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 March 30, 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 (I.R.S. Employer
of 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 May 14, 2003:
5,752,179 shares
WKI HOLDING COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Unaudited Consolidated Statements of Operations for the quarter
ended March 30, 2003 (Successor Company) and for the quarter
ended March 31, 2002 (Predecessor Company) 3
Consolidated Balance Sheets at March 30, 2003 (unaudited) and
December 31, 2002 4
Unaudited Consolidated Statements of Cash Flows for the quarter
ended March 30, 2003 (Successor Company) and for the quarter
ended March 31, 2002 (Predecessor Company) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 33
Certifications 34
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
SUCCESSOR COMPANY
COMPANY FOR THE QUARTER
FOR THE QUARTER ENDED
ENDED MARCH 31, 2002
MARCH 30, 2003 (AS RESTATED)
----------------- -----------------
Net sales $ 128,585 $ 153,951
Cost of sales 95,247 109,487
----------------- -----------------
Gross profit 33,338 44,464
Selling, general and administrative expenses 37,904 43,378
Other expense, net 128 2,144
----------------- -----------------
Operating loss (4,694) (1,058)
Interest expense, net 8,458 16,662
----------------- -----------------
Loss before income taxes, minority interest and
cumulative effect of change in accounting principle (13,152) (17,720)
Income tax expense 1,347 315
----------------- -----------------
Loss before minority interest and cumulative effect of
change in accounting principle (14,499) (18,035)
Minority interest in earnings of subsidiary (39) (35)
----------------- -----------------
Net loss before cumulative effect of change in
accounting principle (14,538) (18,070)
Cumulative effect of change in accounting principle -- (202,089)
----------------- -----------------
Net loss (14,538) (220,159)
----------------- -----------------
Preferred stock dividends -- (4,223)
----------------- -----------------
Net loss applicable to common stock $ (14,538) $ (224,382)
================= =================
Basic and diluted loss before cumulative effect of
change in accounting principle per common share $ (2.53) $ (0.32)
================= =================
Basic and diluted loss per common share $ (2.53) $ (3.26)
================= =================
Weighted average number of common
shares outstanding during the period 5,752,179 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)
ASSETS MARCH 30, 2003 DECEMBER 31, 2002
---------------- ------------------
Current Assets
Cash and cash equivalents $ 3,227 $ 40,117
Accounts receivable (less allowances of $8,478 and
$10,932 in 2003 and 2002, respectively) 64,777 76,198
Inventories, net 154,045 146,593
Prepaid expenses and other current assets 15,881 15,578
---------------- ------------------
Total current assets 237,930 278,486
Other assets 43,928 29,387
Property, plant and equipment, net 121,892 89,773
Other intangible assets, net 107,014 84,600
Goodwill 189,754 260,527
---------------- ------------------
TOTAL ASSETS $ 700,518 $ 742,773
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 25,915 $ 35,844
Current portion of long-term debt 3,296 3,218
Other current liabilities 88,322 121,926
---------------- ------------------
Total current liabilities 117,533 160,988
Long-term debt 378,725 364,889
Pension and post-employment benefit obligations 82,796 81,370
Other long-term liabilities 1,666 1,737
---------------- ------------------
Total liabilities 580,720 608,984
---------------- ------------------
Minority interest in subsidiary 1,527 1,488
---------------- ------------------
STOCKHOLDERS' EQUITY
Common stock - $0.01 par value; 15,000,000 shares
authorized; 5,752,179 shares issued and outstanding 58 58
Additional paid-in capital 132,243 132,243
Accumulated deficit (14,538) --
Accumulated other comprehensive gain 508 --
---------------- ------------------
Total stockholders' equity 118,271 132,301
---------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 700,518 $ 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
COMPANY
SUCCESSOR COMPANY FOR THE QUARTER
FOR THE QUARTER ENDED
ENDED MARCH 31, 2002
MARCH 30, 2003 (AS RESTATED)
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,538) $ (220,159)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,673 9,382
Amortization of deferred financing fees 136 1,056
Impairment loss on intangible assets -- 202,089
Provision for rationalization charges -- 1,084
Cash paid for rationalization charges -- (1,987)
Cash paid for restructuring charges -- (4,753)
Other (477) 638
Changes in operating assets and liabilities:
Accounts receivable 11,421 8,944
Inventories (7,452) 5,218
Prepaid expenses and other current assets (303) (543)
Accounts payable and other current liabilities (42,470) (16,929)
Provision for post-retirement benefits, net of cash paid 1,426 2,502
Other assets and liabilities 449 (245)
---------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (43,135) (13,703)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,644) (3,382)
Net proceeds from sale of assets 1,542 --
Increase in restricted cash (1,222) (661)
---------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (5,324) (4,043)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Successor revolving credit facility 14,000 --
Repayment of Predecessor revolving credit facility -- (3,500)
Repayment of long-term debt, other than revolving
credit facility -- (157)
Payment of deferred financing fees (2,431) --
---------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,569 (3,657)
---------------- --------------
Decrease in cash and cash equivalents (36,890) (21,403)
Cash and cash equivalents - beginning of period 40,117 66,805
---------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,227 $ 45,402
================ ==============
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 QUARTER FOR THE QUARTER
ENDED ENDED
MARCH 30, 2003 MARCH 31, 2002
---------------- ----------------
SUPPLEMENTAL DATA:
Cash paid during the period for:
- --------------------------------
Interest $ 7,514 $ 10,565
Income taxes, net of refunds 512 1,219
Non-cash activity:
- ------------------
Preferred stock dividends $ -- $ 4,223
Transfer of inventory in settlement of royalty liability -- 3,818
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 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 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 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 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 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 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.
Pursuant to Section 15(d) of the Securities Act of 1934, WKI is filing herein
its quarterly report on Form 10-Q, which includes its first fiscal quarter of
the year ended December 31, 2003. The Company's first, second and third fiscal
quarters end on the Sunday nearest to the calendar quarter and the fourth
quarter ends on December 31. The Company's first fiscal quarter in fiscal 2003
and fiscal 2002 ended on March 30, 2003 and March 31, 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. 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 first fiscal quarter ended March 30, 2003 is generally not
comparable to the financial results for the first fiscal quarter ended March 31,
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
7
statements relates primarily to the Company's 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.
(2) BANKRUPTCY REORGANIZATION AND FRESH START REPORTING
REORGANIZATION
On May 31, 2002 (the "Filing Date"), the Company and its eleven 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 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 principle 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 5,752,179 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 notes and 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- Series
B Senior Notes ("9- Notes") issued by EKCO Group Inc. and certain of
its subsidiaries.
8
6. The Company reinstated $4.9 million of pre-existing Industrial Revenue
Bond claims (the "Reinstated IRB claims").
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" or "SOP 90-7"). 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 is using and has
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. Certain valuations have not
yet been finalized and are subject to change during the allocation period in a
manner similar to that prescribed by SFAS No. 141. The Fresh Start Reporting
adjustments recorded in the first quarter of 2003 resulted in a reduction to
goodwill of $70.8 million.
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approach. The Company's patents were valued at $23.0 million with an estimated
remaining useful life 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 $32.9 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment at January 1, 2003 as follows: $4.7 million for land, $13.2
million for buildings, and $15.0 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.
9
The effect of the Plan and implementation of Fresh Start Reporting on the
consolidated balance sheet is 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 -- -- 32,871 122,644
Other intangible assets, net 84,600 -- -- 23,000 107,600
Goodwill 55,985 -- 204,542 H (70,773) 189,754
------------ ------------- ---------- --------- --------
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. The additional adjustments were recorded as of
January 1, 2003.
B. Estimated payables associated with the effects of the Plan are $53.5
million. Of this amount, $35.7 million was paid on the Effective Date.
10
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. The finalization of certain Fresh Start
Reporting valuations will result in further adjustments to the
goodwill balance.
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 shall 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 on 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 on 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.
11
Pursuant to Fresh Start Reporting (See Note 2), at December 31, 2002, 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. Fresh Start Reporting valuations recorded in the first quarter of
2003 resulted in a subsequent reduction to goodwill of $70.8 million. The
Company will test goodwill for impairment at least annually under SFAS No. 142.
As mentioned above, the Company is using, or has used, independent valuation
experts were necessary to appraise the major components of the balance sheet
including intangible assets. Valuations for certain trademarks, patents and
customer relationships were not finalized as of the date of the financial
statements for the year ended December 31, 2002 and are not reflected in those
financial statements.
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approach. The Company's patents were valued at $23.0 million with an estimated
remaining useful life ranging from 4 to 18 years based on the expiration of the
patent under federal law.
Intangible assets with finite lives at March 30, 2003 are summarized as follows
(in thousands):
GROSS ACCUMULATED
BALANCE AMORTIZATION NET BALANCE
--------------- ------------ -------------
Patents $ 23,000 $ 586 $ 22,414
These assets are classified as other intangible assets on the Consolidated
Balance Sheet and their related amortization expense is recorded as selling,
general and administrative expenses in the Consolidated Statement of Operations.
(4) SUPPLEMENTAL BALANCE SHEET DATA
Inventories at March 30, 2003 and December 31, 2002 consisted of the following:
INVENTORIES
(IN THOUSANDS): MARCH 30, 2003 DECEMBER 31, 2002
-------------- -----------------
Finished and in-process goods $ 124,835 $ 117,401
Raw materials and supplies 29,210 29,192
-------------- -----------------
$ 154,045 $ 146,593
============== =================
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. The
Company used published market data to determine the fair value of the Company's
precious metals, principally platinum and rhodium. Other assets at March 30,
2003 and December 31, 2002 consisted of the following:
OTHER ASSETS
(IN THOUSANDS): MARCH 30, 2003 DECEMBER 31, 2002
-------------- -----------------
Precious metals $ 24,163 $ 10,829
Other assets 19,765 18,558
-------------- -----------------
$ 43,928 $ 29,387
============== =================
12
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 $32.9 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment at January 1, 2003 as follows: $4.7 million for land, $13.2
million for buildings, and $15.0 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated useful lives.
Property, plant and equipment at March 30, 2003 and December 31, 2002 consisted
of the following:
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS): MARCH 30, 2003 DECEMBER 31, 2002
---------------- ------------------
Land $ 7,789 $ 3,145
Buildings 28,607 15,249
Machinery and Equipment 93,583 71,379
---------------- ------------------
129,979 89,773
Accumulated Depreciation (8,087) --
---------------- ------------------
$ 121,892 $ 89,773
================ ==================
Other liabilities at March 30, 2003 and December 31, 2002 consisted of the
following:
OTHER CURRENT LIABILITIES
(IN THOUSANDS): MARCH 30, 2003 DECEMBER 31, 2002
--------------- ------------------
Wages and employee benefits $ 19,288 $ 18,528
Accrued advertising and promotion 14,706 17,380
Accrued interest 5,110 3,982
Reorganization accruals 34,231 64,974
Other accrued expenses 14,987 17,062
--------------- ------------------
$ 88,322 $ 121,926
=============== ==================
(5) RELATED PARTY TRANSACTIONS
SUCCESSOR COMPANY
Interest Expense and Debt Issuance Fees
Upon emergence from bankruptcy, certain owners of the Predecessor Company's debt
became principal owners of the Successor Company. During the first quarter of
2003, the Company recorded $1.8 million in interest expense and paid $2.3
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),
between the Company and Borden, the 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 first quarter of 2002, the Company recorded $0.4 million in interest expense
related to the Borden Credit Facility. 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 "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
13
$14.2 million, constituting approximately 10.7% of the outstanding shares of the
Successor Company (excluding the impact of shares reserved for issuance pursuant
to the Management Stock Plan).
The Company and/or affiliates of the Company, including entities related to KKR
purchased 9 5/8% Notes previously issued by the Predecessor Company in the open
market or by other means. During the three months ended March 31, 2002 there
were no additional purchases of 9 5/8% Notes in open market transactions. As of
March 31, 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 affiliate's
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). In addition, during the first
quarter of 2002, an affiliate of KKR acquired an additional $11.0 million of
loans under the Predecessor Company's Senior Credit Facility. On the Effective
Date, the affiliate's 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 Subordinated Notes.
Preferred dividends
In conjunction with the Recapitalization, the 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. As of the March 31, 2002, the Predecessor Company had accrued but
not paid $18.1million in preferred stock dividends, of which $1.4 million was
accrued during the fiscal quarter ended March 31, 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, were canceled for no consideration on the Effective Date.
In the fourth quarter of 1999, the 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 Company if certain financial ratios were satisfied. As of March 31,
2002, the Company had accrued but not paid $23.3 million in preferred stock
dividends, of which $2.8 million was accrued during the fiscal quarter ended
March 31, 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,
effective as of December 31, 2002.
Services provided by Corning, Inc.
Prior to April 1, 1998, the Company operated as a wholly-owned subsidiary of
Corning Incorporated ("Corning"). In connection with the recapitalization of
the Company on April 1, 1998 (the "Recapitalization"), Corning and the 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
14
Company. For the quarter ended March 31, 2002 the Company incurred $0.6 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.
Management Fees
In connection with the Recapitalization, the Company and Borden entered into an
agreement pursuant to which Borden provided certain management, consulting and
financial services to the Company. During the first quarter of 2002, the
Company incurred $0.1 million in services and accrued $0.6 million in
anticipation of a $2.5 million annual Borden management fee. This agreement was
canceled upon emergence from bankruptcy.
(6) BORROWINGS
Debt outstanding as of March 30, 2003 and December 31, 2002 is as follows (in
thousands):
MARCH 30, 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 4.9% due January 2008 $ 237,649 $ 2,401 $ 237,649 $ 2,401
12% senior subordinated notes due
January 2010 123,150 -- 123,150 --
Revolver at an average rate of 4.5% 14,000 -- -- --
Industrial Revenue Bonds, at an average
rate of 5.83% 3,926 895 4,090 817
---------- --------- ---------- ---------
Total Debt $ 378,725 $ 3,296 $ 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 May 12, 2003,
the Company had up to $24.2 million net of letters of credit totaling $14.3
million, available under revolving credit facility subject to borrowing base
restrictions that could significantly reduce the amount available to the
Company. As of May 12, 2003, the Company had $24.2 million, net of letters of
credit totaling $14.3 million, available under the Revolver with approximately
$11.9 million available 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 Secured Subordinated Notes
in the aggregate principal amount of $123.2 million (the "Senior Secured
15
Subordinated Notes"), 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. We are
currently in compliance with all of the financial restrictions and financial
covenants of the new Revolver.
The Senior Secured 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 Secured 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 by paying a redemption premium.
Pursuant to the Plan, $4.9 million in industrial revenue bonds were reinstated
on the Emergence Date. Certain of these bonds with remaining principal of $0.9
million, bear interest at 3% and mature in September 2003 and September 2004.
The remaining bonds having remaining principal of $4 million, bear interest at
6.25% and mature August 2005.
(7) COMMITMENTS
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 cannot be estimated as of March 30, 2003.
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
16
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 $0.5 million as of March 30,
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
cannot be estimated as of March 30, 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 $12.1
million and $13.6 million as of March 30, 2003 and December 31, 2002,
respectively. As of May 12, 2003, the Company had $24.2 million, net of letters
of credit totaling $14.3 million, available under the Revolver with
approximately $11.9 million available after consideration of borrowing base
limits at that date.
(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 quarters ended March 30, 2003 and March 31, 2002, total comprehensive
loss was as follows (in thousands):
SUCCESSOR COMPANY PREDECESSOR COMPANY
FOR QUARTER ENDED FOR THE QUARTER ENDED
MARCH 30, 2003 MARCH 31, 2002
------------------- -----------------------
Net loss $ (14,538) $ (220,159)
Foreign currency translation gain 508 429
Derivative fair value adjustment -- 200
------------------- -----------------------
Comprehensive loss $ (14,030) $ (219,530)
=================== =======================
17
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 quarters ended March 30, 2003 and
March 31, 2002 and related notes to the Consolidated Financial Statements
included elsewhere herein.
BACKGROUND
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
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 39.7% of gross sales in 2002, with our largest
customer being Wal-Mart. 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 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 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 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 the Company to adjust its
purchasing schedule to ensure proper inventory levels in support of second half
of the year programs.
We currently manufacture a portion of our finished goods and 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 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, fragile economic conditions and global
uncertainties impacted our operations as customers responded to poor fourth
quarter 2002 consumer demand by attempting to manage inventories. This economic
climate, continued competitive pressure, and higher than anticipated energy
costs make it very difficult to estimate our results for the rest of the year.
We currently expect our results for the first half of 2003 to be below the
results for the first half of 2002. If the negative trends described above
continue, this may impact our second half year results as well.
REORGANIZATION
On May 31, 2002 (the "Filing Date"), the Company and its eleven 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
18
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 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 principle 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 5,752,179 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 notes and 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- Series
B Senior Notes ("9- 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").
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.
19
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" or "SOP 90-7"). 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 is using and has
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. Certain valuations have not
yet been finalized and are subject to change during the allocation period in a
manner similar to that prescribed by SFAS No. 141. The Fresh Start Reporting
adjustments recorded in the first quarter of 2003 resulted in a reduction to
goodwill of $70.8 million.
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approach. The Company's patents were valued at $23.0 million with an estimated
remaining useful life 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 $32.9 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment at January 1, 2003 as follows: $4.7 million for land, $13.2
million for buildings, and $15.0 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 $14.9 million to
reflect the fair value at December 31, 2002. Precious metals are classified as
other assets on the Consolidated Balance Sheet.
RESULTS OF OPERATIONS
- ---------------------
The following commentary and tables discuss and analyze the comparative results
of our operations and financial condition for the periods covered. We manage
our business on the basis of one reportable segment - the worldwide
manufacturing and marketing of consumer kitchenware products and believe that
our operating segments have similar economic characteristics and meet the
aggregation criteria of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Results for the quarters ended March 30,
2003 and March 31, 2002 were prepared using generally accepted accounting
principles in the United States (GAAP).
20
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------------- ---------------------------
QUARTER ENDED % OF NET QUARTER ENDED % OF NET
($ in thousands) MARCH 30, 2003 SALES MARCH 31, 2002 SALES
---------------- --------- ---------------- ---------
Net sales $ 128,585 100.0% $ 153,951 100.0%
Cost of sales 95,247 74.1 109,487 71.1
---------------- --------- ---------------- ---------
Gross profit 33,338 25.9 44,464 28.9
Selling, general and administrative
expenses 37,904 29.5 43,378 28.2
Other expenses, net 128 0.1 2,144 1.4
---------------- --------- ---------------- ---------
Operating loss (4,694) (3.7) (1,058) (0.7)
Interest expense, net 8,458 6.6 16,662 10.8
---------------- --------- ---------------- ---------
Loss before income taxes, minority
interest and cumulative effect of
change in accounting principle (13,152) (10.3) (17,720) (11.5)
Income tax expense 1,347 1.0 315 0.2
---------------- --------- ---------------- ---------
Loss before minority interest and
cumulative effect of change in
accounting principle (14,499) (11.3) (18,035) (11.7)
Minority interest in subsidiary (39) -- (35) --
---------------- --------- ---------------- ---------
Net loss before cumulative effect of
change in accounting principle (14,538) (11.3) (18,070) (11.7)
Cumulative effect of change in
accounting principle -- -- (202,089) (131.3)
---------------- --------- ---------------- ---------
Net loss $ (14,538) (11.3)% $ (220,159) (143.0)%
================ ========= ================ =========
NET SALES
Net sales for the first quarter of 2003 were $128.6 million, a decrease of $25.4
million or 16.5% from the same period in 2002. Loss of distribution and
promotional programs at certain key accounts due to competitive pricing
pressures, a poor economy, the discontinuance of unprofitable product lines and
the closure of our unprofitable retail outlets accounted for a significant
portion of the decline. Poor volumes were experienced in general throughout our
product categories as key mass merchants curtailed purchasing to manage
inventory levels, which were impacted by a weak fourth quarter 2002 holiday
shopping season. This trend is expected to continue in the short term.
GROSS PROFIT
Gross profit for the first quarter of 2003 was $33.3 million, a decrease of
$11.2 million when compared to gross profit of $44.5 million for the first
quarter of 2002. As a percentage of net sales, gross profit in the first
quarter of 2003 was 25.9%, a decline from 28.9% in the first quarter of 2002
largely attributable to the closure of twenty-nine unprofitable retail outlets
by April 2003, as part of the bankruptcy reorganization. These stores have been
21
turned over to a third party liquidator who is managing the closure and selling
the remaining inventory at close to cost which is affecting profit margins.
Absent the impact of retail outlets, gross margins would have improved slightly
with better product mix in key brands and channels somewhat offset by higher
manufacturing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling general and administrative expenses (SG&A) for the first quarter of 2003
were $37.9 million compared to $43.4 million in 2002, a decrease of $5.5 million
or 12.7%. As a percentage of net sales, SG&A expenses were 29.5% in the first
quarter of 2003 as compared to 28.2% in the first quarter of 2002. The decrease
in overall SG&A was driven by lower retail outlet overhead expense as a result
of the retail store closures and to reduced overall department spending related
to headcount reductions. These savings were partially offset by higher
advertising and promotional expenses to support new product development.
In the first quarter of 2003, we recorded a severance charge of $1.7 million
related to the elimination of employees at the closed retail outlets as well as
other reductions in force and $0.6 million of expense related to the key
employee retention program which was put in place according to the terms of the
Plan. In the first quarter of 2002, SG&A included $1.5 million of professional
and consulting fees related to the development of the bankruptcy reorganization
strategy prior to the Filing and rationalization charges of $1.1 million related
to our 2001 restructuring activities.
OTHER EXPENSE, NET
Other operating expense was $0.1 million in the first quarter of 2003 compared
to $2.1 million in the same period of 2002. During the first quarter of 2003,
we recorded $0.6 million in amortization expense relating to patents that were
recorded on January 1, 2003 at their fair value of $23.0 million as a Fresh
Start Reporting Adjustment. This expense was offset by a gain of $0.2 million
for the sale of precious metals recovered from certain decommissioned
manufacturing equipment. The expense during the first quarter of 2002 was due
to the settlement of a vendor claim.
INTEREST EXPENSE
Interest expense was $8.5 million for the quarter ended March 30, 2003 compared
to $16.7 million for the quarter ended March 31, 2002. The decrease in interest
expense of $8.2 million was attributable to significantly decreased debt levels,
as the Predecessor Company's debt was reduced by more than $450 million upon our
emergence from bankruptcy.
INCOME TAX EXPENSE
Income tax expense in the first quarter of 2003 amounted to $1.3 million
compared to $0.3 million in the first quarter of 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 $0.7 million of federal income
tax expense in the first quarter of 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2002, we 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
22
longer amortized, but shall be tested for impairment annually, or more
frequently if events or changes in circumstance indicate that the asset might be
impaired. Accordingly, we ceased amortization of our goodwill and trademark
assets on January 1, 2002.
In accordance with SFAS No. 142, we performed transitional impairment tests of
our goodwill and trademark assets as of January 1, 2002. We engaged third party
valuation experts to determine the fair value of our reporting units, as defined
by SFAS No. 142, and determined that some of our 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 our $500 million
Reorganization Value. Based on this analysis, we recorded an impairment loss of
$144.3 million relating to goodwill on January 1, 2002. Determinations of the
fair value of our 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, we recorded an impairment loss of $57.8 million relating to our
trademark assets on 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.
NET LOSS
As a result of the factors discussed above, we had a net loss of $14.5 million
compared to a net loss of $220.2 million.
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 $35.4 million for accrued
severance, post bankruptcy reorganization costs, and capital projects.
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). We are currently in compliance with all of
the financial restrictions and financial covenants of the new Revolver.
Although we feel that the provisions of our loan agreements are not restrictive
to normal operations, significant continuing economic pressures could impact the
23
Company's ability to borrow required amounts due to the borrowing base
restrictions related to receivables and inventory.
In the first quarter of 2003, we paid $32.4 million of prepetition liabilities
and expect to pay an additional $18.7 million throughout the remainder of the
year. Negative free cash flow of $48.4 million, defined as the sum of cash flows
from operating activities net of cash used in investing activities, including
the payment of prepetition liabilities, was funded by a reduction in cash
balances and $13.9 million in borrowings under our revolving credit facility. As
of May 12, 2003, we had $24.2 million, net of letters of credit totaling $14.3
million, available under the Revolver with approximately $11.9 million available
after consideration of borrowing base limits at that date.
As a result of 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. We anticipate total contributions to our
pension plan to be $8.7 million in 2003; no contributions were made in the first
quarter.
OPERATING ACTIVITIES
In the first quarter of 2003, net cash used in operating activities was $43.1
million compared to $13.7 million of cash used in operating activities in the
first quarter of 2002. Excluding the effects of bankruptcy and restructuring
related charges the increase in net cash used in operating activities was $0.4
million. The increase in cash usage during the first quarter of 2003 compared
to the same period in 2002 was primarily driven by payments on the Effective
Date of $35.7 million relating to settlement of claims and payment of
professional fees associated with the Reorganization. During the first quarter
of 2002, we paid $6.7 million relating to prior year's restructuring and
rationalization programs, primarily for employee severance. Although these
programs were completed in 2002, cash payments will continue into 2003 largely
as a result of the bankruptcy stay on pre-petition claims.
Cash flows from accounts receivable increased $2.5 million in the first quarter
of 2003 compared to the same period in 2002 due to lower sales in relation to
cash collections, however, days sales outstanding improved by 1.4 days to 50.9
days during the first quarter of 2003 compared to 52.3 days the same period in
the prior year. The change in inventory in the first quarter of 2003 was
unfavorable to the first quarter of 2002 by $12.7 million due to lower 2003
sales. Our accounts payable and accrued liabilities also declined $25.5 million
as we paid $32.4 million in pre-petition liabilities to creditors, payment of
which had been stayed during the bankruptcy proceedings.
INVESTING ACTIVITIES
Cash used for investing activities was $5.3 million in the first quarter of 2003
compared to $4.0 million in the first quarter of 2002. The increase is
attributable to $2.2 million of additional capital expenditures in the first
quarter of 2003 compared to the same period in 2002. We anticipate cash outlays
of approximately $25.0 million for capital expenditures in 2003.
Investing activities in the first quarter of 2003 includes proceeds from the
sale of precious metals recovered from decommissioned manufacturing equipment of
$1.5 million. Also, upon emergence from bankruptcy, we were required by our
lenders to establish escrow accounts totaling $1.2 million for the payment of
certain prepetition liens. These escrows are recorded as restricted cash in the
accompanying financial statements.
24
FINANCING ACTIVITIES
Net cash provided by financing activities totaled $11.6 million in the first
quarter of 2003 compared to net cash used in financing activities of $3.7
million in the first quarter of 2002. We borrowed $13.9 million to fund payment
of prepetition liabilities, negative working capital and capital expenditures in
the first quarter of 2003. During the first quarter of 2002, we repaid $3.5
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
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" or "SOP 90-7"). 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 its 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 are using or 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 first fiscal quarter ended
March 30, 2003 is generally not comparable to the financial results for the
first fiscal quarter ended March 31, 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
25
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 its 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.
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.
ADOPTION OF ACCOUNTING POLICIES
See Note 3 Goodwill and Other Intangible Assets to the Consolidated Financial
Statements for the quarter ended March 30, 2003.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- -----------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The factors discussed below, among
others, could cause actual results to differ materially from those contained in
forward-looking statements made in this report, including without limitation, in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in 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.
26
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;
- increasing 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;
- availability of financing for us or certain of our customers;
- loss of any material intellectual property rights;
- 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 its
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 determines not to increase
local selling prices.
From time to time we reduces foreign currency cash flow exposure due to exchange
rate fluctuations by entering into forward foreign currency exchange contracts.
The use of these contracts protects cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contract. As of March 30,
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, the effect of which is to fix or limit the interest cost as a
percentage of long term debt as agreed by the administrative agent. As of March
30, 2003, we had no such contracts outstanding.
27
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.
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 the
business 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 cannot be estimated as of
March 30, 2003.
28
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 $0.5 million as of March 30, 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 cannot be estimated as of
March 30, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As described in more detail elsewhere herein, upon the Effective Date, all
outstanding shares of common stock, par value $0.01 per share ("Old Common
Stock") and all outstanding shares of preferred stock ("Old Preferred Stock"),
were cancelled as part of the Plan without consideration. Additionally, on the
Effective Date, we issued 5,752,179 shares of common stock, par value $0.01 per
share ("New Common Stock") in connection with the implementation of the Plan.
Of the shares of New Common Stock issued on the Effective Date, approximately
79% were issued to our senior secured debt holders in partial satisfaction of
their prepetition debt of approximately $577.1 million. Approximately 11% of
the New Common Stock was issued to Borden Chemical, Inc., an affiliate of the
Predecessor Company's primary stockholder (Kohlberg, Kravis, Roberts & Co.
L.P.), in full satisfaction of the $25 million prepetition Borden Credit
Facility. The remaining 10% of the shares of New Common Stock was issued to the
holders of the Predecessor Company's 9-5/8% Notes in full satisfaction of their
prepetition debt of $211.1 million under the prepetition indenture that was
terminated.
The issuance of shares of New Common Stock on the Effective Date was exempt from
the registration requirements of the Securities Act of 1933, as amended, and
equivalent provisions of state security laws, in reliance upon Section 1145 (a)
of the Bankruptcy Code. Such Section generally exempts from registration the
issuance of securities if the following conditions are satisfied: (i) the
securities are issued by a debtor under a plan of reorganization, (ii) the
recipients of the securities hold a claim against, an interest in, or a claim
for an administrative expense against the debtor and (iii) the securities are
issued entirely in exchange for the recipient's claim against or interest in the
debtor, or are issued principally in such exchange and partly for cash or
property.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
29
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No. Description of Exhibit
- --- ----------------------
2.1 Second Amended Joint Plan of Reorganization of World Kitchen, Inc.,
its Parent Corporation and its Subsidiary Debtors dated November 15,
2002 (incorporated by reference to Exhibit 99.T3F to Application for
Qualification of Indenture under the Trust Indenture Act of 1939 on
Form T-3 filed November 21, 2002).
*2.2 Modifications, dated December 23, 2002, to Second Amended Joint Plan
of Reorganization of World Kitchen, Inc., its Parent Corporation and
its Subsidiary Debtors dated November 15, 2002.
*2.3 United States Bankruptcy Court of the Northern District of Illinois
Eastern Division Order, dated November 25, 2002, (A) authorizing the
assumption of certain executory contracts with Corning Incorporated
and (B) Approving Related Agreement relating to the assumption and
modification of Exhibits 2.4 to 2.5.
*2.4 Recapitalization Agreement dates as of March 2, 1998, among Corning
Consumer Products Company, Coring Incorporated, Borden, Inc. and CCPC
Acquisition Corp.
*2.5 Amendment to the Recapitalization Agreement dated March 31, 1998
between the Company and Corning.
*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.
30
*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.
*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 Employment Agreement, dated January 28, 2003, between WKI Holding
Company, Inc. and James A Sharman.
*+10.1a Amendment to Employment Agreement, dated April 16, 2003, between WKI
Holding Company, Inc. and James A. Sharman.
*+10.2 Employment Agreement, dated January 30, 2003, between WKI Holding
Company, Inc. and Joseph W. McGarr.
*+10.2a Amendment to Employment Agreement, dated April 16, 2003, between WKI
Holding Company, Inc. and Joseph W. McGarr.
*+10.3 Employment Agreement, dated October 14, 1999, between WKI Holding
Company, Inc. and Alexander Lee.
*+10.4 Modification Agreement, dated September 30, 2002, between WKI Holding
Company, Inc. and Alexander Lee.
*+10.5 Amendment to Employment Agreement, dated January 29, 2003, between WKI
Holding Company, Inc. and Alexander Lee.
*+10.6 Employment Agreement, dated January 28, 2003, between WKI Holding
Company, Inc. and Raymond J. Kulla.
*+10.6a Amendment to Employment Agreement, dated April 16, 2003, between WKI
Holding Company, Inc. and Raymond J. Kulla.
*+10.7 WKI Holding Company, Inc. Stock Option Plan
*+10.8 WKI Holding Company, Inc. Key Employee Retention Plan
*10.9 Agreement, dated as of January 30, 2003, among WKI Holding Company,
Inc., BW Holdings, LLC and the Pension Benefit Guaranty Corporation.
*10.10 Release and Indemnification Agreement, dated as of January 31, 2003,
among WKI Holding Company, Inc., its subsidiaries, and the KKR
Entities party thereto
*10.11 Tax Matters Agreement, dated as of January 31, 2003, between WKI
Holding Company, Inc. and CCPC Acquisition Corp.
31
*10.12 Revolving Credit Agreement, dated as of January 31, 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.
*10.13 Term Loan Credit Agreement, dated as of January 31, 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.
*10.14 Guarantee and Collateral Agreement, dated as of January 31, 2003,
among WKI Holding Company, Inc., JPMorgan Chase Bank, as collateral
agent, and the Subsidiary Parties identified therein.
10.15 Sublease, dated June 21, 2001, between Rolls-Royce North America Inc.
and WKI Holding Company, Inc. (incorporated by reference to Exhibit
10.25 to Annual Report on Form 10-K for the fiscal year ended December
31, 2001 filed on March 28, 2002).
*10.16 Sublease Modification Agreement between Rolls-Royce North America Inc.
and WKI Holding Company, Inc.
*21 Subsidiaries of the Registrant.
________
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
REPORT ON FORM 8-K
WKI Holding Company Inc. filed the following report on Form 8-K:
- Form 8-K filed with the Securities and Exchange Commission on May 14,
2003
32
- --------------------------------------------------------------------------------
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: May 14, 2003 By: /s/ James A. Sharman
------------------------------------
James A. Sharman
President and Chief Executive Officer
Date: May 14, 2003 By: /s/ Joseph W. McGarr
--------------------------------------
Joseph W. McGarr
Chief Financial Officer
33
- --------------------------------------------------------------------------------
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 officers 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 officers 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 officers 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: May 14, 2003 By: /s/ James A. Sharman
-------------------
James A. Sharman
President and Chief Executive Officer
34
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 officers 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 officers 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 officers 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: May 14, 2003 By: /s/ Joseph W. McGarr
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Joseph W. McGarr
Chief Financial Officer
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