Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report 29 148K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 55 194K
Liquidation or Succession
3: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
5: EX-99.1 CHARTER Miscellaneous Exhibit 3 9K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 28, 2004
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission file number 022-28646
WKI HOLDING COMPANY, INC.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1403318
--------------------- -------------------------
(State or other jurisdiction of (I.R.S .Employer
incorporation or organization) Identification No.)
11911 FREEDOM DRIVE, SUITE 600, RESTON, VA 20190
-------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 703-456-4700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares of $0.01 par value common stock outstanding as of May 3, 2004:
5,752,184 shares
1
WKI HOLDING COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Unaudited Consolidated Statements of Operations for the quarter
ended March 28, 2004 and for the quarter ended March 30, 2003 3
Consolidated Balance Sheets at March 28, 2004 (unaudited) and
December 31, 2003 4
Unaudited Consolidated Statements of Cash Flows for the quarter
ended March 28, 2004 and for the quarter ended March 30, 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
[Download Table]
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
FOR THE QUARTER FOR THE QUARTER
ENDED ENDED
MARCH 28, 2004 MARCH 30, 2003
---------------- ----------------
Net sales $ 126,223 $ 128,585
Cost of sales 89,281 95,247
---------------- ----------------
Gross profit 36,942 33,338
Selling, general and administrative expenses 35,384 37,904
Other expense, net 2,262 128
---------------- ----------------
Operating loss (704) (4,694)
Interest expense, net 6,562 8,458
---------------- ----------------
Loss before income taxes and minority interest (7,266) (13,152)
Income tax expense 694 1,347
---------------- ----------------
Loss before minority interest (7,960) (14,499)
Minority interest in earnings of subsidiary (23) (39)
---------------- ----------------
Net loss $ (7,983) $ (14,538)
================ ================
Basic and diluted loss per common share $ (1.39) $ (2.53)
================ ================
Weighted average number of common
shares outstanding during the period 5,752,184 5,752,179
================ ================
The accompanying notes are an integral part of these statements.
3
[Enlarge/Download Table]
WKI HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(UNAUDITED)
ASSETS MARCH 28, 2004 DECEMBER 31, 2003
---------------- -------------------
Current Assets
Cash and cash equivalents $ 4,509 $ 10,343
Accounts receivable (less allowances of $6,771 and $7,600
in 2004 and 2003, respectively) 70,961 75,668
Inventories, net 137,678 129,861
Prepaid expenses and other current assets 13,384 12,854
---------------- -------------------
Total current assets 226,532 228,726
Other assets 32,889 33,601
Property, plant and equipment, net 99,986 103,924
Other intangible assets, net 112,953 114,739
Goodwill 146,592 146,592
---------------- -------------------
TOTAL ASSETS $ 618,952 $ 627,582
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 31,525 $ 30,083
Current portion of long-term debt 2,461 2,491
Other current liabilities 57,246 68,629
---------------- -------------------
Total current liabilities 91,232 101,203
Long-term debt 374,399 362,399
Pension and post-employment benefit obligations 84,483 86,189
Other long-term liabilities 13,275 10,388
---------------- -------------------
Total liabilities 563,389 560,179
---------------- -------------------
Minority interest in subsidiary 1,603 1,580
---------------- -------------------
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 (67,640) (59,657)
Accumulated other comprehensive loss (10,701) (6,821)
---------------- -------------------
Total stockholders' equity 53,960 65,823
---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 618,952 $ 627,582
================ ===================
The accompanying notes are an integral part of these statements.
4
[Enlarge/Download Table]
WKI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
FOR THE QUARTER FOR THE QUARTER
ENDED ENDED
MARCH 28, 2004 MARCH 30, 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,983) $ (14,538)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 9,488 8,673
Amortization of deferred financing fees 281 136
Other (4) (477)
Changes in operating assets and liabilities:
Accounts receivable 3,744 11,421
Inventories (7,997) (7,452)
Prepaid expenses and other current assets (690) (303)
Accounts payable and other current liabilities (8,939) (42,470)
Provision for post-retirement benefits, net of cash paid (1,662) 1,426
Other assets and liabilities (986) 449
---------------- ----------------
Net cash used in operating activities (14,748) (43,135)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,139) (5,644)
Net proceeds from sale of assets 396 1,542
Decrease (increase) in restricted cash 85 (1,222)
---------------- ----------------
Net cash used in investing activities (1,658) (5,324)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility 12,000 14,000
Repayment of long-term debt, other than revolving
credit facility (30) --
Payment of deferred financing fees (1,398) (2,431)
---------------- ----------------
Net cash provided by financing activities 10,572 11,569
---------------- ----------------
Decrease in cash and cash equivalents (5,834) (36,890)
Cash and cash equivalents - beginning of period 10,343 40,117
---------------- ----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 4,509 $ 3,227
================ ================
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 10,047 $ 7,514
Income taxes, net of refunds (312) 512
The accompanying notes are an integral part of these statements.
5
WKI HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
WKI Holding Company Inc. (the "Company" or "WKI") is a leading manufacturer and
marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop
cookware and cutlery products. The Company has strong positions in major
channels of distribution for its products in North America, and has also
achieved a significant presence in certain international markets, primarily Asia
and Australia. In North America, the Company sells both on a wholesale basis to
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 finished goods costs. The Company
purchases the remainder of its 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.
Pursuant to Section 15(d) of the Securities Act of 1934, WKI is filing herein
its quarterly report on Form 10-Q, which includes its first fiscal quarter of
the year ended December 31, 2004. The Company's first, second and third fiscal
quarters end on the Sunday nearest to the calendar quarter and the fourth
quarter ends on December 31. The Company's first fiscal quarter in fiscal 2004
and fiscal 2003 ended on March 28, 2004 and March 30, 2003, respectively. The
unaudited consolidated financial statements reflect all adjustments, which, in
the opinion of management, are necessary for a fair statement of the results of
operations and financial position for the interim periods presented. All such
adjustments are of a normal recurring nature. The consolidated financial
statements are unaudited and should be read in conjunction with the Company's
financial statements for the year ended December 31, 2003, which were filed on
Form 10-K.
6
(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.
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.
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.
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.
For further information please refer to the Company's financial statements for
the year ended December 31, 2003, which were filed on Form 10-K.
7
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
Under this standard, goodwill and intangible assets with indefinite useful lives
are no longer amortized, but are to be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset(s)
might be impaired. Accordingly, the Company ceased amortization of its existing
goodwill and its trademark assets on January 1, 2002.
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
December 31, 2003 (See Note 6 for further information). 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.
The following table summarizes the Company's other intangible assets.
[Enlarge/Download Table]
March 28, 2004 December 31, 2003
--------------------------------- ---------------------------------
Gross Accumulated Net Gross Accumulated Net
Balance Amortization Balance Balance Amortization Balance
-------- ------------- -------- -------- ------------- --------
Amortized intangible assets
Patents $ 23,253 $ 2,955 $ 20,298 $ 23,253 $ 2,363 $ 20,890
Customer relationships 24,750 4,251 20,499 24,750 3,267 21,483
Distribution agreement 7,100 840 6,260 7,100 630 6,470
-------- ------------- -------- -------- ------------- --------
55,103 8,046 47,057 55,103 6,260 48,843
Unamortized intangible
assets
Trademark 64,221 -- 64,221 64,221 -- 64,221
Unrecognized prior
service cost 1,675 -- 1,675 1,675 -- 1,675
-------- ------------- -------- -------- ------------- --------
65,896 -- 65,896 65,896 -- 65,896
-------- ------------- -------- -------- ------------- --------
Total other
intangible assets $120,999 $ 8,046 $112,953 $120,999 $ 6,260 $114,739
======== ============= ======== ======== ============= ========
The Company amortizes its patents on a straight-line basis over the legal life
of the patents which range from 3 to 17 years. The Company capitalizes certain
legal fees incurred directly relating to the application for the maintenance of
certain patent rights. These patent rights are included in the patent balance
and are amortized on a straight-line basis over their estimated economic useful
life which is estimated to be 6 years. Intangible assets associated with
significant customers within the Company's mass merchandising distribution
channels are amortized on a straight-line basis over their estimated remaining
useful lives of 9 years. Intangible assets associated with certain other
8
distribution channels are amortized over their estimated useful lives of 8 years
using the double declining balance method, which is representative of the
contractual turnover of customers within those distribution channels. The
Company's distribution agreement is amortized over its remaining economic useful
life of 7.5 years. Amortization expense was $1.8 million for the first quarter
of 2004 and $0.6 million for the first quarter of 2003. The estimated aggregate
amortization expense for each of the five succeeding fiscal years is $7.6
million.
(4) SUPPLEMENTAL BALANCE SHEET DATA
Inventories at March 28, 2004 and December 31, 2003 consisted of the following:
[Download Table]
INVENTORIES
(IN THOUSANDS): MARCH 28, 2004 DECEMBER 31, 2003
--------------- ------------------
Finished and in-process goods $ 108,408 $ 103,045
Raw materials and supplies 29,270 26,816
--------------- ------------------
$ 137,678 $ 129,861
=============== ==================
Other assets at March 28, 2004 and December 31, 2003 consisted of the following:
[Download Table]
OTHER ASSETS
(IN THOUSANDS): MARCH 28, 2004 DECEMBER 31, 2003
--------------- ------------------
Precious metals $ 19,949 $ 20,369
Other assets 12,940 13,232
--------------- ------------------
$ 32,889 $ 33,601
=============== ==================
Property, plant and equipment at March 28, 2004 and December 31, 2003 consisted
of the following:
[Download Table]
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS): MARCH 28, 2004 DECEMBER 31, 2003
---------------- -------------------
Land $ 6,734 $ 6,734
Buildings 41,338 41,218
Machinery and equipment 88,779 87,307
---------------- -------------------
136,851 135,259
Accumulated depreciation (36,865) (31,335)
---------------- -------------------
$ 99,986 $ 103,924
================ ===================
Depreciation expense was $5.5 million and $5.8 million for the quarters ended
March 28, 2004 and March 30, 2003, respectively.
Other current liabilities at March 28, 2004 and December 31, 2003 consisted of
the following:
[Download Table]
OTHER CURRENT LIABILITIES
(IN THOUSANDS): MARCH 28, 2004 DECEMBER 31, 2003
--------------- ------------------
Wages and employee benefits $ 13,854 $ 16,170
Accrued advertising and promotion 18,858 22,398
Accrued interest 5,364 8,985
Reorganization accruals 1,599 2,812
Other accrued expenses 17,571 18,264
--------------- ------------------
$ 57,246 $ 68,629
=============== ==================
9
(5) RELATED PARTY TRANSACTIONS
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 first quarter of
2004, the Company recorded $8.5 million and paid $5.6 million in interest
expense collectively, to these principal owners. In addition, during the first
quarter of 2004 the Company paid $1.3 million in debt issuance fees and $0.1
million in monthly banking and letter of credit fees to a principal owner. See
Note 6 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 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 March 28, 2004, these
swaps had a combined fair value of $(7.6) million, which is included in other
long-term liabilities and other comprehensive income on the consolidated balance
sheet. During the quarter ended March 28, 2004, the Company recorded
approximately $0.1 million in interest to this principal owner relating to these
swaps.
(6) BORROWINGS
Debt outstanding as of March 28, 2004 and December 31, 2003 and weighted average
interest rates over the period are as follows (in thousands):
[Enlarge/Download Table]
MARCH 28, 2004 DECEMBER 31, 2003
--------------------- ---------------------
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 $ 235,249 $ 2,401
12% senior subordinated notes due
January 2010 123,150 -- 123,150 --
Revolver at an average rate of 5.8% 12,000 -- -- --
Industrial Revenue Bonds, at an average
rate of 6.2% and 5.9% 4,000 60 4,000 90
---------- --------- ---------- ---------
Total Debt $ 374,399 $ 2,461 $ 362,399 $ 2,491
========== ========= ========== =========
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 Company met the 2004
10
requirement in the first quarter of 2004. 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 April 27, 2004, the Company had $44.7 million available under the Revolver
after consideration of borrowing base limits at that date.
Pursuant to the Plan, on the Effective Date, the Company entered into a senior
secured term loan with certain secured lenders in the aggregate principal amount
of $240.1 million (the "Term Loan"), and issued Senior Subordinated Notes in the
aggregate principal amount of $123.2 million. Under the Term Loan, interest
accrues at the Company's election at either JPMorgan Chase's prime rate plus
2.5%, the Federal Funds Effective Rate plus 3.0% or LIBOR times the Statutory
Reserve Rate (as defined in the Credit Agreement) plus 3.5%. The Term Loan is
secured by a second priority lien on the Collateral. The Term Loan requires
quarterly principal payments of approximately $0.6 million beginning April 4,
2003 through December 31, 2007, with a remaining balloon payment of
approximately $228 million due on March 31, 2008. The Company is required to
prepay some or all of outstanding obligations under the Term Loan upon certain
conditions or events as specified in the related loan documents.
The Revolver and Term Loan agreements contain usual and customary restrictions
including, but not limited to, limitations on dividends, redemptions and
repurchases of capital stock, prepayments of debt (other than the Revolver),
additional indebtedness, capital expenditures, mergers, acquisitions,
recapitalizations, asset sales, transactions with affiliates, changes in
business and the amendment of material agreements. Additionally, the Revolver
and Term Loan contain customary financial covenants relating to minimum levels
of EBITDA and maximum leverage ratios and fixed charge coverage ratios. In the
second quarter of 2003 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 Company is currently in compliance with all of the financial
restrictions and financial covenants of the Revolver and Term Loan.
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 March 28, 2004, bear interest at 3% and mature in September 2004.
The balance of the bonds have remaining principal of $4.0 million as of March
28, 2004, bear interest at 6.25% and mature August 2005.
11
(7) COMMITMENTS
Litigation
The Company is a defendant or plaintiff in various claims and lawsuits arising
in the normal course of business. As a result of the bankruptcy proceedings,
holders of litigation claims in the bankruptcy proceedings that arose prior to
May 31, 2002 retain rights to proceed against the Company under certain
limitations of the Court and limitations on recoveries as set forth in the Plan.
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 March 28, 2004.
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 March 28,
2004 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 March 28, 2004. 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 $15.4
million and $14.1 million as of March 28, 2004 and December 31, 2003,
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 March 28, 2004, the swaps had a combined
fair value of $(7.6) million which is included in other long-term liabilities
and other comprehensive income on the consolidated balance sheet.
12
(8) SEGMENT INFORMATION
The Company manages its business on the basis of one reportable segment-the
worldwide manufacturing and marketing of consumer kitchenware products. The
Company believes its operating segments have similar economic characteristics
and meet the aggregation criteria of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
(9) COMPREHENSIVE LOSS
For the quarters ended March 28, 2004 and March 30, 2003, total comprehensive
loss was as follows (in thousands):
[Enlarge/Download Table]
FOR QUARTER ENDED FOR THE QUARTER ENDED
MARCH 28, 2004 MARCH 30, 2003
------------------- -----------------------
Net loss $ (7,983) $ (14,538)
Foreign currency translation adjustment (105) 508
Derivative fair value adjustment (3,775) --
------------------- -----------------------
Comprehensive loss $ (11,863) $ (14,030)
=================== =======================
The following is a summary of the components of accumulated other comprehensive
loss (in thousands):
[Download Table]
MARCH 28, 2004 DECEMBER 31, 2003
---------------- -------------------
Foreign currency translation gain $ 3,580 $ 3,684
Minimum pension liability adjustment (6,641) (6,640)
Derivative fair value adjustment (7,640) (3,865)
---------------- -------------------
Accumulated other comprehensive loss $ (10,701) $ (6,821)
================ ===================
(10) EMPLOYEE RETIREMENT PLANS
Components of Net Periodic Benefit Cost for the quarter ended March 28, 2004 and
March 30, 2003 are as follows:
[Download Table]
Other Post
Pension Benefits Retirement Benefits
--------------------- -----------------------
2004 2003 2004 2003
--------- ---------- ------------ ---------
Service cost $ 264 $ 675 $ 93 $ 375
Interest cost 1,456 1,425 571 775
Expected return on plan assets (1,468) (1,125) -- --
Amortization of prior service cost 39 -- (280) --
--------- ---------- ------------ ---------
Net periodic benefit cost $ 291 $ 975 $ 384 $ 1,150
========= ========== ============ =========
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $13.5 million to its pension
plan in 2004. As of March 28, 2004, $2.3 million of contribution have been
made. The Company presently anticipates paying an additional $8.0 million to
fund its pension plan in 2004 for a total of $10.3 million.
(11) STOCK COMPENSATION PLAN
As of the Effective Date, the Successor Company entered into the Management
Stock Plan, under which a total of 710,942 shares of common stock became
available for issuance. The Management Stock Plan is designed to attract,
retain and motivate key employees and non-employee directors. The Company
accounts for stock based compensation cost using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting
13
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.
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option pricing model. The exercise price at the Grant
Date for each option was equal to its fair value and, as such, no compensation
expense was recorded. Recording the options under the fair value based method
would result in only a nominal effect to the financial statements.
(12) NEW ACCOUNTING PRONOUNCEMENTS
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 quarterly disclosures required by SFAS No. 132R are
included in Note 10.
(13) SUBSEQUENT EVENTS
On April 29, 2004, the Company and two of its subsidiaries, World Kitchen (GHC),
LLC and World Kitchen, Inc. entered into an acquisition agreement ("OXO Sale
Agreement") relating to the sale of its OXO(R) business to Helen of Troy Limited
(Barbados) ("Helen of Troy") for $275 million in cash. A copy of the OXO Sale
Agreement is attached hereto as Exhibit 2.1. The completion of the transaction
is subject to regulatory approvals, approval of the Company's senior lenders,
consummation of Helen of Troy's bank financing and customary closing conditions.
The sale is expected to result in a gain to the Company and is anticipated to be
completed in the second quarter of 2004. The majority of the net proceeds from
this transaction will be used to pay down long-term debt of the Company.
14
WKI HOLDING COMPANY, INC.
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company for the quarters ended March 28, 2004 and
March 30, 2003, 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 43% of net sales in the first quarter
of 2004, 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.
15
Based on these declines and loss of 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
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 for 2004. We are
currently in compliance with all of the financial restrictions and financial
covenants of the Revolver and Term Loan. 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.
On April 29, 2004, the Company and two of its subsidiaries, World Kitchen (GHC),
LLC and World Kitchen, Inc. entered into an acquisition agreement ("OXO Sale
Agreement") relating to the sale of its OXO(R) business to Helen of Troy Limited
(Barbados) ("Helen of Troy") for $275 million in cash. A copy of the OXO Sale
Agreement is attached hereto as Exhibit 2.1. The completion of the transaction
is subject to regulatory approvals, approval of the Company's senior lenders,
consummation of Helen of Troy's bank financing and customary closing conditions.
The sale is expected to result in a gain to the Company and is anticipated to be
completed in the second quarter of 2004. The majority of the net proceeds from
this transaction will be used to pay down long-term debt of the Company.
16
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.
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.
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.
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.
For further information please refer to the Company's financial statements for
the year ended December 31, 2003, which were filed on Form 10-K.
17
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 quarters ended March 28, 2004 and March 30, 2003,
were prepared using generally accepted accounting principles in the United
States.
[Enlarge/Download Table]
Quarter Ended Percent Quarter Ended Percent Percentage
March 28, of net March 30, of net Increase increase
2004 sales 2003 sales (decrease) (decrease)
------------------------- ------------------------- ------------ ----------
Net sales $ 126,223 100.0% $ 128,585 100.0% $ (2,362) (1.8)%
Cost of sales 89,281 70.7 95,247 74.1 (5,966) (6.3)
------------------------- ------------------------- ------------ ----------
Gross profit 36,942 29.3 33,338 25.9 3,604 10.8
Selling, general and
administrative expenses 35,384 28.0 37,904 29.5 (2,520) (6.6)
Other expense, net 2,262 1.8 128 0.1 2,134 1,667.2
------------------------- ------------------------- ------------ ----------
Operating loss (704) (0.6) (4,694) (3.7) 3,990 85.0
Interest expense 6,562 5.2 8,458 6.6 (1,896) (22.4)
Income tax expense 694 0.5 1,347 1.0 (653) (48.5)
Minority interest (23) -- (39) -- (16) (41.0)
------------------------- ------------------------- ------------ ----------
Net loss $ (7,983) (6.3)% $ (14,538) (11.3)% $ 6,555 45.1%
========================= ========================= ============ ==========
Net Sales
Net sales for the first quarter of 2004 were $126.2 million, a decrease of $2.4
million or 1.8% from the same period in 2003. This decrease was attributable to
the closure of twenty-nine unprofitable retail outlets in the first quarter of
2003, in connection with our reorganization. Excluding the impact of the closed
retail outlets in 2003, net sales would have increased $4.3 million or 3.4% as a
result of distribution gains primarily due to new products in our tabletop and
cutlery categories.
Gross Profit
Gross profit for the first quarter of 2004 was $36.9 million, an increase of
$3.6 million when compared to gross profit of $33.3 million for the first
quarter of 2003. As a percentage of net sales, gross profit in the first
quarter of 2004 was 29.3%, an increase from 25.9% or 3.4 percentage points, in
the first quarter of 2003 largely attributable to increased sales of higher
margin product. Absent the impact of the closure of twenty-nine unprofitable
retail outlets in the first quarter of 2003, gross margin would have increased
2.4 percentage points.
Selling, General and Administrative Expenses
Selling general and administrative expenses ("SG&A") for the first quarter of
2004 were $35.4 million compared to $37.9 million in 2003, a decrease of $2.5
million or 6.6%. As a percentage of net sales, SG&A were 28.0% in the first
quarter of 2004 as compared to 29.5% in the first quarter of 2003. The decrease
in overall SG&A was driven by lower retail outlet overhead expense as a result
of the retail store closures in 2003.
18
Other Expense, Net
Other operating expenses were $2.3 million in the first quarter of 2004 compared
to $0.1 million in the same period of 2003. This increase is a result of
amortization for customer relationships and exclusive licenses that were
recorded as part of Fresh Start reporting but the valuation for these items were
not completed until the second quarter of 2003.
Interest Expense
Interest expense was $6.6 million for the quarter ended March 28, 2004 compared
to $8.5 million for the quarter ended March 30, 2003. The $1.9 million decrease
in interest expense was attributable to significantly decreased debt levels upon
the January 31, 2003 emergence from Chapter 11 protection.
Income Tax Expense
Income tax expense in the first quarter of 2004 amounted to $0.7 million
compared to $1.3 million in the first quarter of 2003. Income tax expense is
primarily attributable to foreign income taxes and foreign operations were down
slightly quarter over quarter. We provided a full valuation allowance on the
income tax benefit relating to the current and prior period's pre-tax losses.
Net Loss
As a result of the factors discussed above, we had a net loss of $8.0 million in
the first quarter of 2004 compared to a net loss of $14.5 million for the first
quarter of 2003.
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. 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
April 27, 2004, we had $44.7 million available under the Revolver after
consideration of borrowing base limits at that date.
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,
19
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.
As of March 28, 2004, we were in compliance with all of the financial
restrictions and financial covenants of the Revolver and Term Loan.
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.
In connection with the Reorganization, we entered into an agreement with the
Pension Benefit Guaranty Corporation ("PBGC"), which, among other things,
requires certain additional minimum funding contributions and accelerated
contributions to be made to our pension plan. Total enhanced contributions of
$2 million, $2.5 million and $2.5 million are required to be paid in addition to
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 over the pension plan years 2003, 2005 and 2006, respectively.
Additionally, the agreement requires us to provide a letter of credit in the
amount of $15 million to the PBGC by January 31, 2008. During the first quarter
of 2004 we made $2.3 million in contributions to our pension plan and anticipate
total contributions to our pension plan to be $10.3 million in 2004.
Operating Activities
In the first quarter of 2004, net cash used in operating activities was $14.7
million compared to $43.1 million in the first quarter of 2003. The $28.4
million decrease in cash used in operating activities was primarily driven by
the payments on the Effective Date of $33.3 million relating to settlement of
claims and payment of professional fees associated with the Reorganization.
Excluding the effects of bankruptcy related charges, the increase in cash used
in operating activities was $4.9 million driven by changes in working capital.
Cash flows from accounts receivable were $3.7 million in the first quarter of
2004 compared to $11.4 million in the first quarter of 2003 resulting in an
unfavorable quarter over quarter change of $7.7 million. This result was driven
by lower sales in the fourth quarter of 2003 compared to the fourth quarter of
2002 and an increase of 5.1 days to 56.0 days sales outstanding during the first
quarter of 2004 compared to 50.9 days sales outstanding during the first quarter
of 2003. Our accounts payable and accrued liabilities improved $33.5 million
quarter over quarter in 2003 as we paid $33.3 million in pre-petition
liabilities to creditors, payment of which had been stayed during the bankruptcy
proceedings.
20
Investing Activities
Cash used for investing activities was $1.7 million in the first quarter of 2004
compared to $5.3 million in the first quarter of 2003. The decrease is
attributable to $3.5 million fewer capital expenditures. We anticipate cash
outlays of approximately $23 million for capital expenditures in 2004.
In addition, upon emergence from bankruptcy, we were required by our lenders to
establish escrow accounts totaling $1.2 million for the payment of certain
prepetition liens. These escrows were recorded as restricted cash included in
other assets in the accompanying financial statements. The final distribution
of $0.6 million was disbursed in January 2004. As of February 13, 2004 all
cases were closed and no additional claims payments are expected. We estimate
immaterial amounts to be paid out to our bankruptcy tax and legal advisors for
the wind down of the bankruptcy process.
Financing Activities
Net cash provided by financing activities totaled $10.6 million in the first
quarter of 2004 compared to $11.6 million in the first quarter of 2003 a
decrease of $1.0 million. At March 28, 2004, we had $12 million in borrowings
under our Revolver compared to $14.0 million at March 30. 2003.
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 $15.4
million and $14.1 million as of March 28, 2004 and December 31, 2003,
respectively.
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;
21
- 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);
- 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-Q 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We primarily have market risk in the areas of foreign currency and floating rate
debt. We invoice a significant portion of our international sales in U.S.
dollars, minimizing the effect of foreign exchange gains or losses on our
earnings. As a result, our foreign sales are affected by currency fluctuations
versus U.S. dollar invoicing. Our costs are predominantly denominated in U.S.
dollars. With respect to sales conducted in foreign currencies, increased
strength of the U.S. dollar decreases our reported revenues and margins in
respect of such sales to the extent we are unable or determine not to increase
local selling prices.
From time to time we reduce foreign currency cash flow exposure due to exchange
rate fluctuations by entering into forward foreign currency exchange contracts.
The use of these contracts protects cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contract. As of March 28,
2004, 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 March
28, 2004, these swaps had a combined fair value of $(7.6) million, which is
included in other long-term liabilities and other comprehensive income on the
consolidated balance sheet. A 1% change in the market interest rates would
result in a corresponding change of $5.6 million in the combined fair value of
the interest rate swaps.
22
ITEM 4. 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 quarterly report
on Form 10-Q.
The Company's management, including its Chief Executive and Chief Financial
Officer, does not expect that the disclosure controls and procedures will
prevent all error and all fraud. No matter how well designed and operated,
a control system can provide only reasonable assurance that its objectives
will be met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefit of certain controls
must be considered relative to cost. Due to the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company
have been detected.
Based on that evaluation, our management, including our Chief Executive
Officer and our Chief Financial Officer, concluded that the design and
operation of these disclosure controls and procedures were effective as of
March 28, 2004 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 quarterly report on Form 10-Q that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
23
PART II - OTHER INFORMATION
ITEM 1. 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 March 28, 2004.
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 March 28,
2004 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 March 28, 2004. 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.
24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No. Description of Exhibit
--- ----------------------
2.1* Acquisition Agreement, dated April 29, 1004, by and among World
Kitchen (GHC), LLC, WKI Holding Company, Inc., World Kitchen, Inc.,
Helen of Troy Limited and Helen of Troy Limited
+3.1.1 Amended and Restated Certificate of Incorporation of WKI Holding
Company, Inc.
+3.1.2 Amended and Restated Certificate of Incorporation of World Kitchen,
Inc.
+3.1.3 Certificate of Formation of EKCO Group, LLC.
+3.1.4 Amended and Restated Certificate of Incorporation of EKCO Housewares,
Inc.
+3.1.5 Amended and Restated Certificate of Incorporation of EKCO
Manufacturing of Ohio, Inc.
+3.1.6 Certificate of Formation of WKI Latin America Holding, LLC.
+3.1.7 Certificate of Formation of World Kitchen (GHC), LLC.
+3.2.1 Amended and Restated Bylaws of WKI Holding Company, Inc.
+3.2.2 Amended and Restated Bylaws of World Kitchen, Inc.
+3.2.3 Limited Liability Company Agreement of EKCO Group, LLC.
+3.2.4 Amended and Restated Bylaws of EKCO Housewares, Inc.
+3.2.5 Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc.
+3.2.6 Limited Liability Company Agreement of WKI Latin America Holding, LLC.
+3.2.7 Limited Liability Company Agreement of World Kitchen (GHC), LLC.
25
+4.1 Stockholders' Agreement, dated as of January 31, 2003, by and among
WKI Holding Company, Inc., the Senior Lenders, the Subordinated
Lenders, the Borden Entities party thereto, the Management Members
party thereto and the New Directors party thereto.
+4.2 Indenture, dated as of January 31, 2003, among WKI Holding Company,
Inc., the Subsidiary Guarantors party thereto, and U.S. Bank National
Association, as trustee, relating to 12% Senior Subordinated Notes due
2010.
31.1* Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
99.1* Press Release, dated April 30, 2004.
________
+ Incorporated by reference to the corresponding exhibit number to the annual
report on Form 10-K for the year ended December 31, 2003.
* Filed herewith.
REPORT ON FORM 8-K
None
26
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WKI HOLDING COMPANY, INC.
-------------------------
(Registrant)
Date: May 3, 2004 By: /s/ James A. Sharman
---------------------------------
James A. Sharman
President and Chief Executive Officer
Date: May 3, 2004 By: /s/ Joseph W. McGarr
---------------------------------
Joseph W. McGarr
Chief Financial Officer
27
--------------------------------------------------------------------------------
EXHIBIT INDEX
No. Description of Exhibit
--- ----------------------
2.1* Acquisition Agreement, dated April 29, 1004, by and among World
Kitchen (GHC), LLC, WKI Holding Company, Inc., World Kitchen, Inc.,
Helen of Troy Limited and Helen of Troy Limited
+3.1.1 Amended and Restated Certificate of Incorporation of WKI Holding
Company, Inc.
+3.1.2 Amended and Restated Certificate of Incorporation of World Kitchen,
Inc.
+3.1.3 Certificate of Formation of EKCO Group, LLC.
+3.1.4 Amended and Restated Certificate of Incorporation of EKCO Housewares,
Inc.
+3.1.5 Amended and Restated Certificate of Incorporation of EKCO
Manufacturing of Ohio, Inc.
+3.1.6 Certificate of Formation of WKI Latin America Holding, LLC.
+3.1.7 Certificate of Formation of World Kitchen (GHC), LLC.
+3.2.1 Amended and Restated Bylaws of WKI Holding Company, Inc.
+3.2.2 Amended and Restated Bylaws of World Kitchen, Inc.
+3.2.3 Limited Liability Company Agreement of EKCO Group, LLC.
+3.2.4 Amended and Restated Bylaws of EKCO Housewares, Inc.
+3.2.5 Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc.
+3.2.6 Limited Liability Company Agreement of WKI Latin America Holding, LLC.
+3.2.7 Limited Liability Company Agreement of World Kitchen (GHC), LLC.
+4.1 Stockholders' Agreement, dated as of January 31, 2003, by and among
WKI Holding Company, Inc., the Senior Lenders, the Subordinated
Lenders, the Borden Entities party thereto, the Management Members
party thereto and the New Directors party thereto.
+4.2 Indenture, dated as of January 31, 2003, among WKI Holding Company,
Inc., the Subsidiary Guarantors party thereto, and U.S. Bank National
Association, as trustee, relating to 12% Senior Subordinated Notes due
2010.
31.1* Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
99.1* Press Release, dated April 30, 2004.
28
________
+ Incorporated by reference to the corresponding exhibit number to the annual
report on Form 10-K for the year ended December 31, 2003.
* Filed herewith.
REPORT ON FORM 8-K
None
29
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0001015402-04-001839 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Wed., Apr. 24, 7:59:35.2am ET 
