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