UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2003
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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 333-57099
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WKI HOLDING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1403318
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(State of Incorporation) (I.R.S. Employer Identification No.)
11911 Freedom Drive, Suite 600, Reston VA 20190
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 703-456-4700
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, if definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Security
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Number of shares the Registrant's New Common Stock, par value $0.01 per share,
outstanding as of March 24, 2004: 5,752,184
WKI HOLDING COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTES
Important Information Regarding this Form 10-K 3
PART I
Item 1. Business. 5
Item 2. Properties. 15
Item 3. Legal Proceedings. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. 17
Item 6. Selected Financial Data. 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 35
Item 8. Financial Statement and Supplementary Data. 36
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. 73
Item 9A. Controls and Procedures. 73
PART III
Item 10. Directors and Executive Officers of the Registrant. 74
Item 11. Executive Compensation. 76
Item 12. Security Ownership of Certain Beneficial Owners and Management. 81
Item 13. Certain Relationships and Related Transactions. 82
Item 14. Principal Accounting Fees and Services. 83
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 85
SIGNATURES
2
IMPORTANT INFORMATION REGARDING THIS FORM 10-K
Readers should consider the following information as they review this Form 10-K:
FRESH START ACCOUNTING
As a result of the WKI Holding Company, Inc. (the "Company," "WKI," "we," or
"our") bankruptcy reorganization in January 2003, the Company applied Fresh
Start Reporting (as defined herein) to its consolidated balance sheet as of
December 31, 2002 in accordance with Statement of Position No. 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" as
promulgated by the AICPA. (See Item 1 in the Business section for information
regarding the Company's bankruptcy reorganization). Under Fresh Start Reporting,
a new reporting entity is considered to be created and the recorded amounts of
assets and liabilities are adjusted to reflect their estimated fair values at
the date Fresh Start Reporting is applied. On January 31, 2003, the Debtors (as
defined herein) emerged from Chapter 11 protection. For financial reporting
purposes, December 31, 2002 was considered the emergence date, and the effects
of the reorganization have been reflected in the accompanying financial
statements as if the emergence occurred on that date. As a result of the
application of Fresh Start Reporting, the financial statements of the Successor
Company (as defined herein) are not comparable to the financial statements of
the Predecessor Company (as defined herein).
SAFE HARBOR-FORWARD-LOOKING 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
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, the health of the
global economy, 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 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;
- - price pressures on our products or cost increases that cannot be recovered
through price increases or productivity improvements;
- - acceptance of product changes by the consumer and difficulties or delays in
the development of new product programs (including product line extensions
and renewals);
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- - cost and availability of raw materials, natural and other resources;
- - cost and availability of labor, including potential impacts arising from
work stoppages or other labor disturbances related to negotiating
agreements under our domestic and international collective bargaining
agreements;
- - technological shifts away from our technologies and core competencies;
- - environmental issues relating to unforeseen events;
- - availability and terms of financing for us or certain of our customers;
- - loss of any material intellectual property rights;
- - any difficulties in obtaining or retaining the management or other human
resource competencies that we need to achieve our business objectives; and
- - debt service and mandatory principal payments which may impair our ability
to finance future operations and capital needs and may limit our
flexibility in responding to changing business and economic conditions and
to business opportunities.
Consequently, all of the forward-looking statements made in this Form 10-K are
qualified by these cautionary statements, and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company and its subsidiaries or its business or operations.
4
PART I
ITEM 1. BUSINESS.
GENERAL DEVLOPMENT OF THE BUSINESS
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 retail outlet stores.
Our top five customers accounted for over 40% of net sales in 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 Company's business began as an unincorporated division of Corning
Incorporated ("Corning") in 1915 with the invention of the heat-resistant glass
that has become known as Pyrex(R) glassware. In 1958, Corning introduced a
glass-ceramic cookware product under the Corningware(R) trademark. Corelle(R)
dinnerware, a proprietary three-layer, two-glass, product with high mechanical
strength properties and designed for everyday use, was launched in 1970. In
1988, Corning supplemented its cookware product lines with the acquisition of
the Revere business, which distributes stainless steel and aluminum cookware and
rangetop products known as RevereWare(R).
On March 2, 1998, Corning, the Company, Borden, Inc. ("Borden"), and CCPC
Acquisition Corp. ("CCPC Acquisition") entered into a Recapitalization Agreement
pursuant to which on April 1, 1998, CCPC Acquisition acquired 92% of the
outstanding shares of common stock, par value $0.01 per share of WKI from
Corning for $110.4 million ("Recapitalization"). The stock acquisition was
financed by an equity investment in CCPC Acquisition by BW Holding LLC, an
affiliate of Kohlberg, Kravis Roberts & Co., L.P. ("KKR"), the parent company of
Borden and CCPC Acquisition.
The Company completed the acquisitions of General Housewares Corp. ("GHC"), and
its subsidiaries, effective October 21, 1999, and of EKCO Group, Inc. ("EKCO"),
and most of its subsidiaries, effective October 25, 1999. GHC manufactured and
marketed consumer durable goods with principal lines of business consisting of
kitchen and household tools, precision cutting tools, kitchen cutlery and
cookware. EKCO was a manufacturer and marketer of branded consumer products
including household items such as bakeware, kitchen and household tools,
cleaning products, brooms, brushes and mops. The Company exited EKCO's cleaning
product line in 2000.
As of December 31, 2001, the Company was not in compliance with certain
financial covenants contained in its key loan agreements. The Company did not
have the ability to repay or refinance significant debt repayments that could
have been accelerated as a result of the covenant defaults. Recognizing the
need to reduce the debt on its balance sheet and to resolve the issues raised by
its covenant defaults, the Company engaged financial advisors and other
professionals in early 2002 to initiate discussions with its primary stakeholder
constituencies. The goal of these discussions was to develop a long-term
restructuring plan to reduce the Company's substantial funded debt to a more
manageable level, while minimizing the adverse impact of any financial
restructuring on the business.
On May 31, 2002, the Company announced that it had reached agreement on the
terms of a financial restructuring with the steering committee for its former
bank group and a group of affiliated parties comprised of the Company's primary
shareholders as well as its largest bondholder.
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BANKRUPTCY 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 on or prior to December 31, 2002, and, therefore,
the Company recorded the effects of the Plan and Fresh Start Reporting (as
defined herein) 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 adjusted the historical carrying value of its
assets and liabilities to fair value, as defined by the reorganization value.
The reorganization gain was net of certain professional fees, asset write-offs
and other fees directly associated with the Chapter 11 reorganization. On
January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by
the Court. The remaining three Chapter 11 cases were closed by the Court on
February 12, 2004.
The Company's reorganization value of approximately $500 million, defined as
post-emergence debt and equity ("Reorganization Value"), was determined in the
fourth quarter of 2002, 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 (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 9-1/4%
Series B Senior Notes ("9-1/4% Notes") issued by EKCO Group Inc., a
wholly owned subsidiary of the Company, and certain of its
subsidiaries.
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6. The Company reinstated $4.9 million of certain 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 pre-petition liabilities to its
vendors and other general unsecured creditors. Under the terms of the
Debtors' Plan, general unsecured creditors of the Company were paid
8.8% of the allowable claim amount. General unsecured creditors of the
Company's domestic operating subsidiaries were paid 60% of the
allowable claim amount. Payments of approximately $17 million were
made as prescribed by the Court at various distribution dates as
claims were reconciled or otherwise resolved. The final distributions
were made in January 2004.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). The Company
adopted Fresh Start Reporting because holders of outstanding voting shares of
the Company's capital stock immediately before the Chapter 11 filing and
confirmation of the Plan received less than 50% of the common stock distributed
under the Plan, and the Company's Reorganization Value was less than the
Debtors' post-petition liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141")
for assets, which requires a reorganized entity to record its assets and
liabilities at their fair value. The Company used its 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
using the principles of SFAS No. 141 and liabilities were adjusted to fair value
upon emergence. 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
2003 resulted in a reduction to goodwill of $73.6 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 being amortized over the
remaining estimated useful life of 8.7 years as of January 1, 2003.
7
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 are 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 $24.5 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 $7.3 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, the Debtors' 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 intangible assets related to prior unrecognized
service cost of $5.7 million were written off.
NARRATIVE DESCRIPTION OF THE BUSINESS
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial reporting purposes, the Company operates in the consumer
kitchenware products segment, with principal products as described below.
PRODUCTS
The Company conducts its business operations in the following six principal
product categories within the consumer kitchenware products segment
(collectively, the "Product Categories"): (a) bakeware, (b) dinnerware, (c)
rangetop cookware, (d) kitchen and household tools, (e) cutlery and (f)
precision cutting tools/other. The Product Categories are described further
below.
The Company currently manufactures most of the finished goods comprising its
dinnerware and the glass and metal portion of its 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,
kitchen and household tools and the ceramic portion of its 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.
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Bakeware
The Company manufactures and sells a wide variety of bakeware products that can
be used on the stovetop or in the oven, microwave or freezer. The principal
bakeware brand names are: (a) Corningware(R) and the Corningware(R) product
lines (such as French White(TM), Classics(TM), Creations(TM) and Pop-ins(TM));
(b) Pyrex(R) and the Pyrex(R) sub-brands; (c) EKCO(R); and (d) Baker's
Secret(R).
Corningware(R) stoneware products and Pyrex(R) glass and other products are the
two largest bakeware brands in the United States. Corningware(R) includes
several lines of cookware made from a stoneware material for use in the oven.
Pyrex(R) glass products are made of soda lime glass and are available in a
number of sizes, shapes and colors for a variety of cooking and storage
functions. EKCO(R) products consist of a broad line of uncoated bakeware
products, including cookie sheets, muffin tins, brownie pans, loaf pans and
similar items. Baker's Secret(R) products primarily consist of a broad line of
non-stick coated and insulated "no burn" bakeware items.
Dinnerware
The Company manufactures and sells various dinnerware products under the
principal brand name Corelle(R), which is the nation's top selling dinnerware
brand in the mass merchant channel. The Corelle(R) dinnerware product is
produced using a proprietary manufacturing process, which combines three layers
of glass, producing a dinnerware that is light, durable, break/chip resistant
and stackable. The Company also sources glassware, cups, and mugs and markets
them under the Corelle(R) name.
Rangetop Cookware
The Company sells several product lines of rangetop cookware, which include
stainless steel, hard anodized, aluminum, non-stick glass and cast aluminum
cookware. The principal rangetop cookware brand names are: (a) RevereWare(R)
rangetop and the Revere(R) product lines; (b) EKCO(R) and the EKCO(R) rangetop
cookware product lines; and (c) Magnalite(R). These products are sourced from
third-party manufacturers.
Kitchen and Household Tools
The Company sells a broad line of kitchenware products, including: (a) kitchen
tools and gadgets, such as spoons, spatulas, ladles, peelers, corkscrews,
whisks, can openers and similar items; (b) stainless steel and
porcelain-on-steel kettles and carafes; and (c) barbecue tools and accessories,
such as grilling tools, aprons, mitts, timers, magnets and related items. The
principal brand names in this Product Category include: (a) OXO(R) and the
OXO(R) product lines, including OXO Goodgrips(R) (b) Baker's Secret(R); (c)
Corelle Coordinates(TM); (d) EKCO(R) and related brands; (e) Grilla Gear(R); and
(f) Revere(R).
Cutlery
The Company sells numerous lines of high-carbon stainless steel cutlery in the
United States and Canada. Some of these lines utilize the exclusive Taper
Grind(R) edge, which provides maximum sharpness and easy maintenance. The
principal cutlery brand names include: (a) Chicago Cutlery(R) and related
product lines; and (b) Regent Sheffield(R) and Wiltshire(R) and their product
lines, which the Company licenses from Richardson Sheffield Ltd. for
distribution in the United States and Canada.
Precision Cutting Tools/Other
The Company exclusively distributes in the United States and Canada precision
cutting tools that are manufactured by Olfa Corporation of Osaka, Japan. The
Company sells these precision cutting tools to industrial users, as well as
hobby, craft, hardware and fabric stores. The Company also markets selected
kitchen accessories, which are primarily sold through the Company's retail
outlet stores.
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NEW PRODUCT DEVELOPMENT
The Company is dedicated to developing and launching new and innovative products
in the marketplace that provide demonstrable benefits for our consumers. The
Company's new product development teams consist of cross-functional and
strategically located employees, who work with suppliers to bring new products
to market.
Research and development costs are defined as both internal and external costs
incurred to develop new products or significant extensions of existing products.
Such costs could include concept development, engineering, product design,
prototype creation, commercialization, testing and packaging development work.
All such costs are expensed as incurred and were $3.1 million, $2.0 million, and
$0.2 million in 2003, 2002 and 2001, respectively.
MARKETING
The Company has some of the most recognizable houseware brands in the world and
is committed to ensuring that WKI brands lead in the markets they serve. The
marketing organization is structured into product category teams that drive the
results for the businesses that they manage through cross-functional team
support, business analysis, and marketing execution. Extensive consumer
research is conducted to ensure that products meet the necessary consumer needs,
as well as appropriate level of product differentiation, prior to implementation
into the brand product portfolio.
The Company also seeks to drive incremental distribution with in-store
merchandising programs that leverage seasonal buying habits and product
promotions that the Company uses to drive in-store distribution at the retail
level. These include: advertising, in-store merchandising fixtures and
programs, innovative display programs, new and exciting structural packaging
designs, and cross-branded promotions.
DISTRIBUTION
The Company's products are sold in the United States (which accounted for
approximately 76% of the Company's net sales in 2003) and over 55 foreign
countries. WKI sells these products (a) on a wholesale basis (i) through
distributors, which resell the products to retailers, and (ii) directly to
customers, consisting primarily of mass merchants, department stores and
specialty retailers, which resell the products to consumers; and (b) on a retail
basis directly to consumers through the Company-operated retail outlet stores.
WKI has strong positions in major channels of distribution for its products in
North America and has achieved a significant presence in international markets
in Asia and Australia.
Domestic Wholesale
In the United States, the Company sells to approximately 2,200 customers,
primarily consisting of mass merchants, department stores, grocery and drug
stores, regional based distributors and specialty retailers.
Domestic Retail
The Company operates 76 retail outlet stores in 31 states, located primarily in
domestic outlet malls. These stores, which carry an extensive range of the
Company's products and complementary kitchen accessories, enable the Company to
participate in broader distribution and to profitably sell slower-moving
inventory. The Company believes that its retail outlet stores have developed
marketing and pricing strategies that generate sales that supplement, rather
than compete with, its wholesale customers. These stores also promote and
strengthen the Company's brands, enabling the Company to provide customers a
broader assortment of products beyond those that are commonly stocked by third
party retailers.
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International
The Company's international sales force, together with localized distribution
and marketing capabilities, have allowed the Company to market its bakeware and
dinnerware in Canada, Korea, Australia, Japan, Singapore, Taiwan, Hong Kong and
Mexico. Internationally, the Company sells through a network of distributors as
well as directly to customers made up primarily of mass merchants, supermarkets,
hypermarkets, department stores and specialty retailers, informal and
traditional markets as well as its Company-operated retail outlet stores in
Australia and Canada.
SALES
The Company's domestic customers are served by a combination of Company-employed
salespeople and independent, commissioned representatives. The Company's top
accounts are serviced by the Company's direct sales force teams which are
organized by account for the Company's most significant customers and by channel
teams which focus on grocery stores, department and specialty stores, regional
mass merchandisers, and other retail channels. The teams are directly
accountable for revenues, allowances and promotional spending. Members of the
sales teams regularly call on the Company's customers to develop an in-depth
understanding of each customer's competitive environment and opportunities.
Smaller wholesale accounts are serviced by independent, commissioned sales
representatives.
The Company's international sales force, with personnel located in twelve
countries, work with local retailers and distributors to optimize product
assortment, consumer promotions and advertising for local preferences.
COMPETITION
The market for the Company's products is highly competitive. 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 has, from time to time, experienced price and market share pressure
from certain competitors in certain product lines, particularly in the bakeware
category where metal products of competitors have created retailer price and
margin pressures, and in the rangetop cookware category where non-stick aluminum
products have increased their share of rangetop cookware sales at the expense of
stainless steel products due to the durability and ease of cleaning of new
non-stick coatings.
SEASONAL BUSINESS
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
increased 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 the 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.
11
MANUFACTURING AND RAW MATERIALS
Sand, soda ash, borax, limestone, lithia-containing spars, alumina, stainless
steel, plastic compounds, hardwood products, tin plate steel-copper and
corrugated packaging materials are the principal raw materials used by the
Company. The Company purchases its raw materials on the spot market and through
long-term contracts with suppliers. Most of these materials are available from
various suppliers. Management believes that adequate quantities of these
materials are, and will continue to be, available from various suppliers.
Stainless steel used in the Company's rangetop and bakeware products has been
subject to price volatility, which is expected to continue, as a result of steel
industry consolidation, government tariffs and a shortage of a critical
component of steel production, global coke.
The melting units operated by the Company require both natural gas and
electricity. Back-up procedures and systems to replace the primary source of
these energy inputs are in place in each of the Company's relevant facilities;
however, the back-up procedures may require reduction in production
capabilities. Ongoing programs exist within each of the Company's glass melting
facilities to reduce energy consumption. The Company does not engage in any
hedging activities for commodity trading relating to its supply of natural gas
or electricity, which are subject to market fluctuations. The Company currently
manufactures approximately one half of its finished goods in its own facilities
and purchases the remainder from various vendors in Asia, Europe and Mexico.
The Company believes that alternative sources of supply at competitive prices
are available from other manufacturers of substantially identical products.
In the event that we were to replace a finished goods supplier, certain
transition risks may arise, such as interruptions in supply and quality issues,
that are outside of the Company's control and could have an adverse effect on
the Company's operations and financial performance. In addition, significant
increases in the cost of any of the Company's principal raw materials could have
a material adverse effect on results of operations.
PATENTS AND TRADEMARKS
The Company owns numerous United States and foreign trademarks and trade names
and has applications for the registration of trademarks and trade names pending
in the United States and abroad. The Company's most significant owned
trademarks and/or trade names include Corelle(R), Revere(R), Revere Ware(R),
Visions(R), EKCO(R), Baker's Secret(R), Chicago Cutlery(R), Good Grips(R) and
OXO(R). Other significant trademarks licensed and used by the Company are
Corningware(R), Pyrex(R), and, Regent Sheffield(R). Upon the consummation of the
Recapitalization on April 1, 1998, Corning granted to the Company fully paid,
royalty-free licenses to use the Corningware(R) trademark, servicemark and
tradename and the Pyroceram(R) trademark in the field of housewares and to use
the Pyrex(R) trademark in the fields of housewares and durable consumer
products. These exclusive licenses provide for indefinite renewable ten-year
terms. Pyrex(R) licenses are subject to certain prior exclusive licenses granted
to Newell, a significant competitor of the Company in the United States, and
certain of its subsidiaries to distribute in Europe, Russia, the Middle East and
Africa. In addition, in connection with the Recapitalization, the Company
entered into a license agreement with Corning under which the Company was able
to use "Corning" in connection with the Company's business until April 1,
2001(or up to five years in the case of certain molds used in the manufacturing
process). The Company also has the right to use the trademark Corningware(R) in
connection with the Company's outlet stores.
The Company also owns numerous United States and foreign patents, and has patent
applications pending in the United States and abroad. In addition to its patent
portfolio, the Company possesses a wide array of trade secrets of proprietary
technology and knowledge. The Company also licenses certain intellectual
property rights to or from third parties.
Concurrent with the Recapitalization, Corning granted to the Company a fully
paid, royalty-free license of patents and know-how (including evolutionary
improvements) owned by Corning that pertain to or have been used in the
12
Company's business. Furthermore, the Company and Corning entered into a
five-year technology support agreement (renewable at the option of the Company
for an additional five years), pursuant to which Corning will provide to the
Company (at the Company's option) engineering, manufacturing technology, and
research and development services, among others, at Corning's standard internal
rates. The technology support agreement was assumed in the Chapter 11
proceedings, and renewed for a five-year term on April 1, 2003.
The Company believes that its patents, trademarks, trade names, service marks
and other proprietary rights are important to the development and conduct of its
business and the marketing of its products. As such, the Company vigorously
protects its intellectual property rights.
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 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 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 $0.6 million as of December
31, 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 December 31, 2003. There can be
no assurance that activities at these or any other facilities or future
facilities will not result in additional environmental claims being asserted
against the Company or additional investigations or remedial actions being
required or other costs being imposed.
GOVERNMENTAL REGULATIONS
The Company is subject to various federal, state and local laws affecting its
business, including various environmental, health, fire and safety standards and
consumer protection regulations. See "Environmental Matters." The Company is
also subject to the Fair Labor Standards Act and various state laws governing
such matters as minimum wage requirements, overtime and other working conditions
and citizenship requirements. The Company believes that its operations are in
material compliance with applicable laws and regulations.
EMPLOYEES
At December 31, 2003, the Company employed approximately 2,460 full-time
employees worldwide. Approximately 1,520 employees (including 1,200 in the U.S.
and 320 internationally) are represented by collective bargaining agreements.
The collective bargaining agreement at the Company's Monee facility was
renegotiated in February 2004 and covers approximately 180 union employees. The
collective bargaining agreement at the Company's Massillon facility expires in
September 2004 and covers approximately 170 union employees.
OTHER
Additional information in response to Item 1 relating to geographic information
is found in Note 14 - Segment Information to the Consolidated Financial
Statements.
13
AVAILABLE INFORMATION
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and other documents with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934 (the "Exchange
Act"). The public may read and copy any materials filed with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the Public Reference Room is available by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
at www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers, including the Company, that file
electronically with the SEC.
The Company's Internet website can be found at www.worldkitchen.com. The
--------------------
Company will make available, free of charge, beginning in 2004 for all filings
after Emergence, on or through its website its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any other
reports filed or furnished with the SEC, if applicable, as soon as practicable
after the Company files or furnishes them to the SEC.
14
ITEM 2. PROPERTIES.
WKI utilizes four primary manufacturing facilities (three in the United States
and one decorating facility in Malaysia) and seven principal packaging and
distribution centers (three in the United States and four outside of the United
States). In addition to the properties described below, the Company leases
411,374 sq. ft. of retail space for its Company-operated retail stores located
in the United States (76 stores), in Canada (5 stores) and in Australia (5
stores). Substantially all of the Company's domestic property is subject to
priorities liens under its debt agreements. The Company's facilities are
generally well maintained. The table below summarizes certain data for each of
the Company's principal properties, including its manufacturing and distribution
facilities, at December 31, 2003:
LOCATION PRIMARY USE FACILITY
- -------- ---------------------------------------------------
SQ. FEET OWN/LEASE
--------- ----------
DOMESTIC:
Bentonville, Arkansas Administrative 1,300 Leased
Charleroi, Pennsylvania Manufacturing 585,710 Own
Chambersburg, Pennsylvania (1) Administrative 22,000 Leased
Chambersburg, Pennsylvania (2) Distribution 126,400 Leased
Corning, New York (3) Manufacturing 347,000 Own/Leased
Franklin Park, Illinois (4) Administrative 150,000 Leased
Greencastle, Pennsylvania Distribution 1,034,542 Own
Massillon, Ohio Manufacturing 230,000 Own
Monee, Illinois Distribution/Warehouse 740,800 Leased
New York, New York Administrative 8,000 Leased
Reston, Virginia Corporate Offices 22,661 Leased
Rosemont, Illinois (4) Administrative 35,119 Leased
Terre Haute, Indiana Administrative 20,000 Leased
INTERNATIONAL:
Johor, Malaysia (5) Ware Decorating 218,000 Own
Johor, Malaysia Distribution 66,134 Leased
Mexico City, Mexico Administrative 3,229 Leased
Mumbia, India Administrative 531 Leased
Niagara Falls, Ontario, Canada Admin/Warehouse/Distribution 122,000 Own
Niagara Falls, Ontario, Canada Warehouse 28,000 Leased
Seoul, Korea Administrative 6,013 Leased
Singapore Administrative/Warehouse 16,440 Leased
Sydney, Australia Distribution 74,000 Leased
Taipei, Taiwan Administrative 1,280 Leased
Tokyo, Japan Administrative 1,988 Leased
Hong Kong, China Administrative 2,000 Leased
ShenZhen, China Administrative 5,000 Leased
(1) Chambersburg, PA administrative office is scheduled to close in March
2004, when its lease will terminate. The related administrative
functions were consolidated into the Greencastle facility in January
2004.
(2) Chambersburg, PA distribution center lease ends on June 30, 2004, and
will not be renewed.
(3) Small portion of property is leased as it is shared.
(4) Franklin Park, IL office lease terminated in the first quarter of
2004, and the employees were moved to the Rosemont, IL office, which
lease commenced on December 15, 2003.
(5) The Malaysia location is owned by WKATG Malaysia, a subsidiary that is
80% owned by the Company. The land on which the facility is located is
leased pursuant to a 60-year lease expiring in 2048.
15
ITEM 3. LEGAL PROCEEDINGS.
On May 31, 2002, the Company and eleven of its 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. The Company's non-U.S.
subsidiaries did not file voluntary petitions, were not Debtors and did not
reorganize. On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases
were closed by the Court. The remaining three Chapter 11 cases were closed by
the Court on February 12, 2004. Prior to completing the Chapter 11 proceedings,
seven of the Debtors were merged into other subsidiaries of the Company.
Litigation
The Company has been engaged in, and anticipates it will continue to be engaged
in, the defense of product liability claims related to products it manufactures
or sells. The Company maintains product liability coverage, subject to certain
deductibles and maximum coverage levels, that it believes is adequate and in
accordance with industry standards.
In addition to product liability claims, from time to time the Company is a
defendant in various other claims and lawsuits arising in the normal course of
business. The Company believes, based upon information currently available, 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 our 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 December 31,
2003.
Environmental Matters
The Company's facilities and operations are subject to certain federal, state,
local and foreign laws and regulations relating to environmental protection and
human health and safety, including those governing wastewater discharges, air
emissions, and the use, generation, storage, treatment, transportation and
disposal of hazardous and non-hazardous materials and wastes and the remediation
of contamination associated with such disposal. Because of the nature of the
Company's business, it 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 $0.6 million as of December 31,
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 December 31, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Amended Certificate of Incorporation of Reorganized WKI (the "Amended
Certificate") provides that the Company is authorized to issue up to 15.0
million shares of new common stock, par value $0.01 per share ("Common Stock").
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. As of March 24, 2004,
5,752,184 shares of Common Stock were issued and outstanding, and held by
approximately 40 holders of record. No shares of such common stock trade on any
exchange or are quoted on any automated quotation system.
Covenants in certain debt instruments restrict, and may prohibit, the Company
from paying dividends. No dividends were declared on Common Stock during 2003.
The following table describes certain information relating to equity
compensation plans of the Company as of December 31, 2003.
Equity Compensation Plan Information
(in thousands, except per share data)
--------------------------------------------
Number of
securities
Number of remaining
securities to Weighted- available for
be issued average future
upon exercise exercise price issuance
of of under equity
outstanding outstanding compensation
options options plans
------------- -------------- -------------
Equity compensation plans not
approved by security holders 613,040 $ 18.25 97,902
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information is derived from the
Company's Consolidated Financial Statements for periods both before and after
emerging from Chapter 11 protection on January 31, 2003. For accounting
purposes, the financial statements reflect the reorganization as if it was
consummated on December 31, 2002. Therefore, the consolidated balance sheet
data and related information at December 31, 2003 and 2002 and results of
operations for the fiscal year ended December 31, 2003 are referred to as
"Successor Company" and reflect the effects of the reorganization and the
principles of Fresh Start Reporting. Periods presented prior to December 31,
2002 have been designated "Predecessor Company." Note 2 to the Consolidated
Financial Statements under Item 8 "Financial Statements and Supplementary Data",
provides a reconciliation of the Predecessor Company's consolidated balance
sheet as of December 31, 2002 to that of the Successor Company which presents
the adjustments that give effect to the reorganization and Fresh Start
Reporting. The data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere herein.
Certain amounts have been reclassified in prior years to conform to the current
year presentation.
FIVE YEAR SELECTED FINANCIAL DATA
For the Fiscal Years Ended December 31
(In thousands, except per share data)
SUCCESSOR |
COMPANY | PREDECESSOR COMPANY PREDECESSOR COMPANY
----------- | ------------------------------------------------- -------------------
2003 | 2002 2001 2000 1999
----------- | ----------- ---------- ---------- ----------
RESULTS OF OPERATIONS |
- -------------------------------------------- |
Net sales $ 609,004 | $ 684,846 $ 745,872 $ 827,581 $ 633,534
Net income (loss) from continuing operations $ (59,657) | $ 548,763 (1) $(132,993) (3) $(150,088) (3) $ (28,058) (3)
Net (loss) income applicable to Common |
Stock $ (59,657) | $ 339,532 (1)(2) $(148,451) (3) $(163,472) (3) $ (40,099) (3)
Per share data: |
Basic (loss) income from continuing |
operations $ (10.37) | $ 7.86 (1)(2) $ (2.17) (3) $ (2.45) (3) $ (1.08) (3)
Diluted (loss) income from continuing |
operations $ (10.37) | $ 7.51 (1)(2) $ (2.17) (3) $ (2.45) (3) $ (1.08) (3)
|
CASH FLOW INFORMATION |
- -------------------------------------------- |
Cash flow from operating activities $ (11,133) | $ 1,780 $ 39,488 $ (46,141) $ (32,396)
Cash flow from investing activities $ (12,289) | $ (19,063) $ (18,179) $ (58,424) $(421,509)
Cash flow from financing activities $ (6,352) | $ (9,405) $ 37,583 $ 104,110 $ 453,216
|
FINANCIAL POSITION SUCCESSOR COMPANY | PREDECESSOR COMPANY
- -------------------------------------------- ----------------------- |---------------------------------------------
2003 2002 | 2001 2000 1999
----------- ----------- |---------- ---------- -------------
Cash $ 10,343 $ 40,117 |$ 66,805 $ 7,913 $ 8,368
Working capital $ 127,523 $ 122,416 |$(628,488) (4) $ 201,314 $ 246,610
Total assets $ 627,582 $ 742,773 |$ 831,838 $ 929,220 $ 979,679
Total debt $ 364,890 $ 368,107 |$ 818,483 $ 776,263 $ 672,903
(1) Includes a reorganization gain of $577.2 million.
(2) Includes cumulative effect of change in accounting principle of $202.1 million upon the adoption of SFAS No.142.
(3) Includes restructuring charges of $51.9 million and $69.0 million in 2001 and 1999, respectively; integration
and transaction related expenses of $26.6 million and 9.2 million in 2000 and 1999, respectively; and provision for closeout
of inventories of $20.0 million in 2000. The amount also includes $18.5 million for rationalization charges in 2001, of
which $13.2 million is included in selling, general and administrative expenses and $5.3 million in cost of sales.
(4) Includes long-term debt of $806.1 million which was classified as current liabilities in 2001.
18
ITEM 7. 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 years ended December 31, 2003, 2002
and 2001, and related notes to the Consolidated Financial Statements included
elsewhere herein.
OVERVIEW OF BUSINESS
- --------------------
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 retail outlet stores.
Our top five customers accounted for over 40% of net sales in 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. 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 are also key factors in determining retail sales of all of our
products. Other important competitive factors include new product
introductions, brand identification, style, design, packaging and service
levels.
We currently manufacture most of our finished goods in the dinnerware and the
glass and metal portions of our bakeware categories, which constitutes
approximately one half of our finished goods costs. We purchase the remainder
of finished goods from various vendors in Asia and Europe to support our
rangetop, kitchenware, cutlery and the ceramic portion of our 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 increased
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.
During the course of 2003, the Company continued to experience declining
revenues in certain key product lines, predominantly the tabletop, bakeware and
kitchenware categories. These declines resulted from loss of market share and
distribution at certain customers and a weak retail environment in the first
half of 2003. This environment was evidenced by many key retailers curtailing
purchases in an effort to not only maintain, but reduce, inventory levels. Our
market share and distribution losses stemmed from both competitive pressures and
a lack of spending on new product introductions, the latter being impacted by
our financial situation culminating in the bankruptcy reorganization process
from May 2002 until January 2003.
Based on these declines and loss of market share, we conducted an impairment
test of goodwill and intangible assets with indefinite useful lives as of
December 31, 2003. We engaged third party valuation experts to determine the
fair value of our reporting units, as defined by SFAS No. 142, and determined
that some of the value of our goodwill was impaired. As a result of this
analysis, we recorded an impairment loss of $40.3 million relating to goodwill
as of December 31, 2003.
As a result of the topline shortfall, the Company did not meet its Adjusted
EBITDA covenant for the year ending 2003. Adjusted EBITDA is defined as
earnings before interest, taxes, depreciation and amortization and also excludes
restructuring charges, reorganization charges and other non-recurring items as
19
agreed to by our lenders, such as charges for the Company's Long Term Incentive
Plan (LTIP) and Key Employee Retention Plan (KERP).
On January 23, 2004, limited waivers were obtained, through February 29, 2004,
for the Company's non-compliance with the EBITDA covenant requirement through
December 31, 2003 for both the Revolver and Term loans, which allowed for the
continued extension of credit for a limited period of time. On February 13,
2004, we obtained an amendment and waiver from representatives of the Revolver
and Term loan bank groups which waived certain EBITDA related year-end covenant
compliance for 2003 and significantly reduced specified 2004 Adjusted EBITDA
levels and also revised covenants related to seasonal adjustments to the
borrowing base calculations and certain other debt ratios. With these new
reduced covenant requirements in place, management is positioned to carry on its
turnaround strategy in 2004. There can be no assurance that this strategy will
achieve all anticipated results.
In addition, with the support of our lead Bank Group and the Company's Board of
Directors, management has engaged external advisors to evaluate key areas of the
Company's domestic operations. Initial recommendations concerning business
realignment, process improvement and cost reduction opportunities are being
evaluated and additional analysis is being performed. We expect that the result
of this effort will lead to a restructuring program which will be announced and
commenced in the second or third quarter of 2004. Management will continue its
strategic commitment to consolidate our focus, reduce costs, leverage our brands
and gain new distribution opportunities. We expect to support this commitment
by increased spending in 2004 on new product development, marketing programs and
sales force execution. We will also continue to work towards margin improvement
through already identified manufacturing cost reduction programs. It is
expected that the additional spending required to boost top line performance and
to attract and retain the talent required to continue with the turnaround will
be supported in large part by these manufacturing cost reductions, SG&A
reductions and sourcing efforts. In addition, from time to time we will
continue to review our brands, product lines and distribution arrangements and
evaluate them in light of strategic initiatives and competitive factors.
BACKGROUND
Our businesses began in 1915 as an unincorporated division of Corning,
Inc.("Corning"), and these businesses continued to be owned by Corning until
1998. On April 1, 1998, these businesses were separated from Corning, pursuant
to a leveraged buy-out (the "LBO") under the terms of a Recapitalization
Agreement, dated March 2, 1998 (the "Recapitalization Agreement"), among
Corning, WKI, Borden, Inc.("Borden") and CCPC Acquisition Corp ("CCPC
Acquisition").
Under the Recapitalization Agreement, CCPC Acquisition acquired 92% of the
outstanding shares of common stock of WKI from Corning for $110.4 million. This
stock acquisition was financed by an equity investment in CCPC Acquisition by BW
Holding LLC, an affiliate of Kohlberg, Kravis, Roberts & Co., L.P. ("KKR"),
which organized and controls an investment partnership that owns CCPC
Acquisition and Borden. In connection with these transactions, we paid to
Corning a dividend of $482.8 million, which was financed through external
borrowings.
In the first quarter of 1999, we implemented a comprehensive restructuring
program designed to reduce costs through the elimination of underutilized
capacity, unprofitable product lines and increased utilization of our remaining
facilities (the "1999 Restructuring"). The major elements of the 1999
Restructuring included: (a) the discontinuation of the commercial line of
tableware products; (b) the closing of the related tableware portion of our
manufacturing facility in Charleroi, Pennsylvania; and (c) the discontinuation
of the in-house production of rangetop cookware, which subsequently has been
sourced from third party manufacturers.
Seeking to expand the market share of the business and achieve product growth
following the LBO, we made two significant acquisitions in the last quarter of
1999, first acquiring EKCO Group, Inc. ("EKCO") and most of its subsidiaries, a
manufacturer and marketer of various branded consumer products, including
20
bakeware and kitchen and household tools for approximately $229 million. This
acquisition was financed through the issuance of $150 million in common stock to
CCPC Acquisition and external borrowings.
The second acquisition involved the purchase of General Housewares Corp ("GHC")
and its subsidiaries, a manufacturer and marketer of consumer durable goods with
principal lines of business consisting of kitchen and household tools, precision
cutting tools, kitchen cutlery and cookware. GHC was acquired for a purchase
price of approximately $159 million and financed through the issuance of $50
million in cumulative junior preferred stock to Borden and external borrowings.
During 2000, we dedicated extensive resources to the integration of the acquired
businesses of EKCO and GHC. The integration included the consolidation of
acquired distribution facilities into a new distribution center in Monee,
Illinois, a substantial upgrade to a new enterprise-wide information system in
order to streamline and consolidate internal business functions and related
information reporting, and a consolidation of sales, marketing, finance,
executive administration, human resources and information technology efforts.
By the end of 2000, most of the integration activities were completed; however,
we had fully utilized our $275.0 million revolving credit facility and received
a temporary $40.0 million credit facility from Borden to meet our working
capital and liquidity requirements. In April 2001, the Company effectively
amended and restated both its temporary $40 million credit facility from Borden
and its 1998 Credit Agreement which ultimately led to an additional $50.0
million in long-term financing commitments, ($25 million from Borden and $25
million from the revolving credit facility) which were to expire on March 31,
2004.
In early 2001, we embarked upon a plan designed to strengthen our future
profitability and flexibility (the "2001 Restructuring"). The major elements of
the 2001 Restructuring involved a continuation of the efforts begun in 1999 and
2000 and included: (a) the cessation of manufacturing at the Martinsburg, West
Virginia facility for the Corningware(R) and Visions(R) product lines and
securing alternative sources of production; (b) the cessation of manufacturing
at the Wauconda, Illinois facility for the Chicago Cutlery(R) product lines and
securing alternative sources of production; (c) further consolidation of
distribution operations into the Company's distribution centers at Monee,
Illinois and Greencastle, Pennsylvania; (d) significant restructuring of metal
bakeware manufacturing at Massillon, Ohio; (e) the consolidation of certain
international sales, marketing and distribution operations in Canada and the
United Kingdom; and (f) a continued organizational redesign to achieve headcount
reductions, upgrade key capabilities and centralize certain administrative
functions in Reston, Virginia.
During 2001, while we were undergoing substantial restructuring, our top-line
operating performance was impacted by competitive and market pressures.
Competition stems from both domestic and foreign manufacturers, particularly
low-cost Asian producers. At the same time, many domestic department stores and
other retailers experienced financial difficulties due to slower retail sales
and other economic factors. This, in turn, prompted inventory cutbacks and
delays in new product roll-outs. Moreover, the economic slowdown in 2001, which
continued in 2002, in the United States and abroad has impacted demand for our
products.
As a result of the above, by the end of 2001, our debt burden exceeded $800
million. We had incurred substantial operating and net losses over the course
of the two years ending in 2001, which continued in 2002, from not only the high
interest costs required to service this debt, but our declining revenue stream
due to conditions described above. Despite the strength of our core businesses,
product lines and brand names and the implementation of several successful
operational restructurings, we experienced difficulties maintaining compliance
with outstanding debt covenants. As a result, on May 31, 2002 (the "Filing
Date"), the Company and its eleven U.S. subsidiaries 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 "Court"). We
quickly and successfully emerged from these proceedings on January 31, 2003 (the
"Effective Date"), the details of which are described below.
21
Upon emergence from bankruptcy early in 2003, we were poised to continue our
turnaround and pursue our growth strategies, with our funded debt levels
dramatically reduced from $800 million to $400 million and with key customer and
vendor relationships intact. However, in the first quarter of 2003, continued
weak economic conditions and global uncertainties impacted our sales performance
as customers responded to poor fourth quarter 2002 consumer demand by reducing
their inventory levels. This slowdown continued into the second quarter of
2003. In addition, we 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 and the first half of 2003. The lack
of new products and promotions, which are required to be in place well in
advance of the crucial fourth quarter holiday season, heavily impacted our
ability to generate sales in the second half of 2003. The impact from these
factors continued to have an adverse effect in 2003, resulting in net sales
being substantially below prior year levels. Even so, we were able to manage
our cash flow by reducing inventory levels and discretionary spending and ended
the year with no outstanding balance on our new revolving credit facility (the
"Revolver"). However, as a result of poor earnings performance, we did not
satisfy certain debt covenants under our credit facilities, including required
minimum EBITDA level covenants and leverage ratios as specified in the Revolver
and Term Loan debt agreements. As mentioned above, the Company has obtained the
necessary waivers and amendments, and is also embarking upon a long term
restructuring program to both improve topline performance and reduce costs.
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 January 12, 2004, nine of the twelve
Debtors' Chapter 11 cases were closed by the Court. The remaining three Chapter
11 cases were closed by the Court on February 12, 2004.
On November 15, 2002, the Debtors filed their second amended joint plan of
reorganization (the "Plan") with the Court, which was confirmed on December 23,
2002 (the "Confirmation Date"). All material conditions precedent to the Plan
becoming binding were resolved on or prior to December 31, 2002, and, therefore,
the Company recorded the effects of the Plan and Fresh Start Reporting (as
defined herein) 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 adjusted 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 in the
fourth quarter of 2002, 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 (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 9-1/4%
Series B Senior Notes ("9-1/4% 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 pre-petition liabilities to its
vendors and other general unsecured creditors. Under the terms of the
Debtors' Plan, general unsecured creditors of the Company were paid
8.8% of the allowable claim amount. General unsecured creditors of the
Company's domestic operating subsidiaries were paid 60% of the
allowable claim amount. Payments of approximately $17 million were
made as prescribed by the Court at various distribution dates as
claims were reconciled or otherwise resolved. The final distribution
was made in January 2004.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). The Company
adopted Fresh Start Reporting because holders of outstanding voting shares of
the Company's capital stock immediately before the Chapter 11 filing and
confirmation of the Plan received less than 50% of the common stock distributed
under the Plan, and the Company's Reorganization Value was less than the
Debtors' post-petition liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141")
for assets, which requires a reorganized entity to record its assets and
liabilities at their fair value. The Company used its 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
using the principles of SFAS No. 141 and liabilities were adjusted to fair value
upon emergence. 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
2003 resulted in a reduction to goodwill of $73.6 million.
23
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 of 8.7 years as of January 1, 2003.
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 are 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 $24.5 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 $7.3 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, the Debtors' 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 intangible assets related to prior unrecognized
service cost of $5.7 million were written off.
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
24
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.
The listing below 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 to our
audited financial statements for the year ended December 31, 2003. We consider
the following policies to be important in understanding the judgments involved
in preparing our financial statements and the uncertainties that could affect
our financial condition, results of operations or cash flows.
FRESH START REPORTING AND INTANGIBLE ASSETS
Upon confirmation of the Plan, we adopted the provisions of Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). Fresh Start Reporting
adjustments reflect the application of Statement of Financial Accounting
Standard No. 141 "Business Combinations" ("SFAS No. 141") for assets, which
requires a reorganized entity to record its assets and liabilities at their fair
value. We used our 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 using the principles of SFAS
No. 141 and liabilities were adjusted to fair value upon emergence. 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 as interpreted by independent
valuation experts and results may differ under different assumptions or
conditions.
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 year ended December 31, 2003
is generally not comparable to the financial results for the year ended December
31, 2002. Any financial information herein labeled "Predecessor Company" refers
to periods prior to the adoption of Fresh Start Reporting, while those labeled
"Successor Company" refer to periods following our reorganization. The lack of
comparability in the accompanying consolidated financial statements relates
primarily to our capital structure (outstanding shares used in earnings per
share calculations), debt and bankruptcy related costs, and depreciation and
amortization related to adjusting property, plant and equipment and other
intangible assets to their fair value.
BENEFIT PLANS
We have pension costs and obligations which are dependent on assumptions used by
actuaries in calculating such amounts. These assumptions include discount
rates, inflation, salary growth, long-term return on plan assets, retirement
rates, mortality rates and other factors. While we believe that the assumptions
used are appropriate, significant differences in actual experience or
significant changes in assumptions would affect our pension costs and
obligations.
REVENUE RECOGNITION, SALES RETURNS AND ALLOWANCES, BAD DEBTS
Revenue is recognized when products are shipped to customers and when all
substantial risk of ownership has transferred, net of provisions for customer
allowances, including returns, discounts, rebates, incentives and other
promotional payments. These provisions require us to make estimates regarding
the amount and timing of future returns and deductions. Estimates for returns
are based on historical return rates, current economic trends and changes in
25
customer demand due to product acceptance and in some cases, from information
acquired through discussion with our customers. Estimates regarding other
deductions also involve evaluation of historical deduction rates, assessment of
open customer promotional programs based on allowable percent of gross sales and
expected assessment of volume rebates allowed based on estimated achievement
against targets. Deductions already taken by the customer are generally
included in accrual estimates as a reduction against gross sales with additional
accruals recorded to estimate future sales deductions. 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 patterns 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.
IMPAIRMENT OF INTANGIBLE AND LONG LIVED ASSETS
We evaluate our goodwill and other intangible assets for impairment in
accordance with 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 tested for impairment annually, or more frequently, if events or changes in
circumstance indicate that the assets might be impaired.
We evaluate our property and equipment and other long-lived assets for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." For assets to be disposed of, we recognize the
asset at the lower of carrying value or fair market value less costs of
disposal, as estimated based on comparable asset sales, solicited offers, or a
discounted cash flow model. For assets to be held and used, we review for
impairment whenever facts and circumstances indicate the carrying amount may not
be fully recoverable.
All recognized impairment losses are recorded as operating expenses. There are
several estimates, assumptions and decisions in measuring impairments of
intangible and long-lived assets. Impairment testing requires certain valuation
calculations based on projected future cash flows. Future cash flow estimates
are, by their nature, subjective and actual results may differ materially from
our estimates.
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." Results for the year ended December 31, 2003, 2002 and 2001, were
prepared using generally accepted accounting principles in the United States.
26
2003 COMPARED TO 2002
As a result of the application of Fresh Start Reporting, the financial
statements of the Successor Company are not comparable to the financial
statements of the Predecessor Company. The following table sets forth the
result of operations for the fiscal year ended December 31, 2003 compared to
December 31, 2002 (dollars in thousands).
Successor Percent | Predecessor Percent Percentage
Company of net | Company of net Increase increase
2003 sales | 2002 sales (decrease) (decrease)
---------------------| ----------------------- ------------ ----------
|
Net sales $ 609,004 100.0%| $ 684,846 100.0% $ (75,842) (11.1)%
Cost of sales 443,910 72.9 | 491,751 71.8 (47,841) (9.7)
---------------------| ----------------------- ------------ ----------
Gross profit 165,094 27.1 | 193,095 28.2 (28,001) (14.5)
Selling, general and |
administrative expenses 146,013 24.0 | 162,976 23.8 (16,963) (10.4)
Impairment of goodwill 40,336 6.6 | - - 40,336 100.0
Other expense, net 5,639 0.9 | 3,297 0.5 2,342 71.0
---------------------| ----------------------- ------------ ----------
Operating (loss) income (26,894) (4.4)| 26,822 3.9 (53,716) (200.3)
Interest expense 29,554 4.9 | 53,167 7.8 (23,613) (44.4)
Reorganization items, net -- -- | 577,228 84.3 (577,228) (100.0)
Income tax expense 3,088 0.5 | 1,979 0.3 1,109 56.0
Minority interest (121) -- | (141) -- 20 14.2
Cumulative effect of change in |
accounting principle -- -- | (202,089) (29.5) 202,089 100.0
Preferred stock dividends -- -- | (7,142) (1.0) 7,142 100.0
---------------------| ----------------------- ------------ ----------
Net (loss) income $ (59,657) (9.8)%| $ 339,532 49.6% $ (399,189) (117.6)%
=====================| ======================= ============ ==========
Net Sales
Net sales for 2003 were $609.0 million, a decrease of $75.8 million or 11.1%
from 2002 driven by three key factors. The majority of the decline was driven
by a loss of both promotional and base volume, largely in our rangetop, bakeware
and kitchenware categories. This loss of volume was driven by competitive
pricing pressure at mass merchants and grocery store channels resulting in lower
volume at key accounts as we focused on maintaining profitable business. We
also lost market share and distribution 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 and the first half of 2003.
Secondly, the decline was also impacted in general by the continued retail
buying slump in the first half of 2003. Key retailers worked off excess
inventory from the disappointing 2002 holiday season and managed inventories to
lower overall levels in the first half of 2003, awaiting a return of a stronger
economic environment and related consumer buying.
And lastly, almost one third of the decline was precipitated by the closure of
forty-five retail outlet stores in 2003, as part of our continuing efforts to
rationalize our retail space and improve margins. Including only the impact of
remaining stores year over year (e.g. excluding the impact of the closed stores
on net sales) our sales decline would have been approximately 7.8%.
Gross Profit
Gross profit for 2003 was $165.1 million, a decrease of $28.0 million when
compared to $193.1 million for 2002. As a percentage of net sales, gross profit
in 2003 was 27.1%, a decrease of 1.1 percentage points from 28.2% in 2002.
27
The gross margin decline was largely attributable to two items, the first being
the closure of twenty-nine unprofitable retail store outlets in April 2003 and
related liquidation of inventories. In an effort to expedite these store
closures and reduce overall 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. The second factor includes an asset
impairment charge of $4.1 million taken on certain non-productive assets.
Excluding the impact of all closed stores results from both prior year and
current year and the impact of the impairment charge, gross margins would have
been 28.5% in 2003 compared to 27.4% in 2002, an increase of 1.1 percentage
points over the prior year.
Better margins in our international and OXO categories and lower manufacturing
costs related to our outsourcing initiatives were partially offset by higher
fixed absorption costs related to internal production curtailments in response
to sales demand.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for 2003 were $146.0
million compared to $163.0 million in 2002, a decrease of $17.0 million or 10.4
%. As a percentage of net sales, SG&A expenses were 24.0% in 2003 and 23.8% in
2002. The decrease in SG&A was driven by lower retail outlet overhead expense
as a result of retail store closures. As part of our program to improve
profitability of our retail stores, forty-five under performing stores were
closed during 2003. In addition, during 2003 we recorded a severance charge of
$2.3 million related to the elimination of employees at certain closed retail
outlets, as well as other reductions in force, and $1.8 million of expense
related to the key employee retention program, which was put in place with the
approval of the Court during the Bankruptcy proceedings. During 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 $3.3 million related to our 2001 restructuring
activities.
Impairment of Goodwill
We conduct our annual test of impairment for goodwill and intangible assets with
indefinite useful lives in the first quarter. We also test for impairment if
events or circumstances occur subsequent to our annual impairment test that
would more likely than not reduce the fair value of a reporting unit, as defined
by SFAS No. 142, below its carrying amount. During the course of 2003, we
continued to experience declining revenues in certain key product lines,
predominantly the tabletop, bakeware and kitchenware categories. These declines
resulted from loss of market share and distribution at certain customers and a
weak retail environment in the first half of 2003. Based on these declines and
loss of market share, we conducted an impairment test as of December 31,
2003. We engaged third party valuation experts to determine the fair value of
our reporting units and determined that some of the value of our goodwill was
impaired. As a result of this analysis, we recorded an impairment loss of $40.3
million relating to goodwill as of December 31, 2003.
Other Expense, Net
Other operating expenses were $5.6 million in 2003 compared to $3.3 million in
2002. In 2003, we recorded $6.3 million in amortization expense relating to
patents, customer relationships and exclusive licenses that were recorded as of
January 1, 2003 as a Fresh Start Reporting Adjustment partially offset by
foreign exchange gains and lower royalty expenses.
Interest Expense
Interest expense was $29.6 million in 2003 compared to $53.2 million in 2002.
The decrease in interest expense from the prior year of $23.6 million was
attributable to a reduction of the Predecessor Company's debt by more than $420
million upon our emergence from bankruptcy.
Reorganization Items, Net
A reorganization gain of $577.2 million was recorded at December 31, 2002. Of
this amount, $429.5 million related to the gain on discharge of prepetition
liabilities and $195.3 million related to fresh start adjustments. Partially
offsetting these gains were $21.2 million incurred for professional fees
directly associated with the Chapter 11 reorganization proceedings, $14.1
million related to the write-off of the Predecessor Company's deferred financing
fees, $7.7 million related to lease cancellation and asset write-offs, $2.8
million related to the key employee retention program and $1.8 million of other
expense.
28
Income Tax Expense
Income tax expense, principally attributable to foreign income taxes, was $3.1
million in 2003 compared to $2.0 million in 2002 attributable to foreign income
taxes. We provided a full valuation allowance on the domestic income tax
benefit relating to the current and prior periods' pre-tax losses.
Cumulative Effect of Change in Accounting Principle
On January 1, 2002, we adopted 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. As a result of the
implementation of this Standard we recorded an impairment loss of $202.1 million
which is recorded as a cumulative effect of a change in accounting principle in
the accompanying Consolidated Statements of Operations. Additional information
is found in Note 4 - Goodwill and Other Intangible Assets to the Consolidated
Financial Statements.
Net (Loss) Income
As a result of the factors discussed above, we had a net loss of $59.7 million
in 2003 compared to net income of $339.5 million in 2002.
2002 COMPARED TO 2001
The following table sets forth the result of operations for the fiscal year
ended December 31, 2002 compared to December 31, 2001 (dollars in thousands).
Predecessor Percent Predecessor Percent Percentage
Company of net Company of net Increase increase
2002 sales 2001 sales (decrease) (decrease)
----------------------- ----------------------- ------------ ----------
Net sales $ 684,846 100.0% $ 745,872 100.0% $ (61,026) (8.2)%
Cost of sales 491,751 71.8 558,515 74.9 (66,764) (12.0)
----------------------- ----------------------- ------------ ----------
Gross profit 193,095 28.2 187,357 25.1 5,738 3.1
Selling, general and
administrative expenses 162,976 23.8 179,682 24.1 (16,706) (9.3)
Provision for restructuring costs -- -- 51,888 7.0 (51,888) (100.0)
Other expense, net 3,297 0.5 13,786 1.8 (10,489) (76.1)
----------------------- ----------------------- ------------ ----------
Operating income 26,822 3.9 (57,999) (7.8) 84,821 146.2
Interest expense 53,167 7.8 73,173 9.8 (20,006) (27.3)
Reorganization items, net (577,228) (84.3) -- -- 577,228 100.0
Income tax expense 1,979 0.3 1,600 0.2 379 23.7
Minority interest (141) -- (221) -- 80 36.2
Cumulative effect of change in
accounting principle (202,089) (29.5) -- -- (202,089) (100.0)
Preferred stock dividends (7,142) (1.0) (15,458) (2.1) (8,316) (53.8)
----------------------- ----------------------- ------------ ----------
Net income (loss) $ 339,532 49.6% $ (148,451) (19.9)% $ 487,983 328.7%
======================= ======================= ============ ==========
Net Sales
Net sales for 2002 were $684.8 million, a decrease of $61.0 million or 8.2% from
2001 driven by a number of factors. In 2002, our volumes were heavily impacted
by a loss of distribution in the mass merchandising and department store
channels as certain key retailers were forced to manage purchasing in response
29
to their own troubled financial situations. In addition we lost distribution
within our rangetop business due to increased competition, lack of promotion and
temporary service issues in part related to the bankruptcy. In addition, sales
reductions were driven by our decision to improve margins and reduce exposure to
unprofitable markets. We discontinued our distribution in the United Kingdom,
closed forty-two retail stores and clearance centers, and eliminated our direct
participation in certain grocery channel promotional programs.
Gross Profit
Gross profit for 2002 was $193.1 million, an increase of $5.7 million when
compared to $187.4 million for 2001. As a percentage of net sales, gross profit
in 2002 was 28.2%, an increase of 3.1 percentage points from 25.1% in 2001. The
increase in gross margins was driven by the exit from unprofitable markets and
retail outlet stores as described above. In addition, gross margin improvements
were driven by the impact of 2001 restructuring programs, which included
outsourcing certain key brands to lower cost producers.
Selling, General and Administrative Expenses
SG&A for 2002 was $163.0 million compared to 2001 of $179.7 million. As a
percentage of net sales, SG&A expenses were 23.8% in 2002 compared to 24.1% in
2001. In 2002, we recorded $4.5 million of outside consulting expenses related
to the bankruptcy that were incurred prior to filing for Chapter 11. We also
recorded $3.3 million of additional rationalization expenses related to the 2001
programs just described. The remaining reduction in SG&A expense was due to the
closure of forty-two retail outlet stores and clearance centers during the year.
In 2001, we recorded an $8.3 million bad debt reserve related to the announced
bankruptcy of Kmart and also recorded $13.2 million of administrative expenses
related to our rationalization programs designed to drive manufacturing
efficiencies and the consolidation of business and executive headquarters
locations.
Other Expense, Net
Other operating expenses were $3.3 million in 2002 compared to $13.8 million in
2001. The majority of the decline is due to the lack of goodwill, patent and
trademark amortization as a result of the adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets," which requires that goodwill and intangible assets
with indefinite useful lives to no longer be amortized. This reduction in other
expense was partially offset by lower royalty and commission income due to
reduced year over year sales volume.
Interest Expense
Interest expense was $53.2 million in 2002 compared to $73.2 million in 2001.
The decrease in interest expense was due to the fact that we discontinued the
accrual of interest expense related to certain debt instruments that were
subject to compromise pursuant to SOP 90-7.
Income Tax Expense
Income tax expense in 2002 was $2.0 million compared to $1.6 million in 2001
attributable primarily to foreign taxes. We provided a full valuation allowance
on the domestic income tax benefit relating to the current and prior period's
pre-tax losses.
Net Income (Loss)
As a result of the factors discussed above, we had a net income of $339.5
million in 2002 compared to a net loss of $148.5 million in 2001.
30
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financial Condition
Our principal sources of liquidity for operations are funds generated from
product sales and borrowings under the Revolver, as defined herein. In
connection with the bankruptcy reorganization, we entered into a new revolving
credit agreement (the "Revolver") with a group of lenders. The Revolver
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
domestic subsidiaries' assets and 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). 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. We met the 2004 requirement in the first quarter
of 2004. 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
March 24, 2004, we had $45.5 million available under the Revolver after
consideration of borrowing base limits at that date.
In the second quarter of 2003, 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.
On January 23, 2004, limited waivers were obtained, through February 29, 2004,
for the Company's non-compliance with the EBITDA covenant requirement through
December 31, 2003 for both the Revolver and Term loans, which allowed the
continued extension of credit for a limited period of time. On February 13,
2004, we obtained amendments and waivers from representatives of the Revolver
and Term loan bank groups to waive certain EBITDA related year-end 2003
covenants and revise certain covenants related to 2004 EBITDA levels, seasonal
adjustments to the borrowing base calculations and certain other debt ratios.
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 spent approximately $63 million for bankruptcy reorganization
costs and prepetition claim payments. An additional $0.6 million was paid in
January 2004 prior to the Debtors' Chapter 11 cases being closed by the Court.
Certain immaterial amounts will be paid to consultants as part of the closure of
the Company's Chapter 11 cases. 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 and anticipated capital
expenditures for the foreseeable future and that the Company will remain in
compliance with the amended covenants in both the Revolver and Term Loan
agreements. 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 beyond our control, including but
not limited to, demand for our products, economic development, competition and
other global events that drive the consumer's purchasing behavior.
31
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.
Accordingly, in 2003 we paid $7.7 million in contributions to our pension plan.
Additionally, the agreement requires us to provide a letter of credit in the
amount of $15 million to the PBGC by January 31, 2008.
Operating Activities
During 2003, net cash used in operating activities was $11.1 million compared to
$1.8 million of cash provided by operating activities in 2002. In 2003, we spent
approximately $63 million on bankruptcy reorganization costs and prepetition
claim payments. In 2002, we spent $28.7 million related to bankruptcy
reorganization, restructuring and rationalization programs, the latter programs
primarily including payments for employee severance and location consolidation.
Excluding the effects of bankruptcy, restructuring and rationalization related
charges, net cash provided by operating activities improved by approximately
$21.4 million.
Our accounts receivable as of December 31, 2003 and 2002 decreased from prior
year-ends by $4.7 million and $16.8 million, respectively, resulting in a net
unfavorable year over year change of $12.1 million. This result was driven by a
lower change in year over year fourth quarter sales and an increase of 2.3 days
to 47.6 days sales outstanding during 2003 compared to 45.3 days during 2002.
The change in inventory in 2003 was favorable to 2002 by $11.6 million due to
more aggressive inventory management practices put in place during the course of
the year in response to lower sales demand.
Our accounts payable and accrued liabilities also declined $88.8 million year
over year as we paid approximately $63 million in bankruptcy reorganization
costs and prepetition claim payments.
Investing Activities
Cash used for investing activities was $12.3 million in 2003 compared to $19.1
million in 2002. The decrease is attributable to higher capital expenditures of
$2.7 million offset by proceeds from the sale of assets of $9.3 million.
Capital expenditures in 2003 were $21.4 million compared to $18.7 million in
2002. In 2004, we anticipate total capital expenditures to be approximately $23
million.
The sale of assets in 2003 includes net proceeds from the sale of precious
metals recovered from decommissioned manufacturing equipment of $5.6 million,
the sale of our Waynesboro, Virginia facility for $0.7 million and the sale of
our Martinsburg facility for $3.0 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 December 31, 2003, $0.4 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. The final distribution of $0.6 million was disbursed in January
2004. As of February 13, 2004 all cases have been closed and no additional
claims payments are expected. We estimate immaterial amounts to be paid out to
our bankruptcy tax and legal advisors through the wind down of the bankruptcy
process.
32
Financing Activities
Net cash used in financing activities totaled $6.4 million in 2003 compared to
$9.4 million in 2002. At December 31, 2003, we had no borrowings under our
Revolver and repaid $3.2 million related to our senior credit facilities and
certain Industrial Revenue Bonds. During 2002, we repaid $7.4 million in debt.
Off Balance Sheet Arrangements
In the normal course of business and as collateral for performance, the Company
is contingently liable under standby and import letters of credit totaling $14.1
million and $13.6 million as of December 31, 2003 and 2002, respectively.
Contractual Obligations
The following table summarizes our payments under contractual commitments as of
December 31, 2003.
Payments due by Period (in thousands)
-------------------------------------------------------
Less than 1 More than
Contractual Obligations Total year 1-3 years 3-5 years 5 years
- --------------------------------- ----------- --------- --------- --------- ---------
Long-term debt obligations (a) $ 364,890 $ 2,491 $ 8,802 $ 230,447 $ 123,150
Interest expense (b) 114,962 18,003 41,007 39,942 16,010
Capital lease obligations 1,536 648 888 -- --
Operating lease obligations (c) 61,486 12,959 15,565 9,921 23,041
Purchase obligations (d) 20,328 6,489 7,353 5,662 824
---------- ---------- --------- --------- ---------
Total contractual obligations (e) $ 563,202 $ 40,590 $ 73,615 $ 285,972 $ 163,025
========== ========== ========= ========= =========
(a) Represents our Term Loan, Senior Subordinated Notes and Industrial
Revenue Bonds. See Note 8 to the consolidated financial statements for
further information.
(b) Amounts represent interest expense on fixed rate debt only. Interest
on floating rate debt having a principal of $92.6 million at December
31, 2003 has been excluded.
(c) Amounts represent contractual minimums assuming no increase in rent.
See Note 9 to the consolidated financial statements for further
information.
(d) Consists of legally enforceable and binding obligations primarily to
purchase finished goods and raw materials, to distribute goods and
services, to fix utility costs and certain other legally enforceable
and binding contracts.
(e) Total does not include contractual obligations reported on the
December 31, 2003 balance sheet as current liabilities.
Inflation
We believe the relatively moderate inflation rate of the past decade has not
significantly impacted our operations. Monetary assets (such as cash and cash
equivalents) lose purchasing power as a result of inflation, while monetary
liabilities (such as accounts payable and indebtedness) can be settled with
dollars of diminished purchasing power. While we are exposed to future
inflation, the degree of impact, if any, cannot be predicted.
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
33
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 periods 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 guarantor's year-end. We have not
entered into any guarantees subsequent to December 15, 2002 and the adoption of
FIN 45 had no material effect on our results of operations and financial
position.
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." There
was no impact to our financial statements upon the adoption of SFAS No. 149.
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 FASB Staff Position 150-3, "Effective Date,
Disclosures and Transition for Mandatorily Redeemable Noncontrolling Interest
Under FASB Statement No. 150 deferred certain effective dates. There was no
impact to our financial statements upon the adoption of SFAS No. 150.
In December 2003, the FASB issued Interpretation No. 46 (revised),
"Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R replaces
FASB Interpretation No. 46, which was issued in January 2003. The objective of
FIN 46R is to improve financial reporting by companies involved with variable
interest entities ("VIE"). FIN 46R 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. For any VIEs that must be consolidated under
FIN 46R that were created before January 1, 2004, the assets, liabilities and
non-controlling interest of the VIE initially would be measured at their
carrying amounts, and any difference between the net amount added to the balance
sheet and any previously recognized interest would be recorded as a cumulative
effect of an accounting change. FIN 46R also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. Companies are required to
apply FIN 46R to VIEs generally as of March 31, 2004 and to special-purpose
entities as of December 31, 2003. We are a limited member of a VIE, as defined
by FIN 46, which owns our Monee, Illinois facility. The sole purpose of this
entity is to own and lease the facility to WKI. We became a limited member of
the VIE when the entity was established in April 2000. We have no additional
risk outside of a standard lease agreement, we do not consolidate this entity in
our financial statements and we have no beneficial rights to profits or losses
of this entity.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132R).
SFAS No. 132R amends Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. However, SFAS No. 132R does
not change the recognition and measurement requirements of those Statements but
replaces the disclosure requirements and requires additional disclosure.
Additional new disclosure includes actual mix of plan assets by category, a
description of investment strategies and policies used, a narrative description
of the basis for determining the overall expected long-term rate of return on
asset assumption and aggregate expected contributions. Most disclosure
requirements are effective for fiscal years ending after December 31, 2003 with
34
the remainder of the requirements being effective for fiscal years ending after
June 15, 2004. The new disclosures required by SFAS No. 132R are included in
Note 10 to the Consolidated Financial Statements.
ITEM 7A. 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 December 31,
2003, we had no forward foreign currency exchange contracts outstanding.
We enter into interest rate swaps to alter interest rate exposures between fixed
and floating rates on long-term debt. Under interest rate swaps, we agree with
other parties to exchange, at specified intervals, the difference between fixed
rate and floating rate interest amounts calculated by reference to an agreed
upon notional principal amount. Under the Revolver and Term Loan, we are
required to enter into interest rate protection agreements, the effect of which
is to fix or limit interest cost. On August 6, 2003, we 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 3.9% over the terms of the swap agreements. As of
December 31, 2003, these swaps had a combined fair value of $(3.9) 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 $5.8 million in the combined fair
value of the interest rate swaps.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
WKI HOLDING COMPANY, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
As of December 31, 2003 and 2002 and for the fiscal years ended December 31,
2003, 2002, 2001.
Page
----
Report of Independent Public Accountants 37
Consolidated Statements of Operations 38
Consolidated Balance Sheets 39
Consolidated Statement of Cash Flows 40
Consolidated Statement of Stockholders' Equity (Deficit) 41
Notes to the Consolidated Financial Statements 42
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
WKI Holding Company, Inc.
We have audited the accompanying balance sheets of WKI Holding Company,
Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002
(Successor Company), and the related consolidated statements of operations,
changes in stockholders' equity (deficit), and cash flows for the year ended
December 31, 2003 (Successor Company Operations), and each of the two years in
the period ended December 31, 2002, (collectively, the Predecessor Company
Operations). These Successor and Predecessor consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, on
December 23, 2002, the Bankruptcy Court entered an order confirming the plan of
reorganization which became effective after the close of business on January 31,
2003. Accordingly, the accompanying consolidated financial statements have been
prepared in conformity with AICPA Statement of Position 90-7, "Financial
Reporting for Entities in Reorganization Under the Bankruptcy Code," for the
Successor Company as a new entity with assets, liabilities, and a capital
structure having carrying values not comparable with prior periods as described
in Note 2.
In our opinion, the Successor Company's consolidated financial statements
present fairly, in all material respects, the financial position of WKI Holding
Company, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results
of its operations and its cash flows for the year ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. Further, in our opinion, the Predecessor Company's consolidated
financial statements referred to above present fairly, in all material respects,
the results of its operations and its cash flows for each of the two years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 4 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," on January 1, 2002.
Deloitte & Touche LLP
McLean, Virginia
March 29, 2004
37
CONSOLIDATED STATEMENTS OF OPERATIONS
WKI HOLDING COMPANY, INC.
FOR THE FISCAL YEARS ENDED DECEMBER 31
(In thousands, except share and per share amounts)
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------- ---------------------------
2003 2002 2001
------------------- ------------- ------------
Net sales $ 609,004 $ 684,846 $ 745,872
Cost of sales 443,910 491,751 558,515
------------------- ------------- ------------
Gross profit 165,094 193,095 187,357
Selling, general and administrative expenses 146,013 162,976 179,682
Provision for restructuring costs -- -- 51,888
Impairment of goodwill 40,336 -- --
Other expense, net 5,639 3,297 13,786
------------------- ------------- ------------
Operating (loss) income (26,894) 26,822 (57,999)
Interest expense, net 29,554 53,167 73,173
------------------- ------------- ------------
Loss before reorganization items, income taxes, minority
interest and cumulative effect of change in accounting principle (56,448) (26,345) (131,172)
Reorganization items, net -- 577,228 --
------------------- ------------- ------------
(Loss) income before income taxes, minority interest and
cumulative effect of change in accounting principle (56,448) 550,883 (131,172)
Income tax expense 3,088 1,979 1,600
------------------- ------------- ------------
(Loss) income before minority interest and cumulative effect of
change in accounting principle (59,536) 548,904 (132,772)
Minority interest in earnings of subsidiary (121) (141) (221)
------------------- ------------- ------------
Net (loss) income before cumulative effect of change in
accounting principle (59,657) 548,763 (132,993)
Cumulative effect of change in accounting principle (Note 4) -- (202,089) --
------------------- ------------- ------------
Net (loss) income (59,657) 346,674 (132,993)
Preferred stock dividends -- (7,142) (15,458)
------------------- ------------- ------------
Net (loss) income applicable to Common Stock $ (59,657) $ 339,532 $ (148,451)
=================== ============= ============
Basic net (loss) income before cumulative effect of change in
accounting principle per Common Share $ (10.37) $ 7.86 $ (2.17)
=================== ============= ============
Cumulative effect of change in accounting principle per Common
Share $ -- $ (2.93) $ --
=================== ============= ============
Basic net (loss) income per Common Share $ (10.37) $ 4.93 $ (2.17)
=================== ============= ============
Diluted net (loss) income before cumulative effect of change in
accounting principle per share $ (10.37) $ 7.51 $ (2.17)
=================== ============= ============
Cumulative effect of change in accounting principle per share $ -- $ (2.80) $ --
=================== ============= ============
Diluted net (loss) income per share $ (10.37) $ 4.71 $ (2.17)
=================== ============= ============
Weighted average number of shares outstanding:
Basic 5,752,184 68,910,716 68,382,691
=================== ============= ============
Diluted 5,752,184 72,110,716 68,382,691
=================== ============= ============
The accompanying notes are an integral part of these statements.
38
CONSOLIDATED BALANCE SHEETS
WKI HOLDING COMPANY, INC.
(In thousands, except share and per share amounts)
SUCCESSOR COMPANY
---------------------------------------
ASSETS DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- ------------------
Current Assets
Cash and cash equivalents $ 10,343 $ 40,117
Accounts receivable (less allowances of $7,600 and $10,932 in
2003 and 2002, respectively) 75,668 76,198
Inventories, net 129,861 146,593
Prepaid expenses and other current assets 12,854 15,578
------------------- ------------------
Total current assets 228,726 278,486
Other assets 33,601 27,353
Property, plant and equipment, net 103,924 91,807
Other intangible assets, net 114,739 84,600
Goodwill 146,592 260,527
------------------- ------------------
TOTAL ASSETS $ 627,582 $ 742,773
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 30,083 $ 35,844
Current portion of long-term debt 2,491 3,218
Other current liabilities 68,629 117,008
------------------- ------------------
Total current liabilities 101,203 156,070
Long-term debt 362,399 364,889
Pension and post-employment benefit obligations 86,189 81,370
Other long-term liabilities 10,388 6,655
------------------- ------------------
Total liabilities 560,179 608,984
------------------- ------------------
Minority interest in subsidiary 1,580 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 (59,657) --
Accumulated other comprehensive loss (6,821) --
------------------- ------------------
Total stockholders' equity 65,823 132,301
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 627,582 $ 742,773
=================== ==================
The accompanying notes are an integral part of these statements.
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
WKI HOLDING COMPANY, INC.
FOR THE FISCAL YEARS ENDED DECEMBER 31,
(In thousands)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
----------- ----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002 2001
----------- ------------- -------------
Net (loss) income $ (59,657) | $ 346,674 $ (132,993)
Adjustments to reconcile net (loss) income to net cash (used in) |
provided by operating activities: |
Reorganization items -- | (610,708) --
Cash paid for reorganization items -- | (8,365) --
Depreciation and amortization 36,745 | 36,095 50,731
Amortization of deferred financing fees 520 | 2,935 3,380
Minority interest in earnings of subsidiary 121 | 141 221
Impairment loss on goodwill and intangible assets 40,336 | 202,089 --
Loss on disposition of plant and equipment 293 | 4,454 2,683
Professional services contributed by Borden -- | -- 441
Provision for restructuring costs -- | -- 51,888
Cash paid for restructuring charges -- | (12,257) (7,325)
Provision for rationalization costs -- | 3,839 18,539
Cash paid for rationalization charges -- | (8,066) (10,659)
Changes in operating assets and liabilities: |
Accounts receivable 4,706 | 16,845 52,998
Inventories 18,883 | 7,249 45,482
Prepaid expenses and other current assets 2,896 | (6,047) 5,915
Accounts payable and other current liabilities (50,958) | 37,873 (44,319)
Provision for post-retirement benefits, net of cash paid (3,173) | (8,940) 8,695
Other assets and liabilities (1,845) | (2,031) (6,189)
----------- | ------------- -------------
Net cash (used in) provided by operating activities (11,133) | 1,780 39,488
----------- | ------------- -------------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Capital expenditures (21,419) | (18,709) (21,976)
Net proceeds from sale of assets 9,304 | -- 3,797
Increase in restricted cash (174) | (354) --
----------- | ------------- -------------
Net cash used in investing activities (12,289) | (19,063) (18,179)
----------- | ------------- -------------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Borrowing on revolving credit facility, net -- | (3,900) 27,200
Borrowings on Borden revolving credit facility, net -- | -- 18,900
Repayment of long-term debt, other than revolving credit facility (3,217) | (3,457) (3,881)
Issuance of common stock and stock subscriptions -- | -- 2,453
Purchase of treasury stock -- | -- (1,215)
Deferred financing fees (3,135) | (2,048) (5,874)
----------- | ------------- -------------
Net cash (used in) provided by financing activities (6,352) | (9,405) 37,583
----------- | ------------- -------------
|
(Decrease) increase in cash and cash equivalents (29,774) | (26,688) 58,892
----------- | ------------- -------------
|
Cash and cash equivalents - beginning of year 40,117 | 66,805 7,913
----------- | ------------- -------------
Cash and cash equivalents - end of year $ 10,343 | $ 40,117 $ 66,805
=========== | ============= =============
|
Supplemental disclosures of cash flow information |
Cash paid during the year for: |
Interest $ 24,750 | $ 42,716 $ 71,198
=========== | ============= =============
Income taxes, net of refunds $ 3,565 | $ 2,787 $ (681)
=========== | ============= =============
|
Non cash information: |
Preferred stock dividends $ -- | $ 7,142 $ 15,458
=========== | ============= =============
The accompanying notes are an integral part of these statements.
40
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
WKI HOLDING COMPANY, INC.
(In thousands)
Accu-
mulated Total
Other Stock-
Contri- Additional Accu- Compre- holders
Preferred Common Treasury buted Paid In mulated hensive Equity
Stock Stock Stock Capital Capital Deficit Loss (Deficit)
----------- -------- ---------- ---------- ----------- ---------- -------- ----------
Predecessor Company balance,
January 1, 2001 $ 91,527 $ 674 ($940) $ 604,911 $ -- ($767,584) ($2,939) ($74,351)
Net loss (132,993) (132,993)
Foreign currency translation
adjustment 305 305
Cumulative effect of change in
accounting for derivative (189) (189)
Derivative fair value adjustment (590) (590)
Minimum pension liability
adjustment (8,245) (8,245)
----------
Total comprehensive loss (141,712)
Professional services contributed
by Borden 441 441
Issuance of common stock 22 2,231 2,253
Collection of receivable for stock
sold 200 200
Repurchase of common stock (1,215) (1,215)
Preferred stock dividends 5,213 (15,458) (10,245)
----------- -------- ---------- ---------- ----------- ---------- -------- ----------
Predecessor Company balance,
December 31, 2001 96,740 696 (2,155) 607,783 -- (916,035) (11,658) (224,629)
Net income 346,674 346,674
Foreign currency translation
adjustment 129 129
Minimum pension liability
adjustment (20,098) (20,098)
Derivative fair value adjustment 347 347
----------
Total comprehensive loss 327,052
Preferred stock dividends 1,402 (7,142) (5,740)
Effect of reorganization:
Cancellation of old preferred
stock (98,142) (98,142)
Cancellation of old common stock (696) 2,155 1,459
Fresh start adjustments (607,783) 576,503 31,280 --
New common stock issued in
reorganization 58 132,243 132,301
----------- -------- ---------- ---------- ----------- ---------- -------- ----------
Successor Company balance,
December 31, 2002 -- 58 -- -- 132,243 -- -- 132,301
Net loss (59,657) (59,657)
Foreign currency translation
adjustment 3,684 3,684
Minimum pension liability
adjustment (6,640) (6,640)
Derivative fair value adjustment (3,865) (3,865)
----------
Total comprehensive loss (66,478)
----------- -------- ---------- ---------- ----------- ---------- -------- ----------
Successor Company balance,
December 31, 2003 $ -- $ 58 $ -- $ -- $ 132,243 $ (59,657) $(6,821) $ 65,823
=========== ======== ========== ========== =========== ========== ======== ==========
The accompanying notes are an integral part of these statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WKI HOLDING COMPANY, INC.
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
WKI Holding Company Inc. (the "Company" or "WKI") is a leading manufacturer and
marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop
cookware and cutlery products. The Company has strong positions in major
channels of distribution for its products in North America and has also achieved
a significant presence in certain international markets, primarily Asia and
Australia. In North America, the Company sells both on a wholesale basis to
mass merchants, department stores, specialty retailers, and grocery chains and
on a retail basis through Company-operated retail 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 all of our
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 in the dinnerware
and the glass and metal portions of the bakeware categories, which constitutes
approximately one half of the Company's finish goods costs. The Company
purchases the remainder of finished goods from various vendors in Asia and
Europe to support its rangetop, kitchenware, cutlery, and the ceramic portion of
the 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
increased 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 the 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.
As a consequence of the implementation of Fresh Start Reporting (See Note 2)
effective December 31, 2002, the financial information presented in the audited
consolidated statement of operations and the corresponding statement of cash
flows for the year ended December 31, 2003 is generally not comparable to the
financial results for the year ended December 31, 2002. Any financial
information herein labeled "Predecessor Company" refers to periods prior to the
adoption of Fresh Start Reporting (as defined herein), while those labeled
"Successor Company" refer to periods following the Company's reorganization.
The lack of comparability in the accompanying 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.
42
(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 on or prior to December 31, 2002, and, therefore,
the Company recorded the effects of the Plan and Fresh Start Reporting (as
defined herein) 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 adjusted the historical carrying value of its
assets and liabilities to fair value, as defined by the reorganization value.
On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by
the Court. The remaining three Chapter 11 cases were closed by the Court on
February 12, 2004.
The Company's reorganization value of approximately $500 million, defined as
post-emergence debt and equity ("Reorganization Value"), was determined in the
fourth quarter of 2002, 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.
5. The Company agreed to pay $2.9 million to settle in full the 9-1/4%
Series B Senior Notes ("9-1/4% Notes") issued by EKCO Group Inc., a
wholly owned subsidiary of the Company, and certain of its
subsidiaries.
43
6. The Company reinstated $4.9 million certain 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 pre-petition liabilities to its
vendors and other general unsecured creditors. Under the terms of the
Debtors' Plan, general unsecured creditors of the Company were paid
8.8% of the allowable claim amount. General unsecured creditors of the
Company's domestic operating subsidiaries were paid 60% of the
allowable claim amount. Payments of approximately $17 million were
made as prescribed by the Court at various distribution dates as
claims were reconciled or otherwise resolved. The final distributions
were made in January 2004.
9. The new board of directors was selected in accordance with the terms
of the Plan.
FRESH START REPORTING
Upon confirmation of the Plan, the Company adopted the provisions of Statement
of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). The Company
adopted Fresh Start Reporting because holders of outstanding voting shares of
the Company's capital stock immediately before the Chapter 11 filing and
confirmation of the Plan received less than 50% of the common stock distributed
under the Plan, and the Company's Reorganization Value was less than the
Debtors' post-petition liabilities and allowed claims on a consolidated basis.
Fresh Start Reporting adjustments reflect the application of Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141")
for assets, which requires a reorganized entity to record its assets and
liabilities at their fair value. The Company used its 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
using the principles of SFAS No. 141 and liabilities were adjusted to fair value
upon emergence. 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
2003 resulted in a reduction to goodwill of $73.6 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 of 8.7 years as of January 1, 2003.
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
44
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 are 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 $24.5 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 $7.3 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, the Debtors' 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 a intangible assets related to prior unrecognized
service cost of $5.7 million were written off.
45
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 -- -- (436) 15,142
------------ ------------- ---------- --------- --------
Total current assets 278,486 -- -- (436) 278,050
Other assets 35,038 -- (5,651) F 14,902 44,289
Property, plant and equipment, net 89,773 -- -- 24,491 114,264
Other intangible assets, net 84,600 -- -- 34,044 118,644
Goodwill 55,985 -- 204,542 G (73,599) 186,928
------------ ------------- ---------- --------- --------
TOTAL ASSETS $ 543,882 $ -- $ 198,891 $ (598 ) $742,175
============ ============= ========== ========= ========
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 (598) 80,772
Other long-term liabilities 1,737 -- -- -- 1,737
------------ ------------- ---------- --------- --------
Total liabilities 1,070,495 (465,144) 3,633 (598) 608,386
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 $ 543,882 $ -- $ 198,891 $ (598) $742,175
============ ============= ========== ========= ========
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 Fresh Start 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 the new Senior Secured Subordinated Notes. The
remaining $2.7 million was paid on the Effective Date and is included
in other current liabilities.
46
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 a 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) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"), the most significant of which include:
Principles of Consolidation
The consolidated financial statements present the operating results and
financial position of WKI and the accounts of all entities controlled by the
Company. All intercompany accounts and transactions have been eliminated.
Minority interest in the income of a consolidated subsidiary represents the
minority stockholder's share of the income of the consolidated subsidiary. The
minority interest in the consolidated balance sheets reflect the original
investment by the minority stockholder in the consolidated subsidiary, along
with its proportional share of the accumulated earnings or losses, together with
its share of any capital transactions.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported
herein. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform withthe2003
presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments, primarily government
securities, with an original maturity of three months or less to be cash
equivalents.
47
Allowances for Doubtful Accounts
On a regular basis, the Company evaluates its accounts receivable and
establishes the allowance for doubtful accounts based on an evaluation of
historical bad debts, customer concentration, customer credit ratings, current
economic trends and changes in customer payment patterns. Allowances for
doubtful accounts totaled $7.6 million, $10.9 million and $25.3 million at
December 31, 2003, 2002 and 2001, respectively.
Inventories
Inventories are stated at the lower of cost or market and include raw materials,
labor, manufacturing overhead and cost to purchase outsourced products. The
first-in, first-out method is used for valuing all inventories. The Company
evaluates obsolete and excess inventories and records appropriate reserves based
on expected demand.
Property, Plant and Equipment
Property, plant and equipment for the Predecessor Company was recorded at cost,
less accumulated depreciation. The Successor Company adjusted its property,
plant and equipment to estimated fair value, in conjunction with the
implementation of Fresh Start Reporting (See Note 2) and has eliminated the
accumulated depreciation and amortization of the Debtors. Depreciation is
calculated using the straight-line method based on the estimated useful lives of
the assets as follows: buildings, 9-30 years; machinery and equipment, 3-15
years; and leasehold improvements, over the lease periods. Depreciation expense
was $20.4 million, $24.9 million, $29.1 million, in 2003, 2002 and 2001,
respectively. Capitalized interest costs relate to the purchase and
construction of long-term assets and are amortized over the respective useful
lives of the related assets. The Predecessor Company capitalized interest of
$1.0 million in 2002 and 2001 and wrote-off $3.0 million under Fresh Start
Reporting. During 2003, the Successor Company capitalized interest of $1.1
million.
Other Assets
Other assets consist primarily of precious metals, capitalized computer software
costs and deferred financing fees. Precious metals are recorded at cost for the
Predecessor Company and were adjusted to fair value for the Successor Company
during the allocation period. Precious metals consist of platinum and rhodium
and are used in the Company's manufacturing processes and are expensed to
operations based on utilization. Capitalized computer software costs consist of
costs to purchase and develop software. The Company capitalizes internally
developed software costs based on an analysis of each project's significance to
the Company and its estimated useful life. Capitalized software costs for the
Predecessor Company are carried at cost less accumulated amortization. The
Successor Company adjusted its capitalized software cost to estimated fair value
in conjunction with the implementation of Fresh Start Reporting (See Note 2) and
the accumulated amortization of the Debtors was eliminated. Capitalized
software costs are amortized on a straight-line basis over a period between
three and seven years. Amortization expense for computer software was $9.1
million, $9.2 million, and $8.1 million in 2003, 2002, and 2001, respectively.
Deferred financing fees associated with the Company's debt are amortized to
interest expense on a straight-line basis over the term of the related debt. In
June 2002, $14.1 million of net deferred financing fees associated with
prepetition debt were expensed. In addition, on the Effective Date,
approximately $0.9 million of net deferred financing fees associated with
discharged debts in accordance with the Plan were expensed.
Goodwill and Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142), which requires that goodwill and other
intangibles assets with indefinite useful lives no longer be amortized but
tested at least annually for impairment. As such, the Company no longer
amortizes goodwill or trademark assets. The Company's patents and distribution
agreement was determined to have definite lives and continue to be amortized on
a straight-line basis over their economic useful lives. The Company capitalized
certain legal fees incurred directly relating to the application for the
maintenance of certain patent rights. These patent rights are included in
48
patents amortized over their economic useful life. 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 are
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.
Prior to the Company's emergence from bankruptcy, application of Fresh Start
Reporting, and the adoption of SFAS No. 142, goodwill had been amortized over 40
years and trademarks and patents were amortized over the estimated economic
useful lives, which ranged from 20 to 35 years, using the straight-line method.
Goodwill and other intangibles were carried at cost, less accumulated
amortization. Amortization expense of $11.5 million was recorded in 2001.
Upon the adoption of SFAS No. 142 as of January 1, 2002, the Company recorded an
impairment loss of $144.3 million relating to goodwill and $57.8 million
relating to trademark assets (See Note 4).
New goodwill representing the difference between the Successor Company's
Reorganization Value over the fair value of its assets and liabilities,
excluding debt, of $204.5 million was established in connection with Fresh Start
Reporting (See Note 2). During 2003, an additional $73.6 million of this
goodwill was allocated to certain identified assets upon the finalization of
their respective valuations. The Company conducts its annual test of impairment
for goodwill and intangible assets with indefinite useful lives in the first
quarter. The Company also tests for impairment if events or circumstances occur
subsequent to the Company's annual impairment test that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. During
the course of 2003, the Company continued to experience declining revenues in
certain key product lines, predominantly the tabletop, bakeware and kitchenware
categories. These declines resulted from loss of market share and distribution
at certain customers and a weak retail environment in the first half of 2003.
Based on these declines and loss of market share, the Company conducted an
impairment test as of December 31, 2003. The Company engaged third party
valuation experts to determine the fair value of its reporting units and
determined that some of the value of its goodwill was impaired. Based on this
analysis, the Company recorded an impairment loss of $40.3 million relating to
goodwill as of December 31, 2003.
Impairment Accounting
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." Accordingly, the Company
continues to review the recoverability of its long-lived assets when events or
changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable.
Other Comprehensive Loss
Other comprehensive loss consists of minimum pension liabilities associated with
the underfunding of the Company's pension plans, adjustments to the fair value
of the Company's derivatives and foreign currency translation adjustments.
Stock Based Compensation
The Company accounts for stock based compensation cost using the intrinsic value
method of accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." Accordingly, compensation cost of
stock options is measured as the excess, if any, of the fair market price of the
Company's stock at the date of the grant over the option exercise price and is
charged to operations over the vesting period. The Company follows the
disclosure provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS No. 123), which defines a fair
value-based method of accounting for stock-based compensation.
Revenue Recognition
Revenue is recognized, net of provisions for customer allowances, including
returns, discounts, rebates, incentives and other promotional payments, when
products are shipped to customers and when all substantial risk of ownership has
transferred. Estimates for returns are based on historical return rates,
current economic trends and changes in customer demand. Estimates regarding
other deductions also involve evaluation of historical deduction rates,
assessment of open customer promotional programs based on allowable percent of
49
gross sales and expected assessment of volume rebates allowed based on estimated
achievement against targets. All open deductions (i.e. deductions already taken
by the customer) are generally included in accrual estimates as a reduction
against gross sales with additional accruals recorded to estimate future sales
deductions. In accordance with Emerging Issues Task Force ("EITF") No. 00-10,
"Accounting for Shipping and Handling Fees and Costs," the Company records
amounts billed to customers related to shipping and handling as revenue and all
expenses related to shipping and handling as a cost of product sold.
Advertising Costs
Production costs of future media advertising are deferred until the advertising
occurs, at which point these costs are amortized over the expected beneficial
period and are charged to selling, general and administrative expenses. Media
advertising expenses were $6.1 million, $4.5 million, and $2.7 million in 2003,
2002 and 2001, respectively. Cooperative advertising is accrued at the time of
sale in the financial statements as a reduction of sales because it is viewed as
part of the negotiated price of the products sold.
Research and Development Costs
Research and Development costs are defined as both internal and external costs
incurred to develop new products or significant extensions of existing products.
Such costs could include concept development, engineering, product design,
prototype creation, commercialization, testing and packaging development work.
All such costs are expensed as incurred and were $3.1 million, $2.0 million, and
$0.2 million in 2003, 2002 and 2001, respectively.
Income Taxes
The Company uses the asset and liability approach to account for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period when the change is enacted. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
Translation of Foreign Currencies
The accounts of most foreign subsidiaries and affiliates are measured using
local currency as the functional currency. For those operations, assets and
liabilities are translated into U.S. dollars using period-end exchange rates and
income and expense accounts are translated at average monthly exchange rates.
Net changes resulting from such translations are excluded from net loss and are
recorded as a separate component of accumulated other comprehensive loss in the
consolidated financial statements. Gains and losses from foreign currency
transactions are included in net income in the period in which they arise.
Foreign currency translation adjustments included in accumulated other
comprehensive loss were eliminated upon the adoption of Fresh Start Reporting
(See Note 2).
Derivative Financial Instruments
The Company primarily uses interest rate swaps, which effectively convert a
portion of the Company's variable rate obligations to fixed. The Company enters
into interest rate swaps 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 specific intervals, the difference between
fixed rate and floating rate interest amounts calculated by reference to an
agreed notional principal amount. Interest rate swaps that are in excess of
outstanding obligations are marked to market through other income and expense.
On August 6, 2003, the Company entered into interest rate swaps with a combined
50
notional amount of $145 million. As of December 31, 2003, these swaps had a
combined fair value of $(3.9) million which is included in other comprehensive
loss and other long-term liabilities. At December 31, 2002 and 2001, the
Predecessor Company had a $15.0 million notional amount interest rate swap
outstanding with a fair value of $(0.4) million and $(0.8) million,
respectively. The interest rate swap was rejected during the Chapter 11
proceedings and was settled pursuant to the Plan.
Fair Value of Financial Instruments
The fair value of the Company's debt is estimated using discounted cash flow
analysis based on the incremental borrowing rates currently available to the
Company and for loans with similar loan terms and maturities (See Note 8). The
estimated fair value of cash and cash equivalents, receivables, and trade
payables approximate their carrying value due to the short maturity of these
instruments. The Company is not aware of any factors that would significantly
affect the estimated fair values.
Recently Issued Accounting Standards
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 periods 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 guarantor's year-end. The
Company has not entered into any guarantees subsequent to December 15, 2002 and
the adoption of FIN 45 had no material effect on its results of operations and
financial position.
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." There
was no impact to the Company's financial statements upon the adoption of SFAS
No. 149.
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 FASB Staff Position 150-3, "Effective Date,
Disclosures and Transition for Mandatorily Redeemable Noncontrolling Interest
Under FASB Statement No. 150 deferred certain effective dates. There was no
impact to the Company's financial statements upon the adoption of SFAS No. 150.
In December 2003, the FASB issued Interpretation No. 46 (revised),
"Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R replaces
FASB Interpretation No. 46, which was issued in January 2003. The objective of
FIN 46R is to improve financial reporting by companies involved with variable
interest entities ("VIE"). FIN 46R 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
51
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. For any VIEs that must be consolidated under
FIN 46R that were created before January 1, 2004, the assets, liabilities and
non-controlling interest of the VIE initially would be measured at their
carrying amounts, and any difference between the net amount added to the balance
sheet and any previously recognized interest would be recorded as a cumulative
effect of an accounting change. FIN 46R also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. Companies are required to
apply FIN 46R to VIEs generally as of March 31, 2004 and to special-purpose
entities as of December 31, 2003. The Company is a limited member of a VIE, as
defined by FIN 46, which owns its Monee, Illinois facility. The sole purpose of
this entity is to own and lease the facility to WKI. The Company became a
limited member of the VIE when the entity was established in April 2000. The
Company has no additional risk outside of a standard lease agreement, does not
consolidate this entity in its financial statements and has no beneficial rights
to profits or losses of this entity.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132R).
SFAS No. 132R amends Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. However, SFAS No. 132R does
not change the recognition and measurement requirements of those Statements but
replaces the disclosure requirements and requires additional disclosure.
Additional new disclosure includes actual mix of plan assets by category, a
description of investment strategies and policies used, a narrative description
of the basis for determining the overall expected long-term rate of return on
asset assumption and aggregate expected contributions. Most disclosure
requirements are effective for fiscal years ending after December 31, 2003 with
the remainder of the requirements being effective for fiscal years ending after
June 15, 2004. The new disclosures required by SFAS No. 132R are included in
Note 10.
(4) 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 $73.6 million reduction of goodwill and corresponding
increase to other assets and liabilities (see Note 2).
52
The Company conducts its annual test of impairment for goodwill and indefinite
life intangible assets in the first quarter. The Company also tests for
impairment if events or circumstances occur subsequent to the Company's annual
impairment test that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. During the course of 2003, the Company
continued to experience declining revenues in certain key product lines,
predominantly the tabletop, bakeware and kitchenware categories. These declines
resulted from loss of market share and distribution at certain customers and a
weak retail environment in the first half of 2003. As a result of the topline
shortfall, the Company did not meet its EBITDA covenant for the year ending 2003
(See Note 8 for further information on this). Based on these declines and loss
of market share, the Company conducted an impairment test as of December 31,
2003. The Company engaged third party valuation experts to determine the fair
value of its reporting units using a discounted cash flow analysis and
determined that some of the value of its goodwill was impaired. As a result of
this analysis, the Company recorded an impairment loss of $40.3 million relating
to goodwill as of December 31, 2003.
Intangible assets with finite lives at December 31, 2003 are summarized as
follows (in thousands):
GROSS ACCUMULATED
BALANCE AMORTIZATION NET BALANCE
-------- ------------- ------------
Patents $ 23,253 $ 2,363 $ 20,890
Customer relationships 24,750 3,267 21,483
Distribution agreement 7,100 630 6,470
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 $7.6
million.
(5) SUPPLEMENTAL BALANCE SHEET DATA
Inventories at December 31, 2003 and 2002 consisted of the following:
INVENTORIES
(IN THOUSANDS): DECEMBER 31,
------------------
2003 2002
-------- --------
Finished and in-process goods $103,045 $117,401
Raw materials and supplies 26,816 29,192
-------- --------
$129,861 $146,593
======== ========
The Company increased the value of its precious metals by $14.9 million to
reflect the fair value as of January 1, 2003. The Company used published market
data to determine the fair value of the Company's precious metals, principally
platinum and rhodium. Other assets at December 31, 2003 and 2002 consisted of
the following:
OTHER ASSETS
(IN THOUSANDS): DECEMBER 31,
----------------
2003 2002
------- -------
Precious metals $20,369 $10,829
Other assets 13,232 16,524
------- -------
$33,601 $27,353
======= =======
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 $24.5 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 $7.3 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 December 31, 2003
and 2002 consisted of the following:
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS):
DECEMBER 31,
2003 2002
--------- ---------
Land $ 6,734 $ 3,145
Buildings 41,218 15,249
Machinery and equipment 87,307 83,403
--------- ---------
135,259 101,797
Accumulated depreciation (31,335) (9,990)
--------- ---------
$103,924 $ 91,807
========= =========
53
Other liabilities at December 31, 2003 and 2002 consisted of the following:
OTHER CURRENT LIABILITIES
(IN THOUSANDS): DECEMBER 31,
=================
2003 2002
------- --------
Wages and employee benefits $16,170 $ 11,902
Accrued advertising and promotion 22,398 17,380
Accrued interest 8,985 3,982
Reorganization accruals 2,812 64,974
Other accrued expenses 18,264 18,770
------- --------
$68,629 $117,008
======= ========
(6) 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 year ended
December 31, 2003, the Company recorded $14.2 million and paid $9.2 million in
interest expense collectively, to these principal owners. In addition, during
2003 the Company paid $1.4 million in debt issuance fees and $0.2 million in
monthly banking and letter of credit fees to a principal owner. See Note 8 for
further information on the Company's debt agreements.
In addition, on August 6, 2003, the Company entered into interest rate swaps
with a financial institution that is one of the principal owners of the
Successor Company. These interest rate swaps have a combined notional amount of
$145 million, which expire on March 31, 2008, and convert variable rate interest
to an average fixed rate of 3.9% over the terms of the swap agreements. As of
December 31, 2003, these swaps had a combined fair value of $(3.9) million,
which is included in other comprehensive income and other long-term liabilities
on the consolidated balance sheet. During 2003, the Company recorded
approximately $0.06 million in interest to this principal owner relating to
these swaps and paid this balance in January 2004.
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 year December 31, 2002, the
Predecessor Company recorded $1.5 million in interest expense related to the
Borden Credit Facility and paid $0.7 million through the Filing Date. Interest
expense related to the Borden Credit Facility was accrued during the Chapter 11
process and $1.3 million was paid in full on the Effective Date. The Borden
Credit Facility was secured with an interest on the Predecessor Company's assets
that was second in priority behind the interests securing the Amended and
Restated Credit Agreement with certain bank lenders (the "Predecessor Senior
Credit Facility"). In accordance with the Plan, the Borden Credit Facility
principal balance of $25 million was converted into 615,483 shares of New Common
Stock with an aggregate value of approximately $14.2 million, constituting
approximately 10.7% of the outstanding shares of the Successor Company
54
(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 December 31, 2002, affiliates had purchased an aggregate of $80.5
million of 9-5/8% Notes in open market transactions. In accordance with the
Plan, the 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 year ended December 31, 2002. As the dividends were
expected to be settled by issuing additional shares of preferred stock, the
dividends were recorded in preferred stock in the Predecessor Company balance
sheets. In connection with the Plan, the preferred stock, including any accrued
dividends thereon, 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 year ended December 31, 2002. As
the dividends were expected to be paid in cash, the dividends payable were
recorded as other long-term liabilities in the Predecessor Company balance
sheets. In connection with the Plan, the preferred stock, including accrued
dividends thereon, were canceled for no consideration 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 year ended December 31, 2002, the Predecessor Company incurred
$2.1 million in services provided by Corning. Upon the Effective Date, all of
the common stock held by Corning was canceled as part of the bankruptcy
reorganization and Corning ceased to be a related party.
55
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. The Company
recorded expenses totaling $2.4 million and $2.3 million remained payable at
December 31, 2002. This agreement was canceled on the Effective Date and
amounts owing Borden were settled in accordance with the Plan.
(7) STOCKHOLDERS' EQUITY (DEFICIT)
SUCCESSOR COMPANY
The Amended Certificate of Incorporation of Reorganized WKI (the "Amended
Certificate") provides that, as of the Effective Date, the Successor Company is
authorized to issue up to 15.0 million shares of new common stock, par value
$0.01 per share ("New Common Stock"). As of December 31, 2003 and 2002, 5.8
million shares of New Common Stock were issued and outstanding. The holders of
New Common Stock will be entitled to one vote for each share held of record on
all matters submitted to a vote of stockholders. As of the Effective Date,
710,942 shares of New Common Stock were available for issuance, pursuant to
grants of stock options, under the Management Stock Plan ("Management Stock
Plan"). On May 29, 2003, 611,946 options were issued to key employees and
non-employee directors (See Note 11).
Covenants in certain debt instruments will restrict, and may prohibit, the
Successor Company from paying dividends.
PREDECESSOR COMPANY
At December 31, 2001, the Predecessor Company had 69.6 million shares of common
stock outstanding, ("Old Common Stock"). The Old Common Stock was cancelled as
part of the Plan without consideration.
In 2001, the Predecessor Company issued 2,200,000 shares of Old Common Stock to
the Predecessor Company's management. The shares were issued at $1.00 per share
resulting in proceeds of $2.2 million.
In 2001, the Predecessor Company repurchased 376,000 shares of Old Common Stock
for $1.2 million from prior members of the Predecessor Company's management upon
their termination of employment. The shares were repurchased at rates as
defined in the management equity option plan. Repurchased shares were
classified as common stock held in treasury on the balance sheet. These shares
were also cancelled as part of the Plan.
At December 31, 2001, the Predecessor Company had 3.2 million shares of
preferred stock outstanding ("Old Preferred Stock") with liquidation preferences
of $100.5 million. The Predecessor Company recorded $15.5 million in 2001 in
Old Preferred Stock dividends, none of which were paid. Dividends required to
be settled in cash totaling $25.3 million and $20.5 million in 2002 and 2001,
respectively, were accrued as other long-term liabilities. The $25.3 million
balance as of December 31, 2002 was cancelled with no consideration under the
terms of the Plan.
56
(8) BORROWINGS
Debt outstanding as of December 31, 2003 and 2002, and weighted average interest
rates over the years ended December 31, 2003 and 2002, are as follows (in
thousands):
SUCCESSOR COMPANY
--------------------------------------------
DECEMBER 31, 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 4.7%, due March 2008 $ 235,249 $ 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% -- -- -- --
Industrial Revenue Bonds, at an average
rate of 5.9% and 5.8% 4,000 90 4,090 817
---------- --------- ---------- ---------
Total Debt $ 362,399 $ 2,491 $ 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 of the Company and its domestic subsidiaries' assets and 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 March 24, 2004, the Company had $45.5 million available under the
Revolver after consideration of borrowing base limits at that date.
Pursuant to the Plan, on the Effective Date, the Company entered into a senior
secured term loan with certain secured lenders in the aggregate principal amount
of $240.1 million (the "Term Loan"), and issued Senior Subordinated Notes in the
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),
57
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. As of December 31, 2003, the Company was not
in compliance with certain financial covenants contained in these agreements. On
January 23, 2004 limited waivers were obtained, through February 29, 2004, for
the Company's non-compliance with the EBITDA covenant requirement through
December 31, 2003 for both the Revolver and Term loans, which allowed the
continued extension of credit for a limited period of time. On February 13, 2004
the Company obtained amendments and waivers from representatives of the Revolver
and Term loan bank groups to waive certain EBITDA related year-end 2003
covenants and to revise certain covenants related to 2004 EBITDA levels,
seasonal adjustments to the borrowing base calculations and certain other debt
ratios.
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 December 31, 2003, bear interest at 3% and mature in September
2004. The balance of the bonds have remaining principal of $4.0 million as of
December 31, 2003, bear interest at 6.25% and mature August 2005.
Long-term debt maturing in each of the years subsequent to December 31, 2003 (in
thousands) is as follows:
2004 $ 2,491
2005 6,401
2006 2,401
2007 2,401
2008 228,046
2009 - 2010 123,150
-------------
364,890
Less: current maturities 2,491
-------------
Long-term debt $ 362,399
=============
58
(9) COMMITMENTS AND CONTINGENCIES
LEASES
The Company is a party to certain non-cancelable lease agreements, which expire
at various dates through 2013. Certain of the Company's leases contain
escalation clauses, which require base rent increases over the term of the
lease. Minimum rental commitments outstanding at December 31, 2003 are as
follows (in thousands):
Operating Capital Leases
Leases
---------- ---------------
2004 $ 12,959 $ 648
2005 8,734 555
2006 6,830 333
2007 5,381 --
2008 4,542 --
Thereafter 23,040 --
---------- ---------------
Total minimum lease payments $ 61,486 1,536
==========
Less amounts representing interest 174
---------------
Present value of minimum lease payments $ 1,362
===============
Rental expense was $15.5 million, $24.5 million, and $25.4 million for the years
ended December 31, 2003, 2002, and 2001, respectively. The liability for
capital lease obligations is recorded in other current and other long-term
liabilities in the Company's financial statements. The majority of capital
leases are financed under a master lease agreement at 11.5%. The total value
of assets under capital leases at December 31, 2003 is $1.5 million.
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 in the bankruptcy proceedings 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 December 31, 2003.
Environmental Matters
The Company's facilities and operations are subject to certain federal, state,
local and foreign laws and regulations relating to environmental protection and
human health and safety, including those governing wastewater discharges, air
emissions, and the use, generation, storage, treatment, transportation and
disposal of hazardous and non-hazardous materials and wastes and the remediation
of contamination associated with such disposal. Because of the nature of its
business, the Company has incurred, and will continue to incur, capital and
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 $0.6 million as of December 31,
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
59
could be material but cannot be estimated as of December 31, 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 $14.1
million and $13.6 million as of December 31, 2003 and 2002, respectively.
Interest Rate Swap
The Company enters into interest rate swaps 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, 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 3.9% over the
terms of the swap agreements. As of December 31, 2003, the swaps had a combined
fair value of $(3.9) 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 $5.8 million
in the combined fair value of the interest rate swaps.
(10) EMPLOYEE BENEFITS
EMPLOYEE RETIREMENT PLANS
The World Kitchen, Inc. Pension Plan (the "Benefit Plan") is a defined benefit
pension plan providing retirement income benefits to eligible U.S. employees of
the Company. Effective December 31, 2001, the benefits for most non-union
employees were frozen. Pension plan benefits are generally based on years of
service and/or compensation.
The Company's postretirement benefit plan provides certain medical and life
insurance benefits for retired employees. Substantially all U.S. employees of
the Company may become eligible for these benefits if they fulfill eligibility
requirements as specified by the plan; however, most eligible retirees receive
access only to medical insurance benefits.
60
In accordance with Fresh Start Reporting, the accrued benefit liability of the
Debtors was adjusted to fair value. Accordingly, the Debtors' unrecognized net
actuarial loss and prior service costs were recognized immediately resulting in
an increase to the pension liability of $34.0 million and an increase to the
other post retirement benefit liability of $3.0 million. Relevant data for the
Company's pension and postretirement medical benefit plans at December 31, 2003
and 2002, respectively, is as follows:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- ---------------------------
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
COMPANY | COMPANY COMPANY | COMPANY
(IN THOUSANDS) 2003 | 2002 2003 | 2002
- -------------- ----------- |------------- ----------- |-------------
| |
CHANGE IN BENEFIT OBLIGATION | |
Benefit obligation at beginning of year $ 90,872 |$ 80,658 $ 49,697 |$ 43,461
Service cost 2,251 | 2,694 901 | 1,188
Interest cost 6,009 | 5,415 2,732 | 3,073
Plan participants' contributions -- | 26 480 | 200
Actuarial loss 11,034 | 9,647 3,751 | 3,406
Benefits paid (5,885) | (4,672) (2,483) | (1,631)
Amendments 1,774 | (2,697) (11,925) | --
Settlements -- | (199) -- | --
----------- |------------- ----------- |-------------
Benefit obligations at end of year $ 106,055 |$ $90,872 $ 43,153 |$ 49,697
=========== |============= =========== |=============
| |
CHANGE IN PLAN ASSETS | |
Fair value of plan assets at beginning | |
of year $ 57,849 |$ 53,549 $ -- |$ --
Actual return on plan assets 8,547 | (3,723) -- | --
Employer contributions 6,931 | 12,869 2,003 |$ 1,431
Plan participants' contributions -- | 25 480 | 200
Benefits paid (5,885) | (4,672) (2,483) | (1,631)
Divestitures and settlements -- | (199) -- | --
----------- |------------- ----------- |-------------
Fair value of plan assets at end of year $ 67,442 |$ 57,849 $ -- |$ --
=========== |============= =========== |=============
| |
Funded status $ (38,613) |$ (33,023) $ $(43,152) |$ (49,697)
Unrecognized net actuarial loss 7,072 | 28,576 3,461 | 6,908
Unrecognized prior service cost 1,675 | 5,651 (11,233) | (3,275)
Unrecognized initial net benefit asset -- | (183) -- | --
Post September 30th contributions 2,318 | 1,300 -- | --
----------- |------------- ----------- |-------------
Net amount recognized (27,548) | 2,321 (50,924) | (46,064)
Fresh Start Reporting adjustment -- | (33,994) 598 | (3,633)
----------- |------------- ----------- |-------------
Net amount recognized $ (27,548) |$ (31,673) $ (50,326) |$ (49,697)
=========== |============= =========== |=============
| |
AMOUNTS RECOGNIZED IN STATEMENT OF | |
FINANCIAL POSITION CONSIST OF: | |
Accrued benefit liability $ (35,863) |$ (31,673) $ (50,326) |$ (49,697)
Intangible asset 1,675 | -- -- |$ --
Accumulated other comprehensive income 6,640 | -- -- | --
----------- |------------- ----------- |-------------
Net amount recognized $ (27,548) |$ (31,673) $ (50,326) |$ (49,697)
=========== |============= =========== |=============
The accumulated benefit obligation for all defined benefit pension plans was
$106.1 million and $90.9 million at December 31, 2003 and 2002, respectively.
The Company's pension plan accumulated benefit obligations are in excess of plan
assets.
61
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------------------------- -------------------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
----------- ------------------------ ----------- ------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST: 2003 2002 2001 2003 2002 2001
-----------| ----------- ----------- ----------- ----------- -----------
Service cost $ 2,251 | $ 2,694 $ 5,775 $ 901 $ 1,188 1,685
Interest cost 6,009 | 5,415 5,241 2,732 3,073 2,999
Expected return on plan assets (4,598)| (4,214) (5,360) -- -- --
Amortization of unrecognized transition (11)| (9) (9) -- -- --
Amortization of prior service cost 99 | 509 800 (660) (278) (150)
Recognized net actuarial loss 14 | 232 4 -- -- --
Settlement/Curtailment loss (gain) -- | 4 3,880 -- -- (2,192)
-----------| ----------- ----------- ----------- ----------- -----------
Net periodic benefit cost $ 3,764 | $ 4,631 $ 10,331 2,973 $ 3,983 $ 2,342
===========| =========== =========== =========== =========== ===========
The increase in minimum pension liability included in other comprehensive income
was $6.6 million and $20.1 million in 2003 and 2002, respectively.
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------ ------------------------
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
WEIGHTED AVERAGE ASSUMPTIONS: COMPANY | COMPANY COMPANY | COMPANY
2003 | 2002 2003 | 2002
---------- | ------------ ---------- | ------------
Discount rate 5.75% | 6.50% 5.75% | 6.50%
Expected return on plan assets 8.25 | 8.25 NA | NA
Rate of compensation increase 4.25 | 4.25 4.25 | 4.25
Assumed health care trend rate initial NA | NA 9.00 | 8.00
ultimate NA | NA 5.00 | 5.00
As of the September 30, 2003 measurement date, the expected long-term rate of
return on assets is 8.25%. As defined in SFAS No. 87, "Employers' Accounting
for Pensions" this assumption represents the rate of return on plan assets
reflecting the average rate of earnings expected on the funds invested or to be
invested to provide for the benefits included in the benefit obligation. The
Company's long-term rate of return assumption is based on three main factors: 1)
asset allocations as defined by the Company's investment policy statement, 2)
the Company's asset modeling assumptions, and 3) the Company's modeling
technology. The Company employs a building block approach in determining the
long-term rate of return for plan assets. Historical markets are studied and
long-term historical relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility generate a greater return over the long run.
Current market factors such as inflation and interest rates are evaluated before
long-term capital market assumptions are determined. The long-term portfolio
return is established with proper consideration of diversification and
rebalancing. Peer data and historical returns are reviewed to check for
reasonability and appropriateness.
The consolidated postretirement benefit obligation attributable to the Company's
workforce is determined by application of the terms of health care and life
insurance plans, together with relevant actuarial assumptions and health care
cost trend rates. The annual rate of medical inflation used to determine the
year-end results was assumed to be 9.0% for both pre and post-65 benefits for
2003, decreasing gradually to a net rate of 5.0% per year at 2011 and remaining
at that level thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for health care plans. A
one-percentage point change in the assumed health care cost trend rates would
have the following effects (in thousands):
62
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
--------------- ----------------
Effect on total of service and interest cost $ 79 $ (379)
Effect on postretirement benefit obligation $ 2,722 $ (3,922)
PLAN ASSETS
The Company's pension plan weighted-average asset allocations at December 31,
2003, and 2002, by asset category are as follows:
SUCCESSOR COMPANY
PLAN ASSETS AT DECEMBER 31,
------------------------------
ASSET CATEGORY 2003 2002
- ----------------- --------------- -------------
Equity securities 49.9% 42.2%
Debt securities 24.0 21.8
Cash and other 26.1 36.0
- ----------------- --------------- -------------
100.0% 100.0%
=============== =============
The Company employs a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. The intent of this strategy is to minimize
plan expenses by outperforming plan liabilities over the long run. Risk
tolerance is established through careful consideration of plan liabilities, plan
funded status, and corporate financial condition. The investment portfolio
contains a diversified blend of equity and fixed income investments. Equity
investments are diversified across U.S and international stocks as well as small
and large capitalizations. Investment risk is measured and monitored on an
ongoing basis through annual liability measurements, periodic asset/liability
studies, and quarterly investment portfolio reviews. The asset allocations used
for modeling the long-term rate of return assumption were based on 60% equity
and 40% income target allocations.
CASH FLOWS
CONTRIBUTIONS
The Company's general funding policy is to contribute annually an amount
determined jointly by management and its consulting actuaries that is not less
than the minimum amount required by the Internal Revenue Code. As a result of
the Reorganization Plan, the Company 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 the Benefit Plan. Total enhanced contributions of $7 million are
required to be paid in addition to the minimum funding requirements by the
Employee Retirement Income Security Act of 1974 over the pension plan years
2003-2006. The agreement also requires the Company to provide a letter of
credit in the amount of $15 million to the PBGC by January 31, 2008 guaranteeing
a portion of the plan's underfunding that is currently guaranteed by Borden. In
general, the PBGC agreement will remain in effect until the plan is fully funded
or the Company meets certain pre-established credit ratings. The Company
expects to contribute $13.5 million to its benefit plan in 2004.
63
ESTIMATED FUTURE BENEFIT PAYMENTS
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Pension
Benefits
--------
2004 $ 7,940
2005 8,182
2006 8,437
2007 8,585
2008 8,922
Years 2009 to 2013 46,198
DEFINED CONTRIBUTION PLANS
Prior to October 1, 2002, certain employees of the Company were eligible to
participate in the Borden Savings Plan. Effective October 1, 2002, the account
balances of all current and former WKI employees were transferred to a new
401(k) plan sponsored by the Company (the "WKI Savings Plan"). The WKI Savings
Plan provides benefits that are substantially identical to those previously
provided under the Borden Savings Plan. Charges to WKI's operations for
matching contributions in 2003, 2002, and 2001 amounted to $3.4 million, $3.7
million, and $3.3 million, respectively.
LONG-TERM INCENTIVE PLAN
On May 29, 2003 the WKI Board of Directors approved a Long-Term Incentive Plan,
(the "LTIP") the purpose of which is to motivate and drive behavior that builds
long-term shareholder value, reinforce the achievement of specific business
goals and performance measures, provide long-term incentive compensation
opportunities that are competitive and reward the contribution made by employees
to the creation of shareholder value.
The LTIP provides the Company the ability to award a specified number of award
units of $1,000 each in value to certain key employees of the Company who are
expected to make substantial contributions to the success of the ongoing
business and thereby provides for stability and continuity of operations. The
Award Term commenced on May 29, 2003 and will end on December 31, 2005.
Award units will be paid out in cash to plan participants in the first quarter
of 2006 contingent upon achieving certain targeted financial performance goals
for revenue and EBITDA in 2005. The cash payment will equal $1,000 times the
eligible amount of award units earned in the Award Term and is subject to a
multiplier which can either increase or decrease the award (from maximum to
minimum) based upon financial achievement against the target.
The LTIP is subject to certain change of control provisions, which allow for
full vesting and payout upon the consummation of any material change in the
equity ownership of the Company. Certain employee payments may be accelerated
upon the sale of certain assets of the Company.
On July 31, 2003, 9,069 award units were granted to 49 key employees.
Subsequently, at certain dates in August and September 2003 an additional 165
award units were granted to 4 key employees. The full award amount upon vesting
at the end of 2005, if the target performance goals are met, is $9.3 million.
The expense is being amortized ratably to the income statement over the period
from the date of grant to the employee to the end of the Award Term assuming
achievement of targeted goals in 2005. As such, $1.6 million was recorded in
the year ended December 31, 2003.
64
KEY EMPLOYEE RETENTION PLAN
The Debtors filed certain motions regarding key management employment contracts,
a key employee retention program ("KERP I") and related severance policy in an
effort to retain employees during the bankruptcy period. KERP I and two of the
management contracts were approved by the Court and resulted in the payment of
$4.1 million over the course of three primary earnout dates: the Confirmation
Date of the Plan (December 23, 2002), December 31, 2002 and December 31, 2003.
Accordingly, $2.1 million was earned by December 31, 2002, and paid shortly
thereafter, and $2.0 million was earned by December 31, 2003, and paid shortly
thereafter.
On December 17, 2003 the Board of Directors approved a Key Employee Retention
Program ("KERP II"), the purpose of which is to provide certain employees who
are expected to make substantial contributions during a restructuring of the
Company with financial incentives contingent upon the employee's continued
employment. The retention bonus will vest as follows: the first 50% on December
31, 2004 and the second 50% on July 1, 2005, with cash distributions to be made
as soon as practicable thereafter. The payment amount will equal the employee's
salary times a specified % based upon tiers established within the KERP II.
Amounts paid to employees pursuant to KERP II will be deducted from amounts
payable, if any, under the Company's annual bonus program. The Company's annual
bonus program provides that certain employee participants may receive a
percentage of their regular salary as a bonus if the company achieves certain
financial goals established by the Board. The maximum amount payable under the
provisions of this program is $2.8 million. At its discretion, the Compensation
Committee of the Board of Directors may accelerate the vesting and payment date
of all or any portion of the Retention Bonuses for one or more participants
based upon its evaluation of the Company's achievement of key financial
restructuring milestones.
In addition to this benefit, participants will be eligible to receive an
enhanced severance benefit under certain conditions, of either six or twelve
months base salary plus continuation of medical and dental benefits, depending
upon the tier that the employee has been placed in.
(11) STOCK COMPENSATION PLANS
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 became
available for issuance. The Management Stock Plan is designed to attract, retain
and motivate key employees and non-employee directors. On May 29, 2003 ("Grant
Date") 611,946 options were granted to key employees and non-employee directors
at a price of $18.25 a share, which was based off the Reorganization Value. In
November 2003, an additional 19,390 options were granted and 18,296 options were
cancelled 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 December 31, 2003.
Number Weighted
of Average Exercise
shares Price per Share
-------- -----------------
Options outstanding January 1, 2003 -- --
Options granted 631,336 $ 18.25
Options cancelled (18,296) $ 18.25
Options exercised -- $ 18.25
-------- -----------------
Options outstanding December 31, 2003 613,040 $ 18.25
======== =================
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2003: 4.1% risk free interest rate; 1% expected
volatility; 4 year expected life; and no expected dividend yield. 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
65
fair value based method would result in only a nominal effect to the financial
statements.
The Predecessor Company had a stock option plan for key employees and directors
who were granted options to purchase Old Common Stock in the Predecessor Company
under the Amended and Restated 1998 Stock Purchase and Option Plan for Key
Employees (the "Prepetition Stock Purchase and Option Plan"). Options granted
under the Prepetition Stock Purchase and Option Plan had exercise prices ranging
from $1.00 per share to $5.00 per share and were granted at fair value, vested
over five years, and expired ten years from the date of grant. During 2001,
6,550,000 options to purchase Old Common Stock in the Predecessor Company, with
an exercise price of $1 per share were granted under the Prepetition Stock
Purchase and Option Plan. Those options were accounted for as variable awards.
At December 31, 2001, there were 8,172,713 options outstanding and 770,143
exercisable. Had compensation cost for the Prepetition Stock Purchase and
Option Plan been determined based on the fair value at the grant date consistent
with the provisions of SFAS No. 123, the Predecessor Company's net loss
applicable to Old Common Stock for the year ended December 31, 2001 would not
have been significantly affected.
There were no options granted during fiscal year 2002, and certain options were
forfeited upon the termination of employment of prior members of the Predecessor
Company's management team. In addition, the Prepetition Stock Purchase and
Option Plan and all outstanding options were cancelled upon the confirmation of
the Plan, in conjunction with the Predecessor Company's emergence from
bankruptcy.
(12) INCOME TAXES
The Company files a consolidated U.S. federal tax return with its domestic
subsidiaries. For financial reporting purposes, the Company had the following
foreign and domestic income (loss) before income taxes for the years ended
December 31.
SUCCESSOR
COMPANY PREDECESSOR COMPANY
2003 2002 2001
--------------- ---------- ----------
INCOME (LOSS) BEFORE TAXES ON INCOME (IN THOUSANDS)
U.S. Companies $ (65,850) $ 543,873 $(133,534)
Foreign companies 9,402 7,010 2,362
--------------- ---------- ----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (56,448) 550,883 (131,172)
Cumulative effect of change in accounting principle -- (202,089) --
--------------- ---------- ----------
Income (loss) before income taxes $ (56,448) $ 348,794 $(131,172)
=============== ========== ==========
66
The components of income tax expense for the years ended December 31 consist of
the following items:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ --------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
CURRENT AND DEFERRED TAX EXPENSE:
Current:
U.S. $ -- $ -- $ --
State and municipal 56 -- --
Foreign 2,816 1,979 1,600
Deferred:
U.S. -- -- --
State and municipal -- -- --
Foreign 216 -- --
------------ ------------ ------------
Net tax expense $ 3,088 $ 1,979 $ 1,600
============ ============ ============
The income tax provision at the effective tax rate differs from the income tax
provision at the U.S. federal statutory tax rate in effect during the years
ended December 31, 2003, 2002 and 2001 for the following reasons:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
---------- --------------------------
2003 2002 2001
---------- ------------ ------------
EFFECTIVE TAX RATE RECONCILIATION:
U.S. statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction) in income taxes resulting from:
State taxes, net of federal benefit 5.9 6.0 6.0
Amortization of intangible assets -- -- (1.6)
Disallowed interest expense -- -- (10.2)
Impairment of intangible assets (25.0) 14.4 --
Reorganization goodwill -- (19.5) --
Cancellation of indebtedness/stock basis difference -- (25.6) --
Other 6.8 -- (8.5)
Valuation allowance (28.7) (9.6) (22.5)
Taxes on foreign subsidiary and FSC earnings 0.5 (0.1) 0.6
---------- ------------ ------------
Effective tax rate (5.5)% 0.6% 1.2%
========== ============ ============
In 2002 and 2001, affiliates of the Predecessor Company purchased a portion of
the Company's Prepetition Senior Subordinated Notes and Senior Credit Facility
loans on the open market at a discount. This purchase caused the Company to
incur cancellation of debt ("COD") income for tax purposes of $3.8 million and
$38.2 million ($1.3 million and $13.4 million tax effected) in 2002 and 2001,
respectively. This COD income was not recognized for tax purposes, and the
Company's tax net operating loss ("NOL") carryforwards were reduced by the
amount of COD.
The tax effects of temporary differences and carry forwards that give rise to
the deferred tax assets and liabilities at December 31, 2003 and 2002 are
comprised of the following (in thousands):
67
SUCCESSOR COMPANY
----------------------
DEFERRED TAX ASSET: 2003 2002
---------- ----------
Property and equipment and intangible assets $ 262 $ 40,817
Postretirement, pension and other employee benefits 18,737 23,066
Loss and tax credit carry forwards 173,782 149,936
Inventory reserves 10,079 11,868
Bad debt 1,548 3,406
Restructuring reserve 2,938 6,083
Reorganization costs 6,612 9,390
Deferred financing costs 2,548 6,278
Subpart F income 5,739 3,565
Customer advertising allowances 7,827 6,541
Other 10,999 9,737
---------- ----------
Gross deferred tax assets 241,071 270,687
Deferred tax assets valuation allowance (221,787) (244,914)
---------- ----------
Net deferred tax assets 19,284 25,773
---------- ----------
DEFERRED TAX LIABILITIES:
Property and equipment (18,577) --
Inventory reserves (183) --
Deferred COD/liabilities subject to compromise (net of
new equity) -- (25,340)
---------- ----------
Gross deferred tax liabilities (18,760) (25,340)
---------- ----------
NET DEFERRED TAX ASSETS $ 524 $ 433
========== ==========
As discussed in Note 1, the Company has adopted Fresh Start Reporting as of
December 31, 2002, and accordingly has recorded the effects of the Plan as of
such date. Items recognized pursuant to the Plan, including gain from COD, were
not recognized for tax purposes until the actual contractual cancellation of
debt, the exchange and cancellation of stock and the issuance of stock to new
shareholders on the Effective Date. Accordingly, deferred tax items to reflect
these differences were recorded at December 31, 2002.
As a result of the Plan, the amount of the Company's aggregate indebtedness was
reduced on the Effective Date, which generated income from COD for tax purposes
of $243.7 million. Since the realization of such income occurred under the
Bankruptcy Code, the Company did not recognize income from COD for tax purposes,
but instead reduced certain tax attributes the day after the Effective Date as
follows: $168.0 million of the Company's stock basis in subsidiaries; $59.1
million of its tax NOL and tax credit carryforwards, with the remaining income
from COD reducing its tax basis in depreciable and non-depreciable assets. The
Company's tax NOL carryforwards for federal income tax purposes, after such
attribute reduction, is $379.9 million. Such net operating loss tax
carryforwards expire from 2019 through 2023.
At December 31, 2003, net operating loss carryforwards for our foreign
subsidiaries are approximately $1.1 million for Australian income tax purposes
that have no expiration date, $0.2 million for Brazilian income tax purposes
that have no expiration date and that can only be utilized up to the limit of
30.0% of taxable income for the year. Additionally, our foreign subsidiaries had
about $1.8 million for Mexican income tax purposes that can be carried forward
for 10 years, and $1.7 million for Canadian income tax purposes that can be
carried forward for 7 years. Our foreign subsidiaries may be limited in their
ability to use foreign tax net operating losses in any single year depending on
their ability to generate sufficient taxable income.
On the Effective Date, the Company underwent an ownership change pursuant to
section 382 of the Internal Revenue Code. As a result, the use of any of the
68
Company's NOL carryforwards and tax credits generated prior to the ownership
change that are not reduced pursuant to the provisions discussed above may be
subject to an overall annual limitation of $6.0 million. The Company has not
yet been able to determine whether or not it will qualify for an exception to
this annual limitation. If it does qualify, its NOLs will not be subject to
the $6.0 million annual limitation, however, it would be required to reduce its
existing NOL carryforward by the amount of the interest expense deducted on
indebtedness that was exchanged for the common stock of the Company pursuant to
the Plan of $23.2 million. If the Company does not qualify for the exception,
the annual limitation will result in the expiration of $132.7 million of its
remaining NOL carryforwards at the end of the carryforward period.
The net change in the total valuation allowance for years ended December 31,
2003 and 2002 is a decrease of $23.1 million and an increase of $10.3 million,
respectively. A valuation allowance is recorded when it is more likely than not
that some or all of the deferred tax assets will not be realized. Negative
evidence, such as cumulative losses in recent years, suggests that a valuation
allowance is needed. Based upon cumulative losses in the current and immediate
two proceeding years, the Company determined that a valuation allowance related
to domestic and foreign operations of $221.8 million and $244.9 million was
warranted in 2003 and 2002, respectively.
The Company's reorganization resulted in a significantly modified capital
structure by which SOP 90-7 requires the Company to apply Fresh Start Reporting.
Under Fresh Start Reporting, reversals of valuation reserves recorded against
deferred tax assets that existed as of the Emergence Date will first reduce any
goodwill until exhausted, then other intangibles until exhausted and thereafter
are reported as a reduction of additional paid in capital. Consequently, the
Company will recognize cash tax savings in the year of asset recognition without
the corresponding benefit to income tax expense until goodwill and other
intangibles are exhausted.
Taxes have not been provided on approximately $42.6 million of accumulated
foreign unremitted earnings, which are expected to remain invested indefinitely.
Should the earnings be remitted as dividends, the Company may be subject to
additional U.S. taxes, net of allowable foreign tax credits. It is not
practicable to estimate the amount of any additional taxes that may be payable
on the undistributed earnings.
(13) RESTRUCTURING AND RATIONALIZATION PROGRAMS
During 2002, the Company completed the restructuring and rationalization
programs which were begun during 2001. During 2001, the Predecessor Company's
Board of Directors approved plans to restructure several aspects of the
Company's manufacturing and distribution operations. In addition, the Company
implemented an employee headcount reduction program as part of its continuing
business realignment and cost savings initiatives. These programs resulted in a
restructuring charge of $51.9 million, which was recorded during 2001 on a
separate line within operating income. In addition, $18.5 million of
rationalization and other charges were recorded in 2001 related to the
implementation of these programs. Generally, these costs were recorded as
incurred in operating income ($13.2 million in selling, general and
administrative expenses and $5.3 million in cost of sales.)
The restructuring programs included the following initiatives:
(1) The outsourcing of Corningware and Visions product lines. These
products were previously produced at the Company's Martinsburg, West
Virginia facility (Martinsburg), which was idled as of April 2002 and
was sold in December 2003.
(2) The outsourcing of the Chicago Cutlery product lines. This product was
previously produced at the Company's Wauconda, Illinois facility
(Wauconda), which was idled as of September 2001 and was sold in
December 2001.
69
(3) The consolidation of warehousing and distribution operations at
Waynesboro, Virginia and Plainfield, Indiana into the Company's
distribution centers located in Monee, Illinois and Greencastle,
Pennsylvania. This consolidation occurred in the second quarter of
2002. The Waynesboro facility was sold in June 2003.
(4) The realignment of the production process at the metal bakeware
manufacturing facility at Massillon, Ohio to streamline the
manufacturing and converting processes.
(5) The consolidation of certain international sales and marketing and
distribution operations in Canada and the UK, which occurred at the
end of 2001 and in January 2002, respectively.
(6) The continuation of organizational redesign activities which led to
significant employee headcount reductions as a result of rationalizing
staff and business support functions, upgrading key capabilities and
centralizing executive administrative offices in Reston, Virginia.
RESTRUCTURING CHARGES
- ---------------------
Restructuring details for 2001 activity are as follows (in thousands):
Liability at Restructuring Liability at
December 31, Expense Reclassifications December 31,
2000 2001 Cash Paid and Other 2001
------------- -------------- ------------------- ----------------- ------------
Disposal of assets $ -- $ 26,523 $ (1,243) $ (22,937) $ 2,343
Employee
termination
costs -- 21,646 (5,628) (2,366) 13,652
Other exit costs -- 3,719 (454) 387 3,652
------------- -------------- ------------------- ----------------- ------------
$ -- $ 51,888 $ (7,325) $ (24,916) $ 19,647
============= ============== =================== ================= ============
Restructuring details for 2002 activity are as follows (in thousands):
Liability at Restructuring Liability at
December 31, Expense Reclassifications December 31,
2001 2002 Cash Paid and Other 2002
------------- -------------- ------------------- ---------------- ------------
Disposal of assets $ 2,343 $ -- $ (1,696) $ (647) $ --
Employee
Termination
costs 13,652 -- (9,670) (3,982) --
Other exit costs 3,652 -- (891) (2,761) --
------------- -------------- ------------------- ---------------- ------------
$ 19,647 $ -- $ (12,257) $ (7,390) $ --
============= ============== =================== ================= ===========
DISPOSAL OF ASSETS
As part of the restructuring initiative to close or streamline manufacturing,
distribution and administrative locations, an impairment charge of $26.5 million
was recorded to reflect net realizable value for fixed assets to be sold or
scrapped of which approximately $15.4 million related to the closure and sale of
the Martinsburg manufacturing facility. The charge represents the difference
between book value and estimated fair value of the facility less costs to sell
the facility. At December 31, 2001, $24.1 million of the impairment charge had
either been settled through the sale of the facilities or recorded against the
specific assets involved or was paid. During 2002, $1.7 million was either
settled or paid, and the remaining balance reclassified to other current
liabilities.
70
EMPLOYEE TERMINATION COSTS
As part of the restructuring initiative, the Company recorded $21.6 million
related to employee termination costs. The program impacted a total of
approximately 750 employees: 450 related to plant shutdowns, 75 related to
distribution center consolidation and 225 related to business and staff support
function redesign. As of December 31, 2002, all employees had been terminated.
During 2002, $9.7 million of severance payments were made. The remaining
severance payments were paid through bankruptcy process or otherwise. These
remaining amounts have been reclassified to current accrued liabilities on the
balance sheet as of December 31, 2002. During 2002, severance payments due to
employees who had left the Company prior to the bankruptcy date, were stayed
under the bankruptcy proceedings. These payments were paid out under the terms
of the Reorganization Plan through the reconciliation of individual claims. The
difference between the severance accrual initially recorded as part of the
restructure and the paid claims is estimated within the Gain on Reorganization
included in the 2002 income statement.
(14) 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." The Company markets its products
chiefly in the United States but also has significant business in international
markets such as Canada and Asia.
In 2003, 2002, and 2001, Wal-Mart Stores, Inc., accounted for approximately 24%,
23%, and 21%, respectively, of the Company's net sales. Accounts receivable
from Wal-Mart Stores, Inc. was approximately $8.4 million and $6.7 million at
December 31, 2003 and 2002, respectively.
Net sales by geographic area are presented by attributing revenues from external
customers on the basis of where the products are sold. The following geographic
information is presented in accordance with SFAS No. 131 for the years ended
December 31(in thousands).
SUCCESSOR
COMPANY PREDECESSOR COMPANY
---------- ----------------------
Net Sales: 2003 2002 2001
- ---------- ---------- ---------- ----------
United States $ 465,874 $ 542,997 $ 590,243
Canada 65,548 64,797 68,641
---------- ---------- ----------
North America 531,422 607,794 658,884
Other International 77,582 77,052 86,988
---------- ---------- ----------
Total $ 609,004 $ 684,846 $ 745,872
========== ========== ==========
The Company is exposed to the risk of changes in social, political, and economic
conditions inherent in foreign operations and the value of its foreign assets
are affected by fluctuations in foreign currency exchange rates. The following
geographic information is presented in accordance with SFAS No. 131 for the
years ended December 31(in thousands).
71
SUCCESSOR COMPANY
----------------------------
DECEMBER 31, DECEMBER 31,
Long Lived Assets: 2003 2002
- ------------------ ------------- -------------
United States $ 386,652 $ 455,409
Canada 3,659 3,780
------------- -------------
North America 390,311 459,189
Other International 2,949 3,809
------------- -------------
Total $ 393,260 $ 462,998
============= =============
(15) SUBSEQUENT EVENTS
On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by
the Court. The remaining three Chapter 11 cases were closed by the Court on
February 12, 2004.
On January 23, 2004, limited waivers were obtained, through February 29, 2004,
for the Company's non-compliance with the EBITDA covenant requirement through
December 31, 2003 for both the Revolver and Term loans, which allowed the
continued extension of credit for a limited period of time. On February 13,
2004, the Company obtained amendments and waivers from representatives of the
Revolver and Term loan bank groups to waive certain EBITDA related year-end 2003
covenants and to revise certain covenants related to 2004 EBITDA levels,
seasonal adjustments to the borrowing base calculations and certain other debt
ratios.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. The Company has evaluated
the effectiveness of its 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 Annual Report on
Form 10-K.
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 as of
December 31, 2003 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
change in our internal control over financial reporting during the period
covered by this annual report on Form 10-K that has materially affected, or
is reasonably likely to materially affect, our internal control over
financial reporting.
73
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Stockholders' Agreement the new Board of Directors (collectively
the "Board") of the Company assumed office on the Effective Date, and consisted
of seven members, one being the Chief Executive Officer of Reorganized WKI and
one selected by the Borden Entities (as defined in the Stockholders' Agreement).
The remaining five directors were selected by the holders of a majority of
shares of the New Common Stock issued to the holders of the Bank Loan Claims.
No family relationships exist between any executive officers of the Company.
The following table sets forth information regarding the executive officers and
directors of the Company.
NAME AGE (1) POSITION
- ----------------------- ------- -------------------------------------------------
James A. Sharman 44 Director, President and Chief Executive Officer
Joseph W. McGarr 52 Senior Vice President and Chief Financial Officer
Alexander Lee 43 President, OXO International
Raymond J. Kulla 57 Vice President, General Counsel and Secretary
Douglas S. Arnold 49 Vice President of Human Resources
Terry R. Peets 59 Director and Chairman of the Board
John L. Mariotti 62 Director
David R. Jessick 50 Director
C. Robert Kidder 59 Director
James R. Craigie 50 Director
William E. Redmond, Jr. 44 Director
(1) As of December 31, 2003
James A. Sharman was elected President and Chief Executive Office of the Company
effective October 23, 2002 upon the Effective Date he also assumed position as a
Director. He had previously held the position of Senior Vice President
Household Products Division & Supply Chain Management with the Company since
September 2001. Prior to this appointment he held the position of Senior Vice
President Supply Chain Operations since April 2001. Prior to starting with the
Company, he was Chief Executive Officer of Rubicon Technology, a Chicago-based
manufacturing company. Prior to that he served as Senior Vice President, Supply
Chain Management of CNH Global N.V., a company created in November 1999 from the
merger of Case Corporation and New Holland N.V.
Joseph W. McGarr was appointed Senior Vice President & Chief Financial Officer
of the Company effective May 7, 2001. Prior to that he was Executive Vice
President and Chief Financial Officer of Fort James Corporation in Deerfield,
Illinois. During his 19-year career with Fort James, he served in a variety of
strategic finance, supply chain and marketing positions.
Alexander Lee was appointed President of OXO International on October 14, 1999.
Prior to this appointment he was the President of OXO International Division of
the General Housewares Corporation. He held various management positions with
General Housewares Corporation from September 1994 through October 1999.
Raymond J. Kulla was appointed Vice President, General Counsel and Secretary of
the Company on November 1, 1999. Prior to that he was the Vice President,
General Counsel and Secretary for General Housewares Corporation from October
1995 to September 1999.
74
Douglas S.Arnold was appointed, Vice President of Human Resources effective
February 10, 2003. Prior to that, he was Vice-President of Human Resources for
U.S.Cellular Corporation from January 1995 through September 2001.
Terry R. Peets was elected a Director of the Company in January 2003 and was
elected Chairman of the Board in November 2003. He was Chairman of the Board
for Bruno's Supermarkets from December 2000 to January 2003 and President and
Chief Executive Officer of PIA Merchandising Co. Inc. from August 1997 to
September 1999. Mr. Peets also served as Executive Vice President for Ralphs
Grocery Company from February 1977 to May 1995 and Executive Vice President for
Vons Grocery Company from May 1995 to April 1997. Chairman Peets is currently
Vice Chairman of City of Hope, and a director of Doane Pet Care, Inc.; Pinnacle
Foods, Inc.; PSC Scanning, Inc.; Ruiz Foods, Inc.; QRS Software, Inc.; and
Children's Museum of Orange County.
John L. Mariotti was elected Director and Chairman of the Board in January 2003.
In November 2003 he stepped down as Chairman of the Board for personal reasons
and remained a Director. Since 1994, Mr. Mariotti has been the President and
Chief Executive Officer of The Enterprise Group, a coalition of executives and
consultants to various companies.
David R. Jessick was elected a Director of the Company in January 2003. He is
the Chairman of the Board's Audit Committee and Compensation Committee. Mr.
Jessick is also a consultant to Rite Aid Corporation where he served as a Senior
Executive Vice President and Chief Administrative Officer from December 1999 to
June 2002. He was also the Chief Financial Officer for several large retail
companies including Fred Meyer, Inc. and Thrifty Payless Holdings, Inc.
C. Robert Kidder was elected a Director and Chairman of the Board of World
Kitchen, Inc. in April 1998. Following the Emergence Date, Mr. Kidder remained
on the Board as the Director selected by the Borden Entities. From November
2001 to March 2003, he was President of Borden Capital, Inc., a company which
provided financial and strategic advice to the Borden family of companies. In
January 1995, he was elected a Director, Chairman of the Board and Chief
Executive Officer of Borden, Inc., and continued in these positions until March
2002. He also is currently Chairman of the Board of Borden Chemical, Inc.,
Electronic Data Systems Corporation and Morgan Stanley.
James R. Craigie was elected Director of the Company in January 2003. Mr.
Craigie was the President and Chief Executive Officer of Spalding Sports
Worldwide from December 1998 to September 2003 and an Executive Vice President
and General Manager of Kraft Foods from 1994 to November 1998. He is currently
a director of the Acosta Sales and marketing Company. He was previously a
director of Spalding Sports Worldwide and Nielsen Media.
William E. Redmond, Jr. was elected a Director of the Company in January 2003.
From December 1996 to February 2003, he was Chairman, President and Chief
Executive Officer of GardenWay, Incorporated. He is also currently a director
of Arch Wireless, Inc. and Gentek, Inc.
Each of Messrs Sharman, McGarr, Lee and Kulla served as executive officers, and
Mr. Kidder served as a director and chairman of the Board, of the Predecessor
Company prior to the filing.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The Company has established a separate Audit Committee of the Board of
Directors, comprised of three of its members: David Jessick, Robert Kidder and
John Mariotti. The Company's Board of Directors has determined that Mr. Jessick
qualifies as an audit committee financial expert as defined under Item 401 of
Regulation S-K of the Securities Exchange Act of 1934. The Company believes
that Mr. Jessick is independent, within the meaning of applicable SEC rules.
75
CODE OF ETHICS
The Company has adopted a code of ethics that applies to its principal executive
officers, principal financial officer, principal accounting officer or
controller and certain other senior financial personnel. The code of ethics is
filed as Exhibit 14 to this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The following tables and charts set forth information with respect to benefits
made available, and compensation paid, by the Company during the years ended
December 31, 2003, 2002 and 2001 for services by each of the chief executive
officers and the four other most highly compensated executive officers whose
total salary and bonus exceeded $100,000.
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts
----------------------------------------- ----------- --------------
Other Annual Securities Long-Term All Other
Name and Bonus Compensation Underlying Incentive Plan Compensation
Principal Position Year Salary ($) ($) (1) ($) Options(2) Payouts ($) ($) (3)
- ----------------------------- ---- ---------- -------- ------------- ----------- --------------- -------------
JAMES A. SHARMAN 2003 534,937 468,750 -- 140,000 -- 10,820
President and 2002 394,265 135,000 -- -- -- 6,782
Chief Executive Officer 2001 233,910 50,000 -- -- -- 3,021
JOSEPH W. MCGARR 2003 471,306 322,500 -- 70,000 -- 11,000
Senior Vice President and 2002 443,784 205,575 -- -- -- 71,289
Chief Financial Officer 2001 285,205 50,000 -- -- -- 7,643
ALEXANDER LEE 2003 355,846 117,000 -- 50,000 -- 9,137
President, 2002 333,538 222,600 -- -- -- 9,000
OXO International 2001 312,500 59,000 -- -- -- 2,550
RAYMOND J. KULLA 2003 285,842 152,533 -- 30,000 -- 71,270(4)
Vice President, 2002 275,115 108,750 -- -- -- 10,837
Secretary and General Counsel 2001 250,000 10,000 -- -- -- 43,523
DOUGLAS S. ARNOLD 2003 232,692 98,750 -- 30,000 -- 16,562
Vice President, 2002 N/A N/A N/A N/A N/A N/A
Human Resources 2001 N/A N/A N/A N/A N/A N/A
(1) Annual Bonus includes retention bonuses as described in employment
agreements or the KERP I.
(2) Pursuant to the Plan, all options outstanding on the Effective Date to
acquire shares of Old Common Stock were cancelled. The Options granted to
the Named Executive Officers during the 2003 fiscal year represent options,
granted under the Company's Management Stock Plan
(3) All other compensation includes moving costs, and Company contributions for
defined benefit plans.
(4) The Other Compensation line for 2003 includes a payment of $56,270 to Mr.
Kulla that arose from Mr. Kulla's agreement to forego receiving stock
options in an amount agreed by him, as required by his agreement, dated
December 12, 2002, in return for payment of 60% of a claim relating to the
GHC SERP described hereafter. Mr. Kulla was formerly Vice President,
General Counsel and Secretary of General Housewares Corporation, Inc.(GHC).
GHC was acquired by the Company in October, 1999. As part of his
compensation at GHC Mr. Kulla, along with a number of other GHC executives,
participated in a Supplemental Income Retirement Plan (the "GHC SERP"). The
GHC SERP benefits were frozen as of 12/31/01 and had a net present value
for Mr. Kulla's remaining accrued benefit of $ 93,738 in 2002. Mr. Kulla's
prior employment agreement provided that, under certain circumstances, he
could terminate his employment agreement. As part of his waiver of those
conditions, the Company and Mr. Kulla agreed to payment of 60% of his
remaining accrued GHC SERP benefits.
76
EMPLOYEE AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Certain compensation, including those arrangements within employment agreements
and the LTIP, is triggered by "change of control" events. Change of control is
defined as a change in the beneficial ownership of more than 60% of the common
stock of the Company as a result of a merger, consolidation or similar
transaction or a sale of all or substantially all of the Company's assets; and
the acquisition by any person (as defined in Sections 3(a)(9) and 13(d)(3) of
the Securities and Exchange Act of 1934) of beneficial ownership of more than
35% of the voting securities of the Company.
James A. Sharman Employment Agreement. The Company's employment agreement with
Mr. Sharman provides for a three year term, beginning November 25, 2002, with an
automatic extension of two additional years unless written notice is given by
either party at least six months prior to November 24, 2005. Mr. Sharman's
agreement includes, in addition to the annual base salary, an annual bonus based
on the achievement of certain operational targets; a retention bonus (which has
been paid in full); agreement to permit Mr. Sharman to participate in the Stock
Option Plan; enhanced severance in the event of certain early terminations;
payment of up to $5.0 million in a "change of control"; and subject to certain
specified conditions, a "tax gross up" payment in the event that payments to Mr.
Sharman would be subject to the "golden parachute" excise taxes imposed by the
Internal Revenue Code. Mr. Sharman also participates in the WKI LTIP.
Joseph W. McGarr Employment Agreement. The Company's employment agreement with
Mr. McGarr provides for a three year term, beginning November 25, 2002, with an
automatic extension of two additional years unless written notice is given by
either party at least six months prior to November 24, 2005. Mr. McGarr's
agreement includes, in addition to the annual base salary, an annual bonus based
on the achievement of certain operational targets; a retention bonus (which has
been paid in full); agreement to permit Mr. McGarr to participate in the Stock
Option Plan; enhanced severance in the event of certain early terminations;
payment of up to $2.0 million in a "change of control"; and subject to certain
specified conditions, a "tax gross up" payment in the event that payments to Mr.
McGarr would be subject to the "golden parachute" excise taxes imposed by the
Internal Revenue Code. Mr. McGarr also participates in the WKI LTIP.
Alexander Lee Employment Agreement. The Company's employment agreement with Mr.
Lee provides for a two year term, beginning April 15, 2003, with an automatic
extension of two additional years unless written notice is given by either party
at least 90 days prior to April 14, 2006. Mr. Lee's agreement includes, in
addition to the annual base salary, an annual bonus based on the achievement of
certain operational targets; agreement to permit Mr. Lee to participate in the
Stock Option Plan; enhanced severance in the event of certain early
terminations, which include acceleration of his LTIP awards and vesting under
the Stock Option Plan; payment of enhanced severance in the event that there is
a "change of control" with respect to the Company or a "change of control" with
respect to the business Mr. Lee runs and Mr. Lee's employment agreement is not
assigned to the successor or Mr. Lee does not retain his position; and, subject
to certain specified conditions, a "tax gross up" payment in the event that
payments to Mr. Lee would be subject to golden parachute excise taxes imposed by
the Internal Revenue Code.
Raymond J. Kulla Agreement. The Company's employment agreement with Mr. Kulla
provides for a three year term, beginning January 31, 2003, with an automatic
extension of two additional years unless written notice is given by either party
at least six months prior to January 31, 2006. The agreement includes
provisions for an annual base salary, and annual bonus based on the achievement
of certain operational targets, and enhanced severance benefits.
Douglas S. Arnold Agreement. The Company's employment agreement with Mr. Arnold
provides for a three year term, beginning February 10, 2003, with an automatic
extension of two additional years unless written notice is given by either party
at least six months prior to February 10, 2006. The agreement includes
provisions for an annual base salary, and annual bonus based on the achievement
of certain operational targets, and enhanced severance benefits.
77
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
Number of Percent of Total
Securities Options
Underlying Granted To
Options Employees Exercise Expiration Grant Date
Name Granted (3) In Fiscal Year Price Date (2) Value (3)
- ----------------- ----------- ---------------- --------- ----------- ------------
James A. Sharman 140,000 27.2 $ 18.25 5/29/2013 $ 382,013
Joseph W. McGarr 70,000 13.6 18.25 5/29/2013 191,007
Alexander Lee 50,000 9.7 18.25 5/29/2013 136,433
Raymond J. Kulla 30,000 5.8 18.25 5/29/2013 81,860
Douglas S. Arnold 30,000 5.8 18.25 5/29/2013 81.860
(1) No SARs were granted in 2003 to any of the named executive officers.
(2) The options vest, or become exercisable in equal, annual, one-quarter
increments commencing on the first anniversary of the grant date. Any
exercisable portion of an option that is not exercised will be carried
forward through the ten year term of the grant. Notwithstanding the
foregoing, , the Option granted shall become immediately exercisable in
full in the event of (i) a Change of Control while Optionee is an employee
of the Company or any Subsidiary, (ii) a Termination Without Cause, (iii)
the termination of Optionee's employment due to Disability or (iv)
Optionee's death while Optionee is an employee of the Company or any
Subsidiary.
(3) The values in this column represent the grant date present value of the
options based upon application of the Black-Scholes option pricing model.
The material assumptions and adjustments used in estimating the present
value pursuant to such model are: (a) a volatility factor of 1%; (b) a
dividend yield of 0%; (c) a risk-free rate of return of 4.1%; and (d) an
expected option life of 4 years. The actual value an executive officer
receives from a stock option is dependent on future market conditions and
there can be no assurance that the value ultimately realized by the
executive will not be more or less than the amount reflected in the "Grant
Date Present Value" column.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End At Fiscal Year End
-------------------------- -----------------------------------
Shares
Acquired
On Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable ($) Unexercisable ($)
- ----------------- -------- ------------ ----------- ------------- --------------- -----------------
James A. Sharman -- -- -- 140,000 -- --
Joseph W. McGarr -- -- -- 70,000 -- --
Alexander Lee -- -- -- 50,000 -- --
Raymond J. Kulla -- -- -- 30,000 -- --
Douglas S. Arnold -- -- -- 30,000 -- --
(1) There are no SARs outstanding.
78
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Performance or Estimated Future Payouts under
Other Period Non-Stock Price-Based Plans
Until ----------------------------------
Number of Maturation or
Name Units Payout Threshold Target Maximum
- ----------------- -------------- -------------- ---------- ---------- ----------
James A. Sharman 775.4 12/31/2005 $ 387,700 $ 775,400 $1,550,800
Joseph W. McGarr 192.7 12/31/2005 96,350 192,700 385,400
Alexander Lee 3880.5 12/31/2005 1,040,250 3,880,500 9,561,000
Raymond J. Kulla 86.3 12/31/2005 43,150 86,300 172,600
Douglas S. Arnold 148.3 12/31/2005 74,150 148,300 296,600
LONG TERM INCENTIVE PLANS
On May 29, 2003 the WKI Board of Directors approved a Long-Term Incentive Plan
(the "LTIP"), the purpose of which is to motivate and drive behavior that builds
long-term shareholder value, reinforce the achievement of specific business
goals and performance measures, provide long-term incentive compensation
opportunities that are competitive and reward the contribution made by employees
to the creation of shareholder value.
The LTIP provides the Company the ability to award a specified number of award
units of $1,000 each in value to certain key employees of the Company who are
expected to make substantial contributions to the success of the ongoing
business and thereby provides for stability and continuity of operations. The
Award Term commenced on May 29, 2003 and will end on December 31, 2005.
Award units will be paid out in cash to plan participants in the first quarter
of 2006 contingent upon achieving certain targeted financial performance goals
for revenue and EBITDA in 2005. The cash payment will equal $1,000 times the
eligible amount of award units earned in the Award Term and is subject to a
multiplier which can either increase or decrease the award (from a maximum to
minimum) based upon financial achievement against the target.
In a "change of control" for the Company, LTIP awards would be accelerated and
payable at the target level. With respect to Mr. Lee, a "change of control" for
the Company results in acceleration of 100% of his LTIP awards, while a "change
of control" for his business results in a material but partial acceleration of
his LTIP awards at the target level.
On July 31, 2003 9,069 award units were granted to 49 key employees.
Subsequently, at certain dates in August and September 2003 an additional 165
award units were granted to 4 key employees. The full award amount upon vesting
at the end of 2005, if the target performance goals are met, is $9.3 million.
The expense is being amortized ratably to the income statement over the period
from the date of grant to the employee to the end of the Award Term assuming
achievement of targeted goals in 2005. As such, $1.6 million was recorded in
the year December 31, 2003.
KEY EMPLOYEE RETENTION PLAN
The Debtors filed certain motions regarding key management employment contracts,
a key employee retention program ("KERP I") and related severance policy in an
effort to retain employees during the bankruptcy period. KERP I and two of the
management contracts were approved by the Court and resulted in the payment of
$4.1 million over the course of three primary earnout dates: the Confirmation
Date of the Plan (December 23, 2002), December 31, 2002 and December 31, 2003.
79
Accordingly, $2.1 million was earned by December 31, 2002, and paid shortly
thereafter, and $2.0 million was earned by December 31, 2003, and paid shortly
thereafter.
On December 17, 2003 the Board of Directors approved a Key Employee Retention
Program ("KERP II"), the purpose of which is to provide certain employees who
are expected to make substantial contributions during a restructuring of the
Company with financial incentives contingent upon the employee's continued
employment. The retention bonus will vest as follows: the first 50% on December
31, 2004 and the second 50% on July 1, 2005, with cash distributions to made as
soon as practicable thereafter. The payment amount will equal the employee's
salary times a specified percentage based upon tiers established within the KERP
II. Amounts paid to employees pursuant to KERP II will be deducted from amounts
payable, if any, under the Company's annual bonus program. The Company's annual
bonus program provides that certain employee participants may receive a
percentage of their regular salary as a bonus if the company achieves certain
financial goals established by the Board. The maximum amount payable under the
provisions of this program is $2.8 million. At its discretion, the Compensation
Committee of the Board of Directors may accelerate the vesting and payment date
of all or any portion of the Retention Bonuses for one or more participants
based upon its evaluation of the Company's achievement of key financial
restructuring milestones.
In addition to this benefit, participants will be eligible to receive enhanced
severance benefits under certain conditions, of either six or twelve months base
salary plus continuation of medical and dental benefits, depending upon the tier
that the employee has been placed.
PENSION PLAN
Prior to December 31, 2002, certain of the Company's employees were eligible to
participate in various non-qualified supplemental pension plans or agreements
(collectively, the "Supplemental Pension Plans"), pursuant to which the Company
agreed to pay to certain executives amounts approximately equal to the
difference between the benefits provided for under the WKI pension plan (or a
predecessor thereof) and benefits which would have been provided notwithstanding
the limitations on benefits which may be provided under tax-qualified plans, as
set forth in the Internal Revenue Code. These benefits were frozen effective
April 4, 2002 and the Supplemental Pension Plan was terminated upon the
Company's emergence from Chapter 11, giving rise to unsecured claims against the
Company by the participants in the Supplemental Pension Plan. Certain named
executives have been awarded a special retention opportunity bonus to replace
benefits forfeited and or waived by such individuals under the Supplemental
Pension Plans. On the Confirmation Date these individuals received a lump-sum
payment ranging from 16% to 40% of their salary (and ranging from 50% to 100% of
their forfeited/waived benefit). The total cost to Reorganized WKI of the
Special Retention Opportunity, if earned in full by each employee covered, is
expected to be approximately $180,000.
COMPENSATION OF MEMBERS OF BOARD
Each non-employee director receives an annual retainer of $25,000. The Chairman
of the Board and the Chairman of the Audit Committee each receives an additional
annual retainer of $15,000. All retainers are paid quarterly. Each
non-employee director receives $3,000 for each in-person Board meeting, $3,000
for each telephonic Board meeting lasting more than two hours, $1000 for each
Board Committee Meeting and $1,000 for each other telephonic Board meeting. All
meeting fees are paid at or near each meeting date. Members of the Board also
receive reimbursement for traveling costs and other out-of pocket expenses
incurred in attending Board and Board Committee meetings or other meetings on
behalf of the Company.
The new Board assumed office on January 31, 2003. From January 31, 2003 to
March 31, 2003, certain Directors received compensation of $300 per hour based
on time spent to gain knowledge about the Company.
80
On May 29, 2003 the Chairman of the Board, at that time, received 32,316 options
and each other non-employee director received 12,926 options under the
Management Stock Plan. The options were issued at a price of $18.25 a share and
vest ratably over four years (which may be accelerated under certain conditions)
and expire 10 years from the Grant Date. On November 26, 2003, the Company
announced a change in the Chairman of the Board. On that date, 18,296 options
were cancelled for the previous Chairman of the Board and 19,390 options were
granted to the new Chairman of the Board. The shares granted on November 26,
2003 were issued at a price of $18.25 a share and vest ratably over four years
(which may be accelerated under certain conditions) and expire November 26,
2013. None of the options were exercisable at December 31, 2003.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of the Company currently
includes Mr. David R. Jessick (Chair), Mr. James Craigie and Mr. William E.
Redmond, Jr. In 2003, the Compensation Committee reviewed the key compensation
programs in light of the Company's emergence from Chapter 11 bankruptcy
protection and the requirements for the Company to retain key talent and
successfully implement its near and long term goals. The Compensation Committee
negotiated amendments to, or new, employment agreements with various senior
executives, implemented the LTIP program, implemented the KERP II and
implemented changes to various other compensation and benefits policies and
guidelines. The long term incentive and retention programs were put in place to
enable the Company to remain competitive in the marketplace. In general, the
Compensation Committee strives to pay and incent for performance by placing its
plans and programs in the middle of the range for companies of a similar size
and composition.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Under rules issued by the SEC, a beneficial owner of a security includes any
person who directly or indirectly has shares voting power and/or investment
power with respect to such security or has the right to obtain such voting power
and/or investment power within 60 days. Except as otherwise noted, each
beneficial owner identified in the tables below has sole voting power and
investment power with respect to the shares beneficially owned by such person.
The following table sets forth information with respect to the beneficial
ownership of the Company's New Common Stock as of March 24, 2004 by each person
who is known by the Company to beneficially own more than 5% of the Company's
New Common Stock. Certain shareholders of the Company are funds or hold a
nominee name and the Company may not be aware of the beneficial owners of these
shareholders. There are no shares owned by a director or executive officer of
the Company. While the directors and certain officers of the Company do hold
options to purchase shares, none would hold more than 5% of the Company's New
Common Stock if his or her options were fully exercised.
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------------------------------- ----------- --------
OCM Administrative Services II LLC . . . 1,203,706 20.9%
c/o Oak Tree Capital Management
333 S. Grand Avenue, FL 28
Los Angeles, CA 90071
81
KKR Associates, L.P. . . . . . . . . . . 910,167 15.8
c/o Kohlberg Kravis Roberts & Co., L.P.
9 West 57th Street
New York, New York 10019
JP Morgan Chase Bank . . . . . . . . . . 686,509 11.9
4 New York Plaza
New York, New York 10001
CitiCorp USA Inc. . . . . . . . . . . . 350,408 6.1
599 Lexington Avenue
New York, New York 10043
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Interest Expense and Debt Issuance Fees
Upon emergence from bankruptcy, certain creditors of the Predecessor Company
became beneficial owners of the Successor Company. Certain shareholders of the
Company are funds or hold a nominee name and the Company may not be aware of the
beneficial owners of these shareholders. During the year ended December 31,
2003, the Company recorded $14.2 million and paid $9.2 million in interest
expense. In addition, during 2003 the Company paid $1.4 million in debt
issuance fees and $0.2 million monthly banking and letter of credit fees to JP
Morgan Chase Bank.
Interest
Expense Interest Paid
--------- --------------
($in thousands)
OCM Administrative Services II LLC $ 7,604 4,879
KKR Associates, L.P. 1,544 994
JP Morgan Chase Bank 3,155 2,164
CitiCorp USA Inc. 1,880 1,205
In addition, on August 6, 2003, the Company entered into interest rate swaps
with JP Morgan Chase Bank. These interest rate swaps have a combined notional
amount of $145 million, which expire on March 31, 2008, and convert variable
rate interest to an average fixed rate of 3.9% over the terms of the swap
agreements. As of December 31, 2003, these swaps had a combined fair value of
$(3.9) million, which is included in other comprehensive income and other
long-term liabilities on the consolidated balance sheet. During 2003, the
Company recorded approximately $0.06 million in interest expense to JP Morgan
Chase Bank relating to these swaps and paid this balance in January 2004.
See Note 8 of the Consolidated Financial Statements for further information on
the Company's debt agreements.
82
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Principal Accounting Firm Fees
The following table summarizes the aggregate fees billed to the Company for the
fiscal years ended December 31, 2003, and 2002 by the Company's principal
accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, the "Deloitte
Entities"):
FISCAL YEAR ENDED ($IN THOUSANDS)
-------------------------------------
2003 2002
--------------- --------------------
Audit fees (a) $ 921 $ 874
Audit-related fees (b) 126 300
--------------- --------------------
Total audit and audit related fees 1,047 1,174
Tax fees (c) 2,698 1,734
Other (d) -- 164
--------------- --------------------
Total Fees $ 3,745 $ 3,072
=============== ====================
(a) Fees for audit services billed in 2003 and 2002 consisted of audits of the
Company's consolidated annual financial statements and reviews of the
Company's quarterly financial statements.
(b) Fees for audit related services consisted of bankruptcy services and other
audit related services.
1) Fees for bankruptcy-related audit services totaled $0.1 million and
$0.2 million in 2003 and 2002, respectively.
2) Fees for other audit related services totaled $0.1 million for
employee benefit plan audits in 2003 and 2002.
(c) Fees for tax services billed in 2003 and 2002 consisted of tax compliance,
tax planning and advice and bankruptcy services.
1) Fees for tax compliances services and tax planning and advise totaled
$1.5 million and $1.0 million in 2003 and 2002, respectively.
2) Fees for bankruptcy-related tax services totaled $1.2 million and $0.7
million in 2003 and 2002, respectively.
(d) Other fees in 2002 consisted of internal audit consulting services
performed at the beginning of 2002 which is now being performed internally.
Pre-Approval Policy
The services performed by the Deloitte Entities in 2003 were pre-approved by the
Audit Committee. It is the Company's policy to require that all fees of any
nature paid to the independent auditor must be pre-approved by the Audit
Committee. Approvals for interim requests have been delegated to the Chairman
of the Audit Committee. In certain cases, a de minimis provision applies, which
allows the Chief Financial Officer the ability to obtain retroactive approval
for permissible non-audit services where the engagement was not contemplated in
the original Audit Committee request and the Company is in need of immediate
assistance from the independent auditor when time is of the essence. Updates to
83
requested fees are routinely shared with the Audit Committee at regularly
schedule meetings. A written policy was adopted by the Audit Committee in its
March 2004 meeting.
The majority of the services provided by the independent auditor in 2003 were
pre-approved by the Audit Committee in its July 2003 meeting. Certain
non-contemplated or additional work was approved at various times later in the
year on an interim basis by the Chairman of the Audit Committee, with final
approval at a later date by the full Audit Committee. These approval procedures
did not apply for the billable fees for 2002.
84
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
A. Documents filed as part of the report:
(1) Financial Statements
All financial statements of the registrant are set forth under
Item 8, Financial Statements and Supplementary Data of this
Report on Form 10-K.
(2) Financial Statement Schedules
Schedule II Valuation accounts and reserves.
(3) Exhibits
No. Title
- --------- -----------------------------------------------------------------------------------------------
2.1 Second Amended Joint Plan of Reorganization of World Kitchen, Inc., its Parent Corporation
and its Subsidiary Debtors dated November 15, 2002 (incorporated by reference to Exhibit
99.T3F to Application for Qualification of Indenture under the Trust Indenture Act of 1939
on Form T-3 filed November 21, 2002). (1)
2.2 Modifications, dated December 23, 2002, to Second Amended Joint Plan of Reorganization
of World Kitchen, Inc., its Parent Corporation and its Subsidiary Debtors dated November 15,
2002. (1)
2.3 United States Bankruptcy Court of the Northern District of Illinois Eastern Division Order,
dated November 25, 2002, (A) authorizing the assumption of certain executory contracts with
Corning Incorporated and (B) Approving Related Agreement relating to the assumption and
modification of Exhibits 2.4 to 2.5. (1)
2.4 Recapitalization Agreement dates as of March 2, 1998, among Corning Consumer Products
Company, Coring Incorporated, Borden, Inc. and CCPC Acquisition Corp. (1)
2.5 Amendment to the Recapitalization Agreement dated March 31, 1998 between the Company
and Corning. (1)
3.1.1 Amended and Restated Certificate of Incorporation of WKI Holding Company, Inc. (1)
3.1.2 Amended and Restated Certificate of Incorporation of World Kitchen, Inc. (1)
3.1.3 Certificate of Formation of EKCO Group, LLC. (1)
3.1.4 Amended and Restated Certificate of Incorporation of EKCO Housewares, Inc. (1)
3.1.5 Amended and Restated Certificate of Incorporation of EKCO Manufacturing of Ohio, Inc. (1)
3.1.6 Certificate of Formation of WKI Latin America Holding, LLC. (1)
3.1.7 Certificate of Formation of World Kitchen (GHC), LLC. (1)
3.2.1 Amended and Restated Bylaws of WKI Holding Company, Inc. (1)
85
3.2.2 Amended and Restated Bylaws of World Kitchen, Inc. (1)
3.2.3 Limited Liability Company Agreement of EKCO Group, LLC. (1)
3.2.4 Amended and Restated Bylaws of EKCO Housewares, Inc. (1)
3.2.5 Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc. (1)
3.2.6 Limited Liability Company Agreement of WKI Latin America Holding, LLC. (1)
3.2.7 Limited Liability Company Agreement of World Kitchen (GHC), LLC. (1)
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. (1)
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. (1)
10.1+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and
James A Sharman. (1)
10.1a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding
Company, Inc. and James A. Sharman. (1)
10.2+ Employment Agreement, dated January 30, 2003, between WKI Holding Company, Inc. and
Joseph W. McGarr. (1)
10.2a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding
Company, Inc. and Joseph W. McGarr. (1)
10.3+ Employment Agreement, dated October 14, 1999, between WKI Holding Company, Inc. and
Alexander Lee. (1)
10.4+ Modification Agreement, dated September 30, 2002, between WKI Holding Company, Inc.
and Alexander Lee. (1)
10.5+ Amendment to Employment Agreement, dated January 29, 2003, between WKI Holding
Company, Inc. and Alexander Lee. (1)
10.6+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and
Raymond J. Kulla. (1)
10.6a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding
Company, Inc. and Raymond J. Kulla. (1)
10.7+ WKI Holding Company, Inc. Stock Option Plan (1)
10.8+ WKI Holding Company, Inc. Key Employee Retention Plan (1)
86
10.9 Agreement, dated as of January 30, 2003, among WKI Holding Company, Inc., BW
Holdings, LLC and the Pension Benefit Guaranty Corporation. (1)
10.10 Release and Indemnification Agreement, dated as of January 31, 2003, among WKI Holding
Company, Inc., its subsidiaries, and the KKR Entities party thereto (1)
10.11 Tax Matters Agreement, dated as of January 31, 2003, between WKI Holding Company, Inc.
and CCPC Acquisition Corp. (1)
10.12 Revolving Credit Agreement, dated as of January 31, 2003, among WKI Holding Company,
Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan
Securities Inc., as arranger, and the lenders party thereto. (1)
10.13 Term Loan Credit Agreement, dated as of January 31, 2003, among WKI Holding Company,
Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan
Securities Inc., as arranger, and the lenders party thereto. (1)
10.14 Guarantee and Collateral Agreement, dated as of January 31, 2003, among WKI Holding
Company, Inc., JPMorgan Chase Bank, as collateral agent, and the Subsidiary Parties
identified therein. (1)
10.15 Sublease, dated June 21, 2001, between Rolls-Royce North America Inc. and WKI Holding
Company, Inc. (incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 filed on March 28, 2002). (1)
10.16 Sublease Modification Agreement between Rolls-Royce North America Inc. and WKI
Holding Company, Inc. (1)
10.17 Amendment to the Revolving Credit Agreement dated as of June 30, 2003 among WKI
Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent,
J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (Incorporated by
reference to exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended June 29,
2003)
10.18(a)+ WKI Holding Company, Inc. Long-Term Incentive Plan (Incorporated by reference to exhibit
10.2(a) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.18(b)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003
through December 31, 2005 Award Term (OXO Guidelines) (Incorporated by reference to
exhibit 10.2(b) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.19(c)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003
through December 31, 2005 Award Term (WKI Guidelines) (Incorporated by reference to
exhibit 10.2(c) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.20+ Employment Agreement, dated June 18, 2003, between WKI Holding Company, Inc. and
Douglas S. Arnold (Incorporated by reference to exhibit 10.3 to the Quarterly Report on
Form 10-Q for the period ended June 29, 2003)
10.21+ Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and
Alexander Lee (Incorporated by reference to exhibit 10.4 to the Quarterly Report on Form
10-Q for the period ended June 29, 2003)
87
10.22+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and James A. Sharman (Incorporated by reference to exhibit 10.5 to the
Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.23+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Joseph W. McGarr (Incorporated by reference to exhibit 10.6 to the
Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.24+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Raymond J. Kulla (Incorporated by reference to exhibit 10.1 the Quarterly
Report on Form 10-Q for the period ended September 29, 2003)
10.25+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Douglas S. Arnold (Incorporated by reference to exhibit 10.2 the
Quarterly Report on Form 10-Q for the period ended September 29, 2003)
10.26* Second Amendment and Waiver to the Revolving Credit Agreement dated as of
February 13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as
administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and
the lenders party thereto.
10.27* Amendment and Waiver to the Credit Agreement (Term Loan) dated as of February
13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as
administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and
the lenders party thereto.
10.28* WKI Holding Company, Inc. Key Employee Retention Program II effective January 1, 2004
14* Code of Ethics
14a* Code of Ethics Addendum
21* Subsidiaries of the Registrant
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. Reports on Form 8-K
None
____________________________
* Filed herewith
+ Management contract or compensatory plan arrangement
(1) Incorporated by reference to the corresponding exhibit number to the
Quarterly Report on Form 10-Q for the period ended March 30, 2003.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WKI HOLDING COMPANY, INC.
By /s/ James A. Sharman President and March 24, 2004
-------------------------- Chief Executive Officer,
(James A. Sharman) Director
By /s/ Joseph W. McGarr Chief Financial Officer March 24, 2004
---------------------------
(Joseph W. McGarr)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
By /s/ Terry R. Peets Director and Chairman of the March 24, 2004
--------------------------- Board
(Terry R. Peets)
By /s/ John L. Mariotti Director March 24, 2004
---------------------------
(John L. Mariotti)
By /s/ David R. Jessick Director March 24, 2004
---------------------------
(David R. Jessick)
By /s/ C. Robert Kidder Director March 24, 2004
---------------------------
(C. Robert Kidder)
By /s/ James R. Craigie Director March 24, 2004
---------------------------
(James R. Craigie)
By /s/ William E. Redmond, Jr. Director March 24, 2004
---------------------------
(William E. Redmond, Jr.)
89
EXHIBIT INDEX
No. Title
- --------- -----
2.1 Second Amended Joint Plan of Reorganization of World Kitchen, Inc., its Parent Corporation
and its Subsidiary Debtors dated November 15, 2002 (incorporated by reference to Exhibit
99.T3F to Application for Qualification of Indenture under the Trust Indenture Act of 1939
on Form T-3 filed November 21, 2002). (1)
2.2 Modifications, dated December 23, 2002, to Second Amended Joint Plan of Reorganization
of World Kitchen, Inc., its Parent Corporation and its Subsidiary Debtors dated November 15,
2002. (1)
2.3 United States Bankruptcy Court of the Northern District of Illinois Eastern Division Order,
dated November 25, 2002, (A) authorizing the assumption of certain executory contracts with
Corning Incorporated and (B) Approving Related Agreement relating to the assumption and
modification of Exhibits 2.4 to 2.5. (1)
2.4 Recapitalization Agreement dates as of March 2, 1998, among Corning Consumer Products
Company, Coring Incorporated, Borden, Inc. and CCPC Acquisition Corp. (1)
2.5 Amendment to the Recapitalization Agreement dated March 31, 1998 between the Company
and Corning. (1)
3.1.1 Amended and Restated Certificate of Incorporation of WKI Holding Company, Inc. (1)
3.1.2 Amended and Restated Certificate of Incorporation of World Kitchen, Inc. (1)
3.1.3 Certificate of Formation of EKCO Group, LLC. (1)
3.1.4 Amended and Restated Certificate of Incorporation of EKCO Housewares, Inc. (1)
3.1.5 Amended and Restated Certificate of Incorporation of EKCO Manufacturing of Ohio, Inc. (1)
3.1.6 Certificate of Formation of WKI Latin America Holding, LLC. (1)
3.1.7 Certificate of Formation of World Kitchen (GHC), LLC. (1)
3.2.1 Amended and Restated Bylaws of WKI Holding Company, Inc. (1)
3.2.2 Amended and Restated Bylaws of World Kitchen, Inc. (1)
3.2.3 Limited Liability Company Agreement of EKCO Group, LLC. (1)
3.2.4 Amended and Restated Bylaws of EKCO Housewares, Inc. (1)
3.2.5 Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc. (1)
3.2.6 Limited Liability Company Agreement of WKI Latin America Holding, LLC. (1)
3.2.7 Limited Liability Company Agreement of World Kitchen (GHC), LLC. (1)
90
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. (1)
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. (1)
10.1+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and
James A Sharman. (1)
10.1a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding
Company, Inc. and James A. Sharman. (1)
10.2+ Employment Agreement, dated January 30, 2003, between WKI Holding Company, Inc. and
Joseph W. McGarr. (1)
10.2a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding
Company, Inc. and Joseph W. McGarr. (1)
10.3+ Employment Agreement, dated October 14, 1999, between WKI Holding Company, Inc. and
Alexander Lee. (1)
10.4+ Modification Agreement, dated September 30, 2002, between WKI Holding Company, Inc.
and Alexander Lee. (1)
10.5+ Amendment to Employment Agreement, dated January 29, 2003, between WKI Holding
Company, Inc. and Alexander Lee. (1)
10.6+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and
Raymond J. Kulla. (1)
10.6a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding
Company, Inc. and Raymond J. Kulla. (1)
10.7+ WKI Holding Company, Inc. Stock Option Plan (1)
10.8+ WKI Holding Company, Inc. Key Employee Retention Plan (1)
10.9 Agreement, dated as of January 30, 2003, among WKI Holding Company, Inc., BW
Holdings, LLC and the Pension Benefit Guaranty Corporation. (1)
10.10 Release and Indemnification Agreement, dated as of January 31, 2003, among WKI Holding
Company, Inc., its subsidiaries, and the KKR Entities party thereto (1)
10.11 Tax Matters Agreement, dated as of January 31, 2003, between WKI Holding Company, Inc.
and CCPC Acquisition Corp. (1)
10.12 Revolving Credit Agreement, dated as of January 31, 2003, among WKI Holding Company,
Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan
Securities Inc., as arranger, and the lenders party thereto. (1)
91
10.13 Term Loan Credit Agreement, dated as of January 31, 2003, among WKI Holding Company,
Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan
Securities Inc., as arranger, and the lenders party thereto. (1)
10.14 Guarantee and Collateral Agreement, dated as of January 31, 2003, among WKI Holding
Company, Inc., JPMorgan Chase Bank, as collateral agent, and the Subsidiary Parties
identified therein. (1)
10.15 Sublease, dated June 21, 2001, between Rolls-Royce North America Inc. and WKI Holding
Company, Inc. (incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 filed on March 28, 2002). (1)
10.16 Sublease Modification Agreement between Rolls-Royce North America Inc. and WKI
Holding Company, Inc. (1)
10.17 Amendment to the Revolving Credit Agreement dated as of June 30, 2003 among WKI
Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent,
J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (Incorporated by
reference to exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended June 29,
2003)
10.18(a)+ WKI Holding Company, Inc. Long-Term Incentive Plan (Incorporated by reference to exhibit
10.2(a) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.18(b)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003
through December 31, 2005 Award Term (OXO Guidelines) (Incorporated by reference to
exhibit 10.2(b) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.19(c)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003
through December 31, 2005 Award Term (WKI Guidelines) (Incorporated by reference to
exhibit 10.2(c) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.20+ Employment Agreement, dated June 18, 2003, between WKI Holding Company, Inc. and
Douglas S. Arnold (Incorporated by reference to exhibit 10.3 to the Quarterly Report on
Form 10-Q for the period ended June 29, 2003)
10.21+ Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and
Alexander Lee (Incorporated by reference to exhibit 10.4 to the Quarterly Report on Form
10-Q for the period ended June 29, 2003)
10.22+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and James A. Sharman (Incorporated by reference to exhibit 10.5 to the
Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.23+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Joseph W. McGarr (Incorporated by reference to exhibit 10.6 to the
Quarterly Report on Form 10-Q for the period ended June 29, 2003)
10.24+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Raymond J. Kulla (Incorporated by reference to exhibit 10.1 the Quarterly
Report on Form 10-Q for the period ended September 29, 2003)
92
10.25+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding
Company, Inc. and Douglas S. Arnold (Incorporated by reference to exhibit 10.2 the
Quarterly Report on Form 10-Q for the period ended September 29, 2003)
10.26* Second Amendment and Waiver to the Revolving Credit Agreement dated as of
February 13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as
administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and
the lenders party thereto.
10.27* Amendment and Waiver to the Credit Agreement (Term Loan) dated as of February
13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as
administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and
the lenders party thereto.
10.28* WKI Holding Company, Inc. Key Employee Retention Program II effective January 1, 2004
14* Code of Ethics
14a* Code of Ethics Addendum
21* Subsidiaries of the Registrant
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
____________________________
* Filed herewith
+ Management contract or compensatory plan arrangement
(1) Incorporated by reference to the corresponding exhibit number to the
Quarterly Report on Form 10-Q for the period ended March 30, 2003.
93
SCHEDULE II
WKI HOLDING COMPANY, INC.
VALUATION ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT BALANCE AT
YEAR ENDED DECEMBER 31, 2003 12/31/02 ADDITIONS DEDUCTIONS 12/31/03
- -------------------------------------------- ----------- ---------- ------------ -----------
Doubtful accounts and other sales allowances $ 10,932 $ 30,527 $ (33,859) $ 7,600
Inventory reserves 9,818 3,162 (5,745) 7,235
Deferred tax assets valuation allowance. . . 244,914 28,132 (51,259) 221,787
BALANCE AT BALANCE AT
YEAR ENDED DECEMBER 31, 2002 12/31/01 ADDITIONS DEDUCTIONS 12/31/02
- -------------------------------------------- ----------- ---------- ------------ -----------
Doubtful accounts and other sales allowances $ 25,346 $ 49,604 $ (64,018) $ 10,932
Inventory reserves 13,482 7,750 (11,414) 9,818
Deferred tax assets valuation allowance. . . 234,568 65,995 (55,739) 244,914
BALANCE AT BALANCE AT
YEAR ENDED DECEMBER 31, 2001 12/31/00 ADDITIONS DEDUCTIONS 12/31/01
- -------------------------------------------- ----------- ---------- ------------ -----------
Doubtful accounts and other sales allowances $ 25,567 $ 71,272 $ (71,493) $ 25,346
Inventory reserves 33,227 75,928 (95,673) 13,482
Deferred tax assets valuation allowance. . . 175,582 59,076 -- 234,658
94