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 September 28, 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 November 5,
2003: 5,752,184 shares
WKI HOLDING COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Unaudited Consolidated Statements of Operations for the
quarter and nine months ended September 28, 2003
(Successor Company) and for the quarter and nine months
ended September 29, 2002 (Predecessor Company) 3
Consolidated Balance Sheets at September 28, 2003
(unaudited) and December 31, 2002 4
Unaudited Consolidated Statements of Cash Flows for the
quarter and nine months ended September 28, 2003
(Successor Company) and for the quarter and nine months
ended September 29, 2002 (Predecessor Company) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Disclosure Controls and Procedures 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 36
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 | PREDECESSOR SUCCESSOR | COMPANY
COMPANY | COMPANY COMPANY | FOR THE NINE
FOR THE | FOR THE FOR THE NINE| MONTHS ENDED
QUARTER ENDED | QUARTER ENDED FOR THE NINE| SEPTEMBER 29,
SEPTEMBER 28, | SEPTEMBER 29, MONTHS ENDED| 2002
2003 | 2002 2003 | (AS RESTATED)
---------------| --------------- --------------| ---------------
Net sales $ 158,992 | $ 167,046 $ 410,669 | $ 467,915
Cost of sales 109,385 | 120,425 301,676 | 340,321
---------------| --------------- --------------| ---------------
Gross profit 49,607 | 46,621 108,993 | 127,594
| |
Selling, general and administrative expenses 35,359 | 38,192 103,920 | 126,339
Other expense, net 2,592 | 1,299 4,000 | 3,768
---------------| --------------- --------------| ---------------
| |
Operating income (loss) 11,656 | 7,130 1,073 | (2,513)
Interest expense, net 7,325 | 10,766 23,073 | 41,121
---------------| --------------- --------------| ---------------
| |
Income (loss) before reorganization items, | |
income taxes, minority interest and | |
cumulative effect of change in accounting | |
principle 4,331 | (3,636) (22,000)| (43,634)
Reorganization items, net -- | 8,905 -- | 23,190
---------------| --------------- --------------| ---------------
| |
Income (loss) before income taxes, minority | |
interest and cumulative effect of change in | |
accounting principle 4,331 | (12,541) (22,000)| (66,824)
Income tax (benefit) expense (895)| 579 1,439 | 1,313
---------------| --------------- --------------| ---------------
| |
Income (loss) before minority interest and | |
cumulative effect of change in accounting | |
principle 5,226 | (13,120) (23,439)| (68,137)
Minority interest in earnings of subsidiary (28)| (31) (105)| (96)
---------------| --------------- --------------| ---------------
| |
Net income (loss) before cumulative effect | |
of change in accounting principle 5,198 | (13,151) (23,544)| (68,233)
Cumulative effect of change in accounting | |
principle -- | -- -- | (202,089)
---------------| --------------- --------------| ---------------
| |
Net income (loss) 5,198 | (13,151) (23,544)| (270,322)
Preferred stock dividends -- | -- -- | 7,142
---------------| --------------- --------------| ---------------
| |
Net income (loss) applicable to common | |
stock $ 5,198 | $ (13,151) $ (23,544)| $ (277,464)
===============| =============== ==============| ===============
| |
Basic and diluted income (loss) before | |
cumulative effect of change in | |
accounting principle per common share $ 0.90 | $ (0.19) $ (4.09)| $ (1.09)
===============| =============== ==============| ===============
| |
Basic and diluted income (loss) per | |
common share $ 0.90 | $ (0.19) $ (4.09)| $ (4.03)
===============| =============== ==============| ===============
| |
Weighted average number of common | |
shares outstanding during the period 5,752,184 | 68,910,716 5,752,184 | 68,910,716
===============| =============== ==============| ===============
The accompanying notes are an integral part of these statements.
3
WKI HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(UNAUDITED)
ASSETS SEPTEMBER 28, 2003 DECEMBER 31, 2002
-------------------- ------------------
Current Assets
Cash and cash equivalents $ 967 $ 40,117
Accounts receivable (less allowances of $9,351 and
$10,932 in 2003 and 2002, respectively) 93,240 76,198
Inventories, net 148,697 146,593
Prepaid expenses and other current assets 17,220 15,578
-------------------- ------------------
Total current assets 260,124 278,486
Other assets 38,136 29,387
Property, plant and equipment, net 112,541 89,773
Other intangible assets, net 114,730 84,600
Goodwill 183,225 260,527
-------------------- ------------------
TOTAL ASSETS $ 708,756 $ 742,773
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 34,801 $ 35,844
Current portion of long-term debt 2,572 3,218
Other current liabilities 73,369 121,926
-------------------- ------------------
Total current liabilities 110,742 160,988
Long-term debt 402,660 364,889
Pension and post-employment benefit obligations 80,315 81,370
Other long-term liabilities 6,866 1,737
-------------------- ------------------
Total liabilities 600,583 608,984
-------------------- ------------------
Minority interest in subsidiary 1,564 1,488
-------------------- ------------------
STOCKHOLDERS' EQUITY
Common stock - $0.01 par value; 15,000,000 shares
authorized; 5,752,184 shares issued and outstanding 58 58
Additional paid-in capital 132,243 132,243
Accumulated deficit (23,544) --
Accumulated other comprehensive gain (2,148) --
-------------------- ------------------
Total stockholders' equity 106,609 132,301
-------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 708,756 $ 742,773
==================== ==================
The accompanying notes are an integral part of these statements.
4
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| PREDECESSOR
SUCCESSOR | COMPANY
COMPANY | FOR THE NINE
FOR THE NINE | MONTHS ENDED
MONTHS ENDED | SEPTEMBER 29,
SEPTEMBER 28,| 2002
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 | (AS RESTATED)
--------------| ---------------
Net loss $ (23,544)| $ (270,322)
Adjustments to reconcile net loss to net cash used in |
operating activities: |
Depreciation and amortization 26,847 | 26,770
Amortization of deferred financing fees 421 | 2,099
Reorganization items, net -- | 23,190
Impairment loss on intangible assets -- | 202,089
Provision for rationalization charges -- | 2,895
Cash paid for rationalization charges -- | (7,306)
Cash paid for restructuring charges -- | (11,754)
Other (1,637)| 1,468
Changes in operating assets and liabilities: |
Accounts receivable (14,326)| (8,949)
Inventories (256)| (3,330)
Prepaid expenses and other current assets (1,558)| (4,618)
Accounts payable and other current liabilities (50,210)| 9,496
Provision for post-retirement benefits, net of cash paid (1,260)| (6,959)
Other assets and liabilities 1,563 | (2,995)
--------------| ---------------
NET CASH USED IN OPERATING ACTIVITIES (63,960)| (48,226)
--------------| ---------------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Capital expenditures (14,551)| (11,028)
Net proceeds from sale of assets 6,304 | --
Increase in restricted cash (1,087)| (661)
--------------| ---------------
NET CASH USED IN INVESTING ACTIVITIES (9,334)| (11,689)
--------------| ---------------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Borrowings on Successor revolving credit facility 39,000 | --
Borrowing on debtor in possession credit facility -- | 7,000
Repayment of Predecessor revolving credit facility -- | (3,900)
Repayment of long-term debt, other than revolving |
credit facility (1,875)| (3,194)
Payment of deferred financing fees (2,981)| (1,525)
--------------| ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 34,144 | (1,619)
--------------| ---------------
|
Decrease in cash and cash equivalents (39,150)| (61,534)
Cash and cash equivalents - beginning of period 40,117 | 66,805
--------------| ---------------
|
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 967 | $ 5,271
==============| ===============
The accompanying notes are an integral part of these statements.
5
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
| PREDECESSOR
SUCCESSOR | COMPANY
COMPANY | FOR THE NINE
FOR THE NINE | MONTHS ENDED
MONTHS ENDED | SEPTEMBER 29,
SEPTEMBER 28, | 2002
2003 | (AS RESTATED)
------------- |---------------
|
|
SUPPLEMENTAL DATA: |
|
Cash paid during the period for: |
- -------------------------------- |
|
Interest $ 20,682 |$ 33,012
Income taxes, net of refunds 3,234 | 2,488
|
Non-cash activity: |
- ------------------ |
|
Preferred stock dividends $ -- |$ 7,142
The accompanying notes are an integral part of these statements.
6
WKI HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
WKI Holding Company Inc. (the "Company" or "WKI") is a leading manufacturer and
marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop
cookware and cutlery products. The Company has strong positions in major
channels of distribution for its products in North America and has also achieved
a significant presence in certain international markets, primarily Asia and
Australia. In North America, the Company sells both on a wholesale basis to
retailers, distributors and other accounts that resell the Company's products,
and on a retail basis, through Company-operated factory outlet stores. In the
international market, the Company has established its presence on a wholesale
basis through an international sales force coupled with localized distribution
and marketing capabilities.
The market for the Company's products is highly competitive and the housewares
industry has trended towards consolidation. Competition in the marketplace is
affected not only by domestic manufacturers but also by the large volume of
foreign imports. A number of factors affect competition in the sale of the
Company's products, including, but not limited to, quality, price and
merchandising parameters established by various distribution channels. Shelf
space and placement is a key factor in determining retail sales of bakeware,
dinnerware, kitchenware and rangetop cookware products. Other important
competitive factors include new product introductions, brand identification,
style, design, packaging and service levels.
The Company currently manufactures most of the finished goods comprising its
dinnerware, glass bakeware and metal bakeware categories. The Company also
purchases a significant amount of finished goods from various vendors in Asia
and Europe to support its rangetop, kitchenware, cutlery, and ceramic bakeware
categories. Reliance on finished goods suppliers could give rise to certain
risks, such as interruptions in supply and quality issues, which are outside the
Company's control. In addition, significant increases in the cost of energy,
transportation or principal raw materials could have an adverse effect on
results of operations.
Seasonal variation is a factor in the Company's business in that there is
generally an increase in sales demand in the second half of the year driven by
consumer spending at retailers during 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. Historically, between 55% and
60% of the Company's sales occur during the second half of the year. Because of
the seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full year.
The Company's first, second and third fiscal quarters end on the Sunday nearest
to the end of the calendar quarter and the fourth quarter ends on December 31.
The Company's third fiscal quarter in fiscal 2003 and fiscal 2002 ended on
September 28, 2003 and September 29, 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 under cover of
Form 8-K on May 14, 2003. Certain 2002 amounts have been reclassified to
conform to the 2003 presentation.
As a consequence of the implementation of Fresh Start Reporting (See Note 2)
effective December 31, 2002, the financial information presented in the
unaudited consolidated statement of operations and the corresponding statement
of cash flows for the nine months ended September 28, 2003 is generally not
comparable to the financial results for the nine months ended September 29,
2002. Any financial information herein labeled "Predecessor Company" refers to
periods prior to the adoption of Fresh Start Reporting, while
7
those labeled "Successor Company" refer to periods following the Company's
reorganization. The lack of comparability in the accompanying unaudited
consolidated financial statements relates primarily to the Company's capital
structure (outstanding shares used in earnings per share calculations), debt and
bankruptcy related costs, and depreciation and amortization related to adjusting
property, plant and equipment and other intangible assets and liabilities to
their fair value.
(2) BANKRUPTCY REORGANIZATION AND FRESH START REPORTING
REORGANIZATION
On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in
the United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). The reorganization was jointly administered under the caption "In re
World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257."
During the period from the Filing Date until January 31, 2003 (the "Effective
Date"), the Debtors operated the business as debtors-in-possession under Chapter
11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were
not Debtors and did not reorganize.
On November 15, 2002, the Debtors filed their second amended joint plan of
reorganization (the "Plan") with the Court, which was confirmed on December 23,
2002 (the "Confirmation Date"). All material conditions precedent to the Plan
becoming binding were resolved, for accounting purposes, on or prior to December
31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh
Start Reporting as of that date. On the Effective Date, the Debtors legally
emerged from their bankruptcy proceedings. At December 31, 2002, the Company
recorded a $577.2 million reorganization gain reflecting the cancellation of
debt pursuant to the Plan and to adjust the historical carrying value of its
assets and liabilities to fair value, as defined by the reorganization value.
The Company's reorganization value of approximately $500 million, defined as
post-emergence debt and equity ("Reorganization Value"), was determined based on
an independent valuation by financial valuation experts after consideration of
several factors and assumptions and by using various valuation methods,
including cash flow multiples, price/earnings ratios and other relevant industry
information.
On or about the Effective Date, with the effects reported herein on December 31,
2002, the following principal provisions of the Plan occurred:
1. The Company's old common and preferred stock were cancelled for no
consideration. New Common Stock in the amount of 5,752,184 shares was
to be issued ("New Common Stock") to certain creditors, pursuant to
the Plan, as described below.
2. The Company's senior secured debt of approximately $577.1 million was
discharged in return for the payment of $27.8 million in cash and the
issuance of $240.1 million of new senior secured term loans, $123.2
million of new senior subordinated secured notes ("Senior Subordinated
Notes") and the right to receive 4,528,201 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
Predecessor 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, including
accrued interest, were converted into the right to receive 608,500
shares (approximately 10%) of New Common Stock.
8
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., a wholly
owned subsidiary of the Company, 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 in availability subject
to borrowing base restrictions.
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 domestic
operating subsidiaries will be paid 60% of the allowable claim amount.
These payments will be made as prescribed by the Court at various
distribution dates as claims are reconciled or otherwise resolved.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting"). The Company adopted Fresh Start
Reporting because holders of outstanding voting shares of the Company's capital
stock immediately before the Chapter 11 filing and confirmation of the Plan
received less than 50% of the common stock distributed under the Plan, and the
Company's Reorganization Value was less than the Debtors' post-petition
liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141"),
which requires a reorganized entity to record its assets and liabilities at
their fair value. The Company used its newly determined Reorganization Value
to define the fair value of debt and equity at December 31, 2002. The resulting
reorganized equity value of $132.3 million was allocated to individual assets
and liabilities using the principles of SFAS No. 141. The difference between
the reorganized equity value described above and the resulting fair value of
assets and liabilities was recorded as goodwill. The Company used independent
valuation experts where necessary to estimate the fair value of major components
of the balance sheet including trademarks, patents, customer relationships,
property, plant and equipment and pension benefit obligations. The Fresh Start
Reporting adjustments recorded in the first nine months of 2003 resulted in a
reduction to goodwill of $77.3 million.
Fair valuation adjustments for certain trademarks and exclusive beneficial
license and distribution agreements were recorded as of January 1, 2003, and
were determined using the excess income and relief from royalty approaches. The
Company's trademarks and exclusive beneficial license and distribution
agreements were valued at $71.3 million, resulting in a reduction of $13.1
million to the carrying value at January 1, 2003.
The Company's trademarks and exclusive licenses are recognizable household names
and are renewable solely at the discretion of the Company; as such, they were
determined to have indefinite lives and are not amortized, but will be tested
for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset(s) might be impaired. An exclusive
distribution agreement valued at $7.1 million was determined to have a definite
life based on the term of the governing contract and is amortized over the
remaining estimated useful life as of January 1, 2003 of 8.7 years.
Fair valuation adjustments for certain customer relationships were recorded as
of January 1, 2003, and were determined using the excess income approach for
significant customers within the Company's mass
9
merchandising distribution channels and the cost approach for certain other
distribution channels. The Company's customer relationships were valued at
$24.8 million. Intangible assets associated with significant customers within
the Company's mass merchandising distribution channels are amortized over their
estimated remaining useful lives of 10 years. Intangible assets associated with
certain other distribution channels will be amortized over their estimated
useful lives of 9 years using the double declining balance method, which is
representative of the contractual turnover of customers within those
distribution channels.
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approaches. The Company's patents were valued at $23.0 million with estimated
remaining useful lives ranging from 4 to 18 years based on the expiration of the
patent under federal law.
Fair valuation adjustments for property, plant and equipment were also recorded
as of January 1, 2003. The fair value of the Company's property, plant, and
equipment was determined to be $28.4 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6
million for buildings, and $11.2 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated remaining useful
lives as of January 1, 2003.
The Company used market data to determine the fair value of the Company's
precious metals, principally platinum and rhodium. As a result, the Company
increased the fair value of its precious metals by $14.9 million as of January
1, 2003. Precious metals are classified as other assets in the Consolidated
Balance Sheet.
In December 2002, pension benefit obligations were written up to fair value,
equal to the projected benefit obligation of $31.7 million as of December 31,
2002, as determined by the Company's third-party actuary. Previously recorded
other comprehensive income related to unrecognized actuarial losses of $28.3
million and an intangible asset related to prior unrecognized service cost of
$5.7 million were written off.
10
The effect of the Plan and implementation of Fresh Start Reporting on the
consolidated balance sheet was as follows:
Predecessor Successor
Company Fresh Start Reporting Company
-------------- ---------------------------------- -----------
As of Additional
December 31, Reorganization December 31, Adjustments January 1,
2002 Adjustments 2002 (A) 2003
-------------- ---------------- -------------- ------------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 40,117 $ -- $ -- $ -- $ 40,117
Accounts receivable, net 76,198 -- -- -- 76,198
Inventories, net 146,593 -- -- -- 146,593
Prepaid expenses and other current
assets 15,578 -- -- -- 15,578
-------------- ---------------- -------------- ------------- -----------
Total current assets 278,486 -- -- -- 278,486
Other assets 35,038 -- (5,651) F 14,902 44,289
Property, plant and equipment, net 89,773 -- -- 28,356 118,129
Other intangible assets, net 84,600 -- -- 34,044 118,644
Goodwill 55,985 -- 204,542 G (77,302) 183,225
-------------- ---------------- -------------- ------------- -----------
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
Other current liabilities 56,400 54,089 B, C -- -- 110,489
-------------- ---------------- -------------- ------------- -----------
Total current liabilities 103,681 57,307 -- -- 160,988
Liabilities subject to compromise 887,340 (887,340) D -- -- --
Long-term debt -- 364,889 C -- -- 364,889
Pension and post-employment benefit
obligations 77,737 -- 3,633 F -- 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) E -- -- --
Old Common stock 696 (696) E -- -- --
New Common stock -- 58 C -- -- 58
Common stock held in treasury (2,155) 2,155 E -- -- --
Contributed capital 607,783 -- (607,783) H -- --
Additional paid-in capital -- 132,243 E -- -- 132,243
Accumulated deficit (1,201,287) 429,526 D 771,761 H -- --
Accumulated other comprehensive loss (31,280) -- 31,280 H -- --
-------------- ---------------- -------------- ------------- -----------
Total stockholders' equity (deficit) (528,101) 465,144 195,258 -- 132,301
-------------- ---------------- -------------- ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 543,882 $ -- $ 198,891 $ -- $ 742,773
============== ================ ============== ============= ===========
A. As of December 31, 2002, the Company was still in the process of
evaluating the fair value of certain assets for allocation of the
reorganization value. Additional adjustments were recorded as of
January 1, 2003.
B. Estimated payables and reinstated tax claims at December 31, 2002
associated with the effects of the Plan were $54.1 million. Of this
amount, $27.2 million was paid on the Effective Date.
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
11
the new Senior Secured Subordinated Notes. The remaining $2.7 million
was paid on the Effective Date and is included in other current
liabilities.
D. 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
========
E. 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.
F. Fair value adjustments as of December 31, 2002, in accordance with
Fresh Start Reporting.
G. Excess reorganization value over the fair value of the Company's
assets and liabilities.
H. Elimination of accumulated deficit, accumulated other comprehensive
loss and contributed capital in accordance with Fresh Start Reporting.
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
Under this standard, goodwill and intangible assets with indefinite useful lives
are no longer amortized, but are to be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset(s)
might be impaired. Accordingly, the Company ceased amortization of its existing
goodwill and its trademark assets on January 1, 2002.
In accordance with SFAS No. 142, the Company performed transitional impairment
tests of its goodwill and trademark assets as of January 1, 2002. The Company
engaged third party valuation experts to determine the fair value of its
reporting units, as defined by SFAS No. 142, and determined that some of the
value of its goodwill was impaired. The fair value of all reporting units used
in the transitional goodwill impairment test was performed using the income
approach and equaled the $500 million Reorganization Value. Based on this
analysis, the Company recorded an impairment loss of $144.3 million relating to
goodwill as of January 1, 2002. Determinations of the fair value of the
trademark assets were also performed by third party valuation experts using the
income and relief from royalty approaches. The fair value determinations were
made after considering a variety of indicators including the deterioration in
the business climate and a change in the manner in which the impairment of an
asset is evaluated under the new standard. Based on this analysis, the Company
recorded an impairment loss of $57.8 million relating to trademark assets as of
January 1, 2002. The combined impairment loss of $202.1 million is recorded as a
cumulative effect of a change in accounting principle in the accompanying
Consolidated Statements of Operations.
At December 31, 2002, pursuant to Fresh Start Reporting, the Company increased
goodwill by $204.5 million, which represents the excess of the reorganized
equity value over the fair value of the Company's assets and liabilities.
Subsequent Fresh Start Reporting valuations which occurred during the allocation
period resulted in a $77.3 million reduction of goodwill and corresponding
increase to other assets and
12
liabilities (see Note 2). The Company will test remaining goodwill of $183.2
million and indefinite-lived trademarks and exclusive licenses of $64.2 million
for impairment at least annually in accordance with SFAS No. 142.
Intangible assets with finite lives at September 28, 2003 are summarized as
follows (in thousands):
GROSS ACCUMULATED
BALANCE AMORTIZATION NET BALANCE
-------- ------------- ------------
Patents $ 23,000 $ 1,755 $ 21,245
Customer relationships 24,750 2,178 22,572
Distribution agreement 7,100 420 6,680
These assets are classified as other intangible assets in the Consolidated
Balance Sheet and their related amortization expense is recorded as other
expense in the Consolidated Statement of Operations. The estimated aggregate
amortization expense for each of the five succeeding fiscal years is $7.5
million.
(4) SUPPLEMENTAL BALANCE SHEET DATA
Inventories at September 28, 2003 and December 31, 2002 consisted of the
following:
INVENTORIES
(IN THOUSANDS): SEPTEMBER 28, 2003 DECEMBER 31, 2002
------------------- ------------------
Finished and in-process goods $ 115,399 $ 117,401
Raw materials and supplies 33,298 29,192
------------------- ------------------
$ 148,697 $ 146,593
=================== ==================
The Company increased the value of its precious metals by $14.9 million to
reflect the fair value at December 31, 2002. The Company used published market
data to determine the fair value of the Company's precious metals, principally
platinum and rhodium. Other assets at September 28, 2003 and December 31, 2002
consisted of the following:
OTHER ASSETS
(IN THOUSANDS): SEPTEMBER 28, 2003 DECEMBER 31, 2002
------------------- ------------------
Precious metals $ 20,376 $ 10,829
Other assets 17,760 18,558
------------------- ------------------
$ 38,136 $ 29,387
=================== ==================
Fair valuation adjustments for property, plant and equipment were also recorded
as of January 1, 2003. The fair value of the Company's property plant, and
equipment was determined to be $28.4 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6
million for buildings, and $11.2 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated remaining useful
lives as of January 1, 2003. Property, plant and equipment at September 28,
2003 and December 31, 2002 consisted of the following:
13
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS): SEPTEMBER 28, 2003 DECEMBER 31, 2002
------------------- ------------------
Land $ 6,986 $ 3,145
Buildings 28,807 15,249
Machinery and equipment 92,650 71,379
------------------- ------------------
128,443 89,773
Accumulated depreciation 15,902 --
------------------- ------------------
$ 112,541 $ 89,773
=================== ==================
Other liabilities at September 28, 2003 and December 31, 2002 consisted of the
following:
OTHER CURRENT LIABILITIES
(IN THOUSANDS): SEPTEMBER 28, 2003 DECEMBER 31, 2002
------------------- ------------------
Wages and employee benefits $ 18,961 $ 16,820
Accrued advertising and promotion 17,055 17,380
Accrued interest 5,683 3,982
Reorganization accruals 13,626 64,974
Other accrued expenses 18,044 18,770
------------------- ------------------
$ 73,369 $ 121,926
=================== ==================
(5) RELATED PARTY TRANSACTIONS
SUCCESSOR COMPANY
Interest Expense and Debt Issuance Fees
Upon emergence from bankruptcy, certain creditors of the Predecessor Company
became principal owners of the Successor Company. During the nine months ended
September 28, 2003, the Company recorded $7.8 million in interest expense and
paid $1.0 million in debt issuance fees, collectively, to these principal
owners. See Note 6 for further information on the Company's debt agreements.
PREDECESSOR COMPANY
Interest Expense
Pursuant to a Credit Agreement dated as of August 24, 2000, as amended and
restated as of April 12, 2001 (and as further amended from time to time
thereafter), between the Predecessor Company and Borden, the Predecessor Company
obtained from Borden a temporary $50 million revolving credit facility (the
"Borden Credit Facility"), from which $40 million was initially made available,
and which was reduced, in accordance with its terms, on August 16, 2001 to a $25
million revolving credit facility. During the nine months ended September 29,
2002, the Predecessor Company recorded $1.1 million in interest expense related
to the Borden Credit Facility and paid $0.7 million through the Filing Date.
Interest expense related to the Borden Credit Facility was accrued during the
Chapter 11 process and $1.3 million was paid in full on the Effective Date. The
Borden Credit Facility was secured with an interest on the Predecessor Company's
assets that was second in priority behind the interests securing the Amended and
Restated Credit Agreement with certain bank lenders (the "Predecessor Senior
Credit Facility"). In accordance with the Plan, the Borden Credit Facility
principal balance of $25 million was converted into 615,483 shares of New Common
Stock with an aggregate value of approximately $14.2 million, constituting
approximately 10.7% of the outstanding shares
14
of the Successor Company (excluding the impact of shares reserved for issuance
pursuant to the Management Stock Plan).
An affiliate of the Predecessor Company and of KKR purchased 9 5/8% Notes
previously issued by the Predecessor Company in the open market or by other
means. As of September 29, 2002, affiliates had purchased an aggregate of $80.5
million of 9 5/8% Notes in open market transactions. In accordance with the
Plan, the affiliates' balance on the Filing Date of $80.5 million of 9 5/8%
Notes was converted into 128,193 shares of New Common Stock, which constitutes
approximately 2.2% of the outstanding shares of the Successor Company (excluding
shares reserved for issuance pursuant to the Management Stock Plan). On the
Effective Date, the affiliates' balance of $36.7 million in face amount of loans
under the Predecessor Company's Senior Credit Facility was discharged in return
for its pro rata share of 1) $2.75 million in cash, 2) 4,528,201 shares of New
Common Stock, 3) $240.05 million in principal amount of Term Loans and 4)
$123.15 million in principal amount of Senior Subordinated Notes.
Preferred dividends
Prior to April 1, 1998, the Predecessor Company operated as a wholly-owned
subsidiary of Corning Incorporated ("Corning"). In connection with the
recapitalization of the Predecessor Company on April 1, 1998 (the
"Recapitalization"), the Predecessor Company issued $30.0 million in 12%
cumulative junior pay- in-kind stock to CCPC Acquisition Corp ("CCPC
Acquisition"), its majority shareholder. The cumulative junior preferred stock
consisted of 1.2 million shares with each share having a liquidation preference
of $25. The cumulative junior preferred stock provided for the payment of
dividends in cash, additional shares of junior preferred stock or a combination
thereof of $0.75 per share per calendar quarter, if and when declared by the
Predecessor Company's board of directors. The Predecessor Company stopped
accruing dividends on the Filing Date and as of that date had accrued but not
paid $19.1 million in preferred stock dividends, of which $2.4 million was
expensed during the nine months ended September 29, 2002. As the dividends were
expected to be settled by issuing additional shares of preferred stock, the
dividends were recorded in preferred stock in the Predecessor Company balance
sheets. In connection with the Plan, the preferred stock, including any accrued
dividends thereon, was canceled for no consideration on the Effective Date.
In the fourth quarter of 1999, the Predecessor Company issued $50.0 million in
16% cumulative junior preferred stock to Borden. The cumulative junior
preferred stock consisted of two million shares with each share having a
liquidation preference of $25. The cumulative junior preferred stock provided
for the payment of cash dividends of $1.00 per share per quarter whether or not
declared by the Predecessor Company if certain financial ratios were satisfied.
The Predecessor Company stopped accruing dividends on the Filing Date and as of
that date had accrued but not paid $25.3 million in preferred stock dividends,
of which $4.8 million was expensed during the nine months ended September 29,
2002. As the dividends were expected to be paid in cash, the dividends payable
were recorded as other long-term liabilities in the Predecessor Company balance
sheets. In connection with the Plan, the preferred stock, including accrued
dividends thereon, were canceled for no consideration on the Effective Date.
Services provided by Corning, Inc.
In connection with the Recapitalization, Corning and the Predecessor Company
entered into several agreements whereby Corning would provide certain goods and
services to the Company and would share certain facilities at terms specified in
the agreements. Management believes that the methodology used by Corning to
charge these costs was reasonable, but may not necessarily be indicative of the
costs that would have been incurred had these functions been performed by the
Company. For the nine months ended September 29, 2002, the Predecessor Company
incurred $1.7 million in services provided by Corning. Upon the Effective Date,
all of the common stock held by Corning was canceled as part of the bankruptcy
reorganization and Corning ceased to be a related party.
15
Management Fees
In connection with the Recapitalization, the Predecessor Company and Borden
entered into an agreement pursuant to which Borden provided certain management,
consulting and financial services to the Predecessor Company. During the nine
months ended September 29, 2002, the Predecessor Company incurred $0.2 million
in services and expensed $1.9 million under the management agreement. This
agreement was canceled on the Effective Date and amounts owing Borden were
settled in accordance with the Plan.
(6) BORROWINGS
Debt outstanding as of September 28, 2003 and December 31, 2002, and weighted
average interest rates over the nine-month period ended September 28, 2003 and
year ended December 31, 2002, are as follows (in thousands):
SEPTEMBER 28, 2003 DECEMBER 31, 2002
------------------------ ---------------------
DUE WITHIN DUE WITHIN
LONG-TERM ONE YEAR LONG-TERM ONE YEAR
----------- ----------- ---------- ---------
Senior secured term loan, at an average
rate of 4.8%, due March 2008 $ 236,449 $ 2,401 $ 237,649 $ 2,401
12% senior subordinated notes due
January 2010 123,150 -- 123,150 --
Revolver at an average rate of 4.3% 39,000 -- -- --
Industrial Revenue Bonds, at an average
rate of 4.49% and 5.83% 4,061 171 4,090 817
----------- ----------- ---------- ---------
Total Debt $ 402,660 $ 2,572 $ 364,889 $ 3,218
=========== =========== ========== =========
In connection with the bankruptcy reorganization, on the Effective Date, 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 October 31, 2003, the Company had $20.7 million available under
the Revolver after consideration of borrowing base limits at that date.
Pursuant to the Plan, on the Effective Date, the Company entered into a senior
secured term loan with certain secured lenders in the aggregate principal amount
of $240.1 million (the "Term Loan"), and issued Senior
16
Subordinated Notes in the aggregate principal amount of $123.2 million, in
partial satisfaction of its prepetition secured lenders' claims against the
Predecessor Company.
Under the Term Loan, interest accrues at the Company's election at either
JPMorgan Chase's prime rate plus 2.5%, the Federal Funds Effective Rate plus
3.0% or LIBOR times the Statutory Reserve Rate (as defined in the Credit
Agreement) plus 3.5%. The Term Loan is secured by a second priority lien on the
Collateral. The Term Loan requires quarterly principal payments of
approximately $0.6 million beginning April 4, 2003 through December 31, 2007,
with a remaining balloon payment of approximately $228 million due on March 31,
2008. The Company is required to prepay some or all of 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. In the
second quarter management negotiated an amendment to the Revolver that 1)
increases the inventory advance in the calculation of the Company's borrowing
base from 125% to 175% of eligible accounts receivable during the period from
July 1, 2003, through November 1, 2003, and 2) decreases the required minimum
consolidated EBITDA to levels close to those in the Term Loan for the second,
third and fourth quarters of 2003. The Company is currently in compliance with
all of the financial restrictions and financial covenants of the new Revolver.
The Senior Subordinated Notes are collateralized by a third priority lien on the
Collateral and pay interest semi-annually on each January 31 and July 31 at 12%
per annum. The Senior Subordinated Notes have no sinking fund requirement and
are redeemable, in whole or in part, at the option of the Company beginning
January 31, 2008 upon payment of a redemption premium.
Pursuant to the Plan, $4.9 million in industrial revenue bonds were reinstated
on the Effective Date. Certain of these bonds with remaining principal of $0.1
million as of September 28, 2003 and $0.9 million as of December 31, 2002, bear
interest at 3% and mature in September 2003 and September 2004. The balance of
the bonds have remaining principal of $4.0 million as of September 28, 2003,
bear interest at 6.25% and mature August 2005.
(7) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a defendant or plaintiff in various claims and lawsuits arising
in the normal course of business. As a result of the bankruptcy proceedings,
holders of litigation claims that arose prior to May 31, 2002 retain all rights
to proceed against the Company under certain limitations of the Court. The
Company believes, based upon information it currently possesses and taking into
account established reserves for estimated liabilities and its insurance
coverage, that the ultimate outcome of these proceedings and actions is unlikely
to have a material adverse effect on the Company's financial statements. It is
possible, however, that some matters could be decided unfavorably to the
Company, and could require the Company to pay damages or make other expenditures
in amounts that could be material but cannot be estimated as of September 28,
2003.
17
Environmental Matters
The Company's facilities and operations are subject to certain federal, state,
local and foreign laws and regulations relating to environmental protection and
human health and safety, including those governing wastewater discharges, air
emissions, and the use, generation, storage, treatment, transportation and
disposal of hazardous and non-hazardous materials and wastes and the remediation
of contamination associated with such disposal. Because of the nature of its
business, the Company has incurred, and will continue to incur, capital and
operating expenditures and other costs in complying with and resolving
liabilities under such laws and regulations.
It is the Company's policy to accrue for remediation costs when it is probable
that such costs will be incurred and when a range of loss can be reasonably
estimated. The Company has accrued approximately $0.3 million as of September
28, 2003 for probable environmental remediation and restoration liabilities.
Based on currently available information and analysis, the Company believes that
it is possible that costs associated with such liabilities or as yet unknown
liabilities may exceed current reserves in amounts or a range of amounts that
could be material but cannot be estimated as of September 28, 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 $13.4
million and $13.6 million as of September 28, 2003 and December 31, 2002,
respectively.
Interest Rate Swap
The Company enters into interest rate swaps to lower funding costs or to alter
interest rate exposures between fixed and floating rates on long-term debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed upon notional principal
amount. Under the Revolver and Term Loan the Company is required to enter into
interest rate protection agreements, as agreed by the administrative agent, the
effect of which is to fix or limit the interest cost. On August 6, 2003, the
Company entered into interest rate swaps with a combined notional amount of $145
million, which expire on March 31, 2008. These interest rate swaps convert
variable rate interest to an average fixed rate of 3.69% over the term of the
swap agreements. As of September 28, 2003 the swaps had a combined fair value
of $(5.0) million which is included in other comprehensive income and other
long-term liabilities on the consolidated balance sheet. A 1% change in the
market interest rates would result in a corresponding change of $6.1 million in
the combined fair value of the interest rate swaps.
(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."
18
(9) COMPREHENSIVE LOSS
For the periods ended September 28, 2003 and September 29, 2002, total
comprehensive loss was as follows (in thousands):
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
COMPANY | COMPANY COMPANY | COMPANY
FOR THE | FOR THE FOR THE NINE | FOR THE NINE
QUARTER ENDED | QUARTER ENDED MONTHS ENDED | MONTHS ENDED
SEPTEMBER 28, | SEPTEMBER 29, SEPTEMBER | SEPTEMBER 29,
2003 | 2002 28, 2003 | 2002
---------------| --------------- --------------| ---------------
| |
Net income (loss) $ 5,198 | $ (13,151) $ (23,544)| $ (270,322)
Foreign currency | |
translation adjustment (756)| (752) 2,850 | (2,582)
Derivative fair value | |
adjustment (4,998)| 61 (4,998)| (589)
---------------| --------------- --------------| ---------------
| |
Comprehensive loss $ (556)| $ (13,842) $ (25,692)| $ (273,493)
===============| =============== ==============| ===============
(10) STOCK COMPENSATION PLAN
As of the Effective Date, the Successor Company entered into the Management
Stock Plan, under which a total of 710,942 shares of new common stock are
available for issuance. The Management Stock Plan is designed to attract, retain
and motivate key employees and non-employee directors. The Company accounts for
stock based compensation cost under these plans using the intrinsic value method
of accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." The Company follows the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation", which defines a fair value-based
method of accounting for stock-based compensation and SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
No. 123."
On May 29, 2003 ("Grant Date") 611,946 options were issued to key employees and
non-employee directors at a price of $18.25 a share. The options vest ratably
over four years (which may be accelerated under certain conditions) and expire
10 years from the Grant Date. None of the options were exercisable at September
28, 2003. The exercise price at the Grant Date for each option was equal to its
fair value and, as such, no compensation expense was recorded. Recording the
options under the fair value based method would result in only a nominal effect
to the financial statements.
(11) NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statement No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34." FIN 45 clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies" relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. For guarantees that
fall within the scope of FIN 45, the Interpretation requires that guarantors
recognize a liability equal to the fair value of the guarantee upon its
issuance. The disclosure provisions of the Interpretation are effective for the
financial statements of interim or annual period that end after
19
December 15, 2002. However, the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of a guarantor's year-end. The
Company has not entered into any guarantees subsequent to December 15, 2002 and
does not expect the measurement provisions of FIN 45 to have a material effect
on its results of operations and financial position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of FIN 46 is to improve financial reporting by
companies involved with variable interest entities. FIN 46 changes certain
consolidation requirements by requiring a variable interest entity, as defined,
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that the company is not
required to consolidate but in which it has a significant variable interest.
This Interpretation applies to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. For variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003, application
begins in the first fiscal year or interim period beginning after December 15,
2003. The Company is currently assessing the impact of FIN 46 on its
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company is currently assessing the impact of SFAS No. 149 on its consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently assessing the impact of
SFAS No. 150 on its consolidated financial statements.
20
WKI HOLDING COMPANY, INC.
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company for the periods ended September 28, 2003 and
September 29, 2002, and related notes to the Consolidated Financial Statements
included elsewhere herein.
BACKGROUND
WKI Holding Company Inc. (the "Company," "WKI," "we," or "our") is a leading
manufacturer and marketer of consumer bakeware, dinnerware, kitchen and
household tools, rangetop cookware and cutlery products. We have strong
positions in major channels of distribution for our products in North America
and have also achieved a significant presence in certain international markets,
primarily Asia and Australia. In North America, we sell both on a wholesale
basis to mass merchants, department stores, specialty retailers, and grocery
chains and on a retail basis, through Company-operated factory outlet stores.
Our top five customers accounted for over 38.5% of gross sales in the first nine
months of 2003, with our largest customer being Wal-Mart. In the international
market, we have established our 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
has trended toward consolidation. Competition in the marketplace is affected not
only by domestic manufacturers but also by the large volume of foreign imports.
A number of factors affect competition in the sale of our products, including,
but not limited to, quality, price and merchandising parameters established by
various distribution channels. Shelf space and placement is a key factor in
determining retail sales of bakeware, dinnerware, kitchenware and rangetop
cookware products. Other important competitive factors include new product
introductions, brand identification, style, design, packaging and service
levels. As part of our strategic commitment to consolidate our focus, reduce
costs, leverage our brands and gain new distribution opportunities, from time to
time we review our brands, product lines and distribution arrangements and
evaluate them in light of strategic initiatives and competitive factors.
We currently manufacture most of our finished goods, comprising our dinnerware,
glass bakeware and metal bakeware categories. We also purchase a significant
amount of finished goods from various vendors in Asia and Europe to support our
rangetop, kitchenware, cutlery and ceramic bakeware categories. Reliance on
finished goods suppliers could give rise to certain risks, such as interruptions
in supply and quality issues, which 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.
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 at retailers during the holiday shopping season. This causes us to
adjust our purchasing schedule to ensure proper inventory levels in support of
second half of the year programs. Historically, between 55% and 60% of our
sales occur during the second half of the year. Because of the seasonality of
our business, results for any quarter are not necessarily indicative of the
results that may be achieved for the full year.
We do not believe that inflation has had a material effect on our results during
the periods presented. However, there can be no assurance that we would not be
affected by inflation in the future.
21
In the first quarter of 2003, weak economic conditions and global uncertainties
impacted our operations as customers responded to poor fourth quarter 2002
consumer demand by managing their inventory levels. This slowdown compared to
the prior year continued into the second quarter of 2003. In addition, we have
continued to close unprofitable retail store outlets and have experienced a loss
of distribution in certain categories that resulted, in part, from the
bankruptcy reorganization and lack of new products and promotional spending in
2002. The impact from these factors continued to have an effect in the third
quarter of 2003 with net sales for the quarter and nine months ended September
29, 2003 being below prior year levels. In spite of decreased sales volume we
generated positive operating income in the third quarter of 2003 versus an
operating loss in the third quarter of 2002 as a result of margin improvements
and lower selling, general and administrative expenses.
The Company plans to focus on new products and customer promotional programs in
the fourth quarter; however, we expect that the loss of distribution early in
the year at certain key retailers and competitive pressures within the grocery
channel will continue to impact our fourth quarter revenues. We currently
expect net sales for the fourth quarter of 2003 to be below prior year amounts.
Fourth quarter operating income is currently expected to be below prior year
levels with increased marketing and promotional spending and decreased volumes,
partially offset by manufacturing cost reductions. However, gross margin as a
percentage of sales should be favorable to the prior year. General economic
conditions, our dependence on consumer demand and continued competitive
pressures make it difficult to predict volumes in the fourth quarter of the year
and as such changes in these conditions could alter our outlook.
REORGANIZATION
On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in
the United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). The reorganization was jointly administered under the caption "In re
World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257."
During the period from the Filing Date until January 31, 2003 (the "Effective
Date"), the Debtors operated the business as debtors-in-possession under Chapter
11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were
not Debtors and did not reorganize.
On November 15, 2002, the Debtors filed their second amended joint plan of
reorganization (the "Plan") with the Court, which was confirmed on December 23,
2002 (the "Confirmation Date"). All material conditions precedent to the Plan
becoming binding were resolved, for accounting purposes, on or prior to December
31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh
Start Reporting as of that date. On the Effective Date, the Debtors legally
emerged from their bankruptcy proceedings. At December 31, 2002, the Company
recorded a $577.2 million reorganization gain reflecting the cancellation of
debt pursuant to the Plan and to adjust the historical carrying value of its
assets and liabilities to fair value, as defined by the reorganization value.
The Company's reorganization value of approximately $500 million, defined as
post-emergence debt and equity ("Reorganization Value"), was determined based on
an independent valuation by financial valuation experts after consideration of
several factors and assumptions and by using various valuation methods,
including cash flow multiples, price/earnings ratios and other relevant industry
information.
On or about the Effective Date, with the effects reported herein on December 31,
2002, the following principal provisions of the Plan occurred:
1. The Company's old common and preferred stock were cancelled for no
consideration. New Common Stock in the amount of 5,752,184 shares was
to be issued ("New Common Stock") to certain creditors, pursuant to
the Plan, as described below.
22
2. The Company's senior secured debt of approximately $577.1 million was
discharged in return for the payment of $27.8 million in cash and the
issuance of $240.1 million of new senior secured term loans, $123.2
million of new senior subordinated secured notes ("Senior Subordinated
Notes") and the right to receive 4,528,201 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
Predecessor 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, including
accrued interest, 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., a wholly
owned subsidiary of the Company, 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 in availability subject
to borrowing base restrictions.
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 domestic
operating subsidiaries will be paid 60% of the allowable claim amount.
These payments will be made as prescribed by the Court at various
distribution dates as claims are reconciled or otherwise resolved.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting"). The Company adopted Fresh Start
Reporting because holders of outstanding voting shares of the Company's capital
stock immediately before the Chapter 11 filing and confirmation of the Plan
received less than 50% of the common stock distributed under the Plan, and the
Company's Reorganization Value was less than the Debtors' post-petition
liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141"),
which requires a reorganized entity to record its assets and liabilities at
their fair value. The Company used its newly determined Reorganization Value to
define the fair value of debt and equity at December 31, 2002. The resulting
reorganized equity value of $132.3 million was allocated to individual assets
and liabilities using the principles of SFAS No. 141. The difference between the
reorganized equity value described above and the resulting fair value of assets
and liabilities was recorded as goodwill. The Company used independent valuation
experts where necessary to estimate the fair value of major components of the
balance sheet including trademarks, patents, customer relationships, property,
plant and equipment and pension benefit obligations. The Fresh Start Reporting
adjustments recorded in the first nine months of 2003 resulted in a reduction to
goodwill of $77.3 million.
Fair valuation adjustments for certain trademarks and exclusive beneficial
license and distribution agreements were recorded as of January 1, 2003, and
were determined using the excess income and relief from royalty
23
approaches. The Company's trademarks and exclusive beneficial license and
distribution agreements were valued at $71.3 million, resulting in a reduction
of $13.1 million to the carrying value at January 1, 2003.
The Company's trademarks and exclusive licenses are recognizable household names
and are renewable solely at the discretion of the Company; as such, they were
determined to have indefinite lives and are not amortized, but will be tested
for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset(s) might be impaired. An exclusive
distribution agreement valued at $7.1 million was determined to have a definite
life based on the term of the governing contract and is amortized over the
remaining estimated useful life as of January 1, 2003 of 8.7 years.
Fair valuation adjustments for certain customer relationships were recorded as
of January 1, 2003, and were determined using the excess income approach for
significant customers within the Company's mass merchandising distribution
channels and the cost approach for certain other distribution channels. The
Company's customer relationships were valued at $24.8 million. Intangible
assets associated with significant customers within the Company's mass
merchandising distribution channels are amortized over their estimated remaining
useful lives of 10 years. Intangible assets associated with certain other
distribution channels will be amortized over their estimated useful lives of 9
years using the double declining balance method, which is representative of the
contractual turnover of customers within those distribution channels.
Fair valuation adjustments for certain patents were recorded as of January 1,
2003, and were determined using the excess income and relief from royalty
approaches. The Company's patents were valued at $23.0 million with estimated
remaining useful lives ranging from 4 to 18 years based on the expiration of the
patent under federal law.
Fair valuation adjustments for property, plant and equipment were also recorded
as of January 1, 2003. The fair value of the Company's property, plant, and
equipment was determined to be $28.4 million more than the net book value at
December 31, 2002. The Company adjusted its carrying value of property, plant
and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6
million for buildings, and $11.2 million for machinery and equipment. The
Company will depreciate these assets over their newly estimated remaining useful
lives as of January 1, 2003.
The Company used market data to determine the fair value of the Company's
precious metals, principally platinum and rhodium. As a result, the Company
increased the fair value of its precious metals by $14.9 million as of January
1, 2003. Precious metals are classified as other assets in the Consolidated
Balance Sheet.
In December 2002, pension benefit obligations were written up to fair value,
equal to the projected benefit obligation of $31.7 million as of December 31,
2002, as determined by the Company's third-party actuary. Previously recorded
other comprehensive income related to unrecognized actuarial losses of $28.3
million and an intangible asset related to prior unrecognized service cost of
$5.7 million were written off.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statement No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34." FIN 45 clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies" relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. For guarantees that
fall within the scope of FIN 45, the Interpretation requires that guarantors
recognize a liability equal to the fair value of the guarantee upon its
issuance. The disclosure provisions of the Interpretation are effective for the
financial statements of interim or annual period that end after December 15,
2002. However, the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a
24
guarantor's year-end. The Company has not entered into any guarantees subsequent
to December 15, 2002 and does not expect the measurement provisions of FIN 45 to
have a material effect on its results of operations and financial position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of FIN 46 is to improve financial reporting by
companies involved with variable interest entities. FIN 46 changes certain
consolidation requirements by requiring a variable interest entity, as defined,
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that the company is not
required to consolidate but in which it has a significant variable interest.
This Interpretation applies to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. For variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003, application
begins in the first fiscal year or interim period beginning after December 15,
2003. The Company is currently assessing the impact of FIN 46 on its
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company is currently assessing the impact of SFAS No. 149 on its consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently assessing the impact of
SFAS No. 150 on its consolidated financial statements.
25
RESULTS OF OPERATIONS
- ---------------------
The following commentary and tables provide 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. We believe that our operating
segments have similar economic characteristics and meet the aggregation criteria
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Our first, second and third fiscal quarters end on the Sunday
nearest to the end of the calendar quarter and the fourth quarter ends on
December 31. Our third fiscal quarter in fiscal 2003 and fiscal 2002 ended on
September 28, 2003 and September 29, 2002, respectively. Results for the
quarter and nine months ended September 28, 2003 and September 29, 2002, were
prepared using generally accepted accounting principles in the United States
(GAAP).
Successor Company | Predecessor Company Successor Company | Predecessor Company
---------------------| -------------------- -------------------| --------------------
| Nine | Nine
Quarter | Quarter Months | Months
ended % of | ended % of ended % of | ended % of
September net | September net September net | September net
28, 2003 sales | 29, 2002 sales 28, 2003 sales | 29, 2002 sales
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
| |
Net sales $ 158,992 100.0%| $ 167,046 100.0% $ 410,669 100.0%| $ 467,915 100.0%
Cost of sales 109,385 68.8 | 120,425 72.1 301,676 73.5 | 340,321 72.7
----------- --------| ----------- ------- ----------- ------| ----------- -------
Gross profit 49,607 31.2 | 46,621 27.9 108,993 26.5 | 127,594 27.3
| |
Selling, general and | |
Administrative | |
expenses 35,359 22.2 | 38,192 22.9 103,920 25.3 | 126,339 27.0
Other expenses, net 2,592 1.6 | 1,299 0.8 4,000 1.0 | 3,768 0.8
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
Operating income | |
(loss) 11,656 7.3 | 7,130 4.3 1,073 0.3 | (2,513) (0.5)
Interest expense 7,325 4.6 | 10,766 6.4 23,073 5.6 | 41,121 8.8
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
Income (loss) before | |
reorganization items 4,331 2.7 | (3,636) (2.2) (22,000) (5.4)| (43,634) (9.3)
Reorganization items, | |
net -- -- | 8,905 5.3 -- -- | 23,190 5.0
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
Income (loss) before | |
income taxes 4,331 2.7 | (12,541) (7.5) (22,000) (5.4)| (66,824) (14.3)
Income tax (benefit) | |
expense (895) (0.6)| 579 0.3 1,439 0.3 | 1,313 0.3
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
Income (loss) before | |
minority interest 5,226 3.3 | (13,120) (7.9) (23,439) (5.7)| (68,137) (14.6)
Minority interest in | |
subsidiary (28) -- | (31) -- (105) -- | (96) --
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
Net income (loss) before | |
cumulative effect of | |
change in accounting | |
principle 5,198 3.3 | (13,151) (7.9) (23,544) (5.7)| (68,233) (14.6)
Cumulative effect of | |
change in accounting | |
principle -- -- | -- -- -- -- | (202,089) (43.2)
----------- --------| ----------- ------- ----------- ------| ----------- -------
| |
Net income (loss) $ 5,198 3.3%| $ (13,151) (7.9)% $ (23,544) (5.7)%| $ (270,322) (57.8)%
=========== ========| =========== ======= =========== ======| =========== =======
26
NET SALES
Net sales for the third quarter of 2003 were $159.0 million, a decrease of $8.1
million or 4.8% from the same period in 2002. Net sales for the nine months
ended September 28, 2003 were $410.7 million, a decrease of $57.2 million or 12%
from the nine months ended September 29, 2002. The majority of the decline for
the quarter was driven by lower sales in our retail store outlets due to store
closures. As part of the Company's efforts to improve margins, we continued a
program of store rationalization in 2002 and have closed forty-five stores since
September 29, 2002. Excluding the impact of the closed stores on net sales, our
quarter over quarter and year over year sales declines would have been
approximately 1% and 10 %, respectively.
In addition, there has been a loss of certain promotional and base volume
largely in our metal rangetop, glass bakeware and kitchenware categories
precipitated in part by increasing competitive pricing pressure at mass
merchants and grocery store channels. This has resulted in lower volume at key
accounts as the Company focuses on maintaining profitable business. In
addition, we have lost market share in certain categories year over year which
was precipitated in part by senior management's focus on an expedited exit from
bankruptcy during most of 2002, the lack of new product introductions in certain
categories and lower advertising and promotional spending in the second half of
2002. These effects in the third quarter have been partially offset by
continued successful new product introductions in our OXO line.
Year to date the decline was also impacted by key retailers working off excess
inventory from the disappointing 2002 holiday season, as well as managing
inventories to lower overall levels in the first half of 2003, awaiting a return
of a stronger economic environment and related consumer buying.
GROSS PROFIT
Gross profit for the third quarter of 2003 was $49.6 million, an increase of
$3.0 million when compared to gross profit of $46.6 million for the third
quarter of 2002. As a percentage of net sales, gross profit in the third
quarter of 2003 was 31.2%, an increase of 3.3 percentage points from the third
quarter of 2002. On a year to date basis, gross profit of $109.0 million was
$18.6 million below gross profit of $127.6 million in 2002. As a percentage of
net sales, gross profit for the nine months ended September 28, 2003 was 26.5%,
a decline of 0.8 percentage points, from 27.3% in the nine months ended
September 29, 2002. Excluding the impact of closed stores on gross margins as a
percent of sales, our gross margin percent would have been 4.1 percentage points
favorable quarter over quarter and 1.2 percentage points favorable on a year
over year basis.
The quarter increase was largely attributable to lower timing-related allowance
spending in the current quarter versus 2002. The year to date gross margin
decline was largely attributable to performance in our retail outlets including
the closure of twenty-nine unprofitable stores in April 2003, in connection with
our reorganization. In an effort to expedite these store closures and reduce
inventory held for the retail outlets, certain inventory was consigned to a
third party liquidator during the first half of 2003 who sold it at close to
cost. Better margins in our international and OXO categories and lower
manufacturing costs related to our outsourcing initiatives were offset by higher
fixed absorption costs related to production curtailments in response to sales
demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for the quarter and nine
months ended September 28, 2003 were $35.4 million and $103.9 million,
respectively, compared to the quarter and nine months ended September 29, 2002
of $38.2 million and $126.4 million, respectively. As a percentage of net
sales, SG&A
27
expenses were 22.2% in the third quarter of 2003 as compared to 22.9% in the
third quarter of 2002. On a year to date basis, 2003 SG&A was 25.3% of sales
versus 27.0% of sales in the prior year.
The decrease in overall SG&A for the quarter was driven largely by lower retail
outlet overhead expense as a result of retail store closures and lower
advertising and promotional spending, partially offset by timing of adjustments
to our employee incentive program. As part of our program to improve
profitability of our retail stores, forty-five under performing stores were
closed between September 2002 and September 2003. In addition, during the nine
months ended September 28, 2003, we recorded a severance charge of $1.7 million
related to the elimination of employees at certain closed retail outlets, as
well as other reductions in force, and $1.7 million of expense related to the
key employee retention program, which was put in place according to a Court
order during the Bankruptcy proceedings. During the nine months ended September
29, 2002, SG&A included $4.5 million of professional and consulting fees related
to the development of the bankruptcy reorganization strategy prior to the Filing
and rationalization charges of $2.8 million related to our 2001 restructuring
activities.
OTHER EXPENSE, NET
Other operating expenses were $2.6 million and $4.0 million for the quarter and
nine months ended September 28, 2003, respectively, compared to $1.3 million and
$3.8 million for the same periods of 2002. On a quarter and year to date basis,
we recorded $1.7 million and $4.0 million, respectively, in amortization expense
relating to patents, customer relationships and exclusive licenses that were
recorded as of January 1, 2003 as a Fresh Start Reporting Adjustment. In the
prior year, the lack of amortization expense was offset by higher foreign
exchange losses, an adjustment related to a vendor settlement and higher royalty
expenses.
INTEREST EXPENSE
Interest expense was $7.3 million and $23.1 million for the quarter and nine
months ended September 28, 2003, respectively, compared to $10.8 million and
$41.1 million for the quarter and nine months ended September 29, 2002,
respectively. The decrease in interest expense from the prior year of $3.4
million for the quarter and $18.0 million for the nine months was attributable
to significantly decreased debt levels, as the Predecessor Company's debt was
reduced by more than $420 million upon our emergence from bankruptcy.
REORGANIZATION ITEMS, NET
Reorganization charges of $8.9 million and $23.2 million were incurred for the
quarter and nine months ended September 29, 2002. Of the total costs incurred
in the first nine months of 2002, $14.1 million related to the write off of the
Predecessor Company's deferred financing fees, $7.2 million related to legal,
accounting and other professional fees related to the bankruptcy filing and $1.9
million related to lease rejection costs.
INCOME TAX EXPENSE
Income tax benefit in the quarter was $0.9 million and income tax expense was
$1.4 million for the nine months ended September 28, 2003, compared to $0.6
million in the quarter and $1.3 million in the nine months ended September 29,
2002. A preliminary assessment of our tax status in the first half of the year
assumed that the Company would be subject to the alternative minimum tax ("AMT")
for federal income tax purposes in 2003. As a result of the finalization of the
2002 income tax return and 2003 operating results, we believe we will not be
subject to this tax. Previously recorded AMT of $1.5 million was therefore
written off in the third quarter. 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.
28
NET INCOME (LOSS)
As a result of the factors discussed above, we had net income of $5.2 million
for the quarter ended September 28, 2003 and a net loss of $23.5 million for
the nine months ended September 28, 2003 compared to a net loss of $13.2 million
and $270.3 million for the same periods in 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
FINANCIAL CONDITION
Our capital requirements have arisen principally in connection with financing
working capital needs, servicing debt obligations, funding reorganization,
restructuring and rationalization costs and funding capital expenditures.
During 2003, we expect to spend approximately $60 to $65 million for bankruptcy
reorganization costs and prepetition claim payments, of which approximately $59
million was paid through September 28, 2003.
In connection with the bankruptcy reorganization, we entered into a new
revolving credit agreement (the "Revolver") with a group of lenders. The new
facility provides for a revolving credit loan facility and letters of credit, in
a combined maximum principal amount equal to the lesser of $75 million or a
specified borrowing base, which is based upon eligible receivables and eligible
inventory, with a maximum issuance of $25 million for letters of credit. The
Revolver is secured by a first priority lien on substantially all of our assets
and our domestic subsidiaries, as well as on the stock of most of our
subsidiaries (with the latter, in the case of our non-U.S. subsidiaries, being
limited to 65% of their capital stock) (collectively, the "Collateral"). We are
required to reduce our direct borrowings, excluding letters of credit, on the
Revolver to zero for a period of 15 consecutive days in fiscal year 2004 and for
a period of 30 consecutive days in each fiscal year thereafter. The Revolver
and other loan agreements contain usual and customary restrictions including,
but not limited to, limitations on dividends, redemptions and repurchases of
capital stock, prepayments of debt (other than the Revolver), additional
indebtedness, capital expenditures, mergers, acquisitions, recapitalizations,
asset sales, transactions with affiliates, changes in business and the amendment
of material agreements. Additionally, the Revolver and other loan agreements
contain customary financial covenants relating to minimum levels of operating
EBITDA and maximum leverage ratios and fixed charge coverage ratios (all as
defined in the Revolver agreement). As of October 31, 2003, we had $20.7
million available under the Revolver after consideration of borrowing base
limits at that date. We are currently in compliance with all of the financial
restrictions and financial covenants of the new Revolver.
In the second quarter we negotiated an amendment to the Revolver that 1)
increased the inventory advance in the calculation of our borrowing base from
125% to 175% of eligible accounts receivable during the period from July 1,
2003, through November 1, 2003, and 2) decreased the required minimum
consolidated EBITDA to levels close to those in the Term Loan for the second,
third and fourth quarters of 2003. This change was precipitated by significant
continuing economic pressures experienced in the first half of the year which
could have impacted our short term ability to borrow required amounts, due to
the borrowing base restrictions related to receivables and inventory, and to
meet specified EBITDA levels. In light of the continued pressure on sales that
we experienced in the third quarter of 2003 and the general uncertainty
regarding the economic outlook for the critical holiday season in the fourth
quarter, there is a possibility that our fourth quarter results could be below
the level required for us to remain in compliance with the EBITDA covenants in
the Revolver and Term Loan agreements. Management has continued to meet
regularly with the Agent and Steering Committee of the bank group and has had
discussions concerning the Company's current and expected performance. We
expect, if necessary, to engage in discussion with our banks to reach covenant
compliance.
29
Management believes that cash on hand, along with cash expected to be generated
through operations and availability under our Revolver will be sufficient to
fund operations, anticipated capital expenditures and remaining bankruptcy
claims for the foreseeable future. Although we believe that we will continue to
have access to borrowings under the Revolver in amounts necessary to meet our
normal operating requirements, our ability to meet liquidity needs and comply
with other terms of the bank covenants may be affected by factors, including but
not limited to, demand for our products as impacted by the economy, competition
and other global events that drive the consumer's purchasing behavior.
In connection with the Reorganization, we entered into an agreement with the
Pension Benefit Guaranty Corporation ("PBGC"), which, among other things,
requires certain additional minimum funding contributions and accelerated
contributions to be made to our pension plan. Total enhanced contributions of
$2 million, $2.5 million and $2.5 million are required to be paid in addition to
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 over the pension plan years 2003, 2005 and 2006, respectively.
Additionally, the agreement requires us to provide a letter of credit in the
amount of $15 million to the PBGC by January 31, 2008. In the first nine months
of 2003, we paid $5.3 million in contributions to our pension plan and
anticipate total contributions in 2003 to be $8.7 million.
OPERATING ACTIVITIES
In the nine months ended September 28, 2003, net cash used in operating
activities was $64.0 million compared to $48.2 million of cash used in operating
activities in the nine months ended September 29, 2002. In 2003, we spent
approximately $59 million on bankruptcy reorganization costs and prepetition
claim payments. In 2002, we spent $19.1 million related to restructuring and
rationalization programs, primarily for employee severance. There were no
payments related to these programs during the nine months ended September 28,
2003. Excluding the effects of 2003 bankruptcy and 2002 restructuring and
rationalization related charges, net cash used in operating activities improved
by approximately $24 million.
Cash receipts from accounts receivable generally peak in the fourth quarter of
the year as we realize the effects of the holiday shopping season. As such, the
third quarter generally reflects a build of accounts receivable. Year over
year, our accounts receivable as of September 2003 and 2002 have increased from
prior year-end by $17.8 million and $8.5 million, respectively, resulting in a
net unfavorable change of $5.4 million. The unfavorable change year over year
primarily relates to significantly lower sales in the fourth quarter of 2002
compared to the fourth quarter of 2001, adversely impacting cash collections in
the first quarter of 2003. Lower sales in 2003 compared to 2002 have partially
offset this negative impact. Days sales outstanding improved by 3.5 days to
52.7 days during the nine months ended September 28, 2003 compared to 56.2 days
during the nine months ended September 29, 2002. The change in inventory in the
nine months ended September 28, 2003 was favorable to the nine months ended
September 29, 2002 by $3.1 million due to aggressive management of inventory
purchasing in response to lower sales demand. Our accounts payable and accrued
liabilities also declined $59.7 million as we paid approximately $59 million in
bankruptcy reorganization cost and prepetition claim payments.
INVESTING ACTIVITIES
Cash used for investing activities was $9.3 million in the nine months ended
September 28, 2003 compared to $11.7 million in the nine months ended September
29, 2002. The decrease is attributable to higher capital expenditures offset by
proceeds from the sale of assets. We spent $3.5 million of additional capital
expenditures in the nine months ended September 28, 2003 compared to the nine
months ended September 29, 2002, and anticipate total capital cash outlays for
2003 to be approximately $20.0 million.
The sale of assets in the nine months ended September 28, 2003 includes proceeds
from the sale of precious metals recovered from decommissioned manufacturing
equipment of $5.6 million. In June 2003, we sold land
30
and buildings at our Waynesboro, Virginia facility that closed in 2002 as part
of our 2001 restructuring program. Net proceeds from the sale were $0.7 million.
In connection with the payment of certain claims under our Plan of
Reorganization, we fund, from time to time, a third party distribution agent to
pay claimants. As of September 28, 2003, $1.2 million was held for payment on
resolved prepetition claims but not yet disbursed to prepetition claimants.
These escrows are recorded as restricted cash in the accompanying financial
statements.
FINANCING ACTIVITIES
Net cash provided by financing activities totaled $34.1 million in the nine
months ended September 28, 2003 compared to net cash used in financing
activities of $1.6 million in the nine months ended September 29, 2002. We
borrowed $39.0 million to fund payment of prepetition liabilities and capital
expenditures in the first nine months of 2003. During the nine months ended
September 29, 2002, we repaid $7.1 million in debt and borrowed $7.0 million
under the debtor in possession credit facility.
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 our
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"). Fresh Start Reporting adjustments
reflect the application of Statement of Financial Accounting Standard No. 141
"Business Combinations" ("SFAS No. 141"), which requires a reorganized entity to
record its assets and liabilities at their fair value. We used our newly
determined Reorganization Value to define the fair value of our debt and equity
at December 31, 2002. The resulting reorganized equity value of $132.3 million
was allocated to individual assets and liabilities using the principles of SFAS
No. 141. The difference between the reorganized equity value described above and
the resulting fair value of assets and liabilities was recorded as goodwill. We
used independent valuation experts where necessary to appraise the major
components of the balance sheet including trademarks, patents, customer
relationships, property, plant and equipment and pension benefit obligations.
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.
31
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 nine months ended September
28, 2003 is generally not comparable to the financial results for the nine
months ended September 29, 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 and bankruptcy related
costs, and depreciation and amortization related to adjusting property, plant
and equipment and other intangible assets to their fair value.
Sales returns and allowances, bad debts
The estimation of product returns and deductions for customer allowances,
including rebates, incentives and other promotional payments, requires that we
make estimates regarding the amount and timing of future returns and deductions.
These estimates are based on historical return rates, current economic trends
and changes in customer demand and product acceptance. Significant management
judgment is used in establishing accruals for sales returns and other allowances
in any given accounting period. In addition, we use estimates in determining
the collectibility of our accounts receivable and must rely on our evaluation of
historical bad debts, customer concentration, customer credit ratings, current
economic trends and changes in customer payment terms to arrive at appropriate
reserves. Material differences may result in the amount and timing of earnings
if actual experience differs significantly from management estimates.
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 our
financial statements for the year ended December 31, 2002, which were filed with
the Securities and Exchange Commission on Form 8-K.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- -----------------------------------------
The factors discussed below, among others, could cause actual results to differ
materially from those contained in forward-looking statements, as described in
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, that are 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
32
matters are based on certain assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are
appropriate in the circumstances.
Whether actual results and developments will conform with the Company's
expectations and predictions, however, is subject to a number of risks and
uncertainties, including:
- general economic factors, including, but not limited to, a continuance
of the global economic slowdown, weakness in the retail sector;
changes in interest rates, foreign currency translation rates, and
consumer confidence;
- changes in demand for our products, including as a result of inventory
management by significant customers, and the highly competitive market
for our products, including from foreign imports;
- dependence on significant customers and increasing concentration in
the retail industry;
- reliance on third party manufacturers, particularly in Asia;
- changes in the operating environment in our major non-US markets,
including new and different legal and regulatory requirements, export
or import duties;
- drastic and unforeseen price pressures on our products or significant
cost increases that cannot be recovered through price increases or
productivity improvements;
- acceptance of product changes by the consumer and unpredictable
difficulties or delays in the development of new product programs
(including product line extensions and renewals);
- cost and availability of raw materials, labor and natural and other
resources;
- technological shifts away from our technologies and core competencies;
- environmental issues relating to unforeseen events;
- availability of financing for us or certain of our customers;
- loss of any material intellectual property rights; and
- any difficulties in obtaining or retaining the management or other
human resource competencies that we need to achieve our business
objectives.
Consequently, all of the forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements, and there can be no assurance that the
actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on us and our subsidiaries or our business or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We primarily have market risk in the areas of foreign currency and floating rate
debt. We invoice a significant portion of our international sales in U.S.
dollars, minimizing the effect of foreign exchange gains or losses on our
earnings. As a result, our foreign sales are affected by currency fluctuations
versus U.S. dollar invoicing. Our costs are predominantly denominated in U.S.
dollars. With respect to sales conducted in foreign currencies, increased
strength of the U.S. dollar decreases our reported revenues and margins in
respect of such sales to the extent we are unable or determine not to increase
local selling prices.
From time to time we reduce foreign currency cash flow exposure due to exchange
rate fluctuations by entering into forward foreign currency exchange contracts.
The use of these contracts protects cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contract. As of September 28,
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
33
to an agreed upon notional principal amount. Under the Revolver and Term Loan we
are required to enter into interest rate protection agreements, as agreed by the
administrative agent, the effect of which is to fix or limit the interest cost.
On August 6, 2003, we entered into interest rate swaps with a combined notional
amount of $145 million, which expires on March 31, 2008. These interest rate
swaps convert variable rate interest to an average fixed rate of 3.69% over the
term of the swap agreements. As of September 28, 2003 these swaps had a combined
fair value of $ (5.0) million which is included in other comprehensive income
and other long-term liabilities on the consolidated balance sheet. A 1% change
in the market interest rates would result in a corresponding change of $6.1
million in the combined fair value of the interest rate swaps.
ITEM 4. DISCLOSURE 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this quarterly report on Form 10-Q.
The Company's management, including its Chief Executive and Chief Financial
Officer, does not expect that the disclosure controls and procedures will
prevent all error and all fraud. No matter how well designed and operated,
a control system can provide only reasonable assurance that its objectives
will be met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefit of certain controls
must be considered relative to cost. Due to the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company
have been detected.
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 to
provide reasonable assurance that material information relating to the
Company would be made known to them to allow timely decisions regarding
required disclosures.
(b) Changes in Internal Control Over Financial Reporting. There has been no
significant change in our internal control over financial reporting during
the period covered by this quarterly report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 31, 2002, the Company and eleven of our U.S. subsidiaries (collectively,
the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of
the federal bankruptcy code in the United States Bankruptcy Court for the
Northern District of Illinois. The reorganization was jointly administered
under the caption "In re World Kitchen, Inc., a Delaware Corporation, et al.,
Case No. 02-B21257." The Plan of reorganization was confirmed by the Bankruptcy
Court on December 23, 2002, and became effective January 31, 2003. During the
period from May 31, 2002 until January 31, 2003, the Debtors operated their
businesses as debtors-in-possession under Chapter 11. Our non-U.S. subsidiaries
did not file voluntary petitions, were not Debtors and did not reorganize. In
connection with the Plan, certain subsidiaries of the Predecessor Company were
merged into other subsidiaries. The remaining Debtors continue to reconcile
and, once reconciled or resolved, pay claims in the bankruptcy.
Litigation
We have been engaged in, and anticipate we will continue to be engaged in, the
defense of product liability claims related to products we manufacture or sell.
We maintain product liability coverage, subject to certain deductibles and
maximum coverage levels, that we believe is adequate and in accordance with
industry standards.
In addition to product liability claims, from time to time we are a defendant in
various other claims and lawsuits arising in the normal course of business. We
believe, based upon information currently available, and taking into account
established reserves for estimated liabilities and our insurance coverage, that
the ultimate outcome of these proceedings and actions is unlikely to have a
material adverse effect on our financial statements. It is possible, however,
that some matters could be decided unfavorably to us and could require us to pay
damages, or make other expenditures in amounts that could be material but cannot
be estimated as of September 28, 2003.
Environmental Matters
Our facilities and operations are subject to certain federal, state, local and
foreign laws and regulations relating to environmental protection and human
health and safety, including those governing wastewater discharges, air
emissions, and the use, generation, storage, treatment, transportation and
disposal of hazardous and non-hazardous materials and wastes and the remediation
of contamination associated with such disposal. Because of the nature of our
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 $0.3 million as of September 28, 2003 for probable
environmental remediation and restoration liabilities. Based on currently
available information and analysis, we believe that it is possible that costs
associated with such liabilities or as yet unknown liabilities may exceed
current reserves in amounts or a range of amounts that could be material but
cannot be estimated as of September 28, 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.
35
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description of Exhibit
- --- ----------------------
3.1.1+ Amended and Restated Certificate of Incorporation of WKI Holding
Company, Inc.
3.1.2+ Amended and Restated Certificate of Incorporation of World Kitchen,
Inc.
3.1.3+ Certificate of Formation of EKCO Group, LLC.
3.1.4+ Amended and Restated Certificate of Incorporation of EKCO Housewares,
Inc.
3.1.5+ Amended and Restated Certificate of Incorporation of EKCO
Manufacturing of Ohio, Inc.
3.1.6+ Certificate of Formation of WKI Latin America Holding, LLC.
3.1.7+ Certificate of Formation of World Kitchen (GHC), LLC.
3.2.1+ Amended and Restated Bylaws of WKI Holding Company, Inc.
3.2.2+ Amended and Restated Bylaws of World Kitchen, Inc.
3.2.3+ Limited Liability Company Agreement of EKCO Group, LLC.
3.2.4+ Amended and Restated Bylaws of EKCO Housewares, Inc.
3.2.5+ Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc.
3.2.6+ Limited Liability Company Agreement of WKI Latin America Holding,
LLC.
3.2.7+ Limited Liability Company Agreement of World Kitchen (GHC), LLC.
36
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* Amended and Restated Employment Agreement, dated July 31, 2003,
between WKI Holding Company, Inc. and Raymond J. Kulla.
10.2* Amended and Restated Employment Agreement, dated July 31, 2003,
between WKI Holding Company, Inc. and Douglas S. Arnold.
31.1* Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* Certification of the Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
(b) Report on Form 8-K
None.
________
* Filed herewith.
+ Incorporated by reference to the corresponding exhibit number to the
Quarterly Report on Form 10-Q for the period ended March 30, 2003.
37
- --------------------------------------------------------------------------------
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: November 5, 2003 By: /s/ James A. Sharman
----------------------------------
James A. Sharman
President and Chief Executive Officer
Date: November 5, 2003 By: /s/ Joseph W. McGarr
----------------------------------
Joseph W. McGarr
Chief Financial Officer
38
EXHIBIT INDEX
No. Title
- --- ----------------------
3.1.1+ Amended and Restated Certificate of Incorporation of WKI Holding
Company, Inc.
3.1.2+ Amended and Restated Certificate of Incorporation of World Kitchen,
Inc.
3.1.3+ Certificate of Formation of EKCO Group, LLC.
3.1.4+ Amended and Restated Certificate of Incorporation of EKCO Housewares,
Inc.
3.1.5+ Amended and Restated Certificate of Incorporation of EKCO
Manufacturing of Ohio, Inc.
3.1.6+ Certificate of Formation of WKI Latin America Holding, LLC.
3.1.7+ Certificate of Formation of World Kitchen (GHC), LLC.
3.2.1+ Amended and Restated Bylaws of WKI Holding Company, Inc.
3.2.2+ Amended and Restated Bylaws of World Kitchen, Inc.
3.2.3+ Limited Liability Company Agreement of EKCO Group, LLC.
3.2.4+ Amended and Restated Bylaws of EKCO Housewares, Inc.
3.2.5+ Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc.
3.2.6+ Limited Liability Company Agreement of WKI Latin America Holding,
LLC.
3.2.7+ Limited Liability Company Agreement of World Kitchen (GHC), LLC.
4.1+ Stockholders' Agreement, dated as of January 31, 2003, by and among
WKI Holding Company, Inc., the Senior Lenders, the Subordinated
Lenders, the Borden Entities party thereto, the Management Members
party thereto and the New Directors party thereto.
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* Amended and Restated Employment Agreement, dated July 31, 2003,
between WKI Holding Company, Inc. and Raymond J. Kulla.
10.2* Amended and Restated Employment Agreement, dated July 31, 2003,
between WKI Holding Company, Inc. and Douglas S. Arnold.
31.1* Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* Certification of the Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
39