10-K/A 1 tenk2002amended.txt FOR THE YEAR ENDED DECEMBER 31, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission file number 333-07429 333-07429-01 Remington Products Company, L.L.C. Remington Capital Corp. (Exact name of registrants as specified in their charters) 06-1451076 Delaware 06-1451079 -------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Nos) 60 Main Street, Bridgeport, Connecticut 06604 --------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 367-4400 --------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each class Name of each exchange on which registered None None ----------------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None ----------------------------------------------------------- (Title of Class) 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, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ----- ----- Explanatory Note: This amendment is being filed to reflect the restatement of Remington Products Company, L.L.C.'s consolidated financial statements, as discussed in Note 15 thereto, and other information related to such restated financial statements. Except for Item 1 of Part I, Items 6 and 8 of Part II and Item 15 of Part IV, no other information included in the original report on Form 10-K is amended by Form 10-K/A. PART I ITEM 1. Business General Remington Products Company, L.L.C. and its wholly-owned subsidiaries (the "Company" or "Remington") is a leading consumer products company focusing on the development and marketing of personal care products. The Company designs and distributes electric shavers and accessories, grooming products, hair care appliances, wellness products and other small electrical consumer products. The Company is a Delaware limited liability company that will continue in existence until December 31, 2016 or dissolution prior thereto as determined under the Company's Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"). The Company was formed by Vestar Shaver Corp. and RPI Corp. ("RPI") to acquire the operations of Remington Products Company and its subsidiaries ("RPC") in May of 1996. Vestar Razor Corp. was formed in May of 1996 to hold an interest in the Company. Vestar Shaver Corp. and Vestar Razor Corp. (together, the "Vestar Members") are wholly owned by Vestar Equity Partners, L.P. ("Vestar"), an institutional equity capital fund and affiliate of Vestar Capital Partners ("Vestar Capital"). Forward Looking Statements This annual report on Form 10-K/A may contain forward-looking statements which include assumptions about future market conditions, operations and results. These statements are based on current expectations and are subject to risks and uncertainties. They are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Among the many factors that could cause actual results to differ materially from any forward-looking statements are the success of new product introductions and promotions, changes in the competitive environment for the Company's products, changes in economic conditions, foreign exchange risk, outcome of litigation, and other factors discussed herein and in prior Securities and Exchange Commission filings by the Company. The Company assumes no obligation to update these forward-looking statements or advise of changes in the assumptions on which they were based. Description of Business The Company distributes its products through three operating segments which are comprised of 1) the North American segment, which sells product through mass-merchant retailers, department stores and drug store chains throughout the United States and Canada, 2) the International segment, which sells product through an international network of subsidiaries and distributors, and 3) the U.S. Service Stores segment consisting of Company-owned and operated service stores throughout the United States. Additional financial information relating to Remington's three operating segments is set forth in Note 13 (Business Segment and Geographic Information) of the "Notes to the Consolidated Financial Statements" of the Company appearing elsewhere herein. 2 Products The Company's principal personal care products consist of the following product categories: Shaver and Grooming Products. The Company distributes a complete line of shaver and grooming products, including men's and women's shavers, beard and mustache trimmers, nose and ear trimmers, haircut kits and related accessories. The Company's primary men's electric shavers consist of the MicroScreen(R) line of single, dual and triple foil shavers as well as the MicroFlex(R) line of rotary shavers marketed in North America and the Fast Track(R) line of rotary shavers marketed internationally. The women's electric shaver category includes a full line of women's Smooth & Silky(R) wet/dry shavers as well as epilators. The Company distributes electric shaver accessories consisting of shaver replacement parts (primarily foils and cutters), preshave products and cleaning agents. Grooming products consist of the Precision(R) line, including beard and mustache trimmers, nose hair and ear hair trimmers, and personal groomers, which offer a selection of grooming accessories, as well as a line of home haircut kits. Shaver and grooming products accounted for approximately 64%, 58% and 52% of the Company's net sales for the years ended December 31, 2002, 2001 and 2000, respectively. Hair Care and Wellness. The hair care products consist of hair dryers, hairsetters, curling irons, hair crimpers and straighteners, hot air brushes and lighted mirrors. The hair dryer products include the Company's Vortex(R) hair dryer, and Pro Air(R) chrome dryers. The Company's hairsetter products include the Remington Twisters(R), Express Set(R) hairsetter and the Smart Setter(R) hairsetter, all of which incorporate proprietary technologies of color change and wax core. The curling iron products include Remington's Super Smooth(R) brand using Teflon(R) non-stick technology which is exclusive to Remington's haircare products. Wellness products consist primarily of Remington's paraffin wax hand spas and foot spas. The Company has decided to de-emphasize its wellness products by eliminating fad products and continuing to offer only certain more established products. Hair care and wellness products accounted for approximately 25%, 29% and 31% of the Company's net sales for the years ended December 31, 2002, 2001 and 2000, respectively. Other Products. Remington sells a variety of Remington and non-Remington brand personal care products through the Company's service stores, and has also distributed other small appliances, such as vacuums and electric irons, in certain markets. Distribution The Company's products are sold in the United States and internationally in many countries through mass merchandisers, catalog showrooms, drug store chains and department stores, in addition to the Company's service stores. In the United States, the Company sells products through mass-merchant retailers such as Wal-Mart, K-Mart and Target, department stores such as Sears, Federated and Kohls, drug store chains including Walgreens, Rite Aid and Eckerd, and Remington's own service stores. Throughout the United States, the Company's products are sold through in excess of 20,000 retail outlets. In addition, the Company markets and distributes its products through television direct to consumer retailing with stations such as QVC and Internet retailers such as drugstore.com, as well as the Company's own website, remington-products.com. 3 On a worldwide basis, Wal-Mart accounted for approximately 30% of the Company's net sales during the years ended December 31, 2002 and 2001 and approximately 25% of the Company's net sales during the year ended December 31, 2000. No other customer accounted for more than 10% of the Company's net sales in the three year period ended December 31, 2002. U.S. Service Stores As of March 1, 2003, the Company owned and operated a chain of 69 service stores in the United States. During 2002 there were an average of 77 stores open compared to an average of 88 stores in 2001 and 93 stores in 2000. The number of stores has declined over the last several years as the Company has determined to de-emphasize this segment in favor of investing in its other businesses. The stores are primarily located in shopping malls and outlet malls and sell and service a variety of Remington and non-Remington shavers, personal care and other products. The service stores also oversee sales of replacement parts to approximately 300 independent authorized shaver service dealers across the United States. In 2002, 2001 and 2000 the Company's U.S. Service Stores segment generated approximately 9%, 11% and 12%, respectively, of the Company's net sales. Suppliers All of the Company's finished goods inventories are manufactured for the Company by third party suppliers primarily located in China and Japan. The Company maintains ownership of tools and molds used by many of its suppliers. The Company's most significant suppliers, Izumi Products, Inc., Raymond Industrial Ltd., and Specialife Industries, Ltd., accounted for approximately 45% of the Company's overall cost of sales in 2002. Remington has had a relationship with its suppliers for many years and management considers its present relationships to be good. The Company continues to manufacture certain foil cutting systems and accessories in Bridgeport, Connecticut using proprietary cutting technology and a series of specially designed machines. These systems are then shipped to third party suppliers for inclusion in the finished product. Research and Product Development The Company believes that research and development activities are an important part of the Company's business and are essential to its long-term prospects. Research and development efforts at Remington allow the Company to maintain its unique manufacturing strength in cutting systems for shavers. The Company is continuously pursuing new innovations for its line of shavers including foil improvements and new cutting and trimmer configurations. The Company also devotes resources to the development of new technologies for its other products. During 2002, 2001 and 2000, research and development expenditures by the Company amounted to approximately $3.4, $4.3 and $4.2 million, respectively. 4 Patents and Trademarks The Company owns over 400 patent and patent applications in various countries for both design and utility. The Company's patents primarily cover electric shavers, cutting and trimming mechanisms and hair care and wellness products. In addition, the Company maintains over 1,300 different trademarks around the world which are utilized in connection with its products. As a result of the common origins of the Company and Remington Arms Company, Inc. ("Remington Arms"), the Remington mark is owned by each company with respect to its principal products as well as associated products. Thus, the Company owns the Remington mark for shavers, shaver accessories, grooming products and personal care products, while Remington Arms owns the mark for firearms, sporting goods and products for industrial use, including industrial hand tools. The terms of a 1986 agreement between the Company and Remington Arms provides for their respective rights to use the Remington trademark on products, which are not considered "principal products of interest" for either company. A separate company, Remington Licensing Corporation, owns the Remington trademark in the U.S. with respect to any overlapping uses and the Company and Remington Arms are each licensed to use the trademarks owned by Remington Licensing Corporation in their respective areas of interest. The Company retains the Remington trademark for nearly all products which it believes can benefit from the use of the brand name in the Company's distribution channels. Competition The Company operates in highly competitive markets. Competition for retail sales to consumers is based on several factors, including brand name recognition, value, quality, price and availability. Primary competitive factors with respect to selling such products to retailers are brand reputation, product categories offered, broad coverage within each product category, support and service in addition to price. Remington competes with established producers of foil and rotary shavers, such as Koninklijke Philips Electronics, N.V. ("Philips") and The Gillette Company, including its Braun Division, in the U.S. and International electric shaver and grooming markets. The Company's major competitors in the hair care market are Conair and Helen of Troy. There are no substantial barriers to entry for new competitors in the personal care products industry. However, companies that are able to maintain or increase the amount of retail shelf space allocated to their respective products may gain a competitive advantage. The rotary shaver market is significant outside the United States. The continued expansion of sales of the Company's rotary shavers outside the United States will be affected by, among other factors, the outcome of ongoing legal actions between the Company and Philips with respect to trademarks and designs registered by Philips outside the United States. See Item 3. Legal Proceedings. 5 Employees As of March 1, 2003, the Company employed approximately 750 people worldwide of which approximately 90 were employed part-time in the Company's service stores. None of the Company's employees are represented by a union. Remington believes that its relations with its employees are good. Environmental Matters The Company's manufacturing operations in Bridgeport, Connecticut are subject to federal, state and local environmental laws and regulations. The Company believes it is in substantial compliance with all such environmental laws, which are applicable to its operations. In addition, as part of routine reporting requirements in connection with past property transfers, the Company has reported to the Connecticut Department of Environmental Protection (the "CTDEP") that it has detected petroleum, metals and solvent compounds in soil and ground water samples taken from its Bridgeport facility. The general remedial strategies have been selected by the Company and those strategies which require CTDEP approvals have been submitted for approval. All other strategies do not require approval for implementation. In addition to its ongoing program of environmental compliance, the Company has accruals of approximately $0.7 million to cover the anticipated costs of the remediation. The Company believes that any required change to the reserves due to the inherent uncertainties as to the ultimate costs for the remediation activities which are eventually undertaken would not be material to the Company's financial position or results of operations. International Operations and Distribution Remington's International segment generated approximately 27% of the Company's net sales in 2002 and 2001, respectively and approximately 31% of the Company's net sales in 2000. The Company's international network of subsidiaries and distributors currently extends to over 85 countries worldwide. The Company distributes its products through direct sales forces located in the United Kingdom, Germany, Italy, France, Ireland, Australia and New Zealand. In all other parts of the world the Company distributes its products through local distributors. The Company distributes products internationally through department stores, catalog showrooms, mass merchandisers, drug stores, specialized shaver shops and mail order distributors as well as through the Company's 10 service stores in the United Kingdom. In June 2000, the Company sold its 12 service stores in Australia. Additional financial information relating to Remington's international operations is set forth in Note 13 (Business Segment and Geographic Information) of the "Notes to Consolidated Financial Statements" of the Company appearing elsewhere herein. 6 Risk Factors In connection with a review of this Annual Report on Form 10-K/A, the following risk factors should be considered carefully. Debt. Remington has a significant amount of indebtedness. As of December 31, 2002 the Company had outstanding indebtedness of approximately $187 million or approximately $154 million net of approximately $33 million of cash and cash equivalents. Remington's substantial indebtedness could have important consequences. For example, it could: - make it more difficult for the Company to meet its obligations to creditors, including holders of its Senior Subordinated Notes, who could then require the Company to do such things as restructure its indebtedness, sell assets, or raise additional debt or equity capital; - limit the Company's ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of the Company's growth strategy, research and development costs or other purposes; - require the Company to dedicate a substantial portion of its cash flow to pay principal and interest on its debt, which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes; - limit the Company's flexibility in planning for and reacting to changes in its business and in the industry in which the Company operates that could make it more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and - place the Company at a disadvantage compared to its competitors that have less debt. Any of the above listed factors could have a material adverse affect on Remington's business and results of operations and its ability to meet its obligations. The credit agreement governing the Company's revolving credit facility restricts management's discretion in operating the Company's business. In addition, the credit agreement requires the Company to maintain specified financial ratios and tests, among other obligations. In addition, the credit agreement governing the Company's revolving credit facility restricts, among other things, the Company's: - ability to incur additional indebtedness; - ability to make acquisitions; and - ability to make capital expenditures. Market Uncertainties. The markets in which Remington competes are highly competitive. The Company competes with large and established national and multinational companies, as well as smaller companies, in all of its product lines. Some of these competitors have, and new competitors may have, substantially greater resources than Remington has. Consequently, it cannot be assured that Remington will be able to compete effectively in the future. 7 Manufacturing Uncertainties. The Company depends on comparatively few suppliers. The vast majority of finished goods are manufactured by suppliers located in China and Japan. The Company's three most significant suppliers of finished goods in 2002 accounted for approximately 45% of the total cost of sales, with the largest supplier comprising approximately 21% of the total cost of sales. Any adverse change in any of the following could have a material adverse effect on Remington's business: - relationships with these suppliers; - the financial condition of these suppliers; - the ability to import outsourced products; or - these suppliers' ability to manufacture and deliver outsourced products on a timely basis. Although the Company has long-established relationships with many of its suppliers, it does not have long-term contracts with any of its suppliers. It cannot be assured that the Company could quickly or effectively replace any of its suppliers if the need arose, and it cannot be assured that the Company could retrieve tooling and molds possessed by any of its suppliers. Remington's dependence on these few suppliers could also adversely affect its ability to react quickly and effectively to changes in the market for its products. In addition, international manufacturing is subject to significant risks, including: - labor unrest; - political instability; - restrictions on transfer of funds; - domestic and international customs and tariffs; - unexpected changes in regulatory environments; and - potentially adverse tax consequences. It cannot be assured that Remington's business will not be adversely affected by the aforementioned risks, each of which could have an adverse effect on its ability to increase or maintain its international importing activities and/or on its results of operations. Remington depends on a single manufacturing facility for certain essential parts of its products. Remington manufactures the majority of its foil cutting systems, using specially designed machines and proprietary cutting technology, at its sole company-owned manufacturing facility in Bridgeport, Connecticut. This manufacturing facility is subject to the normal hazards that could result in any material damage to any such facility. Damage to this facility, or prolonged interruption in the operations of this facility for repairs or other reasons, would have a material adverse effect on Remington's financial position and its results of operations. Product Introductions. The Company cannot be certain that its product innovations and marketing successes will continue. The Company believes that its future success will depend, in part, upon its ability to continue making innovations in its existing products and to develop, manufacture and market new products. The Company cannot assure that it will be successful in the introduction, marketing and manufacture of any new products or product innovations. Furthermore, there can be no assurance that the Company will be able to develop and introduce new products or improvements to its existing products which satisfy customer needs or achieve market acceptance. The failure to develop products and introduce them successfully in a timely manner could adversely affect Remington's financial condition and its results of operations. 8 Customer Concentration. A small number of major customers account for a significant percentage of Remington's total net sales, and a decrease in orders from these major customers would cause the Company's net sales and profitability to decline. Net sales to the Company's five largest customers accounted for approximately 50% of its total net sales in 2002. Wal-Mart accounted for approximately 30% of its net sales worldwide during 2002. No other customer accounted for more than 10% of the Company's worldwide net sales in 2002. Although the Company has long-established relationships with many of its customers, it does not have long-term contracts with any of its customers. A decrease in business from any of the Company's major customers could have a material adverse effect on the Company's financial condition and results of operations. On January 22, 2002, Kmart, one of the Company's largest U.S. customers, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. While the outcome of the bankruptcy case can not be predicted, the Company continues to ship product to Kmart and is hopeful that the customer will successfully reorganize and emerge from bankruptcy in 2003, as announced. However, if the customer is unsuccessful in reorganizing, there could be a short-term material adverse effect to the Company's operating results. It is the Company's belief that continued consumer demand for its products would ultimately be absorbed by the Company's other customers, although there can be no assurance of this. Kmart accounted for approximately 7% of the Company's net sales for each of the fiscal years ended December 31, 2002, 2001 and 2000. The Company has no pre-petition receivables from Kmart. Currency Risk. The Company is subject to foreign currency fluctuations as a result of its foreign operations. In 2002, 31% of the Company's net sales were made outside the United States. The U.S. dollar value of the Company's sales varies with currency exchange rate fluctuations. Changes in currency exchange rates could have an adverse effect on results of operations and the Company's ability to meet interest and principal obligations on its debt. The Company's results of operations are affected by changes in exchange rates. The Company's foreign subsidiaries sell products in local currency. While many of the Company's selling and distribution costs are also denominated in these currencies, a large portion of product costs are U.S. dollar denominated. The Company takes precautions against these fluctuations by entering into foreign exchange forward contracts, which, in effect, lock in U.S. dollar exchange rates for products which the Company's foreign subsidiaries purchase. However, there can be no assurance that significant changes in currency exchange rates will not have an adverse impact on the Company's business or results of operations. Managing Growth. The Company may be unsuccessful in managing the growth of its business or integrating possible future acquisitions. It cannot be assured that the Company will be able to either identify and acquire attractive acquisition candidates at prices and on terms favorable to it or succeed at effectively and profitably managing the integration of an acquired business. 9 Reliance on Key Personnel. The loss of the services of any members of the Company's senior management team could adversely affect its business. The Company is dependent on the continued services of its senior management team. The loss of any key personnel could have an adverse effect on the Company's business. The Company does not maintain key-person insurance for any of its officers, employees or directors. Litigation. The Company is engaged in a number of active litigations. In addition to litigation arising in the ordinary course of business, the Company is involved in a series of legal disputes with Philips. In each of several related actions which are pending in the United Kingdom, Philips has alleged that the sale of Remington's rotary shavers infringes upon registered trademarks owned by Philips. Accordingly, Philips is seeking damages and injunctions relating to the rotary shavers which Remington sells in the United Kingdom. Remington is defending these actions vigorously and has filed counterclaims alleging the invalidity of Philip's trademarks. The Company has filed preemptive claims against Philips in each of France and Italy seeking to nullify rotary shaver trademarks held by Philips in these countries. In response to Remington's claims and the sale by Remington of its rotary shavers, Philips has filed counterclaims alleging trademark infringement by Remington. At the present time, the Company cannot assess the damages that it would incur in the event it were to lose one or more of the pending or future litigations with Philips, although it does believe that such a loss or losses would not have a material adverse effect on its consolidated fiancial position or results of operations. PART II ITEM 6. Selected Financial Data The following table summarizes selected financial information and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and accompanying notes thereto appearing elsewhere herein (in thousands):
Year Ended December 31, ----------------------------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Statement of Operations Data: Net sales $365,061 $356,022 $342,180 $299,500 $252,300 Operating income 40,157 1,903 38,255 29,120 6,016 Interest expense, net 24,196 26,341 24,368 21,494 20,499 Net income (loss) (1) 16,773 (23,381) 12,737 6,035 (15,337) Depreciation and amortization 3,402 5,834 5,753 5,555 5,169 Balance Sheet Data (at period end): Working capital $82,552 $87,446 $106,039 $85,053 $68,294 Total assets (3) 234,957 241,736 242,487 223,990 195,727 Total debt 187,090 213,042 203,266 195,841 187,668 Cumulative Preferred Dividend (2) 73,335 58,243 44,835 32,921 22,336
------------------------------- (1) Due to the fact that the Company is a limited liability company ("L.L.C.") federal income taxes on net earnings of the Company are payable directly by the members pursuant to the Internal Revenue Code. Accordingly, no provision has been made for federal income taxes for the Company. However, certain state and local jurisdictions do not recognize L.L.C. status for taxing purposes and require taxes to be paid on net earnings. Furthermore, earnings of certain foreign operations are taxable under local statutes. (2) Dividend payments are subject to restrictions by the terms of the Company's debt agreements. See Note 6 of the "Notes to Consolidated Financial Statements." (3) As restated for December 31, 2002. See note 15 in the Consolidated Financial Statements and accompanying notes thereto appearing elsewhere herein. 2 PART II ITEM 8. Financial Statements and Supplementary Data The Company's financial statements and supplementary data are included elsewhere herein as outlined on page F-1. PART IV ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements 2. Financial Statement Schedule 3. Exhibits 31.1 Chief Executive Officer Certification of Periodic Financial Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer Certification of Periodic Financial Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None 3 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. REMINGTON PRODUCTS COMPANY, L.L.C. By: /s/Kris J. Kelley ---------------------------------------------- Kris J. Kelley, Vice President and Controller Date: September 25, 2003 4 INDEX TO FINANCIAL STATEMENTS
Pages ----- Financial Statements Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 2002 (Restated) and 2001 F-3 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 F-4 Consolidated Statements of Members' Deficit for the years ended December 31, 2002 (Restated), 2001 and 2000 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002,2001 and 2000 F-6 Notes to Consolidated Financial Statements F-7 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2002 S-1
Certain schedules are omitted because they are not applicable or the required information is provided in the Financial Statements or related notes thereto. F-1 Independent Auditors' Report To the Management Committee of REMINGTON PRODUCTS COMPANY, L.L.C.: We have audited the accompanying consolidated balance sheets of Remington Products Company, L.L.C. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, members' deficit, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the consolidated financial statement schedule listed in the index to the consolidated financial statements. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. As discussed in Note 4 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and intangible assets when it adopted SFAS No. 142, "Goodwill and Other Intangible Assets". As discussed in Note 15 to the consolidated financial statements, the accompanying 2002 financial statements have been restated. DELOITTE & TOUCHE LLP Stamford, Connecticut February 7, 2003 (September 25, 2003 as to Note 15) F-2 Remington Products Company, L.L.C. Consolidated Balance Sheets (in thousands)
December 31, ---------------------------- 2002 2001 ----------- ---------- (As Restated, see Note 15) ASSETS Current assets: Cash and cash equivalents $ 32,846 $4,087 Accounts receivable, net 73,205 78,849 Inventories 49,122 75,216 Prepaid and other assets 3,484 3,451 --------- --------- Total current assets 158,657 161,603 Property, plant and equipment, net 12,314 13,006 Goodwill, net 27,720 27,720 Other intangibles, net 24,399 24,866 Other assets 11,867 14,541 --------- --------- Total assets $234,957 $241,736 ========= ========= LIABILITIES AND MEMBERS' DEFICIT Current liabilities: Accounts payable $ 24,218 $ 30,006 Short-term borrowings 1,613 4,075 Current portion of long-term debt 314 322 Accrued liabilities 49,960 39,754 --------- --------- Total current liabilities 76,105 74,157 Long-term debt 185,163 208,645 Other liabilities 3,443 1,302 Commitments and contingencies Members' deficit: Members' deficit (19,413) (36,186) Accumulated other comprehensive income (10,341) (6,182) --------- --------- Total members' deficit (29,754) (42,368) --------- --------- Total liabilities and members' deficit $234,957 $241,736 ========= =========
See notes to consolidated financial statements. F-3 Remington Products Company, L.L.C. Consolidated Statements of Operations (in thousands)
Year Ended December 31, ------------------------------------------- 2002 2001 2000 -------- -------- -------- Net sales $365,061 $356,022 $342,180 Cost of sales 209,967 230,512 196,506 --------- --------- --------- Gross profit 155,094 125,510 145,674 Selling, general and administrative expenses 114,470 121,670 105,467 Amortization of intangibles 467 1,937 1,952 --------- --------- --------- Operating income 40,157 1,903 38,255 Interest expense, net 24,196 26,341 24,368 Other expense (income) (1,013) 2,039 751 --------- --------- --------- Income (loss) before income taxes 16,974 (26,477) 13,136 Provision (benefit) for income taxes 201 (3,096) 399 --------- --------- --------- Net income (loss) $ 16,773 $(23,381) $ 12,737 ========= ========= ========= Net income (loss) applicable to common units $ 1,681 $(36,789) $ 823 ========= ========= =========
See notes to consolidated financial statements. F-4 Remington Products Company, L.L.C. Consolidated Statements of Members' Deficit (in thousands)
Accumulated Other Total Preferred Common Other Accumulated Comprehensive Members' Equity Units Capital Deficit Income Deficit --------- ------ ------- ----------- ------------- -------- Balance, January 1, 2000 $ 94,921 $6,880 $(73,921) $(53,318) $(2,345) $(27,783) Preferred dividend 11,914 (11,914) Comprehensive income (loss): Net income 12,737 Foreign currency translation (2,235) Unrealized hedging loss (223) Total comprehensive income 10,279 -------- ------ --------- --------- -------- --------- Balance, December 31, 2000 106,835 6,880 (73,921) (52,495) (4,803) (17,504) Preferred dividend 13,408 (13,408) - Comprehensive income (loss): Net loss (23,381) Foreign currency translation (1,546) Unrealized hedging gain 167 Dividend distribution (104) Total comprehensive loss (24,864) -------- ------ --------- --------- -------- --------- Balance, December 31, 2001 120,243 6,880 (73,921) (89,388) (6,182) (42,368) Preferred dividend 15,092 (15,092) - Comprehensive income (loss): Net income 16,773 Additional mimimum pension liability adjustment (as restated, see note 15) (2,763) Foreign currency translation 1,390 Unrealized hedging loss (2,786) Total comprehensive income 12,614 -------- ------ --------- --------- -------- --------- Balance, December 31, 2002 $135,335 $6,880 $(73,921) $(87,707) $(10,341) $(29,754) ======== ====== ========= ========= ======== =========
See notes to consolidated financial statements. F-5 Remington Products Company, L.L.C. Consolidated Statements of Cash Flows (in thousands)
Year Ended December 31, --------------------------------------- 2002 2001 2000 -------- --------- -------- Cash flows from operating activities: Net income (loss) $16,773 $(23,381) $ 12,737 Adjustments to reconcile net income (loss) to net cash provided by (used in)operating activities: Depreciation 2,935 3,897 3,801 Amortization of intangibles 467 1,937 1,952 Amortization of deferred financing fees 2,259 2,242 2,790 Provision for bad debts 970 4,232 878 Inventory write-downs 2,021 9,518 1,309 Deferred income taxes 705 (3,289) 428 Other 147 785 223 -------- --------- --------- 26,277 (4,059) 24,118 Changes in assets and liabilities: Accounts receivable 9,203 4,015 (15,578) Inventories 26,400 (19,413) (15,740) Accounts payable (6,286) 6,209 506 Accrued liabilities 8,480 7,791 2,151 Other, net (5,550) 1,179 660 -------- --------- --------- Cash provided by (used in) operating activities 58,524 (4,278) (3,883) -------- --------- --------- Cash flows from investing activities: Capital expenditures (2,105) (4,322) (4,414) Cash flows from financing activities: Proceeds from sale of Senior Subordinated Notes - 50,000 - Repayments under term loan facilities - (18,869) (1,918) Repayments under credit facilities (63,886) (157,111) (49,497) Borrowings under credit facilities 36,051 136,968 61,989 Debt issuance costs and other, net (330) (8,215) (1,107) -------- --------- --------- Cash provided by (used in) financing activities (28,165) 2,773 9,467 Effect of exchange rate changes on cash 505 (428) (694) -------- --------- --------- Increase (decrease) in cash and cash equivalents 28,759 (6,255) 476 Cash and cash equivalents, beginning of year 4,087 10,342 9,866 -------- --------- --------- Cash and cash equivalents, end of year $32,846 $ 4,087 $ 10,342 ======== ========= ========= Supplemental cash flow information: Interest paid $22,207 $ 23,710 $ 21,810 Income taxes paid (refunded), net $ 156 $ 547 $ (17)
See notes to consolidated financial statements. F-6 Remington Products Company, L.L.C. Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Remington Products Company, L.L.C. and its wholly owned subsidiaries, (the "Company") develop and market personal care products. The Company distributes on a worldwide basis electrical shavers and accessories, grooming products, hair care appliances, including hair dryers and hairsetters, wellness products such as paraffin wax hand spas and foot spas, and other small electrical consumer products. The Company's products are sold worldwide primarily through mass merchandisers, catalog showrooms, drug store chains and department stores in addition to the Company's own service stores. Organization: Remington Products Company, L.L.C., a Delaware limited liability company, was formed by Vestar Shaver Corp. and RPI Corp. ("RPI") to acquire the operations of Remington Products Company and its subsidiaries in May of 1996. Vestar Razor Corp. was formed in May of 1996 to hold an interest in the Company. Vestar Shaver Corp. and Vestar Razor Corp. (together, the "Vestar Members") are wholly owned by Vestar Equity Partners, L.P. ("Vestar"), an institutional equity capital fund and affiliate of Vestar Capital Partners ("Vestar Capital"). Remington Capital Corp. is a wholly owned subsidiary of Remington Products Company, L.L.C. and has no operations of its own. Basis of Presentation: The consolidated financial statements include the accounts of Remington Products Company, L.L.C. and subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results will differ from those estimates. Estimates are used for, but not limited to the establishment of the allowance for doubtful accounts, reserves for sales returns and allowances, reserves for obsolete inventories, product warranty costs, taxes, pension liability and contingencies. Cash and Cash Equivalents: Cash consists of bank balances, cash on hand and balances in money market accounts. Allowance for Doubtful Accounts: The allowance for doubtful accounts at December 31, totaled $5,008 thousand in 2002 and $4,961 thousand in 2001. Inventories: The Company's inventories are valued at the lower of cost or market. The majority of inventory is finished goods and is accounted for utilizing the first-in, first-out (FIFO) method. Domestic manufactured inventories, which represent approximately 5% of the consolidated inventories as of December 31, 2002 and 4% at December 31, 2001, are stated at cost determined by the last-in, first-out (LIFO) method. As of December 31, 2002 and 2001, the excess of current replacement cost over LIFO cost of inventories was not significant. Property, Plant and Equipment: Property, plant and equipment is recorded primarily at cost. Depreciation is provided for principally on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 20 years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. Intangibles: Patents are being amortized on a straight-line basis over a period of ten years. Goodwill and tradenames, which have been deemed to have indefinite lives, are no longer being amortized and are tested for impairment at least annually. F-7 Deferred Financing Costs: Costs associated with obtaining financing arrangements are included in other assets and are being amortized over the term of the related borrowings using the effective interest rate method. Deferred financing costs and accumulated amortization totalled $19.5 million and $10.6 million, respectively, at December 31, 2002 and $19.7 million and $8.9 million, respectively, at December 31, 2001. Long Lived Assets: Impairment losses are recorded on long lived assets when indicators of impairment are present and the anticipated undiscounted operating cash flows generated by those assets are less than the assets' carrying value. Revenue Recognition: Revenue from product sales is recognized, net of estimated sales returns and allowances, when the goods are shipped and title passes to the customer. Research and Development: Research and development costs related to both present and future products are expensed as incurred. Such costs totaled $3.4 million, $4.3 million and $4.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. Shipping and Handling Costs: Shipping and handling costs represent costs associated with shipping products to customers and handling finished goods. Included in selling, general and administrative expenses are shipping and handling costs of $18.6 million in 2002, $25.2 million in 2001 and $16.7 million in 2000. Interest Income: Interest income is included in interest expense, net on the Consolidated Statements of Operations and amounted to $0.2 million, $0.1 million, and $0.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. Income Taxes: U.S. Federal income taxes on net earnings of the Company are payable directly by the members. In jurisdictions where partnership status is not recognized or foreign corporate subsidiaries exist, the Company provides for income taxes currently payable as well as for those deferred because of temporary differences between the financial and tax basis of assets and liabilities. Net Income (Loss) Applicable to Common Units: Net income (loss) applicable to common units is calculated by taking the Company's net income or loss for the period and subtracting the cumulative preferred dividend for the same period. Derivatives and Hedging Activity: The Company recognizes all derivatives at fair value. Depending on the nature of the underlying exposure being hedged, changes in the fair value of derivatives are recognized either in the statement of operations or other comprehensive income ("OCI"). The ineffective portion of the change in fair value of the derivative is recognized in earnings. In accordance with the Company's foreign exchange risk management policy, the Company hedges the foreign subsidiaries' forecasted purchases of inventory denominated in currencies different than the subsidiary's functional currency. The derivative contracts related to these hedges primarily consist of forward foreign exchange contracts and options, which are designated as cash flow hedges. These contracts generally have maturities not exceeding twelve months. For cash flow hedges, the fair value changes of the derivative instruments related to the effective portion of the hedges are initially recorded as a component of OCI. Unrealized gains and losses on cash flow hedges accumulate in OCI and are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. For forecasted purchases of inventory, amounts are reclassified when the hedged inventory is reflected in cost of goods sold. F-8 As of December 31, 2002 and 2001, other than forward foreign exchange contracts and options, the Company was not party to any other derivatives as defined by SFAS No. 133, as amended and interpreted. At December 31, 2002, the Company had unrealized losses of $3.0 million, net of tax, classified in OCI for its outstanding hedge contracts related to forecasted inventory purchases. Approximately $2.1 million of this amount is expected to be reclassified to cost of goods sold in the first six months of 2003. For the three years ended December 31, 2002, 2001 and 2000 the losses classified in other expense (income) related to the ineffective portion of the Company's outstanding hedge contracts were immaterial. Translation of Foreign Currencies: Assets and liabilities of the Company's foreign subsidiaries are translated at the exchange rate in effect at each balance sheet date. Statement of operations accounts are translated at the average exchange rate for the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in the cumulative translation adjustment account in OCI. Foreign currency transaction gains and losses are recognized in other expense (income) and totaled a net gain of $1.5 million for the year ended December 31, 2002 and net losses of $1.7 million and $0.9 million for the years ended December 31, 2001 and 2000, respectively. Recent Accounting Pronouncements: In August 2001, SFAS No. 143, Accounting for Asset Retirement Obligations, was issued. This Statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In November 2001, the Emerging Issues Task Force reached consensus on Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products (EITF 01-9). The Company adopted this consensus on January 1, 2002. In accordance with the consensus the Company has reclassified, for all periods presented, certain payments to its customers as a reduction of sales, primarily the cost of cooperative advertising with its trade customers. Prior to the adoption of this consensus the Company classified these payments as selling, general and administrative expenses in its Consolidated Statement of Operations. Because adoption of EITF 01-9 resulted solely in reclassification within the Consolidated Statement of Operations, there has been no impact on the Company's financial condition, operating income or net income for any of the periods presented. In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. This statement provides guidance on the recognition and measurement of liabilities associated with disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45) was issued. FIN No. 45 elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not expect the initial recognition provision to have a material impact on the Company's consolidated financial position results of operations or cash flows. The disclosure requirements of FIN No. 45 are effective for the Company's year ended December 31, 2002 and are included in footnote 9 to the consolidated financial statements. In January 2003, FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46) was issued. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. Based on current operations, the Company does not expect the adoption of FIN No. 46 to have a material effect on its financial position or results of operations or cash flows. F-9 2. Inventories Inventories were comprised of the following as of December 31, 2002 and 2001 (in thousands): 2002 2001 -------- -------- Finished goods $46,552 $71,308 Work in process and raw materials 2,570 3,908 ------- ------- $49,122 $75,216 ======= ======= 3. Property, Plant and Equipment Property, plant and equipment as of December 31, 2002 and 2001 consisted of (in thousands): 2002 2001 -------- -------- Land and buildings $ 2,960 $ 2,790 Leasehold improvements 4,578 5,230 Machinery, equipment and tooling 12,569 11,440 Furniture, fixtures and other 7,550 7,804 -------- -------- 27,657 27,264 Less accumulated depreciation (15,343) (14,258) -------- -------- $12,314 $13,006 ======== ======== 4. Goodwill and Other Intangibles The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. In accordance with SFAS No. 142, beginning on January 1, 2002, the Company's goodwill and its tradenames, which have been deemed to have indefinite lives, are no longer being amortized and are subject to annual impairment tests. Application by the Company of the nonamortization provision of SFAS No. 142 resulted in an increase in operating income of approximately $1.4 million for the year ended December 31, 2002. Had the Company applied SFAS No. 142 on January 1, 2000, operating income would have increased by approximately $1.5 million for each of the years ended December 31, 2001 and 2000. The Company's reporting units are also its reportable segments and all of the Company's goodwill is associated with the North American segment. As of January 1, 2002 the Company performed the required transitional impairment tests of goodwill and tradenames and no transitional impairment was present. As of June 30, 2002 the Company performed the required annual impairment tests of goodwill and tradenames and no impairment was present. There can be no assurance that future impairment tests will not result in a charge to earnings. Goodwill and other intangible assets were comprised of the following (in thousands): December 31, December 31, 2002 2001 ------------- ------------ Amortized Intangible Assets: Patents carrying amount $4,670 $ 4,670 Patents accumulated amortization 3,090 2,623 ------ ------- Patents, net $1,580 $ 2,047 ====== ======= Unamortized Intangible Assets: Goodwill $27,720 $27,720 Tradenames 22,819 22,819 ------- ------- $50,539 $50,539 ======= ======= F-10 Remington Products Company, L.L.C. Notes to Consolidated Financial Statements (continued) Estimated amortization expense is $467 thousand for each of the three years in the period ending December 31, 2005, $179 thousand for the year ending December 31, 2006 and zero for each year thereafter. 5. Accrued Liabilities Accrued liabilities were comprised of the following as of December 31, 2002 and 2001 (in thousands): 2002 2001 -------- --------- Advertising and promotion expenses $22,004 $18,233 Compensation and benefits 9,575 4,369 Income and other taxes payable 3,558 3,048 Forward contracts 3,298 - Interest 2,678 3,200 Distribution expense 1,531 3,399 Other 7,316 7,505 -------- ------- $49,960 $39,754 ======== ======= 6. Debt Long-term debt at December 31, 2002 and 2001 consisted of (in thousands): 2002 2001 ---------- ----------- Senior Subordinated Notes $180,000 $180,000 Revolving Credit Facility 4,950 28,373 Capital Leases 527 594 --------- --------- 185,477 208,967 Less current portion (314) (322) --------- --------- $185,163 $208,645 ========= ========= 11% Senior Subordinated Notes: During 2001 the Company completed the sale of $50.0 million of 11% Senior Subordinated Notes. The net proceeds of approximately $44.8 million were used to repay existing term loans and supplemental loans and a portion of revolving credit borrowings. The Company has outstanding $180.0 million in principal amount of 11% Senior Subordinated Notes, which consists of approximately $165 million of Series D Notes and approximately $15 million in Series B Notes (the "Senior Subordinated Notes"). The Senior Subordinated Notes are general unsecured obligations of the Company which mature on May 15, 2006. Interest accrues at the rate of 11% per annum and is payable semi-annually in arrears. The Senior Subordinated Notes are currently redeemable, in whole or in part, at the option of the Company at a redemption price of 103.667% of the principal amount then outstanding plus accrued and unpaid interest and any applicable damages. The redemption price reduces to 101.833% on May 15, 2003 and then to 100% on May 15, 2004. The Senior Subordinated Notes indenture contains a number of operating covenants which impose restrictions with respect to certain business matters, including the amount and terms under which the Company can obtain additional financing in the future. In addition, the Senior Subordinated Notes indenture limits the amount of dividends that the Company is permitted to pay. As of December 31, 2002, the Company was in compliance with its debt covenants under the Senior Subordinated Notes indenture. F-11 Revolving Credit Facility: The Company has a $110.0 million asset based revolving credit facility (the "Facility") . The Facility provides for $70.0 million in revolving credit to the Company and $40.0 million in revolving credit to certain of its subsidiaries. Borrowings under the facility are subject to a borrowing base of 85% of eligible receivables and 60% of eligible inventories. The Facility expires on March 31, 2006. Interest rates per annum applicable to the Facility are based, at the Company's option, as of December 31, 2002, upon a Eurodollar rate ("LIBOR") plus 3.25% or the greater of (i) prime rate plus 2.0% and (ii) the federal funds rate plus 2.5%; provided, however, that the interest rates are subject to adjustment based on certain levels of financial performance. As of December 31, 2002 the interest rate on borrowings under the Facility was 6.75%. Interest is payable quarterly in arrears, including a commitment fee of 0.375% per annum on the average daily unused portion of the Facility. The obligations under the Facility are secured by essentially all of the tangible and intangible assets and properties of the Company and its subsidiaries. The Facility requires the Company to maintain certain financial maintenance tests, the more restrictive of which require the Company to maintain leverage and fixed charge coverage ratios as defined. The Facility also contains a number of operating covenants which impose restrictions with respect to certain business matters, including the amount and terms under which the Company can obtain additional financing in the future. In addition, the Facility limits the amount of dividends that the Company is permitted to pay. As of December 31, 2002 the Company was in compliance with all covenants under the Facility and availability under the Facility was approximately $62 million in addition to the Company's cash of $32.8 million. On November 22, 2002 the Facility was amended to allow the Company, subject to certain restrictions, to repurchase up to a maximum of $20 million of Senior Subordinated Notes during 2003 and up to $10 million per year thereafter, not to exceed $40 million in the aggregate during the term of the Facility. Short Term Borrowings: Short Term Borrowings consist of local revolving credit lines at some of the Company's foreign subsidiaries and totaled approximately $1.6 million and $4.1 million as of December 31, 2002 and 2001, respectively. These facilities are collateralized by assets of the subsidiaries or are guaranteed by the Company. The weighted average interest rate under these facilities was approximately 6.0% in 2002 and 6.3% in 2001. 7. Membership Equity The Vestar Members and RPI (collectively the "Members") have entered into an Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"), which governs the relative rights and duties of the Members. The ownership interests of the Members in the Company consist of preferred members' equity (the "Preferred Equity") and common units (the "Common Units"), together, the "Equity". The Common Units represent the common equity of the Company. As of December 31, 2002, the Company's Common Units were owned 50% by the Vestar Members and 50% by RPI, however, in accordance with the LLC Agreement, Vestar effectively controls the Management Committee and the affairs and policies of the Company. The Preferred Equity is entitled to a cumulative preferred dividend of 12% per annum, compounded quarterly, and to an aggregate liquidation preference of $62.0 million (net of any prior repayments of Preferred Equity) plus any accrued but unpaid preferred dividends. As of December 31, 2002 the aggregate unpaid Preferred Equity, including accrued dividends of $73.3 million, totaled $135.3 million of which the Vestar Members own 48.4% and RPI owns 51.6%. In January 1998, the Company repurchased any remaining outstanding common units owned by certain officers of the Company, cancelled all outstanding related options and adopted a new Phantom Equity Program. Under this program, as amended, a maximum of approximately 20.2% of the value of the Company's Equity can be awarded to selected officers and other key employees of the Company. The Phantom Equity Program is comprised of time based, performance based and super performance based awards. All awards grant to the recipient a specified percentage of the Equity (the "applicable percentage"). F-12 A time based award vests either in five equal annual installments, upon the sale of the Company or upon an initial public offering of the Company's stock, whichever comes first. The performance and super performance based awards are similar to the time based awards except that the performance based award vests in stages as the Company achieves specified performance targets while the super performance based award vests entirely upon the achievement of a single target. The Company has achieved the specified performance target required for full vesting of the outstanding performance based awards, but has not as yet achieved the specific performance target for full vesting of the outstanding super performance based award. Payment of vested awards is dependent upon the achievement of both a performance criteria and an event criteria, except in the discretion of the Management Committee in the event of death or disability or termination of employment without cause. The event criteria is a Company sale, IPO, or when Vestar's ownership falls below 10% of the Common Units. Any super performance based award which is not fully vested by December 31, 2004 will automatically terminate. The Phantom Equity Program and all awards are subject to readjustment in the event of a reorganization of the Company required in connection with a refinancing, and the applicable percentages are subject to readjustment to take into consideration new issuances of Equity. 8. Income Taxes The Company is recognized as a partnership for Federal income tax purposes. As such, U.S. Federal income taxes on net earnings of the Company are payable directly by the members pursuant to the Internal Revenue Code. Accordingly, no provision has been made for Federal income taxes for the Company. However, certain state and local jurisdictions do not recognize partnership status for taxing purposes and require taxes to be paid on net earnings. Furthermore, earnings of certain foreign operations are taxable under local statutes. Pretax income/(losses) for years ended December 31, are as follows (in thousands): 2002 2001 2000 --------- --------- --------- U.S. operations $15,242 $ (3,503) $11,765 Non-U.S. operations 1,732 (22,974) 1,371 ------- --------- ------- Total $16,974 $(26,477) $13,136 ======== ========= ======= The provision for income taxes consists of the following for the years ended December 31 (in thousands): 2002 2001 2000 --------- --------- --------- Current: Foreign $(1,103) $ 151 $ (55) State and local 30 42 26 Deferred: Foreign 1,274 (3,289) 428 -------- -------- ------ Total $ 201 $(3,096) $ 399 ======== ======== ====== F-13
Reconciliation of income taxes computed at the U.S. Federal statutory income tax rate to the provision for income taxes (in thousands): Income taxes computed at statutory U.S. Federal $5,941 $(9,270) $4,734 income tax rate Partnership status for U.S. federal income tax purposes (5,335) 1,344 (4,254) State and local income taxes 30 42 26 Foreign tax refunds - - (924) Establishment/(reversal) of valuation allowance (875) 3,998 (16) Adjustment for foreign income tax rates 440 790 833 ------- -------- ------- Provision for income taxes $ 201 $(3,096) $ 399 ======= ======== =======
The components of the Company's deferred tax assets and liabilities included on the balance sheet at December 31 are as follows (in thousands): 2002 2001 ------- ------- Depreciation and other $1,798 $ 530 Foreign tax loss carryforwards 6,724 8,758 ------ ------- 8,522 9,288 Less valuation allowance (4,773) (5,161) ------- ------- Total deferred tax assets (liabilities), net $3,749 $4,127 ======= ======= The valuation allowance relates primarily to the foreign tax loss carryforwards and other foreign deferred tax assets. The valuation allowance has been recorded against the portion of the foreign tax loss carryforwards and other deferred tax assets for which, based on the available evidence, it is more likely than not that a tax benefit will not be realized. Approximately $2.5 million of the $21.4 million in foreign tax loss carryforwards expire between 2003 through 2007, while the remaining $18.9 million has no expiration date. 9. Commitments and Contingencies The Company is liable under the terms of noncancelable leases of real estate and equipment for minimum annual rent payments as follows (in thousands): Operating Capital Leases Leases --------- ------- 2003 $ 3,981 $381 2004 2,555 129 2005 2,009 85 2006 1,260 - 2007 and thereafter 4,624 - ------- ---- Total minimum lease payments $14,429 595 ======= ==== Less: amount representing interest 68 ---- Present value of minimum lease payments $527 ==== Rent expense was $7,245, $7,022 and $7,004 thousand for the years ended December 31, 2002, 2001 and 2000. F-14 The majority of the leases contain escalation clauses which provide for increases to recover future increases in certain operating costs and certain leases require additional payments based on sales volume. The future minimum rental payments shown above include base rentals with known escalations. Lease agreements may include renewal options and usually require that the Company pay for utilities, taxes, insurance and maintenance expenses. The Company maintains a reserve for warranty expense which provides for future claims by consumers under the Company's product warranty. The reserve as of December 31, 2001 was $1.3 million. During 2002 charges against the reserve and additional provisions made to the reserve were $1.6 million and $1.7 million, respectively, thereby resulting in a $1.4 million reserve for warranty expense as of December 31, 2002. As of December 31, 2002, the Company had outstanding letters of credit of $1.3 million and commitments to purchase goods and services, primarily inventory for resale, in the amount of $40.3 million. Pursuant to severance and retirement agreements with certain former executives of the Company, such former executives' phantom stock awards were cancelled. However, the value of the vested portion of these awards as of the beginning of 2003 as determined by the Management Committee will be paid to the executives at the time an "event" occurs which would otherwise require generally payments under the Company's Phantom Equity Program (refer to Note 7 for additional disclosure of the Company's Phantom Equity Program). The aggregate amount of such contingent payments is approximately $2.0 million. The Company is involved in legal and administrative proceedings and claims of various types. While any litigation contains an element of uncertainty, management believes that the outcome of each such proceeding or claim which is pending or known to be threatened, or all of them combined, will not have a material adverse effect on the Company's consolidated financial position or results of operations. 10. Employee Benefit Plans United Kingdom Pension Plan. The Company's UK subsidiary has a contributory defined benefit pension plan which covers substantially all of the UK subsidiary's employees. Pension benefits are based upon length of service and compensation under a final compensation averaging formula. The Company's funding policy is to make contributions consistent with statutory requirements. The plan's assets are primarily invested in equity instruments. Information regarding the Company's pension plan as of December 31, 2002 and 2001 are as follows (in thousands): F-15 Change in Benefit Obligation: 2002 2001 ------ ------ Benefit obligation at beginning of year $6,760 $6,893 Service cost 375 362 Interest cost 407 355 Actuarial loss 923 - Benefits paid (657) (679) Currency exchange rate effects 768 (171) ------- ------- Benefit obligations at end of year 8,576 6,760 ------- ------- Change in Plan Assets: Fair value of plan assets at beginning of year 5,341 6,560 Actual return on plan assets (879) (837) Employer contributions 332 360 Participant contributions 104 114 Benefits paid (657) (679) Currency exchange rate effects 501 (177) ------- ------- Fair value of plan assets at end of year 4,742 5,341 ------- ------- Funded Status (3,834) (1,419) Unrecognized net actuarial loss 4,481 2,016 ------- ------- Prepaid benefit cost $ 647 $ 597 ======= ======= Amounts recognized in the consolidated balance sheets: Prepaid pension cost $ - $ 597 Accrued benefit liability (2,604) N/A Accumulated other comprehensive income 3,251 - ------- ------- Net amount recognized $ 647 $ 597 ======= ======= Weighted average assumptions: Discount rate 5.5% 6.0% Expected return on plan assets 7.0% 7.0% Rate of compensation increase 3.25% 3.25% Year Ended December 31, ------------------------- 2002 2001 2000 ---- ---- ---- Components of Net Periodic Benefit Cost: Service cost $ 271 $253 $ 259 Interest cost 407 380 370 Expected return on plan assets (333) (312) (426) ------ ----- ------ Net periodic benefit cost $ 345 $321 $ 203 ====== ===== ====== Employee Savings Plan. The Company has a savings accumulation plan (the "Plan") under Section 401(k) of the Internal Revenue Code covering substantially all regular employees in the United States. The Plan is subject to the provisions of ERISA. The Plan provides for Company matching contributions in an amount equal to 50% of those employees' contributions up to a maximum of 6% of their total salary. Effective early 2003 the Company amended its matching contribution to 60% of the first 6% of annual compensation contributed. The Company's matching contributions were $0.4 million for each of the years ended December 31, 2002 and 2001 and $0.3 million for the year ended December 31, 2000. F-16 Deferred Compensation Plan. The Company has a Deferred Compensation Plan pursuant to which eligible executive employees may elect to defer all or a portion of the bonus otherwise payable under the Company's annual bonus plan and up to 50% of their annual salary, and such amounts are placed into a deferral account. For each employee who elects to participate in the Deferred Compensation Plan and makes a contribution thereto, the Company makes a matching contribution of 25% of an employee's contribution, up to a maximum contribution by the employee of $300 thousand, subject to the achievement by the Company of its performance goals for the fiscal year with respect to which the contribution was made. The participants may select various mutual funds in which all or a part of their deferral accounts will be deemed to be invested. Distributions from a participant's deferral account will be paid in a lump sum or in equal annual installments over a period of up to 15 years beginning upon their termination of employment, death or retirement. All amounts deferred by the participants pursuant to the Deferred Compensation Plan are paid to a Trust to be held in order to fund the Company's obligations under the Deferred Compensation Plan. The assets of the Trust, however, are subject to the claims of the creditors of the Company in certain circumstances. 11. Financial Instruments, Credit Risk and Other Fair Value of Financial Instruments: The carrying amounts for cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities approximate fair value due to the short maturities of these instruments. The fair value and book value at December 31, 2002 of long-term fixed rate debt was approximately $147.8 million and $180.0 million, respectively. The fair value and book value at December 31, 2001 of long-term fixed rate debt was approximately $137.7 million and $180.0 million, respectively. Concentration of Credit Risk: Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and accounts receivable. The Company places its cash with high credit quality institutions. At times such amounts may be in excess of the FDIC insurance limits. As of December 31, 2002, the Company had an uncollateralized receivable with Wal-Mart which represented approximately 19% of the Company's accounts receivable balance. During calendar 2002, sales to Wal-Mart represented approximately 30% of the Company's net sales. The Company performs ongoing credit evaluations of its customers' financial condition but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Foreign Currency Exposure Management: The Company is exposed to foreign currency risk primarily to the extent that its foreign subsidiaries purchase inventory in U.S. dollars. The Company has entered into foreign currency forward contracts and options to mitigate the effect of fluctuating foreign currencies. The Company uses derivative financial instruments only for risk management purposes and does not use them for speculation or trading. At December 31, 2002, forward contracts to sell approximately 13.9 million UK Pounds Sterling, 3.7 million Canadian dollars, 4.4 million Australian dollars and 4.5 million euros were outstanding, all of which mature in 2003. At December 31, 2001, forward contracts to sell 15.2 million UK Pounds Sterling, 6.7 million Canadian dollars, 6.1 million Australian dollars and 6.3 million euros were outstanding and matured at various dates in 2002. The accounting for hedges is discussed separately under Derivatives and Hedging Activity within Footnote 1. Other: The Company's finished goods are manufactured for the Company by third-party suppliers located primarily in China and Japan. The Company's most significant suppliers, Izumi Industrial Inc., Raymond Industrial Ltd., and Specialife Industries, Ltd., accounted for approximately 45% of the Company's overall cost of sales in 2002. Although the Company considers its present relationships with these suppliers to be good, any adverse change in the relationships with these suppliers, the financial condition of these suppliers, the Company's ability to import outsourced products or these suppliers' ability to manufacture and deliver outsourced products on a timely basis would have a material adverse effect on the Company. F-17 12. Related Party Transactions Pursuant to a management agreement (the "Management Agreement") entered into in connection with the reorganization of the Company in 1996, Vestar Capital receives an annual advisory fee equal to the greater of $500 thousand or 1.5% of EBITDA (as defined in such agreement) of the Company on a consolidated basis for rendering advisory and consulting services in relation to strategic financial planning and other affairs of the Company. Vestar Capital will also be paid reasonable and customary investment banking fees in connection with an initial public offering, sale of the Company and other financing. The Management Agreement will be in effect until May 23, 2006, provided that the Management Agreement will terminate on the earlier to occur of: (i) a qualified public offering or (ii) the first date that the Vestar Members own less than 25% of the number of the Company's Common Units owned by the Vestar Members on May 23, 1996, and provided further that Vestar Capital may terminate the Management Agreement at any time. Pursuant to a consulting and transitional services agreement (the "Consulting Agreement") entered into in connection with the reorganization of the Company in 1996, RPI receives an annual fee equal to the greater of $500 thousand or 1.5% of EBITDA (as defined in such agreement) of the Company on a consolidated basis for rendering advisory and consulting services in relation to strategic financial planning, product development and evaluation of mergers, acquisitions and divestitures. The Consulting Agreement will be in effect until May 23, 2006, provided that the Consulting Agreement will terminate on the earlier to occur of: (i) a qualified public offering or (ii) the first date that RPI owns less than 25% of the number of the Company's Common Units owned by RPI on May 23, 1996, and provided further that Vestar Capital may terminate the Consulting Agreement at any time (but only to the extent that Vestar Capital also terminates similar provisions of the Management Agreement). Pursuant to a reimbursement and indemnification agreement (the "Indemnification Agreement") between the Company, Vestar and Mr. Kiam entered into in June 1999 in connection with the guarantee of the unsecured supplemental loans to the Company under the former senior credit agreement, Vestar and Mr. Kiam, each received an annual guarantee fee of $100 thousand from the Company. This Agreement was terminated in April 2001, when the unsecured supplemental loans under the guarantee were paid in full. 13. Business Segment and Geographical Information The Company distributes its products through its three operating segments, which are comprised of 1) the North America segment, which sells product primarily through mass-merchant retailers, department stores and drug store chains throughout the United States and Canada, 2) the International segment, which sells product through an international network of subsidiaries and distributors and 3) the U.S. Service Stores segment, consisting of Company-owned and operated service stores throughout the United States. The Operating segments reported below are the segments of the Company for which separate financial information is available that is evaluated on a regular basis by the Company's senior management in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The segment's performance is evaluated based on segment operating income, which is defined as earnings before interest, taxes, depreciation and amortization. All corporate related costs and assets, such as intangibles and deferred financing fees, are included in the North America segment and are not allocated to the other segments' operating income or assets, respectively. Segment net sales are evaluated excluding intersegment sales, which are not material. F-18 Information by segment and geographical location is as follows (in thousands):
Year Ended December 31, ---------------------------------------------- 2002 2001 2000 -------- -------- -------- Net Sales: North America $232,669 $220,538 $191,990 International 98,984 96,817 107,445 U.S. Service Stores 33,408 38,667 42,745 --------- --------- --------- Total $365,061 $356,022 $342,180 ========= ========= ========= Operating Income: North America $ 37,346 $ 21,309 $ 32,278 International 4,590 (15,319) 8,533 U.S. Service Stores 1,623 1,747 3,197 Depreciation and amortization (3,402) (5,834) (5,753) --------- --------- --------- Total $ 40,157 $ 1,903 $ 38,255 ========= ========= ========= Segment Assets: North America $137,112 $158,322 $143,365 International 57,891 71,220 79,867 U.S. Service Stores 7,108 8,107 8,913 Cash and Cash Equivalents 32,846 4,087 10,342 --------- --------- --------- Total $234,957 $241,736 $242,487 ========= ========= ========= Capital Expenditures: North America $ 1,791 $ 2,598 $ 3,136 International 295 889 714 U.S. Service Stores 19 835 564 --------- --------- --------- Total $ 2,105 $ 4,322 $ 4,414 ========= ======== =========
Net sales in the United Kingdom represented approximately 14%, 14% and 17% of the Company's net sales during the years ended December 31, 2002, 2001 and 2000, respectively. No other country contributed more than 10% of net sales. The Company's largest customer, Wal-Mart, accounted for approximately 30%, 30% and 25% of the Company's net sales during the years ended December 31, 2002, 2001 and 2000, respectively, and is serviced primarily by the North American segment. No other customer accounted for more than 10% of the Company's net sales during the years ended December 31, 2002, 2001 and 2000. F-19 14. Quarterly Financial Information (unaudited, in thousands)
Three Months Ended ---------------------------------------------------------- 2002 March 31 June 30 September 30 December 31 Total Year ---------------------- ---------- ---------- ------------ ----------- ---------- Net sales $53,805 70,000 79,203 162,053 365,061 Gross profit 21,458 28,258 33,869 71,509 155,094 Operating income 1,691 4,885 11,256 22,325 40,157 Income (loss) before income taxes (4,272) (377) 4,971 16,652 16,974 Net income (loss) (4,066) (238) 5,532 15,545 16,773 Net income (loss) applicable to common units (7,673) (3,954) 1,705 11,603 1,681 Total Comprehensive Income (loss) (1) (3,804) (770) 4,933 12,255 12,614 2001 ---------------------- Net sales $51,746 $58,619 $78,243 $167,414 356,022 Gross profit 21,249 17,051 31,211 55,999 125,510 Operating income (loss) 827 (11,340) 7,575 4,841 1,903 Income (loss) before income taxes (5,570) (18,187) 1,629 (4,349) (26,477) Net income (loss) (4,941) (13,919) 1,802 (6,323) (23,381) Net income (loss) applicable to common units (8,146) (17,220) (1,598) (9,825) (36,789) Total Comprehensive Income (loss) (5,479) (13,629) 881 (6,637) (24,864)
Sales of the Company's products are highly seasonal, with a large percentage of net sales occurring during the Christmas selling season. The Company typically derives on average approximately 45% of its annual net sales in the fourth quarter of each year. (1) The total comprehensive income for the three months and year ended December 31, 2002 has been restated as a result of an additional minimum liability for the Company's defined benefit pension plan in the United Kingdom, as discussed in Note 15 to the Consolidated Financial Statements. The amount previously reported was $15,018 for the three months ended December 31, 2002 and $15,377 for the year ended December 31, 2002. F-20 15. Restatement Subsequent to the issuance of its consolidated financial statements for the year ended December 31, 2002, the Company determined that an additional mimimum liability should have been recorded at December 31, 2002 for the unfunded accumulated benefit obligation related to the Company's defined benefit pension plan in the United Kingdom as determined by an actuarial study performed as of December 31, 2002. Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions, which defines an unfunded accumulated benefit obligation as the excess of a plan's accumulated benefit obligation over the fair value of its assets, requires recognition of an additional minimum liability if an unfunded accumulated benefit obligation exists and an asset has been recognized as prepaid pension cost. As a result, the Company's consolidated balance sheet at December 31, 2002 and its consolidated statement of members' deficit for the year then ended have been restated from the amounts previously reported to record an additional minimum pension liability at December 31, 2002. These changes had no effect on the Company's 2001 financial statements or its 2002 reported results of operations or cash flows. The following table summarizes the effect of the restatement at December 31, 2002 and for the year then ended: 2002 ------------------------------------ As previously reported As Restated ---------------------- ----------- At December 31: Other assets $ 12,026 $ 11,867 Total assets 235,116 234,957 Other liabilities 839 3,443 Accumulated other comprehensive loss (7,578) (10,341) Total members' deficit (26,991) (29,754) Total liabilities and members' deficit 235,116 234,957 For the year ended December 31: Total comprehensive income 15,377 12,614 The restated amounts in the table above reflect the recording at Decembr 31, 2002 of a minimum pension liability of $3,251 thousand, a deferred tax asset of $488 thousand (net of a valuation allowance of $487 thousand) related to the benefits associated with such losses, and the resulting charge to other comprehensive income of $2,763. The accumulated benefit obligation at December 31, 2002 relted to the plan is $7,346 thousand. F-21 REMINGTON PRODUCTS COMPANY, L.L.C. Schedule II--Valuation & Qualifying Accounts ( in thousands)
Additions Balance at Charged to Balance at Beginning Costs and End of Year Expenses Deductions of Year ---------- ----------- ---------- ----------- Allowance for doubtful accounts: Year ended December 31, 2002 $ 4,961 970 (923) $ 5,008 Year ended December 31, 2001 $ 2,864 4,232 (2,135) $ 4,961 Year ended December 31, 2000 $ 2,335 878 (349) $ 2,864 Allowance for cash discounts and returns: Year ended December 31, 2002 $20,070 32,481 (37,643) $14,908 Year ended December 31, 2001 $10,206 38,671 (28,807) $20,070 Year ended December 31, 2000 $10,166 19,525 (19,485) $10,206 Inventory reserves: Year ended December 31, 2002 $ 7,404 2,021 (6,702) $ 2,723 Year ended December 31, 2001 $ 1,172 9,518 (3,286) $ 7,404 Year ended December 31, 2000 $ 1,639 1,309 (1,776) $ 1,172
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