-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AAyYOmb3PmHEO9kq3FFB/RwzIr1q1dx8CEePN1mjErgpPdzmEVOcW9rFGpnjZTzx KnrVQMnHKQhVB1v3q4XVGw== 0001015402-04-001267.txt : 20040330 0001015402-04-001267.hdr.sgml : 20040330 20040330163024 ACCESSION NUMBER: 0001015402-04-001267 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WKI HOLDING CO INC CENTRAL INDEX KEY: 0001063574 STANDARD INDUSTRIAL CLASSIFICATION: GLASS PRODUCTS, MADE OF PURCHASED GLASS [3231] IRS NUMBER: 161403318 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-57099 FILM NUMBER: 04701565 BUSINESS ADDRESS: STREET 1: 11911 FREEDOM DRIVE STREET 2: SUITE 600 CITY: RESTON STATE: VA ZIP: 20190 BUSINESS PHONE: 703-456-4700 MAIL ADDRESS: STREET 1: 11911 FREEDOM DRIVE STREET 2: SUITE 600 CITY: RESTON STATE: VA ZIP: 20190 FORMER COMPANY: FORMER CONFORMED NAME: CCPC HOLDING CO INC DATE OF NAME CHANGE: 19980814 FORMER COMPANY: FORMER CONFORMED NAME: CORNING CONSUMER PRODUCTS CO DATE OF NAME CHANGE: 19980608 10-K 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2003 ------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to____________ Commission file number 333-57099 --------- WKI HOLDING COMPANY, INC. ------------------------- (Exact name of registrant as specified in its charter) Delaware 16-1403318 - -------------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer 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 ------------ Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, if definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Security Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] Number of shares the Registrant's New Common Stock, par value $0.01 per share, outstanding as of March 24, 2004: 5,752,184 WKI HOLDING COMPANY, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTES Important Information Regarding this Form 10-K 3 PART I Item 1. Business. 5 Item 2. Properties. 15 Item 3. Legal Proceedings. 16 Item 4. Submission of Matters to a Vote of Security Holders. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 17 Item 6. Selected Financial Data. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 35 Item 8. Financial Statement and Supplementary Data. 36 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 73 Item 9A. Controls and Procedures. 73 PART III Item 10. Directors and Executive Officers of the Registrant. 74 Item 11. Executive Compensation. 76 Item 12. Security Ownership of Certain Beneficial Owners and Management. 81 Item 13. Certain Relationships and Related Transactions. 82 Item 14. Principal Accounting Fees and Services. 83 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 85 SIGNATURES
2 IMPORTANT INFORMATION REGARDING THIS FORM 10-K Readers should consider the following information as they review this Form 10-K: FRESH START ACCOUNTING As a result of the WKI Holding Company, Inc. (the "Company," "WKI," "we," or "our") bankruptcy reorganization in January 2003, the Company applied Fresh Start Reporting (as defined herein) to its consolidated balance sheet as of December 31, 2002 in accordance with Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" as promulgated by the AICPA. (See Item 1 in the Business section for information regarding the Company's bankruptcy reorganization). Under Fresh Start Reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date Fresh Start Reporting is applied. On January 31, 2003, the Debtors (as defined herein) emerged from Chapter 11 protection. For financial reporting purposes, December 31, 2002 was considered the emergence date, and the effects of the reorganization have been reflected in the accompanying financial statements as if the emergence occurred on that date. As a result of the application of Fresh Start Reporting, the financial statements of the Successor Company (as defined herein) are not comparable to the financial statements of the Predecessor Company (as defined herein). SAFE HARBOR-FORWARD-LOOKING STATEMENTS The factors discussed below, among others, could cause actual results to differ materially from those contained in forward-looking statements, as described in "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, that are made in this report, including without limitation, in "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our related press releases and in oral statements made by authorized officers of the Company. When used in this report, any press release or oral statement, the words "looking forward," "estimate," "project," "anticipate," "expect," "intend," "believe," "plan" and similar expressions are intended to identify a forward-looking statement. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The forward-looking statements regarding such matters are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. Whether actual results and developments will conform with the Company's expectations and predictions, however, is subject to a number of risks and uncertainties, including: - - general economic factors, including, but not limited to, the health of the global economy, weakness in the retail sector, changes in interest rates, foreign currency translation rates, and consumer confidence; - - changes in demand for our products, including as a result of inventory management by significant customers and the highly competitive market for our products, including from foreign imports; - - dependence on significant customers and concentration in the retail industry; - - reliance on third party manufacturers, particularly in Asia; - - changes in the operating environment in our major non-US markets, including new and different legal and regulatory requirements, export or import duties; - - price pressures on our products or cost increases that cannot be recovered through price increases or productivity improvements; - - acceptance of product changes by the consumer and difficulties or delays in the development of new product programs (including product line extensions and renewals); 3 - - cost and availability of raw materials, natural and other resources; - - cost and availability of labor, including potential impacts arising from work stoppages or other labor disturbances related to negotiating agreements under our domestic and international collective bargaining agreements; - - technological shifts away from our technologies and core competencies; - - environmental issues relating to unforeseen events; - - availability and terms of financing for us or certain of our customers; - - loss of any material intellectual property rights; - - any difficulties in obtaining or retaining the management or other human resource competencies that we need to achieve our business objectives; and - - debt service and mandatory principal payments which may impair our ability to finance future operations and capital needs and may limit our flexibility in responding to changing business and economic conditions and to business opportunities. Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company and its subsidiaries or its business or operations. 4 PART I ITEM 1. BUSINESS. GENERAL DEVLOPMENT OF THE BUSINESS WKI Holding Company Inc. (the "Company," "WKI," "we," or "our") is a leading manufacturer and marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop cookware and cutlery products. We have strong positions in major channels of distribution for our products in North America, and have also achieved a significant presence in certain international markets, primarily Asia and Australia. In North America, we sell both on a wholesale basis to mass merchants, department stores, specialty retailers, and grocery chains and on a retail basis, through Company-operated retail outlet stores. Our top five customers accounted for over 40% of net sales in 2003, with our largest customer being Wal-Mart. In the international market, we have established our presence on a wholesale basis through an international sales force coupled with localized distribution and marketing capabilities. The Company's business began as an unincorporated division of Corning Incorporated ("Corning") in 1915 with the invention of the heat-resistant glass that has become known as Pyrex(R) glassware. In 1958, Corning introduced a glass-ceramic cookware product under the Corningware(R) trademark. Corelle(R) dinnerware, a proprietary three-layer, two-glass, product with high mechanical strength properties and designed for everyday use, was launched in 1970. In 1988, Corning supplemented its cookware product lines with the acquisition of the Revere business, which distributes stainless steel and aluminum cookware and rangetop products known as RevereWare(R). On March 2, 1998, Corning, the Company, Borden, Inc. ("Borden"), and CCPC Acquisition Corp. ("CCPC Acquisition") entered into a Recapitalization Agreement pursuant to which on April 1, 1998, CCPC Acquisition acquired 92% of the outstanding shares of common stock, par value $0.01 per share of WKI from Corning for $110.4 million ("Recapitalization"). The stock acquisition was financed by an equity investment in CCPC Acquisition by BW Holding LLC, an affiliate of Kohlberg, Kravis Roberts & Co., L.P. ("KKR"), the parent company of Borden and CCPC Acquisition. The Company completed the acquisitions of General Housewares Corp. ("GHC"), and its subsidiaries, effective October 21, 1999, and of EKCO Group, Inc. ("EKCO"), and most of its subsidiaries, effective October 25, 1999. GHC manufactured and marketed consumer durable goods with principal lines of business consisting of kitchen and household tools, precision cutting tools, kitchen cutlery and cookware. EKCO was a manufacturer and marketer of branded consumer products including household items such as bakeware, kitchen and household tools, cleaning products, brooms, brushes and mops. The Company exited EKCO's cleaning product line in 2000. As of December 31, 2001, the Company was not in compliance with certain financial covenants contained in its key loan agreements. The Company did not have the ability to repay or refinance significant debt repayments that could have been accelerated as a result of the covenant defaults. Recognizing the need to reduce the debt on its balance sheet and to resolve the issues raised by its covenant defaults, the Company engaged financial advisors and other professionals in early 2002 to initiate discussions with its primary stakeholder constituencies. The goal of these discussions was to develop a long-term restructuring plan to reduce the Company's substantial funded debt to a more manageable level, while minimizing the adverse impact of any financial restructuring on the business. On May 31, 2002, the Company announced that it had reached agreement on the terms of a financial restructuring with the steering committee for its former bank group and a group of affiliated parties comprised of the Company's primary shareholders as well as its largest bondholder. 5 BANKRUPTCY REORGANIZATION On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for the Northern District of Illinois (the "Court"). The reorganization was jointly administered under the caption "In re World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257." During the period from the Filing Date until January 31, 2003 (the "Effective Date"), the Debtors operated the business as debtors-in-possession under Chapter 11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were not Debtors and did not reorganize. On November 15, 2002, the Debtors filed their second amended joint plan of reorganization (the "Plan") with the Court, which was confirmed on December 23, 2002 (the "Confirmation Date"). All material conditions precedent to the Plan becoming binding were resolved on or prior to December 31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh Start Reporting (as defined herein) as of that date. On the Effective Date, the Debtors legally emerged from their bankruptcy proceedings. At December 31, 2002, the Company recorded a $577.2 million reorganization gain reflecting the cancellation of debt pursuant to the Plan and adjusted the historical carrying value of its assets and liabilities to fair value, as defined by the reorganization value. The reorganization gain was net of certain professional fees, asset write-offs and other fees directly associated with the Chapter 11 reorganization. On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by the Court. The remaining three Chapter 11 cases were closed by the Court on February 12, 2004. The Company's reorganization value of approximately $500 million, defined as post-emergence debt and equity ("Reorganization Value"), was determined in the fourth quarter of 2002, based on an independent valuation by financial valuation experts after consideration of several factors and assumptions and by using various valuation methods, including cash flow multiples, price/earnings ratios and other relevant industry information. On or about the Effective Date, with the effects reported herein on December 31, 2002, the following principal provisions of the Plan occurred: 1. The Company's old common and preferred stock were cancelled for no consideration. New Common Stock in the amount of 5,752,184 shares was to be issued ("New Common Stock") to certain creditors, pursuant to the Plan, as described below. 2. The Company's senior secured debt of approximately $577.1 million was discharged in return for the payment of $27.8 million in cash and the issuance of $240.1 million of new senior secured term loans, $123.2 million of new senior subordinated secured notes ("Senior Subordinated Notes") and the right to receive 4,528,201 shares (approximately 79%) of New Common Stock. 3. The Company's $25 million revolving credit facility due to Borden Chemical, Inc. (the "Borden Credit Facility"), an affiliate of the Predecessor Company's primary stockholder (KKR), was converted into the right to receive 615,483 shares (approximately 11%) of New Common Stock. 4. The Company's 9-5/8% Notes in the amount of $211.1 million, including accrued interest, were converted into the right to receive 608,500 shares (approximately 10%) of New Common Stock. 5. The Company agreed to pay $2.9 million to settle in full the 9-1/4% Series B Senior Notes ("9-1/4% Notes") issued by EKCO Group Inc., a wholly owned subsidiary of the Company, and certain of its subsidiaries. 6 6. The Company reinstated $4.9 million of certain pre-existing Industrial Revenue Bond claims (the "Reinstated IRB claims"). 7. The Debtors' $50 million debtor in possession financing was repaid in full and terminated, and the Company entered into a new Revolving Credit Agreement providing up to $75 million in availability subject to borrowing base restrictions. 8. The Company became obligated to pay pre-petition liabilities to its vendors and other general unsecured creditors. Under the terms of the Debtors' Plan, general unsecured creditors of the Company were paid 8.8% of the allowable claim amount. General unsecured creditors of the Company's domestic operating subsidiaries were paid 60% of the allowable claim amount. Payments of approximately $17 million were made as prescribed by the Court at various distribution dates as claims were reconciled or otherwise resolved. The final distributions were made in January 2004. 9. The new board of directors was selected in accordance with the terms of the Plan. FRESH START REPORTING Upon confirmation of the Plan, the Company adopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). The Company adopted Fresh Start Reporting because holders of outstanding voting shares of the Company's capital stock immediately before the Chapter 11 filing and confirmation of the Plan received less than 50% of the common stock distributed under the Plan, and the Company's Reorganization Value was less than the Debtors' post-petition liabilities and allowed claims on a consolidated basis. Fresh Start Reporting adjustments reflect the application of Statement of Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141") for assets, which requires a reorganized entity to record its assets and liabilities at their fair value. The Company used its Reorganization Value to define the fair value of debt and equity at December 31, 2002. The resulting reorganized equity value of $132.3 million was allocated to individual assets using the principles of SFAS No. 141 and liabilities were adjusted to fair value upon emergence. The difference between the reorganized equity value described above and the resulting fair value of assets and liabilities was recorded as goodwill. The Company used independent valuation experts where necessary to estimate the fair value of major components of the balance sheet including trademarks, patents, customer relationships, property, plant and equipment and pension benefit obligations. The Fresh Start Reporting adjustments recorded in 2003 resulted in a reduction to goodwill of $73.6 million. Fair valuation adjustments for certain trademarks and exclusive beneficial license and distribution agreements were recorded as of January 1, 2003, and were determined using the excess income and relief from royalty approaches. The Company's trademarks and exclusive beneficial license and distribution agreements were valued at $71.3 million, resulting in a reduction of $13.1 million to the carrying value at January 1, 2003. The Company's trademarks and exclusive licenses are recognizable household names and are renewable solely at the discretion of the Company; as such, they were determined to have indefinite lives and are not amortized, but will be tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset(s) might be impaired. An exclusive distribution agreement valued at $7.1 million was determined to have a definite life based on the term of the governing contract and is being amortized over the remaining estimated useful life of 8.7 years as of January 1, 2003. 7 Fair valuation adjustments for certain customer relationships were recorded as of January 1, 2003, and were determined using the excess income approach for significant customers within the Company's mass merchandising distribution channels and the cost approach for certain other distribution channels. The Company's customer relationships were valued at $24.8 million. Intangible assets associated with significant customers within the Company's mass merchandising distribution channels are amortized over their estimated remaining useful lives of 10 years. Intangible assets associated with certain other distribution channels are amortized over their estimated useful lives of 9 years using the double declining balance method, which is representative of the contractual turnover of customers within those distribution channels. Fair valuation adjustments for certain patents were recorded as of January 1, 2003, and were determined using the excess income and relief from royalty approaches. The Company's patents were valued at $23.0 million with estimated remaining useful lives ranging from 4 to 18 years based on the expiration of the patent under federal law. Fair valuation adjustments for property, plant and equipment were also recorded as of January 1, 2003. The fair value of the Company's property, plant, and equipment was determined to be $24.5 million more than the net book value at December 31, 2002. The Company adjusted its carrying value of property, plant and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6 million for buildings, and $7.3 million for machinery and equipment. The Company will depreciate these assets over their newly estimated remaining useful lives as of January 1, 2003. The Company used market data to determine the fair value of the Company's precious metals, principally platinum and rhodium. As a result, the Company increased the fair value of its precious metals by $14.9 million as of January 1, 2003. Precious metals are classified as other assets in the Consolidated Balance Sheet. In December 2002, the Debtors' pension benefit obligations were written up to fair value, equal to the projected benefit obligation of $31.7 million as of December 31, 2002, as determined by the Company's third-party actuary. Previously recorded other comprehensive income related to unrecognized actuarial losses of $28.3 million and intangible assets related to prior unrecognized service cost of $5.7 million were written off. NARRATIVE DESCRIPTION OF THE BUSINESS FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS For financial reporting purposes, the Company operates in the consumer kitchenware products segment, with principal products as described below. PRODUCTS The Company conducts its business operations in the following six principal product categories within the consumer kitchenware products segment (collectively, the "Product Categories"): (a) bakeware, (b) dinnerware, (c) rangetop cookware, (d) kitchen and household tools, (e) cutlery and (f) precision cutting tools/other. The Product Categories are described further below. The Company currently manufactures most of the finished goods comprising its dinnerware and the glass and metal portion of its bakeware categories. The Company also purchases a significant amount of finished goods from various vendors in Asia and Europe to support its rangetop, kitchenware, cutlery, kitchen and household tools and the ceramic portion of its bakeware categories. Reliance on finished goods suppliers could give rise to certain risks, such as interruptions in supply and quality issues, which are outside the Company's control. In addition, significant increases in the cost of energy, transportation or principal raw materials could have an adverse effect on results of operations. 8 Bakeware The Company manufactures and sells a wide variety of bakeware products that can be used on the stovetop or in the oven, microwave or freezer. The principal bakeware brand names are: (a) Corningware(R) and the Corningware(R) product lines (such as French White(TM), Classics(TM), Creations(TM) and Pop-ins(TM)); (b) Pyrex(R) and the Pyrex(R) sub-brands; (c) EKCO(R); and (d) Baker's Secret(R). Corningware(R) stoneware products and Pyrex(R) glass and other products are the two largest bakeware brands in the United States. Corningware(R) includes several lines of cookware made from a stoneware material for use in the oven. Pyrex(R) glass products are made of soda lime glass and are available in a number of sizes, shapes and colors for a variety of cooking and storage functions. EKCO(R) products consist of a broad line of uncoated bakeware products, including cookie sheets, muffin tins, brownie pans, loaf pans and similar items. Baker's Secret(R) products primarily consist of a broad line of non-stick coated and insulated "no burn" bakeware items. Dinnerware The Company manufactures and sells various dinnerware products under the principal brand name Corelle(R), which is the nation's top selling dinnerware brand in the mass merchant channel. The Corelle(R) dinnerware product is produced using a proprietary manufacturing process, which combines three layers of glass, producing a dinnerware that is light, durable, break/chip resistant and stackable. The Company also sources glassware, cups, and mugs and markets them under the Corelle(R) name. Rangetop Cookware The Company sells several product lines of rangetop cookware, which include stainless steel, hard anodized, aluminum, non-stick glass and cast aluminum cookware. The principal rangetop cookware brand names are: (a) RevereWare(R) rangetop and the Revere(R) product lines; (b) EKCO(R) and the EKCO(R) rangetop cookware product lines; and (c) Magnalite(R). These products are sourced from third-party manufacturers. Kitchen and Household Tools The Company sells a broad line of kitchenware products, including: (a) kitchen tools and gadgets, such as spoons, spatulas, ladles, peelers, corkscrews, whisks, can openers and similar items; (b) stainless steel and porcelain-on-steel kettles and carafes; and (c) barbecue tools and accessories, such as grilling tools, aprons, mitts, timers, magnets and related items. The principal brand names in this Product Category include: (a) OXO(R) and the OXO(R) product lines, including OXO Goodgrips(R) (b) Baker's Secret(R); (c) Corelle Coordinates(TM); (d) EKCO(R) and related brands; (e) Grilla Gear(R); and (f) Revere(R). Cutlery The Company sells numerous lines of high-carbon stainless steel cutlery in the United States and Canada. Some of these lines utilize the exclusive Taper Grind(R) edge, which provides maximum sharpness and easy maintenance. The principal cutlery brand names include: (a) Chicago Cutlery(R) and related product lines; and (b) Regent Sheffield(R) and Wiltshire(R) and their product lines, which the Company licenses from Richardson Sheffield Ltd. for distribution in the United States and Canada. Precision Cutting Tools/Other The Company exclusively distributes in the United States and Canada precision cutting tools that are manufactured by Olfa Corporation of Osaka, Japan. The Company sells these precision cutting tools to industrial users, as well as hobby, craft, hardware and fabric stores. The Company also markets selected kitchen accessories, which are primarily sold through the Company's retail outlet stores. 9 NEW PRODUCT DEVELOPMENT The Company is dedicated to developing and launching new and innovative products in the marketplace that provide demonstrable benefits for our consumers. The Company's new product development teams consist of cross-functional and strategically located employees, who work with suppliers to bring new products to market. Research and development costs are defined as both internal and external costs incurred to develop new products or significant extensions of existing products. Such costs could include concept development, engineering, product design, prototype creation, commercialization, testing and packaging development work. All such costs are expensed as incurred and were $3.1 million, $2.0 million, and $0.2 million in 2003, 2002 and 2001, respectively. MARKETING The Company has some of the most recognizable houseware brands in the world and is committed to ensuring that WKI brands lead in the markets they serve. The marketing organization is structured into product category teams that drive the results for the businesses that they manage through cross-functional team support, business analysis, and marketing execution. Extensive consumer research is conducted to ensure that products meet the necessary consumer needs, as well as appropriate level of product differentiation, prior to implementation into the brand product portfolio. The Company also seeks to drive incremental distribution with in-store merchandising programs that leverage seasonal buying habits and product promotions that the Company uses to drive in-store distribution at the retail level. These include: advertising, in-store merchandising fixtures and programs, innovative display programs, new and exciting structural packaging designs, and cross-branded promotions. DISTRIBUTION The Company's products are sold in the United States (which accounted for approximately 76% of the Company's net sales in 2003) and over 55 foreign countries. WKI sells these products (a) on a wholesale basis (i) through distributors, which resell the products to retailers, and (ii) directly to customers, consisting primarily of mass merchants, department stores and specialty retailers, which resell the products to consumers; and (b) on a retail basis directly to consumers through the Company-operated retail outlet stores. WKI has strong positions in major channels of distribution for its products in North America and has achieved a significant presence in international markets in Asia and Australia. Domestic Wholesale In the United States, the Company sells to approximately 2,200 customers, primarily consisting of mass merchants, department stores, grocery and drug stores, regional based distributors and specialty retailers. Domestic Retail The Company operates 76 retail outlet stores in 31 states, located primarily in domestic outlet malls. These stores, which carry an extensive range of the Company's products and complementary kitchen accessories, enable the Company to participate in broader distribution and to profitably sell slower-moving inventory. The Company believes that its retail outlet stores have developed marketing and pricing strategies that generate sales that supplement, rather than compete with, its wholesale customers. These stores also promote and strengthen the Company's brands, enabling the Company to provide customers a broader assortment of products beyond those that are commonly stocked by third party retailers. 10 International The Company's international sales force, together with localized distribution and marketing capabilities, have allowed the Company to market its bakeware and dinnerware in Canada, Korea, Australia, Japan, Singapore, Taiwan, Hong Kong and Mexico. Internationally, the Company sells through a network of distributors as well as directly to customers made up primarily of mass merchants, supermarkets, hypermarkets, department stores and specialty retailers, informal and traditional markets as well as its Company-operated retail outlet stores in Australia and Canada. SALES The Company's domestic customers are served by a combination of Company-employed salespeople and independent, commissioned representatives. The Company's top accounts are serviced by the Company's direct sales force teams which are organized by account for the Company's most significant customers and by channel teams which focus on grocery stores, department and specialty stores, regional mass merchandisers, and other retail channels. The teams are directly accountable for revenues, allowances and promotional spending. Members of the sales teams regularly call on the Company's customers to develop an in-depth understanding of each customer's competitive environment and opportunities. Smaller wholesale accounts are serviced by independent, commissioned sales representatives. The Company's international sales force, with personnel located in twelve countries, work with local retailers and distributors to optimize product assortment, consumer promotions and advertising for local preferences. COMPETITION The market for the Company's products is highly competitive. Competition in the marketplace is affected not only by domestic manufacturers but also by the large volume of foreign imports. A number of factors affect competition in the sale of the Company's products, including, but not limited to, quality, price and merchandising parameters established by various distribution channels. Shelf space and placement is a key factor in determining retail sales of bakeware, dinnerware, kitchenware and rangetop cookware products. Other important competitive factors include new product introductions, brand identification, style, design, packaging and service levels. The Company has, from time to time, experienced price and market share pressure from certain competitors in certain product lines, particularly in the bakeware category where metal products of competitors have created retailer price and margin pressures, and in the rangetop cookware category where non-stick aluminum products have increased their share of rangetop cookware sales at the expense of stainless steel products due to the durability and ease of cleaning of new non-stick coatings. SEASONAL BUSINESS Seasonal variation is a factor in the Company's business in that there is generally an increase in sales demand in the second half of the year driven by increased consumer spending at retailers during the holiday shopping season. This causes the Company to adjust its purchasing schedule to ensure proper inventory levels in support of the second half of the year programs. Historically, between 55% and 60% of the Company's sales occur during the second half of the year. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year. 11 MANUFACTURING AND RAW MATERIALS Sand, soda ash, borax, limestone, lithia-containing spars, alumina, stainless steel, plastic compounds, hardwood products, tin plate steel-copper and corrugated packaging materials are the principal raw materials used by the Company. The Company purchases its raw materials on the spot market and through long-term contracts with suppliers. Most of these materials are available from various suppliers. Management believes that adequate quantities of these materials are, and will continue to be, available from various suppliers. Stainless steel used in the Company's rangetop and bakeware products has been subject to price volatility, which is expected to continue, as a result of steel industry consolidation, government tariffs and a shortage of a critical component of steel production, global coke. The melting units operated by the Company require both natural gas and electricity. Back-up procedures and systems to replace the primary source of these energy inputs are in place in each of the Company's relevant facilities; however, the back-up procedures may require reduction in production capabilities. Ongoing programs exist within each of the Company's glass melting facilities to reduce energy consumption. The Company does not engage in any hedging activities for commodity trading relating to its supply of natural gas or electricity, which are subject to market fluctuations. The Company currently manufactures approximately one half of its finished goods in its own facilities and purchases the remainder from various vendors in Asia, Europe and Mexico. The Company believes that alternative sources of supply at competitive prices are available from other manufacturers of substantially identical products. In the event that we were to replace a finished goods supplier, certain transition risks may arise, such as interruptions in supply and quality issues, that are outside of the Company's control and could have an adverse effect on the Company's operations and financial performance. In addition, significant increases in the cost of any of the Company's principal raw materials could have a material adverse effect on results of operations. PATENTS AND TRADEMARKS The Company owns numerous United States and foreign trademarks and trade names and has applications for the registration of trademarks and trade names pending in the United States and abroad. The Company's most significant owned trademarks and/or trade names include Corelle(R), Revere(R), Revere Ware(R), Visions(R), EKCO(R), Baker's Secret(R), Chicago Cutlery(R), Good Grips(R) and OXO(R). Other significant trademarks licensed and used by the Company are Corningware(R), Pyrex(R), and, Regent Sheffield(R). Upon the consummation of the Recapitalization on April 1, 1998, Corning granted to the Company fully paid, royalty-free licenses to use the Corningware(R) trademark, servicemark and tradename and the Pyroceram(R) trademark in the field of housewares and to use the Pyrex(R) trademark in the fields of housewares and durable consumer products. These exclusive licenses provide for indefinite renewable ten-year terms. Pyrex(R) licenses are subject to certain prior exclusive licenses granted to Newell, a significant competitor of the Company in the United States, and certain of its subsidiaries to distribute in Europe, Russia, the Middle East and Africa. In addition, in connection with the Recapitalization, the Company entered into a license agreement with Corning under which the Company was able to use "Corning" in connection with the Company's business until April 1, 2001(or up to five years in the case of certain molds used in the manufacturing process). The Company also has the right to use the trademark Corningware(R) in connection with the Company's outlet stores. The Company also owns numerous United States and foreign patents, and has patent applications pending in the United States and abroad. In addition to its patent portfolio, the Company possesses a wide array of trade secrets of proprietary technology and knowledge. The Company also licenses certain intellectual property rights to or from third parties. Concurrent with the Recapitalization, Corning granted to the Company a fully paid, royalty-free license of patents and know-how (including evolutionary improvements) owned by Corning that pertain to or have been used in the 12 Company's business. Furthermore, the Company and Corning entered into a five-year technology support agreement (renewable at the option of the Company for an additional five years), pursuant to which Corning will provide to the Company (at the Company's option) engineering, manufacturing technology, and research and development services, among others, at Corning's standard internal rates. The technology support agreement was assumed in the Chapter 11 proceedings, and renewed for a five-year term on April 1, 2003. The Company believes that its patents, trademarks, trade names, service marks and other proprietary rights are important to the development and conduct of its business and the marketing of its products. As such, the Company vigorously protects its intellectual property rights. ENVIRONMENTAL MATTERS The Company's facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and human health and safety, including those governing wastewater discharges, air emissions, and the use, generation, storage, treatment, transportation and disposal of hazardous and non-hazardous materials and wastes and the remediation of contamination associated with such disposal. Because of the nature of our business, we have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with and resolving liabilities under such laws and regulations. It is the Company's policy to accrue for remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company has accrued approximately $0.6 million as of December 31, 2003 for probable environmental remediation and restoration liabilities. Based on currently available information and analysis, the Company believes that it is possible that costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that could be material but cannot be estimated as of December 31, 2003. There can be no assurance that activities at these or any other facilities or future facilities will not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required or other costs being imposed. GOVERNMENTAL REGULATIONS The Company is subject to various federal, state and local laws affecting its business, including various environmental, health, fire and safety standards and consumer protection regulations. See "Environmental Matters." The Company is also subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. The Company believes that its operations are in material compliance with applicable laws and regulations. EMPLOYEES At December 31, 2003, the Company employed approximately 2,460 full-time employees worldwide. Approximately 1,520 employees (including 1,200 in the U.S. and 320 internationally) are represented by collective bargaining agreements. The collective bargaining agreement at the Company's Monee facility was renegotiated in February 2004 and covers approximately 180 union employees. The collective bargaining agreement at the Company's Massillon facility expires in September 2004 and covers approximately 170 union employees. OTHER Additional information in response to Item 1 relating to geographic information is found in Note 14 - Segment Information to the Consolidated Financial Statements. 13 AVAILABLE INFORMATION The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The Company's Internet website can be found at www.worldkitchen.com. The -------------------- Company will make available, free of charge, beginning in 2004 for all filings after Emergence, on or through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any other reports filed or furnished with the SEC, if applicable, as soon as practicable after the Company files or furnishes them to the SEC. 14 ITEM 2. PROPERTIES. WKI utilizes four primary manufacturing facilities (three in the United States and one decorating facility in Malaysia) and seven principal packaging and distribution centers (three in the United States and four outside of the United States). In addition to the properties described below, the Company leases 411,374 sq. ft. of retail space for its Company-operated retail stores located in the United States (76 stores), in Canada (5 stores) and in Australia (5 stores). Substantially all of the Company's domestic property is subject to priorities liens under its debt agreements. The Company's facilities are generally well maintained. The table below summarizes certain data for each of the Company's principal properties, including its manufacturing and distribution facilities, at December 31, 2003:
LOCATION PRIMARY USE FACILITY - -------- --------------------------------------------------- SQ. FEET OWN/LEASE --------- ---------- DOMESTIC: Bentonville, Arkansas Administrative 1,300 Leased Charleroi, Pennsylvania Manufacturing 585,710 Own Chambersburg, Pennsylvania (1) Administrative 22,000 Leased Chambersburg, Pennsylvania (2) Distribution 126,400 Leased Corning, New York (3) Manufacturing 347,000 Own/Leased Franklin Park, Illinois (4) Administrative 150,000 Leased Greencastle, Pennsylvania Distribution 1,034,542 Own Massillon, Ohio Manufacturing 230,000 Own Monee, Illinois Distribution/Warehouse 740,800 Leased New York, New York Administrative 8,000 Leased Reston, Virginia Corporate Offices 22,661 Leased Rosemont, Illinois (4) Administrative 35,119 Leased Terre Haute, Indiana Administrative 20,000 Leased INTERNATIONAL: Johor, Malaysia (5) Ware Decorating 218,000 Own Johor, Malaysia Distribution 66,134 Leased Mexico City, Mexico Administrative 3,229 Leased Mumbia, India Administrative 531 Leased Niagara Falls, Ontario, Canada Admin/Warehouse/Distribution 122,000 Own Niagara Falls, Ontario, Canada Warehouse 28,000 Leased Seoul, Korea Administrative 6,013 Leased Singapore Administrative/Warehouse 16,440 Leased Sydney, Australia Distribution 74,000 Leased Taipei, Taiwan Administrative 1,280 Leased Tokyo, Japan Administrative 1,988 Leased Hong Kong, China Administrative 2,000 Leased ShenZhen, China Administrative 5,000 Leased (1) Chambersburg, PA administrative office is scheduled to close in March 2004, when its lease will terminate. The related administrative functions were consolidated into the Greencastle facility in January 2004. (2) Chambersburg, PA distribution center lease ends on June 30, 2004, and will not be renewed. (3) Small portion of property is leased as it is shared. (4) Franklin Park, IL office lease terminated in the first quarter of 2004, and the employees were moved to the Rosemont, IL office, which lease commenced on December 15, 2003. (5) The Malaysia location is owned by WKATG Malaysia, a subsidiary that is 80% owned by the Company. The land on which the facility is located is leased pursuant to a 60-year lease expiring in 2048.
15 ITEM 3. LEGAL PROCEEDINGS. On May 31, 2002, the Company and eleven of its U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy code in the United States Bankruptcy Court for the Northern District of Illinois. The reorganization was jointly administered under the caption "In re World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257." The Plan of reorganization was confirmed by the Bankruptcy Court on December 23, 2002, and became effective January 31, 2003. During the period from May 31, 2002 until January 31, 2003, the Debtors operated their businesses as debtors-in-possession under Chapter 11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were not Debtors and did not reorganize. On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by the Court. The remaining three Chapter 11 cases were closed by the Court on February 12, 2004. Prior to completing the Chapter 11 proceedings, seven of the Debtors were merged into other subsidiaries of the Company. Litigation The Company has been engaged in, and anticipates it will continue to be engaged in, the defense of product liability claims related to products it manufactures or sells. The Company maintains product liability coverage, subject to certain deductibles and maximum coverage levels, that it believes is adequate and in accordance with industry standards. In addition to product liability claims, from time to time the Company is a defendant in various other claims and lawsuits arising in the normal course of business. The Company believes, based upon information currently available, and taking into account established reserves for estimated liabilities and its insurance coverage, that the ultimate outcome of these proceedings and actions is unlikely to have a material adverse effect on our financial statements. It is possible, however, that some matters could be decided unfavorably to the Company and could require the Company to pay damages, or make other expenditures in amounts that could be material but cannot be estimated as of December 31, 2003. Environmental Matters The Company's facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and human health and safety, including those governing wastewater discharges, air emissions, and the use, generation, storage, treatment, transportation and disposal of hazardous and non-hazardous materials and wastes and the remediation of contamination associated with such disposal. Because of the nature of the Company's business, it has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with and resolving liabilities under such laws and regulations. It is the Company's policy to accrue for remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company has accrued approximately $0.6 million as of December 31, 2003 for probable environmental remediation and restoration liabilities. Based on currently available information and analysis, the Company believes that it is possible that costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that could be material but cannot be estimated as of December 31, 2003. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 16 PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Amended Certificate of Incorporation of Reorganized WKI (the "Amended Certificate") provides that the Company is authorized to issue up to 15.0 million shares of new common stock, par value $0.01 per share ("Common Stock"). The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. As of March 24, 2004, 5,752,184 shares of Common Stock were issued and outstanding, and held by approximately 40 holders of record. No shares of such common stock trade on any exchange or are quoted on any automated quotation system. Covenants in certain debt instruments restrict, and may prohibit, the Company from paying dividends. No dividends were declared on Common Stock during 2003. The following table describes certain information relating to equity compensation plans of the Company as of December 31, 2003.
Equity Compensation Plan Information (in thousands, except per share data) -------------------------------------------- Number of securities Number of remaining securities to Weighted- available for be issued average future upon exercise exercise price issuance of of under equity outstanding outstanding compensation options options plans ------------- -------------- ------------- Equity compensation plans not approved by security holders 613,040 $ 18.25 97,902
17 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial information is derived from the Company's Consolidated Financial Statements for periods both before and after emerging from Chapter 11 protection on January 31, 2003. For accounting purposes, the financial statements reflect the reorganization as if it was consummated on December 31, 2002. Therefore, the consolidated balance sheet data and related information at December 31, 2003 and 2002 and results of operations for the fiscal year ended December 31, 2003 are referred to as "Successor Company" and reflect the effects of the reorganization and the principles of Fresh Start Reporting. Periods presented prior to December 31, 2002 have been designated "Predecessor Company." Note 2 to the Consolidated Financial Statements under Item 8 "Financial Statements and Supplementary Data", provides a reconciliation of the Predecessor Company's consolidated balance sheet as of December 31, 2002 to that of the Successor Company which presents the adjustments that give effect to the reorganization and Fresh Start Reporting. The data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements and Notes thereto, included elsewhere herein. Certain amounts have been reclassified in prior years to conform to the current year presentation. FIVE YEAR SELECTED FINANCIAL DATA For the Fiscal Years Ended December 31 (In thousands, except per share data)
SUCCESSOR | COMPANY | PREDECESSOR COMPANY PREDECESSOR COMPANY ----------- | ------------------------------------------------- ------------------- 2003 | 2002 2001 2000 1999 ----------- | ----------- ---------- ---------- ---------- RESULTS OF OPERATIONS | - -------------------------------------------- | Net sales $ 609,004 | $ 684,846 $ 745,872 $ 827,581 $ 633,534 Net income (loss) from continuing operations $ (59,657) | $ 548,763 (1) $(132,993) (3) $(150,088) (3) $ (28,058) (3) Net (loss) income applicable to Common | Stock $ (59,657) | $ 339,532 (1)(2) $(148,451) (3) $(163,472) (3) $ (40,099) (3) Per share data: | Basic (loss) income from continuing | operations $ (10.37) | $ 7.86 (1)(2) $ (2.17) (3) $ (2.45) (3) $ (1.08) (3) Diluted (loss) income from continuing | operations $ (10.37) | $ 7.51 (1)(2) $ (2.17) (3) $ (2.45) (3) $ (1.08) (3) | CASH FLOW INFORMATION | - -------------------------------------------- | Cash flow from operating activities $ (11,133) | $ 1,780 $ 39,488 $ (46,141) $ (32,396) Cash flow from investing activities $ (12,289) | $ (19,063) $ (18,179) $ (58,424) $(421,509) Cash flow from financing activities $ (6,352) | $ (9,405) $ 37,583 $ 104,110 $ 453,216 | FINANCIAL POSITION SUCCESSOR COMPANY | PREDECESSOR COMPANY - -------------------------------------------- ----------------------- |--------------------------------------------- 2003 2002 | 2001 2000 1999 ----------- ----------- |---------- ---------- ------------- Cash $ 10,343 $ 40,117 |$ 66,805 $ 7,913 $ 8,368 Working capital $ 127,523 $ 122,416 |$(628,488) (4) $ 201,314 $ 246,610 Total assets $ 627,582 $ 742,773 |$ 831,838 $ 929,220 $ 979,679 Total debt $ 364,890 $ 368,107 |$ 818,483 $ 776,263 $ 672,903 (1) Includes a reorganization gain of $577.2 million. (2) Includes cumulative effect of change in accounting principle of $202.1 million upon the adoption of SFAS No.142. (3) Includes restructuring charges of $51.9 million and $69.0 million in 2001 and 1999, respectively; integration and transaction related expenses of $26.6 million and 9.2 million in 2000 and 1999, respectively; and provision for closeout of inventories of $20.0 million in 2000. The amount also includes $18.5 million for rationalization charges in 2001, of which $13.2 million is included in selling, general and administrative expenses and $5.3 million in cost of sales. (4) Includes long-term debt of $806.1 million which was classified as current liabilities in 2001.
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company for the years ended December 31, 2003, 2002 and 2001, and related notes to the Consolidated Financial Statements included elsewhere herein. OVERVIEW OF BUSINESS - -------------------- WKI Holding Company Inc. (the "Company," "WKI," "we," or "our") is a leading manufacturer and marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop cookware and cutlery products. We have strong positions in major channels of distribution for our products in North America and have also achieved a significant presence in certain international markets, primarily Asia and Australia. In North America, we sell both on a wholesale basis to mass merchants, department stores, specialty retailers, and grocery chains and on a retail basis, through Company-operated retail outlet stores. Our top five customers accounted for over 40% of net sales in 2003, with our largest customer being Wal-Mart. In the international market, we have established our presence on a wholesale basis through an international sales force coupled with localized distribution and marketing capabilities. The market for our products is highly competitive. Competition in the marketplace is affected not only by domestic manufacturers but also by the large volume of foreign imports. A number of factors affect competition in the sale of our products, including, but not limited to, quality, price and merchandising parameters established by various distribution channels. Shelf space and placement are also key factors in determining retail sales of all of our products. Other important competitive factors include new product introductions, brand identification, style, design, packaging and service levels. We currently manufacture most of our finished goods in the dinnerware and the glass and metal portions of our bakeware categories, which constitutes approximately one half of our finished goods costs. We purchase the remainder of finished goods from various vendors in Asia and Europe to support our rangetop, kitchenware, cutlery and the ceramic portion of our bakeware categories. Reliance on finished goods suppliers could give rise to certain risks, such as interruptions in supply and quality issues, which are outside our control. In addition, significant increases in the cost of energy, transportation or principal raw materials could have an adverse effect on results of operations. Seasonal variation is a factor in our business in that there is generally an increase in sales demand in the second half of the year driven by increased consumer spending at retailers during the holiday shopping season. This causes us to adjust our purchasing schedule to ensure proper inventory levels in support of second half of the year programs. Historically, between 55% and 60% of our sales occur during the second half of the year. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year. During the course of 2003, the Company continued to experience declining revenues in certain key product lines, predominantly the tabletop, bakeware and kitchenware categories. These declines resulted from loss of market share and distribution at certain customers and a weak retail environment in the first half of 2003. This environment was evidenced by many key retailers curtailing purchases in an effort to not only maintain, but reduce, inventory levels. Our market share and distribution losses stemmed from both competitive pressures and a lack of spending on new product introductions, the latter being impacted by our financial situation culminating in the bankruptcy reorganization process from May 2002 until January 2003. Based on these declines and loss of market share, we conducted an impairment test of goodwill and intangible assets with indefinite useful lives as of December 31, 2003. We engaged third party valuation experts to determine the fair value of our reporting units, as defined by SFAS No. 142, and determined that some of the value of our goodwill was impaired. As a result of this analysis, we recorded an impairment loss of $40.3 million relating to goodwill as of December 31, 2003. As a result of the topline shortfall, the Company did not meet its Adjusted EBITDA covenant for the year ending 2003. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and also excludes restructuring charges, reorganization charges and other non-recurring items as 19 agreed to by our lenders, such as charges for the Company's Long Term Incentive Plan (LTIP) and Key Employee Retention Plan (KERP). On January 23, 2004, limited waivers were obtained, through February 29, 2004, for the Company's non-compliance with the EBITDA covenant requirement through December 31, 2003 for both the Revolver and Term loans, which allowed for the continued extension of credit for a limited period of time. On February 13, 2004, we obtained an amendment and waiver from representatives of the Revolver and Term loan bank groups which waived certain EBITDA related year-end covenant compliance for 2003 and significantly reduced specified 2004 Adjusted EBITDA levels and also revised covenants related to seasonal adjustments to the borrowing base calculations and certain other debt ratios. With these new reduced covenant requirements in place, management is positioned to carry on its turnaround strategy in 2004. There can be no assurance that this strategy will achieve all anticipated results. In addition, with the support of our lead Bank Group and the Company's Board of Directors, management has engaged external advisors to evaluate key areas of the Company's domestic operations. Initial recommendations concerning business realignment, process improvement and cost reduction opportunities are being evaluated and additional analysis is being performed. We expect that the result of this effort will lead to a restructuring program which will be announced and commenced in the second or third quarter of 2004. Management will continue its strategic commitment to consolidate our focus, reduce costs, leverage our brands and gain new distribution opportunities. We expect to support this commitment by increased spending in 2004 on new product development, marketing programs and sales force execution. We will also continue to work towards margin improvement through already identified manufacturing cost reduction programs. It is expected that the additional spending required to boost top line performance and to attract and retain the talent required to continue with the turnaround will be supported in large part by these manufacturing cost reductions, SG&A reductions and sourcing efforts. In addition, from time to time we will continue to review our brands, product lines and distribution arrangements and evaluate them in light of strategic initiatives and competitive factors. BACKGROUND Our businesses began in 1915 as an unincorporated division of Corning, Inc.("Corning"), and these businesses continued to be owned by Corning until 1998. On April 1, 1998, these businesses were separated from Corning, pursuant to a leveraged buy-out (the "LBO") under the terms of a Recapitalization Agreement, dated March 2, 1998 (the "Recapitalization Agreement"), among Corning, WKI, Borden, Inc.("Borden") and CCPC Acquisition Corp ("CCPC Acquisition"). Under the Recapitalization Agreement, CCPC Acquisition acquired 92% of the outstanding shares of common stock of WKI from Corning for $110.4 million. This stock acquisition was financed by an equity investment in CCPC Acquisition by BW Holding LLC, an affiliate of Kohlberg, Kravis, Roberts & Co., L.P. ("KKR"), which organized and controls an investment partnership that owns CCPC Acquisition and Borden. In connection with these transactions, we paid to Corning a dividend of $482.8 million, which was financed through external borrowings. In the first quarter of 1999, we implemented a comprehensive restructuring program designed to reduce costs through the elimination of underutilized capacity, unprofitable product lines and increased utilization of our remaining facilities (the "1999 Restructuring"). The major elements of the 1999 Restructuring included: (a) the discontinuation of the commercial line of tableware products; (b) the closing of the related tableware portion of our manufacturing facility in Charleroi, Pennsylvania; and (c) the discontinuation of the in-house production of rangetop cookware, which subsequently has been sourced from third party manufacturers. Seeking to expand the market share of the business and achieve product growth following the LBO, we made two significant acquisitions in the last quarter of 1999, first acquiring EKCO Group, Inc. ("EKCO") and most of its subsidiaries, a manufacturer and marketer of various branded consumer products, including 20 bakeware and kitchen and household tools for approximately $229 million. This acquisition was financed through the issuance of $150 million in common stock to CCPC Acquisition and external borrowings. The second acquisition involved the purchase of General Housewares Corp ("GHC") and its subsidiaries, a manufacturer and marketer of consumer durable goods with principal lines of business consisting of kitchen and household tools, precision cutting tools, kitchen cutlery and cookware. GHC was acquired for a purchase price of approximately $159 million and financed through the issuance of $50 million in cumulative junior preferred stock to Borden and external borrowings. During 2000, we dedicated extensive resources to the integration of the acquired businesses of EKCO and GHC. The integration included the consolidation of acquired distribution facilities into a new distribution center in Monee, Illinois, a substantial upgrade to a new enterprise-wide information system in order to streamline and consolidate internal business functions and related information reporting, and a consolidation of sales, marketing, finance, executive administration, human resources and information technology efforts. By the end of 2000, most of the integration activities were completed; however, we had fully utilized our $275.0 million revolving credit facility and received a temporary $40.0 million credit facility from Borden to meet our working capital and liquidity requirements. In April 2001, the Company effectively amended and restated both its temporary $40 million credit facility from Borden and its 1998 Credit Agreement which ultimately led to an additional $50.0 million in long-term financing commitments, ($25 million from Borden and $25 million from the revolving credit facility) which were to expire on March 31, 2004. In early 2001, we embarked upon a plan designed to strengthen our future profitability and flexibility (the "2001 Restructuring"). The major elements of the 2001 Restructuring involved a continuation of the efforts begun in 1999 and 2000 and included: (a) the cessation of manufacturing at the Martinsburg, West Virginia facility for the Corningware(R) and Visions(R) product lines and securing alternative sources of production; (b) the cessation of manufacturing at the Wauconda, Illinois facility for the Chicago Cutlery(R) product lines and securing alternative sources of production; (c) further consolidation of distribution operations into the Company's distribution centers at Monee, Illinois and Greencastle, Pennsylvania; (d) significant restructuring of metal bakeware manufacturing at Massillon, Ohio; (e) the consolidation of certain international sales, marketing and distribution operations in Canada and the United Kingdom; and (f) a continued organizational redesign to achieve headcount reductions, upgrade key capabilities and centralize certain administrative functions in Reston, Virginia. During 2001, while we were undergoing substantial restructuring, our top-line operating performance was impacted by competitive and market pressures. Competition stems from both domestic and foreign manufacturers, particularly low-cost Asian producers. At the same time, many domestic department stores and other retailers experienced financial difficulties due to slower retail sales and other economic factors. This, in turn, prompted inventory cutbacks and delays in new product roll-outs. Moreover, the economic slowdown in 2001, which continued in 2002, in the United States and abroad has impacted demand for our products. As a result of the above, by the end of 2001, our debt burden exceeded $800 million. We had incurred substantial operating and net losses over the course of the two years ending in 2001, which continued in 2002, from not only the high interest costs required to service this debt, but our declining revenue stream due to conditions described above. Despite the strength of our core businesses, product lines and brand names and the implementation of several successful operational restructurings, we experienced difficulties maintaining compliance with outstanding debt covenants. As a result, on May 31, 2002 (the "Filing Date"), the Company and its eleven U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy code in the United States Bankruptcy Court for the Northern District of Illinois (the "Court"). We quickly and successfully emerged from these proceedings on January 31, 2003 (the "Effective Date"), the details of which are described below. 21 Upon emergence from bankruptcy early in 2003, we were poised to continue our turnaround and pursue our growth strategies, with our funded debt levels dramatically reduced from $800 million to $400 million and with key customer and vendor relationships intact. However, in the first quarter of 2003, continued weak economic conditions and global uncertainties impacted our sales performance as customers responded to poor fourth quarter 2002 consumer demand by reducing their inventory levels. This slowdown continued into the second quarter of 2003. In addition, we experienced a loss of distribution in certain categories that resulted, in part, from the bankruptcy reorganization and lack of new products and promotional spending in 2002 and the first half of 2003. The lack of new products and promotions, which are required to be in place well in advance of the crucial fourth quarter holiday season, heavily impacted our ability to generate sales in the second half of 2003. The impact from these factors continued to have an adverse effect in 2003, resulting in net sales being substantially below prior year levels. Even so, we were able to manage our cash flow by reducing inventory levels and discretionary spending and ended the year with no outstanding balance on our new revolving credit facility (the "Revolver"). However, as a result of poor earnings performance, we did not satisfy certain debt covenants under our credit facilities, including required minimum EBITDA level covenants and leverage ratios as specified in the Revolver and Term Loan debt agreements. As mentioned above, the Company has obtained the necessary waivers and amendments, and is also embarking upon a long term restructuring program to both improve topline performance and reduce costs. REORGANIZATION On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for the Northern District of Illinois (the "Court"). The reorganization was jointly administered under the caption "In re World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257." During the period from the Filing Date until January 31, 2003 (the "Effective Date"), the Debtors operated the business as debtors-in-possession under Chapter 11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were not Debtors and did not reorganize. On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by the Court. The remaining three Chapter 11 cases were closed by the Court on February 12, 2004. On November 15, 2002, the Debtors filed their second amended joint plan of reorganization (the "Plan") with the Court, which was confirmed on December 23, 2002 (the "Confirmation Date"). All material conditions precedent to the Plan becoming binding were resolved on or prior to December 31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh Start Reporting (as defined herein) as of that date. On the Effective Date, the Debtors legally emerged from their bankruptcy proceedings. At December 31, 2002, the Company recorded a $577.2 million reorganization gain reflecting the cancellation of debt pursuant to the Plan and adjusted the historical carrying value of its assets and liabilities to fair value, as defined by the reorganization value. The Company's reorganization value of approximately $500 million, defined as post-emergence debt and equity ("Reorganization Value"), was determined in the fourth quarter of 2002, based on an independent valuation by financial valuation experts after consideration of several factors and assumptions and by using various valuation methods, including cash flow multiples, price/earnings ratios and other relevant industry information. On or about the Effective Date, with the effects reported herein on December 31, 2002, the following principal provisions of the Plan occurred: 1. The Company's old common and preferred stock were cancelled for no consideration. New Common Stock in the amount of 5,752,184 shares was to be issued ("New Common Stock") to certain creditors, pursuant to the Plan, as described below. 22 2. The Company's senior secured debt of approximately $577.1 million was discharged in return for the payment of $27.8 million in cash and the issuance of $240.1 million of new senior secured term loans, $123.2 million of new senior subordinated secured notes ("Senior Subordinated Notes") and the right to receive 4,528,201 shares (approximately 79%) of New Common Stock. 3. The Company's $25 million revolving credit facility due to Borden Chemical, Inc. (the "Borden Credit Facility"), an affiliate of the Predecessor Company's primary stockholder (KKR), was converted into the right to receive 615,483 shares (approximately 11%) of New Common Stock. 4. The Company's 9-5/8% Notes in the amount of $211.1 million, including accrued interest, were converted into the right to receive 608,500 shares (approximately 10%) of New Common Stock. 5. The Company agreed to pay $2.9 million to settle in full the 9-1/4% Series B Senior Notes ("9-1/4% Notes") issued by EKCO Group Inc., a wholly owned subsidiary of the Company, and certain of its subsidiaries. 6. The Company reinstated $4.9 million of pre-existing Industrial Revenue Bond claims (the "Reinstated IRB claims"). 7. The Debtors' $50 million debtor in possession financing was repaid in full and terminated, and the Company entered into a new Revolving Credit Agreement providing up to $75 million in availability subject to borrowing base restrictions. 8. The Company became obligated to pay pre-petition liabilities to its vendors and other general unsecured creditors. Under the terms of the Debtors' Plan, general unsecured creditors of the Company were paid 8.8% of the allowable claim amount. General unsecured creditors of the Company's domestic operating subsidiaries were paid 60% of the allowable claim amount. Payments of approximately $17 million were made as prescribed by the Court at various distribution dates as claims were reconciled or otherwise resolved. The final distribution was made in January 2004. 9. The new board of directors was selected in accordance with the terms of the Plan. FRESH START REPORTING Upon confirmation of the Plan, the Company adopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). The Company adopted Fresh Start Reporting because holders of outstanding voting shares of the Company's capital stock immediately before the Chapter 11 filing and confirmation of the Plan received less than 50% of the common stock distributed under the Plan, and the Company's Reorganization Value was less than the Debtors' post-petition liabilities and allowed claims on a consolidated basis. Fresh Start Reporting adjustments reflect the application of Statement of Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141") for assets, which requires a reorganized entity to record its assets and liabilities at their fair value. The Company used its Reorganization Value to define the fair value of debt and equity at December 31, 2002. The resulting reorganized equity value of $132.3 million was allocated to individual assets using the principles of SFAS No. 141 and liabilities were adjusted to fair value upon emergence. The difference between the reorganized equity value described above and the resulting fair value of assets and liabilities was recorded as goodwill. The Company used independent valuation experts where necessary to estimate the fair value of major components of the balance sheet including trademarks, patents, customer relationships, property, plant and equipment and pension benefit obligations. The Fresh Start Reporting adjustments recorded in 2003 resulted in a reduction to goodwill of $73.6 million. 23 Fair valuation adjustments for certain trademarks and exclusive beneficial license and distribution agreements were recorded as of January 1, 2003, and were determined using the excess income and relief from royalty approaches. The Company's trademarks and exclusive beneficial license and distribution agreements were valued at $71.3 million, resulting in a reduction of $13.1 million to the carrying value at January 1, 2003. The Company's trademarks and exclusive licenses are recognizable household names and are renewable solely at the discretion of the Company; as such, they were determined to have indefinite lives and are not amortized, but will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset(s) might be impaired. An exclusive distribution agreement valued at $7.1 million was determined to have a definite life based on the term of the governing contract and is amortized over the remaining estimated useful life of 8.7 years as of January 1, 2003. Fair valuation adjustments for certain customer relationships were recorded as of January 1, 2003, and were determined using the excess income approach for significant customers within the Company's mass merchandising distribution channels and the cost approach for certain other distribution channels. The Company's customer relationships were valued at $24.8 million. Intangible assets associated with significant customers within the Company's mass merchandising distribution channels are amortized over their estimated remaining useful lives of 10 years. Intangible assets associated with certain other distribution channels are amortized over their estimated useful lives of 9 years using the double declining balance method, which is representative of the contractual turnover of customers within those distribution channels. Fair valuation adjustments for certain patents were recorded as of January 1, 2003, and were determined using the excess income and relief from royalty approaches. The Company's patents were valued at $23.0 million with estimated remaining useful lives ranging from 4 to 18 years based on the expiration of the patent under federal law. Fair valuation adjustments for property, plant and equipment were also recorded as of January 1, 2003. The fair value of the Company's property, plant, and equipment was determined to be $24.5 million more than the net book value at December 31, 2002. The Company adjusted its carrying value of property, plant and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6 million for buildings, and $7.3 million for machinery and equipment. The Company will depreciate these assets over their newly estimated remaining useful lives as of January 1, 2003. The Company used market data to determine the fair value of the Company's precious metals, principally platinum and rhodium. As a result, the Company increased the fair value of its precious metals by $14.9 million as of January 1, 2003. Precious metals are classified as other assets in the Consolidated Balance Sheet. In December 2002, the Debtors' pension benefit obligations were written up to fair value, equal to the projected benefit obligation of $31.7 million as of December 31, 2002, as determined by the Company's third-party actuary. Previously recorded other comprehensive income related to unrecognized actuarial losses of $28.3 million and intangible assets related to prior unrecognized service cost of $5.7 million were written off. CRITICAL ACCOUNTING POLICIES - ---------------------------- Our discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The application of these principles requires that in certain instances we make estimates and assumptions regarding future events that impact the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. On an ongoing basis, we review the basis for our 24 estimates and will make adjustments based on historical experience, current and anticipated economic conditions, accepted actuarial valuation methodologies or other factors that we consider to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. The listing below is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States. There are also areas in which our judgment in selecting an available accounting alternative would not produce a materially different result. Our accounting policies are more fully described in Note 3 to our audited financial statements for the year ended December 31, 2003. We consider the following policies to be important in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our financial condition, results of operations or cash flows. FRESH START REPORTING AND INTANGIBLE ASSETS Upon confirmation of the Plan, we adopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). Fresh Start Reporting adjustments reflect the application of Statement of Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141") for assets, which requires a reorganized entity to record its assets and liabilities at their fair value. We used our Reorganization Value to define the fair value of our debt and equity at December 31, 2002. The resulting reorganized equity value of $132.3 million was allocated to individual assets using the principles of SFAS No. 141 and liabilities were adjusted to fair value upon emergence. The difference between the reorganized equity value described above and the resulting fair value of assets and liabilities was recorded as goodwill. We used independent valuation experts where necessary to appraise the major components of the balance sheet including trademarks, patents, customer relationships, property, plant and equipment and pension benefit obligations. The determination of fair value of assets and liabilities required significant estimates and judgments made by management as interpreted by independent valuation experts and results may differ under different assumptions or conditions. As a consequence of the implementation of Fresh Start Reporting, the financial information presented in the unaudited consolidated statement of operations and the corresponding statement of cash flows for the year ended December 31, 2003 is generally not comparable to the financial results for the year ended December 31, 2002. Any financial information herein labeled "Predecessor Company" refers to periods prior to the adoption of Fresh Start Reporting, while those labeled "Successor Company" refer to periods following our reorganization. The lack of comparability in the accompanying consolidated financial statements relates primarily to our capital structure (outstanding shares used in earnings per share calculations), debt and bankruptcy related costs, and depreciation and amortization related to adjusting property, plant and equipment and other intangible assets to their fair value. BENEFIT PLANS We have pension costs and obligations which are dependent on assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension costs and obligations. REVENUE RECOGNITION, SALES RETURNS AND ALLOWANCES, BAD DEBTS Revenue is recognized when products are shipped to customers and when all substantial risk of ownership has transferred, net of provisions for customer allowances, including returns, discounts, rebates, incentives and other promotional payments. These provisions require us to make estimates regarding the amount and timing of future returns and deductions. Estimates for returns are based on historical return rates, current economic trends and changes in 25 customer demand due to product acceptance and in some cases, from information acquired through discussion with our customers. Estimates regarding other deductions also involve evaluation of historical deduction rates, assessment of open customer promotional programs based on allowable percent of gross sales and expected assessment of volume rebates allowed based on estimated achievement against targets. Deductions already taken by the customer are generally included in accrual estimates as a reduction against gross sales with additional accruals recorded to estimate future sales deductions. Significant management judgment is used in establishing accruals for sales returns and other allowances in any given accounting period. In addition, we use estimates in determining the collectibility of our accounts receivable and must rely on our evaluation of historical bad debts, customer concentration, customer credit ratings, current economic trends and changes in customer payment patterns to arrive at appropriate reserves. Material differences may result in the amount and timing of earnings if actual experience differs significantly from management estimates. EXCESS AND OBSOLETE INVENTORY RESERVES We record inventory on a first-in, first-out basis and record adjustments to the value of this inventory in situations where it appears that we will not be able to recover the cost of the product. This lower of cost or market analysis is based on our estimate of forecasted demand by customer by product. A decrease in product demand due to changing customer tastes, consumer buying patterns or loss of shelf space to competitors could significantly impact our evaluation of our excess and obsolete inventories. IMPAIRMENT OF INTANGIBLE AND LONG LIVED ASSETS We evaluate our goodwill and other intangible assets for impairment in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under this standard, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are tested for impairment annually, or more frequently, if events or changes in circumstance indicate that the assets might be impaired. We evaluate our property and equipment and other long-lived assets for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For assets to be disposed of, we recognize the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For assets to be held and used, we review for impairment whenever facts and circumstances indicate the carrying amount may not be fully recoverable. All recognized impairment losses are recorded as operating expenses. There are several estimates, assumptions and decisions in measuring impairments of intangible and long-lived assets. Impairment testing requires certain valuation calculations based on projected future cash flows. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. RESULTS OF OPERATIONS - --------------------- The following commentary and tables provide the comparative results of our operations and financial condition for the periods covered. We manage our business on the basis of one reportable segment - the worldwide manufacturing and marketing of consumer kitchenware products. We believe that our operating segments have similar economic characteristics and meet the aggregation criteria of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Results for the year ended December 31, 2003, 2002 and 2001, were prepared using generally accepted accounting principles in the United States. 26 2003 COMPARED TO 2002 As a result of the application of Fresh Start Reporting, the financial statements of the Successor Company are not comparable to the financial statements of the Predecessor Company. The following table sets forth the result of operations for the fiscal year ended December 31, 2003 compared to December 31, 2002 (dollars in thousands).
Successor Percent | Predecessor Percent Percentage Company of net | Company of net Increase increase 2003 sales | 2002 sales (decrease) (decrease) ---------------------| ----------------------- ------------ ---------- | Net sales $ 609,004 100.0%| $ 684,846 100.0% $ (75,842) (11.1)% Cost of sales 443,910 72.9 | 491,751 71.8 (47,841) (9.7) ---------------------| ----------------------- ------------ ---------- Gross profit 165,094 27.1 | 193,095 28.2 (28,001) (14.5) Selling, general and | administrative expenses 146,013 24.0 | 162,976 23.8 (16,963) (10.4) Impairment of goodwill 40,336 6.6 | - - 40,336 100.0 Other expense, net 5,639 0.9 | 3,297 0.5 2,342 71.0 ---------------------| ----------------------- ------------ ---------- Operating (loss) income (26,894) (4.4)| 26,822 3.9 (53,716) (200.3) Interest expense 29,554 4.9 | 53,167 7.8 (23,613) (44.4) Reorganization items, net -- -- | 577,228 84.3 (577,228) (100.0) Income tax expense 3,088 0.5 | 1,979 0.3 1,109 56.0 Minority interest (121) -- | (141) -- 20 14.2 Cumulative effect of change in | accounting principle -- -- | (202,089) (29.5) 202,089 100.0 Preferred stock dividends -- -- | (7,142) (1.0) 7,142 100.0 ---------------------| ----------------------- ------------ ---------- Net (loss) income $ (59,657) (9.8)%| $ 339,532 49.6% $ (399,189) (117.6)% =====================| ======================= ============ ==========
Net Sales Net sales for 2003 were $609.0 million, a decrease of $75.8 million or 11.1% from 2002 driven by three key factors. The majority of the decline was driven by a loss of both promotional and base volume, largely in our rangetop, bakeware and kitchenware categories. This loss of volume was driven by competitive pricing pressure at mass merchants and grocery store channels resulting in lower volume at key accounts as we focused on maintaining profitable business. We also lost market share and distribution in certain categories year over year, which was precipitated, in part, by senior management's focus on an expedited exit from bankruptcy during most of 2002, the lack of new product introductions in certain categories and lower advertising and promotional spending in the second half of 2002 and the first half of 2003. Secondly, the decline was also impacted in general by the continued retail buying slump in the first half of 2003. Key retailers worked off excess inventory from the disappointing 2002 holiday season and managed inventories to lower overall levels in the first half of 2003, awaiting a return of a stronger economic environment and related consumer buying. And lastly, almost one third of the decline was precipitated by the closure of forty-five retail outlet stores in 2003, as part of our continuing efforts to rationalize our retail space and improve margins. Including only the impact of remaining stores year over year (e.g. excluding the impact of the closed stores on net sales) our sales decline would have been approximately 7.8%. Gross Profit Gross profit for 2003 was $165.1 million, a decrease of $28.0 million when compared to $193.1 million for 2002. As a percentage of net sales, gross profit in 2003 was 27.1%, a decrease of 1.1 percentage points from 28.2% in 2002. 27 The gross margin decline was largely attributable to two items, the first being the closure of twenty-nine unprofitable retail store outlets in April 2003 and related liquidation of inventories. In an effort to expedite these store closures and reduce overall inventory held for the retail outlets, certain inventory was consigned to a third party liquidator during the first half of 2003 who sold it at close to cost. The second factor includes an asset impairment charge of $4.1 million taken on certain non-productive assets. Excluding the impact of all closed stores results from both prior year and current year and the impact of the impairment charge, gross margins would have been 28.5% in 2003 compared to 27.4% in 2002, an increase of 1.1 percentage points over the prior year. Better margins in our international and OXO categories and lower manufacturing costs related to our outsourcing initiatives were partially offset by higher fixed absorption costs related to internal production curtailments in response to sales demand. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for 2003 were $146.0 million compared to $163.0 million in 2002, a decrease of $17.0 million or 10.4 %. As a percentage of net sales, SG&A expenses were 24.0% in 2003 and 23.8% in 2002. The decrease in SG&A was driven by lower retail outlet overhead expense as a result of retail store closures. As part of our program to improve profitability of our retail stores, forty-five under performing stores were closed during 2003. In addition, during 2003 we recorded a severance charge of $2.3 million related to the elimination of employees at certain closed retail outlets, as well as other reductions in force, and $1.8 million of expense related to the key employee retention program, which was put in place with the approval of the Court during the Bankruptcy proceedings. During 2002, SG&A included $4.5 million of professional and consulting fees related to the development of the bankruptcy reorganization strategy prior to the Filing and rationalization charges of $3.3 million related to our 2001 restructuring activities. Impairment of Goodwill We conduct our annual test of impairment for goodwill and intangible assets with indefinite useful lives in the first quarter. We also test for impairment if events or circumstances occur subsequent to our annual impairment test that would more likely than not reduce the fair value of a reporting unit, as defined by SFAS No. 142, below its carrying amount. During the course of 2003, we continued to experience declining revenues in certain key product lines, predominantly the tabletop, bakeware and kitchenware categories. These declines resulted from loss of market share and distribution at certain customers and a weak retail environment in the first half of 2003. Based on these declines and loss of market share, we conducted an impairment test as of December 31, 2003. We engaged third party valuation experts to determine the fair value of our reporting units and determined that some of the value of our goodwill was impaired. As a result of this analysis, we recorded an impairment loss of $40.3 million relating to goodwill as of December 31, 2003. Other Expense, Net Other operating expenses were $5.6 million in 2003 compared to $3.3 million in 2002. In 2003, we recorded $6.3 million in amortization expense relating to patents, customer relationships and exclusive licenses that were recorded as of January 1, 2003 as a Fresh Start Reporting Adjustment partially offset by foreign exchange gains and lower royalty expenses. Interest Expense Interest expense was $29.6 million in 2003 compared to $53.2 million in 2002. The decrease in interest expense from the prior year of $23.6 million was attributable to a reduction of the Predecessor Company's debt by more than $420 million upon our emergence from bankruptcy. Reorganization Items, Net A reorganization gain of $577.2 million was recorded at December 31, 2002. Of this amount, $429.5 million related to the gain on discharge of prepetition liabilities and $195.3 million related to fresh start adjustments. Partially offsetting these gains were $21.2 million incurred for professional fees directly associated with the Chapter 11 reorganization proceedings, $14.1 million related to the write-off of the Predecessor Company's deferred financing fees, $7.7 million related to lease cancellation and asset write-offs, $2.8 million related to the key employee retention program and $1.8 million of other expense. 28 Income Tax Expense Income tax expense, principally attributable to foreign income taxes, was $3.1 million in 2003 compared to $2.0 million in 2002 attributable to foreign income taxes. We provided a full valuation allowance on the domestic income tax benefit relating to the current and prior periods' pre-tax losses. Cumulative Effect of Change in Accounting Principle On January 1, 2002, we adopted SFAS No. 142. Under this standard, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are to be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset(s) might be impaired. As a result of the implementation of this Standard we recorded an impairment loss of $202.1 million which is recorded as a cumulative effect of a change in accounting principle in the accompanying Consolidated Statements of Operations. Additional information is found in Note 4 - Goodwill and Other Intangible Assets to the Consolidated Financial Statements. Net (Loss) Income As a result of the factors discussed above, we had a net loss of $59.7 million in 2003 compared to net income of $339.5 million in 2002. 2002 COMPARED TO 2001 The following table sets forth the result of operations for the fiscal year ended December 31, 2002 compared to December 31, 2001 (dollars in thousands).
Predecessor Percent Predecessor Percent Percentage Company of net Company of net Increase increase 2002 sales 2001 sales (decrease) (decrease) ----------------------- ----------------------- ------------ ---------- Net sales $ 684,846 100.0% $ 745,872 100.0% $ (61,026) (8.2)% Cost of sales 491,751 71.8 558,515 74.9 (66,764) (12.0) ----------------------- ----------------------- ------------ ---------- Gross profit 193,095 28.2 187,357 25.1 5,738 3.1 Selling, general and administrative expenses 162,976 23.8 179,682 24.1 (16,706) (9.3) Provision for restructuring costs -- -- 51,888 7.0 (51,888) (100.0) Other expense, net 3,297 0.5 13,786 1.8 (10,489) (76.1) ----------------------- ----------------------- ------------ ---------- Operating income 26,822 3.9 (57,999) (7.8) 84,821 146.2 Interest expense 53,167 7.8 73,173 9.8 (20,006) (27.3) Reorganization items, net (577,228) (84.3) -- -- 577,228 100.0 Income tax expense 1,979 0.3 1,600 0.2 379 23.7 Minority interest (141) -- (221) -- 80 36.2 Cumulative effect of change in accounting principle (202,089) (29.5) -- -- (202,089) (100.0) Preferred stock dividends (7,142) (1.0) (15,458) (2.1) (8,316) (53.8) ----------------------- ----------------------- ------------ ---------- Net income (loss) $ 339,532 49.6% $ (148,451) (19.9)% $ 487,983 328.7% ======================= ======================= ============ ==========
Net Sales Net sales for 2002 were $684.8 million, a decrease of $61.0 million or 8.2% from 2001 driven by a number of factors. In 2002, our volumes were heavily impacted by a loss of distribution in the mass merchandising and department store channels as certain key retailers were forced to manage purchasing in response 29 to their own troubled financial situations. In addition we lost distribution within our rangetop business due to increased competition, lack of promotion and temporary service issues in part related to the bankruptcy. In addition, sales reductions were driven by our decision to improve margins and reduce exposure to unprofitable markets. We discontinued our distribution in the United Kingdom, closed forty-two retail stores and clearance centers, and eliminated our direct participation in certain grocery channel promotional programs. Gross Profit Gross profit for 2002 was $193.1 million, an increase of $5.7 million when compared to $187.4 million for 2001. As a percentage of net sales, gross profit in 2002 was 28.2%, an increase of 3.1 percentage points from 25.1% in 2001. The increase in gross margins was driven by the exit from unprofitable markets and retail outlet stores as described above. In addition, gross margin improvements were driven by the impact of 2001 restructuring programs, which included outsourcing certain key brands to lower cost producers. Selling, General and Administrative Expenses SG&A for 2002 was $163.0 million compared to 2001 of $179.7 million. As a percentage of net sales, SG&A expenses were 23.8% in 2002 compared to 24.1% in 2001. In 2002, we recorded $4.5 million of outside consulting expenses related to the bankruptcy that were incurred prior to filing for Chapter 11. We also recorded $3.3 million of additional rationalization expenses related to the 2001 programs just described. The remaining reduction in SG&A expense was due to the closure of forty-two retail outlet stores and clearance centers during the year. In 2001, we recorded an $8.3 million bad debt reserve related to the announced bankruptcy of Kmart and also recorded $13.2 million of administrative expenses related to our rationalization programs designed to drive manufacturing efficiencies and the consolidation of business and executive headquarters locations. Other Expense, Net Other operating expenses were $3.3 million in 2002 compared to $13.8 million in 2001. The majority of the decline is due to the lack of goodwill, patent and trademark amortization as a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill and intangible assets with indefinite useful lives to no longer be amortized. This reduction in other expense was partially offset by lower royalty and commission income due to reduced year over year sales volume. Interest Expense Interest expense was $53.2 million in 2002 compared to $73.2 million in 2001. The decrease in interest expense was due to the fact that we discontinued the accrual of interest expense related to certain debt instruments that were subject to compromise pursuant to SOP 90-7. Income Tax Expense Income tax expense in 2002 was $2.0 million compared to $1.6 million in 2001 attributable primarily to foreign taxes. We provided a full valuation allowance on the domestic income tax benefit relating to the current and prior period's pre-tax losses. Net Income (Loss) As a result of the factors discussed above, we had a net income of $339.5 million in 2002 compared to a net loss of $148.5 million in 2001. 30 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Financial Condition Our principal sources of liquidity for operations are funds generated from product sales and borrowings under the Revolver, as defined herein. In connection with the bankruptcy reorganization, we entered into a new revolving credit agreement (the "Revolver") with a group of lenders. The Revolver provides for a revolving credit loan facility and letters of credit, in a combined maximum principal amount equal to the lesser of $75 million or a specified borrowing base, which is based upon eligible receivables and eligible inventory, with a maximum issuance of $25 million for letters of credit. The Revolver is secured by a first priority lien on substantially all of our domestic subsidiaries' assets and the stock of most of our subsidiaries (with the latter, in the case of our non-U.S. subsidiaries, being limited to 65% of their capital stock). We are required to reduce our direct borrowings, excluding letters of credit, on the Revolver to zero for a period of 15 consecutive days in fiscal year 2004 and for a period of 30 consecutive days in each fiscal year thereafter. We met the 2004 requirement in the first quarter of 2004. The Revolver and other loan agreements contain usual and customary restrictions including, but not limited to, limitations on dividends, redemptions and repurchases of capital stock, prepayments of debt (other than the Revolver), additional indebtedness, capital expenditures, mergers, acquisitions, recapitalizations, asset sales, transactions with affiliates, changes in business and the amendment of material agreements. Additionally, the Revolver and other loan agreements contain customary financial covenants relating to minimum levels of operating EBITDA and maximum leverage ratios and fixed charge coverage ratios (all as defined in the Revolver agreement). As of March 24, 2004, we had $45.5 million available under the Revolver after consideration of borrowing base limits at that date. In the second quarter of 2003, we negotiated an amendment to the Revolver that 1) increased the inventory advance in the calculation of our borrowing base from 125% to 175% of eligible accounts receivable during the period from July 1, 2003 through November 1, 2003, and 2) decreased the required minimum consolidated EBITDA to levels close to those in the Term Loan for the second, third and fourth quarters of 2003. This change was precipitated by significant continuing economic pressures experienced in the first half of the year which could have impacted our short term ability to borrow required amounts, due to the borrowing base restrictions related to receivables and inventory, and to meet specified EBITDA levels. On January 23, 2004, limited waivers were obtained, through February 29, 2004, for the Company's non-compliance with the EBITDA covenant requirement through December 31, 2003 for both the Revolver and Term loans, which allowed the continued extension of credit for a limited period of time. On February 13, 2004, we obtained amendments and waivers from representatives of the Revolver and Term loan bank groups to waive certain EBITDA related year-end 2003 covenants and revise certain covenants related to 2004 EBITDA levels, seasonal adjustments to the borrowing base calculations and certain other debt ratios. Our capital requirements have arisen principally in connection with financing working capital needs, servicing debt obligations, funding reorganization, restructuring and rationalization costs and funding capital expenditures. During 2003, we spent approximately $63 million for bankruptcy reorganization costs and prepetition claim payments. An additional $0.6 million was paid in January 2004 prior to the Debtors' Chapter 11 cases being closed by the Court. Certain immaterial amounts will be paid to consultants as part of the closure of the Company's Chapter 11 cases. Management believes that cash on hand, along with cash expected to be generated through operations and availability under our Revolver, will be sufficient to fund operations and anticipated capital expenditures for the foreseeable future and that the Company will remain in compliance with the amended covenants in both the Revolver and Term Loan agreements. Although we believe that we will continue to have access to borrowings under the Revolver in amounts necessary to meet our normal operating requirements, our ability to meet liquidity needs and comply with other terms of the bank covenants may be affected by factors beyond our control, including but not limited to, demand for our products, economic development, competition and other global events that drive the consumer's purchasing behavior. 31 In connection with the Reorganization, we entered into an agreement with the Pension Benefit Guaranty Corporation ("PBGC"), which, among other things, requires certain additional minimum funding contributions and accelerated contributions to be made to our pension plan. Total enhanced contributions of $2 million, $2.5 million and $2.5 million are required to be paid in addition to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 over the pension plan years 2003, 2005 and 2006, respectively. Accordingly, in 2003 we paid $7.7 million in contributions to our pension plan. Additionally, the agreement requires us to provide a letter of credit in the amount of $15 million to the PBGC by January 31, 2008. Operating Activities During 2003, net cash used in operating activities was $11.1 million compared to $1.8 million of cash provided by operating activities in 2002. In 2003, we spent approximately $63 million on bankruptcy reorganization costs and prepetition claim payments. In 2002, we spent $28.7 million related to bankruptcy reorganization, restructuring and rationalization programs, the latter programs primarily including payments for employee severance and location consolidation. Excluding the effects of bankruptcy, restructuring and rationalization related charges, net cash provided by operating activities improved by approximately $21.4 million. Our accounts receivable as of December 31, 2003 and 2002 decreased from prior year-ends by $4.7 million and $16.8 million, respectively, resulting in a net unfavorable year over year change of $12.1 million. This result was driven by a lower change in year over year fourth quarter sales and an increase of 2.3 days to 47.6 days sales outstanding during 2003 compared to 45.3 days during 2002. The change in inventory in 2003 was favorable to 2002 by $11.6 million due to more aggressive inventory management practices put in place during the course of the year in response to lower sales demand. Our accounts payable and accrued liabilities also declined $88.8 million year over year as we paid approximately $63 million in bankruptcy reorganization costs and prepetition claim payments. Investing Activities Cash used for investing activities was $12.3 million in 2003 compared to $19.1 million in 2002. The decrease is attributable to higher capital expenditures of $2.7 million offset by proceeds from the sale of assets of $9.3 million. Capital expenditures in 2003 were $21.4 million compared to $18.7 million in 2002. In 2004, we anticipate total capital expenditures to be approximately $23 million. The sale of assets in 2003 includes net proceeds from the sale of precious metals recovered from decommissioned manufacturing equipment of $5.6 million, the sale of our Waynesboro, Virginia facility for $0.7 million and the sale of our Martinsburg facility for $3.0 million. In connection with the payment of certain claims under our Plan of Reorganization, we fund, from time to time, a third party distribution agent to pay claimants. As of December 31, 2003, $0.4 million was held for payment on resolved prepetition claims but not yet disbursed to prepetition claimants. These escrows are recorded as restricted cash in the accompanying financial statements. The final distribution of $0.6 million was disbursed in January 2004. As of February 13, 2004 all cases have been closed and no additional claims payments are expected. We estimate immaterial amounts to be paid out to our bankruptcy tax and legal advisors through the wind down of the bankruptcy process. 32 Financing Activities Net cash used in financing activities totaled $6.4 million in 2003 compared to $9.4 million in 2002. At December 31, 2003, we had no borrowings under our Revolver and repaid $3.2 million related to our senior credit facilities and certain Industrial Revenue Bonds. During 2002, we repaid $7.4 million in debt. Off Balance Sheet Arrangements In the normal course of business and as collateral for performance, the Company is contingently liable under standby and import letters of credit totaling $14.1 million and $13.6 million as of December 31, 2003 and 2002, respectively. Contractual Obligations The following table summarizes our payments under contractual commitments as of December 31, 2003.
Payments due by Period (in thousands) ------------------------------------------------------- Less than 1 More than Contractual Obligations Total year 1-3 years 3-5 years 5 years - --------------------------------- ----------- --------- --------- --------- --------- Long-term debt obligations (a) $ 364,890 $ 2,491 $ 8,802 $ 230,447 $ 123,150 Interest expense (b) 114,962 18,003 41,007 39,942 16,010 Capital lease obligations 1,536 648 888 -- -- Operating lease obligations (c) 61,486 12,959 15,565 9,921 23,041 Purchase obligations (d) 20,328 6,489 7,353 5,662 824 ---------- ---------- --------- --------- --------- Total contractual obligations (e) $ 563,202 $ 40,590 $ 73,615 $ 285,972 $ 163,025 ========== ========== ========= ========= ========= (a) Represents our Term Loan, Senior Subordinated Notes and Industrial Revenue Bonds. See Note 8 to the consolidated financial statements for further information. (b) Amounts represent interest expense on fixed rate debt only. Interest on floating rate debt having a principal of $92.6 million at December 31, 2003 has been excluded. (c) Amounts represent contractual minimums assuming no increase in rent. See Note 9 to the consolidated financial statements for further information. (d) Consists of legally enforceable and binding obligations primarily to purchase finished goods and raw materials, to distribute goods and services, to fix utility costs and certain other legally enforceable and binding contracts. (e) Total does not include contractual obligations reported on the December 31, 2003 balance sheet as current liabilities.
Inflation We believe the relatively moderate inflation rate of the past decade has not significantly impacted our operations. Monetary assets (such as cash and cash equivalents) lose purchasing power as a result of inflation, while monetary liabilities (such as accounts payable and indebtedness) can be settled with dollars of diminished purchasing power. While we are exposed to future inflation, the degree of impact, if any, cannot be predicted. NEW ACCOUNTING PRONOUNCEMENTS - ----------------------------- In November 2002, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies" relating to the guarantor's accounting for, and 33 disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The disclosure provisions of the Interpretation are effective for the financial statements of interim or annual periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. We have not entered into any guarantees subsequent to December 15, 2002 and the adoption of FIN 45 had no material effect on our results of operations and financial position. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." There was no impact to our financial statements upon the adoption of SFAS No. 149. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The FASB Staff Position 150-3, "Effective Date, Disclosures and Transition for Mandatorily Redeemable Noncontrolling Interest Under FASB Statement No. 150 deferred certain effective dates. There was no impact to our financial statements upon the adoption of SFAS No. 150. In December 2003, the FASB issued Interpretation No. 46 (revised), "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. The objective of FIN 46R is to improve financial reporting by companies involved with variable interest entities ("VIE"). FIN 46R changes certain consolidation requirements by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interest of the VIE initially would be measured at their carrying amounts, and any difference between the net amount added to the balance sheet and any previously recognized interest would be recorded as a cumulative effect of an accounting change. FIN 46R also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Companies are required to apply FIN 46R to VIEs generally as of March 31, 2004 and to special-purpose entities as of December 31, 2003. We are a limited member of a VIE, as defined by FIN 46, which owns our Monee, Illinois facility. The sole purpose of this entity is to own and lease the facility to WKI. We became a limited member of the VIE when the entity was established in April 2000. We have no additional risk outside of a standard lease agreement, we do not consolidate this entity in our financial statements and we have no beneficial rights to profits or losses of this entity. In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132R). SFAS No. 132R amends Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. However, SFAS No. 132R does not change the recognition and measurement requirements of those Statements but replaces the disclosure requirements and requires additional disclosure. Additional new disclosure includes actual mix of plan assets by category, a description of investment strategies and policies used, a narrative description of the basis for determining the overall expected long-term rate of return on asset assumption and aggregate expected contributions. Most disclosure requirements are effective for fiscal years ending after December 31, 2003 with 34 the remainder of the requirements being effective for fiscal years ending after June 15, 2004. The new disclosures required by SFAS No. 132R are included in Note 10 to the Consolidated Financial Statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We primarily have market risk in the areas of foreign currency and floating rate debt. We invoice a significant portion of our international sales in U.S. dollars, minimizing the effect of foreign exchange gains or losses on our earnings. As a result, our foreign sales are affected by currency fluctuations versus U.S. dollar invoicing. Our costs are predominantly denominated in U.S. dollars. With respect to sales conducted in foreign currencies, increased strength of the U.S. dollar decreases our reported revenues and margins in respect of such sales to the extent we are unable or determine not to increase local selling prices. From time to time we reduce foreign currency cash flow exposure due to exchange rate fluctuations by entering into forward foreign currency exchange contracts. The use of these contracts protects cash flows against unfavorable movements in exchange rates, to the extent of the amount under contract. As of December 31, 2003, we had no forward foreign currency exchange contracts outstanding. We enter into interest rate swaps to alter interest rate exposures between fixed and floating rates on long-term debt. Under interest rate swaps, we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed upon notional principal amount. Under the Revolver and Term Loan, we are required to enter into interest rate protection agreements, the effect of which is to fix or limit interest cost. On August 6, 2003, we entered into interest rate swaps with a combined notional amount of $145 million, which expire on March 31, 2008. These interest rate swaps convert variable rate interest to an average fixed rate of 3.9% over the terms of the swap agreements. As of December 31, 2003, these swaps had a combined fair value of $(3.9) million, which is included in other comprehensive income and other long-term liabilities on the consolidated balance sheet. A 1% change in the market interest rates would result in a corresponding change of $5.8 million in the combined fair value of the interest rate swaps. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. WKI HOLDING COMPANY, INC. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES As of December 31, 2003 and 2002 and for the fiscal years ended December 31, 2003, 2002, 2001. Page ---- Report of Independent Public Accountants 37 Consolidated Statements of Operations 38 Consolidated Balance Sheets 39 Consolidated Statement of Cash Flows 40 Consolidated Statement of Stockholders' Equity (Deficit) 41 Notes to the Consolidated Financial Statements 42 36 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of WKI Holding Company, Inc. We have audited the accompanying balance sheets of WKI Holding Company, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002 (Successor Company), and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for the year ended December 31, 2003 (Successor Company Operations), and each of the two years in the period ended December 31, 2002, (collectively, the Predecessor Company Operations). These Successor and Predecessor consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, on December 23, 2002, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective after the close of business on January 31, 2003. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with AICPA Statement of Position 90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy Code," for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 2. In our opinion, the Successor Company's consolidated financial statements present fairly, in all material respects, the financial position of WKI Holding Company, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company's consolidated financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. Deloitte & Touche LLP McLean, Virginia March 29, 2004 37
CONSOLIDATED STATEMENTS OF OPERATIONS WKI HOLDING COMPANY, INC. FOR THE FISCAL YEARS ENDED DECEMBER 31 (In thousands, except share and per share amounts) SUCCESSOR COMPANY PREDECESSOR COMPANY ------------------- --------------------------- 2003 2002 2001 ------------------- ------------- ------------ Net sales $ 609,004 $ 684,846 $ 745,872 Cost of sales 443,910 491,751 558,515 ------------------- ------------- ------------ Gross profit 165,094 193,095 187,357 Selling, general and administrative expenses 146,013 162,976 179,682 Provision for restructuring costs -- -- 51,888 Impairment of goodwill 40,336 -- -- Other expense, net 5,639 3,297 13,786 ------------------- ------------- ------------ Operating (loss) income (26,894) 26,822 (57,999) Interest expense, net 29,554 53,167 73,173 ------------------- ------------- ------------ Loss before reorganization items, income taxes, minority interest and cumulative effect of change in accounting principle (56,448) (26,345) (131,172) Reorganization items, net -- 577,228 -- ------------------- ------------- ------------ (Loss) income before income taxes, minority interest and cumulative effect of change in accounting principle (56,448) 550,883 (131,172) Income tax expense 3,088 1,979 1,600 ------------------- ------------- ------------ (Loss) income before minority interest and cumulative effect of change in accounting principle (59,536) 548,904 (132,772) Minority interest in earnings of subsidiary (121) (141) (221) ------------------- ------------- ------------ Net (loss) income before cumulative effect of change in accounting principle (59,657) 548,763 (132,993) Cumulative effect of change in accounting principle (Note 4) -- (202,089) -- ------------------- ------------- ------------ Net (loss) income (59,657) 346,674 (132,993) Preferred stock dividends -- (7,142) (15,458) ------------------- ------------- ------------ Net (loss) income applicable to Common Stock $ (59,657) $ 339,532 $ (148,451) =================== ============= ============ Basic net (loss) income before cumulative effect of change in accounting principle per Common Share $ (10.37) $ 7.86 $ (2.17) =================== ============= ============ Cumulative effect of change in accounting principle per Common Share $ -- $ (2.93) $ -- =================== ============= ============ Basic net (loss) income per Common Share $ (10.37) $ 4.93 $ (2.17) =================== ============= ============ Diluted net (loss) income before cumulative effect of change in accounting principle per share $ (10.37) $ 7.51 $ (2.17) =================== ============= ============ Cumulative effect of change in accounting principle per share $ -- $ (2.80) $ -- =================== ============= ============ Diluted net (loss) income per share $ (10.37) $ 4.71 $ (2.17) =================== ============= ============ Weighted average number of shares outstanding: Basic 5,752,184 68,910,716 68,382,691 =================== ============= ============ Diluted 5,752,184 72,110,716 68,382,691 =================== ============= ============
The accompanying notes are an integral part of these statements. 38
CONSOLIDATED BALANCE SHEETS WKI HOLDING COMPANY, INC. (In thousands, except share and per share amounts) SUCCESSOR COMPANY --------------------------------------- ASSETS DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------- ------------------ Current Assets Cash and cash equivalents $ 10,343 $ 40,117 Accounts receivable (less allowances of $7,600 and $10,932 in 2003 and 2002, respectively) 75,668 76,198 Inventories, net 129,861 146,593 Prepaid expenses and other current assets 12,854 15,578 ------------------- ------------------ Total current assets 228,726 278,486 Other assets 33,601 27,353 Property, plant and equipment, net 103,924 91,807 Other intangible assets, net 114,739 84,600 Goodwill 146,592 260,527 ------------------- ------------------ TOTAL ASSETS $ 627,582 $ 742,773 =================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 30,083 $ 35,844 Current portion of long-term debt 2,491 3,218 Other current liabilities 68,629 117,008 ------------------- ------------------ Total current liabilities 101,203 156,070 Long-term debt 362,399 364,889 Pension and post-employment benefit obligations 86,189 81,370 Other long-term liabilities 10,388 6,655 ------------------- ------------------ Total liabilities 560,179 608,984 ------------------- ------------------ Minority interest in subsidiary 1,580 1,488 ------------------- ------------------ STOCKHOLDERS' EQUITY Common stock - $0.01 par value; 15,000,000 shares authorized; 5,752,184 shares issued and outstanding 58 58 Additional paid-in capital 132,243 132,243 Accumulated deficit (59,657) -- Accumulated other comprehensive loss (6,821) -- ------------------- ------------------ Total stockholders' equity 65,823 132,301 ------------------- ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 627,582 $ 742,773 =================== ==================
The accompanying notes are an integral part of these statements. 39
CONSOLIDATED STATEMENTS OF CASH FLOWS WKI HOLDING COMPANY, INC. FOR THE FISCAL YEARS ENDED DECEMBER 31, (In thousands) SUCCESSOR COMPANY PREDECESSOR COMPANY ----------- ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002 2001 ----------- ------------- ------------- Net (loss) income $ (59,657) | $ 346,674 $ (132,993) Adjustments to reconcile net (loss) income to net cash (used in) | provided by operating activities: | Reorganization items -- | (610,708) -- Cash paid for reorganization items -- | (8,365) -- Depreciation and amortization 36,745 | 36,095 50,731 Amortization of deferred financing fees 520 | 2,935 3,380 Minority interest in earnings of subsidiary 121 | 141 221 Impairment loss on goodwill and intangible assets 40,336 | 202,089 -- Loss on disposition of plant and equipment 293 | 4,454 2,683 Professional services contributed by Borden -- | -- 441 Provision for restructuring costs -- | -- 51,888 Cash paid for restructuring charges -- | (12,257) (7,325) Provision for rationalization costs -- | 3,839 18,539 Cash paid for rationalization charges -- | (8,066) (10,659) Changes in operating assets and liabilities: | Accounts receivable 4,706 | 16,845 52,998 Inventories 18,883 | 7,249 45,482 Prepaid expenses and other current assets 2,896 | (6,047) 5,915 Accounts payable and other current liabilities (50,958) | 37,873 (44,319) Provision for post-retirement benefits, net of cash paid (3,173) | (8,940) 8,695 Other assets and liabilities (1,845) | (2,031) (6,189) ----------- | ------------- ------------- Net cash (used in) provided by operating activities (11,133) | 1,780 39,488 ----------- | ------------- ------------- | CASH FLOWS FROM INVESTING ACTIVITIES: | Capital expenditures (21,419) | (18,709) (21,976) Net proceeds from sale of assets 9,304 | -- 3,797 Increase in restricted cash (174) | (354) -- ----------- | ------------- ------------- Net cash used in investing activities (12,289) | (19,063) (18,179) ----------- | ------------- ------------- | CASH FLOWS FROM FINANCING ACTIVITIES: | Borrowing on revolving credit facility, net -- | (3,900) 27,200 Borrowings on Borden revolving credit facility, net -- | -- 18,900 Repayment of long-term debt, other than revolving credit facility (3,217) | (3,457) (3,881) Issuance of common stock and stock subscriptions -- | -- 2,453 Purchase of treasury stock -- | -- (1,215) Deferred financing fees (3,135) | (2,048) (5,874) ----------- | ------------- ------------- Net cash (used in) provided by financing activities (6,352) | (9,405) 37,583 ----------- | ------------- ------------- | (Decrease) increase in cash and cash equivalents (29,774) | (26,688) 58,892 ----------- | ------------- ------------- | Cash and cash equivalents - beginning of year 40,117 | 66,805 7,913 ----------- | ------------- ------------- Cash and cash equivalents - end of year $ 10,343 | $ 40,117 $ 66,805 =========== | ============= ============= | Supplemental disclosures of cash flow information | Cash paid during the year for: | Interest $ 24,750 | $ 42,716 $ 71,198 =========== | ============= ============= Income taxes, net of refunds $ 3,565 | $ 2,787 $ (681) =========== | ============= ============= | Non cash information: | Preferred stock dividends $ -- | $ 7,142 $ 15,458 =========== | ============= =============
The accompanying notes are an integral part of these statements. 40
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) WKI HOLDING COMPANY, INC. (In thousands) Accu- mulated Total Other Stock- Contri- Additional Accu- Compre- holders Preferred Common Treasury buted Paid In mulated hensive Equity Stock Stock Stock Capital Capital Deficit Loss (Deficit) ----------- -------- ---------- ---------- ----------- ---------- -------- ---------- Predecessor Company balance, January 1, 2001 $ 91,527 $ 674 ($940) $ 604,911 $ -- ($767,584) ($2,939) ($74,351) Net loss (132,993) (132,993) Foreign currency translation adjustment 305 305 Cumulative effect of change in accounting for derivative (189) (189) Derivative fair value adjustment (590) (590) Minimum pension liability adjustment (8,245) (8,245) ---------- Total comprehensive loss (141,712) Professional services contributed by Borden 441 441 Issuance of common stock 22 2,231 2,253 Collection of receivable for stock sold 200 200 Repurchase of common stock (1,215) (1,215) Preferred stock dividends 5,213 (15,458) (10,245) ----------- -------- ---------- ---------- ----------- ---------- -------- ---------- Predecessor Company balance, December 31, 2001 96,740 696 (2,155) 607,783 -- (916,035) (11,658) (224,629) Net income 346,674 346,674 Foreign currency translation adjustment 129 129 Minimum pension liability adjustment (20,098) (20,098) Derivative fair value adjustment 347 347 ---------- Total comprehensive loss 327,052 Preferred stock dividends 1,402 (7,142) (5,740) Effect of reorganization: Cancellation of old preferred stock (98,142) (98,142) Cancellation of old common stock (696) 2,155 1,459 Fresh start adjustments (607,783) 576,503 31,280 -- New common stock issued in reorganization 58 132,243 132,301 ----------- -------- ---------- ---------- ----------- ---------- -------- ---------- Successor Company balance, December 31, 2002 -- 58 -- -- 132,243 -- -- 132,301 Net loss (59,657) (59,657) Foreign currency translation adjustment 3,684 3,684 Minimum pension liability adjustment (6,640) (6,640) Derivative fair value adjustment (3,865) (3,865) ---------- Total comprehensive loss (66,478) ----------- -------- ---------- ---------- ----------- ---------- -------- ---------- Successor Company balance, December 31, 2003 $ -- $ 58 $ -- $ -- $ 132,243 $ (59,657) $(6,821) $ 65,823 =========== ======== ========== ========== =========== ========== ======== ==========
The accompanying notes are an integral part of these statements. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WKI HOLDING COMPANY, INC. (1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION WKI Holding Company Inc. (the "Company" or "WKI") is a leading manufacturer and marketer of consumer bakeware, dinnerware, kitchen and household tools, rangetop cookware and cutlery products. The Company has strong positions in major channels of distribution for its products in North America and has also achieved a significant presence in certain international markets, primarily Asia and Australia. In North America, the Company sells both on a wholesale basis to mass merchants, department stores, specialty retailers, and grocery chains and on a retail basis through Company-operated retail outlet stores. In the international market, the Company has established its presence on a wholesale basis through an international sales force coupled with localized distribution and marketing capabilities. The market for the Company's products is highly competitive and the housewares industry has trended towards consolidation. Competition in the marketplace is affected not only by domestic manufacturers but also by the large volume of foreign imports. A number of factors affect competition in the sale of the Company's products, including, but not limited to, quality, price and merchandising parameters established by various distribution channels. Shelf space and placement is a key factor in determining retail sales of all of our products. Other important competitive factors include new product introductions, brand identification, style, design, packaging and service levels. The Company currently manufactures most of the finished goods in the dinnerware and the glass and metal portions of the bakeware categories, which constitutes approximately one half of the Company's finish goods costs. The Company purchases the remainder of finished goods from various vendors in Asia and Europe to support its rangetop, kitchenware, cutlery, and the ceramic portion of the bakeware categories. Reliance on finished goods suppliers could give rise to certain risks, such as interruptions in supply and quality issues, which are outside the Company's control. In addition, significant increases in the cost of energy, transportation or principal raw materials could have an adverse effect on results of operations. Seasonal variation is a factor in the Company's business in that there is generally an increase in sales demand in the second half of the year driven by increased consumer spending at retailers during the holiday shopping season. This causes the Company to adjust its purchasing schedule to ensure proper inventory levels in support of the second half of the year programs. Historically, between 55% and 60% of the Company's sales occur during the second half of the year. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year. As a consequence of the implementation of Fresh Start Reporting (See Note 2) effective December 31, 2002, the financial information presented in the audited consolidated statement of operations and the corresponding statement of cash flows for the year ended December 31, 2003 is generally not comparable to the financial results for the year ended December 31, 2002. Any financial information herein labeled "Predecessor Company" refers to periods prior to the adoption of Fresh Start Reporting (as defined herein), while those labeled "Successor Company" refer to periods following the Company's reorganization. The lack of comparability in the accompanying consolidated financial statements relates primarily to the Company's capital structure (outstanding shares used in earnings per share calculations), debt and bankruptcy related costs, and depreciation and amortization related to adjusting property, plant and equipment and other intangible assets and liabilities to their fair value. 42 (2) BANKRUPTCY REORGANIZATION AND FRESH START REPORTING REORGANIZATION On May 31, 2002 (the "Filing Date"), the Company and its U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy code ("Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for the Northern District of Illinois (the "Court"). The reorganization was jointly administered under the caption "In re World Kitchen, Inc., a Delaware Corporation, et al., Case No. 02-B21257." During the period from the Filing Date until January 31, 2003 (the "Effective Date"), the Debtors operated the business as debtors-in-possession under Chapter 11. The Company's non-U.S. subsidiaries did not file voluntary petitions, were not Debtors and did not reorganize. On November 15, 2002, the Debtors filed their second amended joint plan of reorganization (the "Plan") with the Court, which was confirmed on December 23, 2002 (the "Confirmation Date"). All material conditions precedent to the Plan becoming binding were resolved on or prior to December 31, 2002, and, therefore, the Company recorded the effects of the Plan and Fresh Start Reporting (as defined herein) as of that date. On the Effective Date, the Debtors legally emerged from their bankruptcy proceedings. At December 31, 2002, the Company recorded a $577.2 million reorganization gain reflecting the cancellation of debt pursuant to the Plan and adjusted the historical carrying value of its assets and liabilities to fair value, as defined by the reorganization value. On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by the Court. The remaining three Chapter 11 cases were closed by the Court on February 12, 2004. The Company's reorganization value of approximately $500 million, defined as post-emergence debt and equity ("Reorganization Value"), was determined in the fourth quarter of 2002, based on an independent valuation by financial valuation experts after consideration of several factors and assumptions and by using various valuation methods, including cash flow multiples, price/earnings ratios and other relevant industry information. On or about the Effective Date, with the effects reported herein on December 31, 2002, the following principal provisions of the Plan occurred: 1. The Company's old common and preferred stock were cancelled for no consideration. New Common Stock in the amount of 5,752,184 shares was to be issued ("New Common Stock") to certain creditors, pursuant to the Plan, as described below. 2. The Company's senior secured debt of approximately $577.1 million was discharged in return for the payment of $27.8 million in cash and the issuance of $240.1 million of new senior secured term loans, $123.2 million of new senior subordinated secured notes ("Senior Subordinated Notes") and the right to receive 4,528,201 shares (approximately 79%) of New Common Stock. 3. The Company's $25 million revolving credit facility due to Borden Chemical, Inc. (the "Borden Credit Facility"), an affiliate of the Predecessor Company's primary stockholder (Kohlberg, Kravis, Roberts & Co. L.P. ("KKR")), was converted into the right to receive 615,483 shares (approximately 11%) of New Common Stock. 4. The Company's 9-5/8% Notes in the amount of $211.1 million, including accrued interest, were converted into the right to receive 608,500 shares (approximately 10%) of New Common Stock. 5. The Company agreed to pay $2.9 million to settle in full the 9-1/4% Series B Senior Notes ("9-1/4% Notes") issued by EKCO Group Inc., a wholly owned subsidiary of the Company, and certain of its subsidiaries. 43 6. The Company reinstated $4.9 million certain of pre-existing Industrial Revenue Bond claims (the "Reinstated IRB claims"). 7. The Debtors' $50 million debtor in possession financing was repaid in full and terminated, and the Company entered into a new Revolving Credit Agreement providing up to $75 million in availability subject to borrowing base restrictions. 8. The Company became obligated to pay pre-petition liabilities to its vendors and other general unsecured creditors. Under the terms of the Debtors' Plan, general unsecured creditors of the Company were paid 8.8% of the allowable claim amount. General unsecured creditors of the Company's domestic operating subsidiaries were paid 60% of the allowable claim amount. Payments of approximately $17 million were made as prescribed by the Court at various distribution dates as claims were reconciled or otherwise resolved. The final distributions were made in January 2004. 9. The new board of directors was selected in accordance with the terms of the Plan. FRESH START REPORTING Upon confirmation of the Plan, the Company adopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh Start Reporting" or "SOP 90-7"). The Company adopted Fresh Start Reporting because holders of outstanding voting shares of the Company's capital stock immediately before the Chapter 11 filing and confirmation of the Plan received less than 50% of the common stock distributed under the Plan, and the Company's Reorganization Value was less than the Debtors' post-petition liabilities and allowed claims on a consolidated basis. Fresh Start Reporting adjustments reflect the application of Statement of Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141") for assets, which requires a reorganized entity to record its assets and liabilities at their fair value. The Company used its Reorganization Value to define the fair value of debt and equity at December 31, 2002. The resulting reorganized equity value of $132.3 million was allocated to individual assets using the principles of SFAS No. 141 and liabilities were adjusted to fair value upon emergence. The difference between the reorganized equity value described above and the resulting fair value of assets and liabilities was recorded as goodwill. The Company used independent valuation experts where necessary to estimate the fair value of major components of the balance sheet including trademarks, patents, customer relationships, property, plant and equipment and pension benefit obligations. The Fresh Start Reporting adjustments recorded in 2003 resulted in a reduction to goodwill of $73.6 million. Fair valuation adjustments for certain trademarks and exclusive beneficial license and distribution agreements were recorded as of January 1, 2003, and were determined using the excess income and relief from royalty approaches. The Company's trademarks and exclusive beneficial license and distribution agreements were valued at $71.3 million, resulting in a reduction of $13.1 million to the carrying value at January 1, 2003. The Company's trademarks and exclusive licenses are recognizable household names and are renewable solely at the discretion of the Company; as such, they were determined to have indefinite lives and are not amortized, but will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset(s) might be impaired. An exclusive distribution agreement valued at $7.1 million was determined to have a definite life based on the term of the governing contract and is amortized over the remaining estimated useful life of 8.7 years as of January 1, 2003. Fair valuation adjustments for certain customer relationships were recorded as of January 1, 2003, and were determined using the excess income approach for significant customers within the Company's mass merchandising distribution channels and the cost approach for certain other distribution channels. The 44 Company's customer relationships were valued at $24.8 million. Intangible assets associated with significant customers within the Company's mass merchandising distribution channels are amortized over their estimated remaining useful lives of 10 years. Intangible assets associated with certain other distribution channels are amortized over their estimated useful lives of 9 years using the double declining balance method, which is representative of the contractual turnover of customers within those distribution channels. Fair valuation adjustments for certain patents were recorded as of January 1, 2003, and were determined using the excess income and relief from royalty approaches. The Company's patents were valued at $23.0 million with estimated remaining useful lives ranging from 4 to 18 years based on the expiration of the patent under federal law. Fair valuation adjustments for property, plant and equipment were also recorded as of January 1, 2003. The fair value of the Company's property, plant, and equipment was determined to be $24.5 million more than the net book value at December 31, 2002. The Company adjusted its carrying value of property, plant and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6 million for buildings, and $7.3 million for machinery and equipment. The Company will depreciate these assets over their newly estimated remaining useful lives as of January 1, 2003. The Company used market data to determine the fair value of the Company's precious metals, principally platinum and rhodium. As a result, the Company increased the fair value of its precious metals by $14.9 million as of January 1, 2003. Precious metals are classified as other assets in the Consolidated Balance Sheet. In December 2002, the Debtors' pension benefit obligations were written up to fair value, equal to the projected benefit obligation of $31.7 million as of December 31, 2002, as determined by the Company's third-party actuary. Previously recorded other comprehensive income related to unrecognized actuarial losses of $28.3 million and a intangible assets related to prior unrecognized service cost of $5.7 million were written off. 45 The effect of the Plan and implementation of Fresh Start Reporting on the consolidated balance sheet was as follows:
Predecessor Successor Company Fresh Start Reporting Company ------------ --------------------------- ---------- As of Additional December 31, Reorganization December 31, Adjustments January 1, 2002 Adjustments 2002 (A) 2003 ------------ ------------- ---------- --------- -------- Assets Current Assets Cash and cash equivalents $ 40,117 $ -- $ -- $ -- $ 40,117 Accounts receivable, net 76,198 -- -- -- 76,198 Inventories, net 146,593 -- -- -- 146,593 Prepaid expenses and other current assets 15,578 -- -- (436) 15,142 ------------ ------------- ---------- --------- -------- Total current assets 278,486 -- -- (436) 278,050 Other assets 35,038 -- (5,651) F 14,902 44,289 Property, plant and equipment, net 89,773 -- -- 24,491 114,264 Other intangible assets, net 84,600 -- -- 34,044 118,644 Goodwill 55,985 -- 204,542 G (73,599) 186,928 ------------ ------------- ---------- --------- -------- TOTAL ASSETS $ 543,882 $ -- $ 198,891 $ (598 ) $742,175 ============ ============= ========== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable $ 47,281 $ -- $ -- $ -- $ 47,281 Current portion of long-term debt - 3,218 C -- -- 3,218 Other current liabilities 56,400 54,089 B, C -- -- 110,489 ------------ ------------- ---------- --------- -------- Total current liabilities 103,681 57,307 -- -- 160,988 Liabilities subject to compromise 887,340 (887,340) D -- -- -- Long-term debt -- 364,889 C -- -- 364,889 Pension and post-employment benefit obligations 77,737 -- 3,633 F (598) 80,772 Other long-term liabilities 1,737 -- -- -- 1,737 ------------ ------------- ---------- --------- -------- Total liabilities 1,070,495 (465,144) 3,633 (598) 608,386 Minority interest in subsidiary 1,488 -- -- -- 1,488 Stockholders' Equity (Deficit) Old Preferred stock 98,142 (98,142) E -- -- -- Old Common stock 696 (696) E -- -- -- New Common stock -- 58 C -- -- 58 Common stock held in treasury (2,155) 2,155 E -- -- -- Contributed capital 607,783 -- (607,783) H -- -- Additional paid-in capital -- 132,243 E -- -- 132,243 Accumulated deficit (1,201,287) 429,526 D 771,761 H -- -- Accumulated other comprehensive loss (31,280) -- 31,280 H -- -- ------------ ------------- ---------- --------- -------- Total stockholders' equity (deficit) (528,101) 465,144 195,258 -- 132,301 ------------ ------------- ---------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 543,882 $ -- $ 198,891 $ (598) $742,175 ============ ============= ========== ========= ======== A. As of December 31, 2002, the Company was still in the process of evaluating the fair value of certain assets for allocation of the reorganization value. Additional Fresh Start adjustments were recorded as of January 1, 2003. B. Estimated payables and reinstated tax claims at December 31, 2002 associated with the effects of the Plan were $54.1 million. Of this amount, $27.2 million was paid on the Effective Date. C. In accordance with the Plan, Allowed Bank Loan Claims under the Prepetition Credit Facility in the amount of $552.1 million were converted into $104.1 million in New Common Stock, $240.1 million in principal amount of new Senior Secured Term Loans and $123.2 million in principal amount of the new Senior Secured Subordinated Notes. The remaining $2.7 million was paid on the Effective Date and is included in other current liabilities. 46 D. Estimated settlement of liabilities subject to compromise and other transactions in connection with the Plan. As a result of the consummation of the Plan, the Company recognized a gain on the reorganization. This gain was recorded in the Predecessor Company's statement of operations as a component of net reorganization items. Gain on discharge of prepetition liabilities: Bank Loan Claims $ 82,002 Borden Claim 12,044 9-5/8% Notes 197,080 Unsecured Claims 14,082 Elimination of Old Stock 122,951 Surrender of Hamilton, Ohio property in satisfaction of certain IRB Claims 1,367 ------------- Gain on discharge of prepetition liabilities $ 429,526 ============= E. Old WKI Common Stock and Old WKI Preferred Stock and accrued but unpaid dividends and any related interest were cancelled on the Effective Date for no consideration. F. Fair value adjustments as of December 31, 2002, in accordance with Fresh Start Reporting. G. Excess reorganization value over the fair value of the Company's assets and liabilities. H. Elimination of accumulated deficit, accumulated other comprehensive loss and contributed capital in accordance with Fresh Start Reporting.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), the most significant of which include: Principles of Consolidation The consolidated financial statements present the operating results and financial position of WKI and the accounts of all entities controlled by the Company. All intercompany accounts and transactions have been eliminated. Minority interest in the income of a consolidated subsidiary represents the minority stockholder's share of the income of the consolidated subsidiary. The minority interest in the consolidated balance sheets reflect the original investment by the minority stockholder in the consolidated subsidiary, along with its proportional share of the accumulated earnings or losses, together with its share of any capital transactions. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform withthe2003 presentation. Cash and Cash Equivalents The Company considers all highly liquid investments, primarily government securities, with an original maturity of three months or less to be cash equivalents. 47 Allowances for Doubtful Accounts On a regular basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts based on an evaluation of historical bad debts, customer concentration, customer credit ratings, current economic trends and changes in customer payment patterns. Allowances for doubtful accounts totaled $7.6 million, $10.9 million and $25.3 million at December 31, 2003, 2002 and 2001, respectively. Inventories Inventories are stated at the lower of cost or market and include raw materials, labor, manufacturing overhead and cost to purchase outsourced products. The first-in, first-out method is used for valuing all inventories. The Company evaluates obsolete and excess inventories and records appropriate reserves based on expected demand. Property, Plant and Equipment Property, plant and equipment for the Predecessor Company was recorded at cost, less accumulated depreciation. The Successor Company adjusted its property, plant and equipment to estimated fair value, in conjunction with the implementation of Fresh Start Reporting (See Note 2) and has eliminated the accumulated depreciation and amortization of the Debtors. Depreciation is calculated using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 9-30 years; machinery and equipment, 3-15 years; and leasehold improvements, over the lease periods. Depreciation expense was $20.4 million, $24.9 million, $29.1 million, in 2003, 2002 and 2001, respectively. Capitalized interest costs relate to the purchase and construction of long-term assets and are amortized over the respective useful lives of the related assets. The Predecessor Company capitalized interest of $1.0 million in 2002 and 2001 and wrote-off $3.0 million under Fresh Start Reporting. During 2003, the Successor Company capitalized interest of $1.1 million. Other Assets Other assets consist primarily of precious metals, capitalized computer software costs and deferred financing fees. Precious metals are recorded at cost for the Predecessor Company and were adjusted to fair value for the Successor Company during the allocation period. Precious metals consist of platinum and rhodium and are used in the Company's manufacturing processes and are expensed to operations based on utilization. Capitalized computer software costs consist of costs to purchase and develop software. The Company capitalizes internally developed software costs based on an analysis of each project's significance to the Company and its estimated useful life. Capitalized software costs for the Predecessor Company are carried at cost less accumulated amortization. The Successor Company adjusted its capitalized software cost to estimated fair value in conjunction with the implementation of Fresh Start Reporting (See Note 2) and the accumulated amortization of the Debtors was eliminated. Capitalized software costs are amortized on a straight-line basis over a period between three and seven years. Amortization expense for computer software was $9.1 million, $9.2 million, and $8.1 million in 2003, 2002, and 2001, respectively. Deferred financing fees associated with the Company's debt are amortized to interest expense on a straight-line basis over the term of the related debt. In June 2002, $14.1 million of net deferred financing fees associated with prepetition debt were expensed. In addition, on the Effective Date, approximately $0.9 million of net deferred financing fees associated with discharged debts in accordance with the Plan were expensed. Goodwill and Intangible Assets On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which requires that goodwill and other intangibles assets with indefinite useful lives no longer be amortized but tested at least annually for impairment. As such, the Company no longer amortizes goodwill or trademark assets. The Company's patents and distribution agreement was determined to have definite lives and continue to be amortized on a straight-line basis over their economic useful lives. The Company capitalized certain legal fees incurred directly relating to the application for the maintenance of certain patent rights. These patent rights are included in 48 patents amortized over their economic useful life. Intangible assets associated with significant customers within the Company's mass merchandising distribution channels are amortized over their estimated remaining useful lives of 10 years. Intangible assets associated with certain other distribution channels are amortized over their estimated useful lives of 9 years using the double declining balance method, which is representative of the contractual turnover of customers within those distribution channels. Prior to the Company's emergence from bankruptcy, application of Fresh Start Reporting, and the adoption of SFAS No. 142, goodwill had been amortized over 40 years and trademarks and patents were amortized over the estimated economic useful lives, which ranged from 20 to 35 years, using the straight-line method. Goodwill and other intangibles were carried at cost, less accumulated amortization. Amortization expense of $11.5 million was recorded in 2001. Upon the adoption of SFAS No. 142 as of January 1, 2002, the Company recorded an impairment loss of $144.3 million relating to goodwill and $57.8 million relating to trademark assets (See Note 4). New goodwill representing the difference between the Successor Company's Reorganization Value over the fair value of its assets and liabilities, excluding debt, of $204.5 million was established in connection with Fresh Start Reporting (See Note 2). During 2003, an additional $73.6 million of this goodwill was allocated to certain identified assets upon the finalization of their respective valuations. The Company conducts its annual test of impairment for goodwill and intangible assets with indefinite useful lives in the first quarter. The Company also tests for impairment if events or circumstances occur subsequent to the Company's annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the course of 2003, the Company continued to experience declining revenues in certain key product lines, predominantly the tabletop, bakeware and kitchenware categories. These declines resulted from loss of market share and distribution at certain customers and a weak retail environment in the first half of 2003. Based on these declines and loss of market share, the Company conducted an impairment test as of December 31, 2003. The Company engaged third party valuation experts to determine the fair value of its reporting units and determined that some of the value of its goodwill was impaired. Based on this analysis, the Company recorded an impairment loss of $40.3 million relating to goodwill as of December 31, 2003. Impairment Accounting On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." Accordingly, the Company continues to review the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Other Comprehensive Loss Other comprehensive loss consists of minimum pension liabilities associated with the underfunding of the Company's pension plans, adjustments to the fair value of the Company's derivatives and foreign currency translation adjustments. Stock Based Compensation The Company accounts for stock based compensation cost using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, compensation cost of stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of the grant over the option exercise price and is charged to operations over the vesting period. The Company follows the disclosure provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123), which defines a fair value-based method of accounting for stock-based compensation. Revenue Recognition Revenue is recognized, net of provisions for customer allowances, including returns, discounts, rebates, incentives and other promotional payments, when products are shipped to customers and when all substantial risk of ownership has transferred. Estimates for returns are based on historical return rates, current economic trends and changes in customer demand. Estimates regarding other deductions also involve evaluation of historical deduction rates, assessment of open customer promotional programs based on allowable percent of 49 gross sales and expected assessment of volume rebates allowed based on estimated achievement against targets. All open deductions (i.e. deductions already taken by the customer) are generally included in accrual estimates as a reduction against gross sales with additional accruals recorded to estimate future sales deductions. In accordance with Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company records amounts billed to customers related to shipping and handling as revenue and all expenses related to shipping and handling as a cost of product sold. Advertising Costs Production costs of future media advertising are deferred until the advertising occurs, at which point these costs are amortized over the expected beneficial period and are charged to selling, general and administrative expenses. Media advertising expenses were $6.1 million, $4.5 million, and $2.7 million in 2003, 2002 and 2001, respectively. Cooperative advertising is accrued at the time of sale in the financial statements as a reduction of sales because it is viewed as part of the negotiated price of the products sold. Research and Development Costs Research and Development costs are defined as both internal and external costs incurred to develop new products or significant extensions of existing products. Such costs could include concept development, engineering, product design, prototype creation, commercialization, testing and packaging development work. All such costs are expensed as incurred and were $3.1 million, $2.0 million, and $0.2 million in 2003, 2002 and 2001, respectively. Income Taxes The Company uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Translation of Foreign Currencies The accounts of most foreign subsidiaries and affiliates are measured using local currency as the functional currency. For those operations, assets and liabilities are translated into U.S. dollars using period-end exchange rates and income and expense accounts are translated at average monthly exchange rates. Net changes resulting from such translations are excluded from net loss and are recorded as a separate component of accumulated other comprehensive loss in the consolidated financial statements. Gains and losses from foreign currency transactions are included in net income in the period in which they arise. Foreign currency translation adjustments included in accumulated other comprehensive loss were eliminated upon the adoption of Fresh Start Reporting (See Note 2). Derivative Financial Instruments The Company primarily uses interest rate swaps, which effectively convert a portion of the Company's variable rate obligations to fixed. The Company enters into interest rate swaps to alter interest rate exposures between fixed and floating rates on long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specific intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount. Interest rate swaps that are in excess of outstanding obligations are marked to market through other income and expense. On August 6, 2003, the Company entered into interest rate swaps with a combined 50 notional amount of $145 million. As of December 31, 2003, these swaps had a combined fair value of $(3.9) million which is included in other comprehensive loss and other long-term liabilities. At December 31, 2002 and 2001, the Predecessor Company had a $15.0 million notional amount interest rate swap outstanding with a fair value of $(0.4) million and $(0.8) million, respectively. The interest rate swap was rejected during the Chapter 11 proceedings and was settled pursuant to the Plan. Fair Value of Financial Instruments The fair value of the Company's debt is estimated using discounted cash flow analysis based on the incremental borrowing rates currently available to the Company and for loans with similar loan terms and maturities (See Note 8). The estimated fair value of cash and cash equivalents, receivables, and trade payables approximate their carrying value due to the short maturity of these instruments. The Company is not aware of any factors that would significantly affect the estimated fair values. Recently Issued Accounting Standards In November 2002, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies" relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The disclosure provisions of the Interpretation are effective for the financial statements of interim or annual periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The Company has not entered into any guarantees subsequent to December 15, 2002 and the adoption of FIN 45 had no material effect on its results of operations and financial position. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." There was no impact to the Company's financial statements upon the adoption of SFAS No. 149. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The FASB Staff Position 150-3, "Effective Date, Disclosures and Transition for Mandatorily Redeemable Noncontrolling Interest Under FASB Statement No. 150 deferred certain effective dates. There was no impact to the Company's financial statements upon the adoption of SFAS No. 150. In December 2003, the FASB issued Interpretation No. 46 (revised), "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. The objective of FIN 46R is to improve financial reporting by companies involved with variable interest entities ("VIE"). FIN 46R changes certain consolidation requirements by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the 51 variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interest of the VIE initially would be measured at their carrying amounts, and any difference between the net amount added to the balance sheet and any previously recognized interest would be recorded as a cumulative effect of an accounting change. FIN 46R also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Companies are required to apply FIN 46R to VIEs generally as of March 31, 2004 and to special-purpose entities as of December 31, 2003. The Company is a limited member of a VIE, as defined by FIN 46, which owns its Monee, Illinois facility. The sole purpose of this entity is to own and lease the facility to WKI. The Company became a limited member of the VIE when the entity was established in April 2000. The Company has no additional risk outside of a standard lease agreement, does not consolidate this entity in its financial statements and has no beneficial rights to profits or losses of this entity. In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132R). SFAS No. 132R amends Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. However, SFAS No. 132R does not change the recognition and measurement requirements of those Statements but replaces the disclosure requirements and requires additional disclosure. Additional new disclosure includes actual mix of plan assets by category, a description of investment strategies and policies used, a narrative description of the basis for determining the overall expected long-term rate of return on asset assumption and aggregate expected contributions. Most disclosure requirements are effective for fiscal years ending after December 31, 2003 with the remainder of the requirements being effective for fiscal years ending after June 15, 2004. The new disclosures required by SFAS No. 132R are included in Note 10. (4) GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under this standard, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset(s) might be impaired. Accordingly, the Company ceased amortization of its existing goodwill and its trademark assets on January 1, 2002. In accordance with SFAS No. 142, the Company performed transitional impairment tests of its goodwill and trademark assets as of January 1, 2002. The Company engaged third party valuation experts to determine the fair value of its reporting units, as defined by SFAS No. 142, and determined that some of the value of its goodwill was impaired. The fair value of all reporting units used in the transitional goodwill impairment test was performed using the income approach and equaled the $500 million Reorganization Value. Based on this analysis, the Company recorded an impairment loss of $144.3 million relating to goodwill as of January 1, 2002. Determinations of the fair value of the trademark assets were also performed by third party valuation experts using the income and relief from royalty approaches. The fair value determinations were made after considering a variety of indicators including the deterioration in the business climate and a change in the manner in which the impairment of an asset is evaluated under the new standard. Based on this analysis, the Company recorded an impairment loss of $57.8 million relating to trademark assets as of January 1, 2002. The combined impairment loss of $202.1 million is recorded as a cumulative effect of a change in accounting principle in the accompanying Consolidated Statements of Operations. At December 31, 2002, pursuant to Fresh Start Reporting, the Company increased goodwill by $204.5 million, which represents the excess of the reorganized equity value over the fair value of the Company's assets and liabilities. Subsequent Fresh Start Reporting valuations which occurred during the allocation period resulted in a $73.6 million reduction of goodwill and corresponding increase to other assets and liabilities (see Note 2). 52 The Company conducts its annual test of impairment for goodwill and indefinite life intangible assets in the first quarter. The Company also tests for impairment if events or circumstances occur subsequent to the Company's annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the course of 2003, the Company continued to experience declining revenues in certain key product lines, predominantly the tabletop, bakeware and kitchenware categories. These declines resulted from loss of market share and distribution at certain customers and a weak retail environment in the first half of 2003. As a result of the topline shortfall, the Company did not meet its EBITDA covenant for the year ending 2003 (See Note 8 for further information on this). Based on these declines and loss of market share, the Company conducted an impairment test as of December 31, 2003. The Company engaged third party valuation experts to determine the fair value of its reporting units using a discounted cash flow analysis and determined that some of the value of its goodwill was impaired. As a result of this analysis, the Company recorded an impairment loss of $40.3 million relating to goodwill as of December 31, 2003. Intangible assets with finite lives at December 31, 2003 are summarized as follows (in thousands):
GROSS ACCUMULATED BALANCE AMORTIZATION NET BALANCE -------- ------------- ------------ Patents $ 23,253 $ 2,363 $ 20,890 Customer relationships 24,750 3,267 21,483 Distribution agreement 7,100 630 6,470
These assets are classified as other intangible assets in the Consolidated Balance Sheet and their related amortization expense is recorded as other expense in the Consolidated Statement of Operations. The estimated aggregate amortization expense for each of the five succeeding fiscal years is $7.6 million. (5) SUPPLEMENTAL BALANCE SHEET DATA Inventories at December 31, 2003 and 2002 consisted of the following:
INVENTORIES (IN THOUSANDS): DECEMBER 31, ------------------ 2003 2002 -------- -------- Finished and in-process goods $103,045 $117,401 Raw materials and supplies 26,816 29,192 -------- -------- $129,861 $146,593 ======== ========
The Company increased the value of its precious metals by $14.9 million to reflect the fair value as of January 1, 2003. The Company used published market data to determine the fair value of the Company's precious metals, principally platinum and rhodium. Other assets at December 31, 2003 and 2002 consisted of the following:
OTHER ASSETS (IN THOUSANDS): DECEMBER 31, ---------------- 2003 2002 ------- ------- Precious metals $20,369 $10,829 Other assets 13,232 16,524 ------- ------- $33,601 $27,353 ======= =======
Fair valuation adjustments for property, plant and equipment were also recorded as of January 1, 2003. The fair value of the Company's property plant, and equipment was determined to be $24.5 million more than the net book value at December 31, 2002. The Company adjusted its carrying value of property, plant and equipment as of January 1, 2003 as follows: $4.6 million for land, $12.6 million for buildings, and $7.3 million for machinery and equipment. The Company will depreciate these assets over their newly estimated remaining useful lives as of January 1, 2003. Property, plant and equipment at December 31, 2003 and 2002 consisted of the following:
PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS): DECEMBER 31, 2003 2002 --------- --------- Land $ 6,734 $ 3,145 Buildings 41,218 15,249 Machinery and equipment 87,307 83,403 --------- --------- 135,259 101,797 Accumulated depreciation (31,335) (9,990) --------- --------- $103,924 $ 91,807 ========= =========
53 Other liabilities at December 31, 2003 and 2002 consisted of the following:
OTHER CURRENT LIABILITIES (IN THOUSANDS): DECEMBER 31, ================= 2003 2002 ------- -------- Wages and employee benefits $16,170 $ 11,902 Accrued advertising and promotion 22,398 17,380 Accrued interest 8,985 3,982 Reorganization accruals 2,812 64,974 Other accrued expenses 18,264 18,770 ------- -------- $68,629 $117,008 ======= ========
(6) RELATED PARTY TRANSACTIONS SUCCESSOR COMPANY Interest Expense and Debt Issuance Fees Upon emergence from bankruptcy, certain creditors of the Predecessor Company became principal owners of the Successor Company. During the year ended December 31, 2003, the Company recorded $14.2 million and paid $9.2 million in interest expense collectively, to these principal owners. In addition, during 2003 the Company paid $1.4 million in debt issuance fees and $0.2 million in monthly banking and letter of credit fees to a principal owner. See Note 8 for further information on the Company's debt agreements. In addition, on August 6, 2003, the Company entered into interest rate swaps with a financial institution that is one of the principal owners of the Successor Company. These interest rate swaps have a combined notional amount of $145 million, which expire on March 31, 2008, and convert variable rate interest to an average fixed rate of 3.9% over the terms of the swap agreements. As of December 31, 2003, these swaps had a combined fair value of $(3.9) million, which is included in other comprehensive income and other long-term liabilities on the consolidated balance sheet. During 2003, the Company recorded approximately $0.06 million in interest to this principal owner relating to these swaps and paid this balance in January 2004. PREDECESSOR COMPANY Interest Expense Pursuant to a Credit Agreement dated as of August 24, 2000, as amended and restated as of April 12, 2001 (and as further amended from time to time thereafter), between the Predecessor Company and Borden, the Predecessor Company obtained from Borden a temporary $50 million revolving credit facility (the "Borden Credit Facility"), from which $40 million was initially made available, and which was reduced, in accordance with its terms, on August 16, 2001 to a $25 million revolving credit facility. During the year December 31, 2002, the Predecessor Company recorded $1.5 million in interest expense related to the Borden Credit Facility and paid $0.7 million through the Filing Date. Interest expense related to the Borden Credit Facility was accrued during the Chapter 11 process and $1.3 million was paid in full on the Effective Date. The Borden Credit Facility was secured with an interest on the Predecessor Company's assets that was second in priority behind the interests securing the Amended and Restated Credit Agreement with certain bank lenders (the "Predecessor Senior Credit Facility"). In accordance with the Plan, the Borden Credit Facility principal balance of $25 million was converted into 615,483 shares of New Common Stock with an aggregate value of approximately $14.2 million, constituting approximately 10.7% of the outstanding shares of the Successor Company 54 (excluding the impact of shares reserved for issuance pursuant to the Management Stock Plan). An affiliate of the Predecessor Company and of KKR purchased 9-5/8% Notes previously issued by the Predecessor Company in the open market or by other means. As of December 31, 2002, affiliates had purchased an aggregate of $80.5 million of 9-5/8% Notes in open market transactions. In accordance with the Plan, the affiliates' balance on the Filing Date of $80.5 million of 9-5/8% Notes was converted into 128,193 shares of New Common Stock, which constitutes approximately 2.2% of the outstanding shares of the Successor Company (excluding shares reserved for issuance pursuant to the Management Stock Plan). On the Effective Date, the affiliates' balance of $36.7 million in face amount of loans under the Predecessor Company's Senior Credit Facility was discharged in return for its pro rata share of 1) $2.75 million in cash, 2) 4,528,201 shares of New Common Stock, 3) $240.05 million in principal amount of Term Loans and 4) $123.15 million in principal amount of Senior Subordinated Notes. Preferred dividends Prior to April 1, 1998, the Predecessor Company operated as a wholly-owned subsidiary of Corning Incorporated ("Corning"). In connection with the recapitalization of the Predecessor Company on April 1, 1998 (the "Recapitalization"), the Predecessor Company issued $30.0 million in 12% cumulative junior pay-in-kind stock to CCPC Acquisition Corp ("CCPC Acquisition"), its majority shareholder. The cumulative junior preferred stock consisted of 1.2 million shares with each share having a liquidation preference of $25. The cumulative junior preferred stock provided for the payment of dividends in cash, additional shares of junior preferred stock or a combination thereof of $0.75 per share per calendar quarter, if and when declared by the Predecessor Company's board of directors. The Predecessor Company stopped accruing dividends on the Filing Date and as of that date had accrued but not paid $19.1 million in preferred stock dividends, of which $2.4 million was expensed during the year ended December 31, 2002. As the dividends were expected to be settled by issuing additional shares of preferred stock, the dividends were recorded in preferred stock in the Predecessor Company balance sheets. In connection with the Plan, the preferred stock, including any accrued dividends thereon, was canceled for no consideration on the Effective Date. In the fourth quarter of 1999, the Predecessor Company issued $50.0 million in 16% cumulative junior preferred stock to Borden. The cumulative junior preferred stock consisted of two million shares with each share having a liquidation preference of $25. The cumulative junior preferred stock provided for the payment of cash dividends of $1.00 per share per quarter whether or not declared by the Predecessor Company if certain financial ratios were satisfied. The Predecessor Company stopped accruing dividends on the Filing Date and as of that date had accrued but not paid $25.3 million in preferred stock dividends, of which $4.8 million was expensed during the year ended December 31, 2002. As the dividends were expected to be paid in cash, the dividends payable were recorded as other long-term liabilities in the Predecessor Company balance sheets. In connection with the Plan, the preferred stock, including accrued dividends thereon, were canceled for no consideration on the Effective Date. Services provided by Corning, Inc. In connection with the Recapitalization, Corning and the Predecessor Company entered into several agreements whereby Corning would provide certain goods and services to the Company and would share certain facilities at terms specified in the agreements. Management believes that the methodology used by Corning to charge these costs was reasonable, but may not necessarily be indicative of the costs that would have been incurred had these functions been performed by the Company. For the year ended December 31, 2002, the Predecessor Company incurred $2.1 million in services provided by Corning. Upon the Effective Date, all of the common stock held by Corning was canceled as part of the bankruptcy reorganization and Corning ceased to be a related party. 55 Management Fees In connection with the Recapitalization, the Predecessor Company and Borden entered into an agreement pursuant to which Borden provided certain management, consulting and financial services to the Predecessor Company. The Company recorded expenses totaling $2.4 million and $2.3 million remained payable at December 31, 2002. This agreement was canceled on the Effective Date and amounts owing Borden were settled in accordance with the Plan. (7) STOCKHOLDERS' EQUITY (DEFICIT) SUCCESSOR COMPANY The Amended Certificate of Incorporation of Reorganized WKI (the "Amended Certificate") provides that, as of the Effective Date, the Successor Company is authorized to issue up to 15.0 million shares of new common stock, par value $0.01 per share ("New Common Stock"). As of December 31, 2003 and 2002, 5.8 million shares of New Common Stock were issued and outstanding. The holders of New Common Stock will be entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. As of the Effective Date, 710,942 shares of New Common Stock were available for issuance, pursuant to grants of stock options, under the Management Stock Plan ("Management Stock Plan"). On May 29, 2003, 611,946 options were issued to key employees and non-employee directors (See Note 11). Covenants in certain debt instruments will restrict, and may prohibit, the Successor Company from paying dividends. PREDECESSOR COMPANY At December 31, 2001, the Predecessor Company had 69.6 million shares of common stock outstanding, ("Old Common Stock"). The Old Common Stock was cancelled as part of the Plan without consideration. In 2001, the Predecessor Company issued 2,200,000 shares of Old Common Stock to the Predecessor Company's management. The shares were issued at $1.00 per share resulting in proceeds of $2.2 million. In 2001, the Predecessor Company repurchased 376,000 shares of Old Common Stock for $1.2 million from prior members of the Predecessor Company's management upon their termination of employment. The shares were repurchased at rates as defined in the management equity option plan. Repurchased shares were classified as common stock held in treasury on the balance sheet. These shares were also cancelled as part of the Plan. At December 31, 2001, the Predecessor Company had 3.2 million shares of preferred stock outstanding ("Old Preferred Stock") with liquidation preferences of $100.5 million. The Predecessor Company recorded $15.5 million in 2001 in Old Preferred Stock dividends, none of which were paid. Dividends required to be settled in cash totaling $25.3 million and $20.5 million in 2002 and 2001, respectively, were accrued as other long-term liabilities. The $25.3 million balance as of December 31, 2002 was cancelled with no consideration under the terms of the Plan. 56 (8) BORROWINGS Debt outstanding as of December 31, 2003 and 2002, and weighted average interest rates over the years ended December 31, 2003 and 2002, are as follows (in thousands):
SUCCESSOR COMPANY -------------------------------------------- DECEMBER 31, 2003 DECEMBER 31, 2002 --------------------- --------------------- DUE WITHIN DUE WITHIN LONG-TERM ONE YEAR LONG-TERM ONE YEAR ---------- --------- ---------- --------- Senior secured term loan, at an average rate of 4.7%, due March 2008 $ 235,249 $ 2,401 $ 237,649 $ 2,401 12% senior subordinated notes due January 2010 123,150 -- 123,150 -- Revolver at an average rate of 4.3% -- -- -- -- Industrial Revenue Bonds, at an average rate of 5.9% and 5.8% 4,000 90 4,090 817 ---------- --------- ---------- --------- Total Debt $ 362,399 $ 2,491 $ 364,889 $ 3,218 ========== ========= ========== =========
In connection with the bankruptcy reorganization, on the Effective Date, the Company entered into a new Revolving Credit Agreement (the "Revolver") with a group of lenders. The new facility provides for a revolving credit loan facility and letters of credit in a combined maximum principal amount equal to the lesser of $75 million or a specified borrowing base, which is based upon eligible receivables and eligible inventory, with a maximum issuance of $25 million for letters of credit. The Revolver is secured by a first priority lien on substantially all of the Company and its domestic subsidiaries' assets and on the stock of most of the Company's subsidiaries (with the latter, in the case of the Company's non-U.S. subsidiaries, being limited to 65% of their capital stock) (collectively, the "Collateral"). The Company is required to reduce its direct borrowings, excluding letters of credit, on the Revolver to zero for a period of 15 consecutive days in fiscal year 2004 and for a period of 30 consecutive days in each fiscal year thereafter. The rate of interest charged is adjusted quarterly based on a pricing grid, which is a function of the ratio of the Company's total debt to Adjusted EBITDA, as defined in the loan documents. The credit facility provides the Company the option of borrowing at a spread over the base rate (as defined) for base rate loans or the Adjusted London Interbank Offered Rate (LIBOR) for Eurodollar loans. In addition, the Company pays a quarterly commitment fee of 0.50% on the average daily unused amount. As of March 24, 2004, the Company had $45.5 million available under the Revolver after consideration of borrowing base limits at that date. Pursuant to the Plan, on the Effective Date, the Company entered into a senior secured term loan with certain secured lenders in the aggregate principal amount of $240.1 million (the "Term Loan"), and issued Senior Subordinated Notes in the aggregate principal amount of $123.2 million, in partial satisfaction of its prepetition secured lenders' claims against the Predecessor Company. Under the Term Loan, interest accrues at the Company's election at either JPMorgan Chase's prime rate plus 2.5%, the Federal Funds Effective Rate plus 3.0% or LIBOR times the Statutory Reserve Rate (as defined in the Credit Agreement) plus 3.5%. The Term Loan is secured by a second priority lien on the Collateral. The Term Loan requires quarterly principal payments of approximately $0.6 million beginning April 4, 2003 through December 31, 2007, with a remaining balloon payment of approximately $228 million due on March 31, 2008. The Company is required to prepay some or all of outstanding obligations under the Term Loan upon certain conditions or events as specified in the related loan documents. The Revolver and Term Loan agreements contain usual and customary restrictions including, but not limited to, limitations on dividends, redemptions and repurchases of capital stock, prepayments of debt (other than the Revolver), 57 additional indebtedness, capital expenditures, mergers, acquisitions, recapitalizations, asset sales, transactions with affiliates, changes in business and the amendment of material agreements. Additionally, the Revolver and Term Loan contain customary financial covenants relating to minimum levels of EBITDA and maximum leverage ratios and fixed charge coverage ratios. In the second quarter management negotiated an amendment to the Revolver that 1) increases the inventory advance in the calculation of the Company's borrowing base from 125% to 175% of eligible accounts receivable during the period from July 1, 2003, through November 1, 2003, and 2) decreases the required minimum consolidated EBITDA to levels close to those in the Term Loan for the second, third and fourth quarters of 2003. As of December 31, 2003, the Company was not in compliance with certain financial covenants contained in these agreements. On January 23, 2004 limited waivers were obtained, through February 29, 2004, for the Company's non-compliance with the EBITDA covenant requirement through December 31, 2003 for both the Revolver and Term loans, which allowed the continued extension of credit for a limited period of time. On February 13, 2004 the Company obtained amendments and waivers from representatives of the Revolver and Term loan bank groups to waive certain EBITDA related year-end 2003 covenants and to revise certain covenants related to 2004 EBITDA levels, seasonal adjustments to the borrowing base calculations and certain other debt ratios. The Senior Subordinated Notes are collateralized by a third priority lien on the Collateral and pay interest semi-annually on each January 31 and July 31 at 12% per annum. The Senior Subordinated Notes have no sinking fund requirement and are redeemable, in whole or in part, at the option of the Company beginning January 31, 2008 upon payment of a redemption premium. Pursuant to the Plan, $4.9 million in industrial revenue bonds were reinstated on the Effective Date. Certain of these bonds with remaining principal of $0.1 million as of December 31, 2003, bear interest at 3% and mature in September 2004. The balance of the bonds have remaining principal of $4.0 million as of December 31, 2003, bear interest at 6.25% and mature August 2005. Long-term debt maturing in each of the years subsequent to December 31, 2003 (in thousands) is as follows: 2004 $ 2,491 2005 6,401 2006 2,401 2007 2,401 2008 228,046 2009 - 2010 123,150 ------------- 364,890 Less: current maturities 2,491 ------------- Long-term debt $ 362,399 ============= 58 (9) COMMITMENTS AND CONTINGENCIES LEASES The Company is a party to certain non-cancelable lease agreements, which expire at various dates through 2013. Certain of the Company's leases contain escalation clauses, which require base rent increases over the term of the lease. Minimum rental commitments outstanding at December 31, 2003 are as follows (in thousands):
Operating Capital Leases Leases ---------- --------------- 2004 $ 12,959 $ 648 2005 8,734 555 2006 6,830 333 2007 5,381 -- 2008 4,542 -- Thereafter 23,040 -- ---------- --------------- Total minimum lease payments $ 61,486 1,536 ========== Less amounts representing interest 174 --------------- Present value of minimum lease payments $ 1,362 ===============
Rental expense was $15.5 million, $24.5 million, and $25.4 million for the years ended December 31, 2003, 2002, and 2001, respectively. The liability for capital lease obligations is recorded in other current and other long-term liabilities in the Company's financial statements. The majority of capital leases are financed under a master lease agreement at 11.5%. The total value of assets under capital leases at December 31, 2003 is $1.5 million. Litigation The Company is a defendant or plaintiff in various claims and lawsuits arising in the normal course of business. As a result of the bankruptcy proceedings, holders of litigation claims in the bankruptcy proceedings that arose prior to May 31, 2002 retain all rights to proceed against the Company under certain limitations of the Court. The Company believes, based upon information it currently possesses and taking into account established reserves for estimated liabilities and its insurance coverage, that the ultimate outcome of these proceedings and actions is unlikely to have a material adverse effect on the Company's financial statements. It is possible, however, that some matters could be decided unfavorably to the Company, and could require the Company to pay damages or make other expenditures in amounts that could be material but cannot be estimated as of December 31, 2003. Environmental Matters The Company's facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and human health and safety, including those governing wastewater discharges, air emissions, and the use, generation, storage, treatment, transportation and disposal of hazardous and non-hazardous materials and wastes and the remediation of contamination associated with such disposal. Because of the nature of its business, the Company has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with and resolving liabilities under such laws and regulations. It is the Company's policy to accrue for remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company has accrued approximately $0.6 million as of December 31, 2003 for probable environmental remediation and restoration liabilities. Based on currently available information and analysis, the Company believes that it is possible that costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that 59 could be material but cannot be estimated as of December 31, 2003. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. Letters of Credit In the normal course of business and as collateral for performance, the Company is contingently liable under standby and import letters of credit totaling $14.1 million and $13.6 million as of December 31, 2003 and 2002, respectively. Interest Rate Swap The Company enters into interest rate swaps to alter interest rate exposures between fixed and floating rates on long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed upon notional principal amount. Under the Revolver and Term Loan, the Company is required to enter into interest rate protection agreements, the effect of which is to fix or limit the interest cost. On August 6, 2003, the Company entered into interest rate swaps with a combined notional amount of $145 million, which expire on March 31, 2008. These interest rate swaps convert variable rate interest to an average fixed rate of 3.9% over the terms of the swap agreements. As of December 31, 2003, the swaps had a combined fair value of $(3.9) million which is included in other comprehensive income and other long-term liabilities on the consolidated balance sheet. A 1% change in the market interest rates would result in a corresponding change of $5.8 million in the combined fair value of the interest rate swaps. (10) EMPLOYEE BENEFITS EMPLOYEE RETIREMENT PLANS The World Kitchen, Inc. Pension Plan (the "Benefit Plan") is a defined benefit pension plan providing retirement income benefits to eligible U.S. employees of the Company. Effective December 31, 2001, the benefits for most non-union employees were frozen. Pension plan benefits are generally based on years of service and/or compensation. The Company's postretirement benefit plan provides certain medical and life insurance benefits for retired employees. Substantially all U.S. employees of the Company may become eligible for these benefits if they fulfill eligibility requirements as specified by the plan; however, most eligible retirees receive access only to medical insurance benefits. 60 In accordance with Fresh Start Reporting, the accrued benefit liability of the Debtors was adjusted to fair value. Accordingly, the Debtors' unrecognized net actuarial loss and prior service costs were recognized immediately resulting in an increase to the pension liability of $34.0 million and an increase to the other post retirement benefit liability of $3.0 million. Relevant data for the Company's pension and postretirement medical benefit plans at December 31, 2003 and 2002, respectively, is as follows:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------- --------------------------- SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR COMPANY | COMPANY COMPANY | COMPANY (IN THOUSANDS) 2003 | 2002 2003 | 2002 - -------------- ----------- |------------- ----------- |------------- | | CHANGE IN BENEFIT OBLIGATION | | Benefit obligation at beginning of year $ 90,872 |$ 80,658 $ 49,697 |$ 43,461 Service cost 2,251 | 2,694 901 | 1,188 Interest cost 6,009 | 5,415 2,732 | 3,073 Plan participants' contributions -- | 26 480 | 200 Actuarial loss 11,034 | 9,647 3,751 | 3,406 Benefits paid (5,885) | (4,672) (2,483) | (1,631) Amendments 1,774 | (2,697) (11,925) | -- Settlements -- | (199) -- | -- ----------- |------------- ----------- |------------- Benefit obligations at end of year $ 106,055 |$ $90,872 $ 43,153 |$ 49,697 =========== |============= =========== |============= | | CHANGE IN PLAN ASSETS | | Fair value of plan assets at beginning | | of year $ 57,849 |$ 53,549 $ -- |$ -- Actual return on plan assets 8,547 | (3,723) -- | -- Employer contributions 6,931 | 12,869 2,003 |$ 1,431 Plan participants' contributions -- | 25 480 | 200 Benefits paid (5,885) | (4,672) (2,483) | (1,631) Divestitures and settlements -- | (199) -- | -- ----------- |------------- ----------- |------------- Fair value of plan assets at end of year $ 67,442 |$ 57,849 $ -- |$ -- =========== |============= =========== |============= | | Funded status $ (38,613) |$ (33,023) $ $(43,152) |$ (49,697) Unrecognized net actuarial loss 7,072 | 28,576 3,461 | 6,908 Unrecognized prior service cost 1,675 | 5,651 (11,233) | (3,275) Unrecognized initial net benefit asset -- | (183) -- | -- Post September 30th contributions 2,318 | 1,300 -- | -- ----------- |------------- ----------- |------------- Net amount recognized (27,548) | 2,321 (50,924) | (46,064) Fresh Start Reporting adjustment -- | (33,994) 598 | (3,633) ----------- |------------- ----------- |------------- Net amount recognized $ (27,548) |$ (31,673) $ (50,326) |$ (49,697) =========== |============= =========== |============= | | AMOUNTS RECOGNIZED IN STATEMENT OF | | FINANCIAL POSITION CONSIST OF: | | Accrued benefit liability $ (35,863) |$ (31,673) $ (50,326) |$ (49,697) Intangible asset 1,675 | -- -- |$ -- Accumulated other comprehensive income 6,640 | -- -- | -- ----------- |------------- ----------- |------------- Net amount recognized $ (27,548) |$ (31,673) $ (50,326) |$ (49,697) =========== |============= =========== |=============
The accumulated benefit obligation for all defined benefit pension plans was $106.1 million and $90.9 million at December 31, 2003 and 2002, respectively. The Company's pension plan accumulated benefit obligations are in excess of plan assets. 61
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS -------------------------------------- ------------------------------------- SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR COMPANY COMPANY COMPANY COMPANY ----------- ------------------------ ----------- ------------------------ COMPONENTS OF NET PERIODIC BENEFIT COST: 2003 2002 2001 2003 2002 2001 -----------| ----------- ----------- ----------- ----------- ----------- Service cost $ 2,251 | $ 2,694 $ 5,775 $ 901 $ 1,188 1,685 Interest cost 6,009 | 5,415 5,241 2,732 3,073 2,999 Expected return on plan assets (4,598)| (4,214) (5,360) -- -- -- Amortization of unrecognized transition (11)| (9) (9) -- -- -- Amortization of prior service cost 99 | 509 800 (660) (278) (150) Recognized net actuarial loss 14 | 232 4 -- -- -- Settlement/Curtailment loss (gain) -- | 4 3,880 -- -- (2,192) -----------| ----------- ----------- ----------- ----------- ----------- Net periodic benefit cost $ 3,764 | $ 4,631 $ 10,331 2,973 $ 3,983 $ 2,342 ===========| =========== =========== =========== =========== ===========
The increase in minimum pension liability included in other comprehensive income was $6.6 million and $20.1 million in 2003 and 2002, respectively.
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ------------------------ ------------------------ SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR WEIGHTED AVERAGE ASSUMPTIONS: COMPANY | COMPANY COMPANY | COMPANY 2003 | 2002 2003 | 2002 ---------- | ------------ ---------- | ------------ Discount rate 5.75% | 6.50% 5.75% | 6.50% Expected return on plan assets 8.25 | 8.25 NA | NA Rate of compensation increase 4.25 | 4.25 4.25 | 4.25 Assumed health care trend rate initial NA | NA 9.00 | 8.00 ultimate NA | NA 5.00 | 5.00
As of the September 30, 2003 measurement date, the expected long-term rate of return on assets is 8.25%. As defined in SFAS No. 87, "Employers' Accounting for Pensions" this assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The Company's long-term rate of return assumption is based on three main factors: 1) asset allocations as defined by the Company's investment policy statement, 2) the Company's asset modeling assumptions, and 3) the Company's modeling technology. The Company employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness. The consolidated postretirement benefit obligation attributable to the Company's workforce is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. The annual rate of medical inflation used to determine the year-end results was assumed to be 9.0% for both pre and post-65 benefits for 2003, decreasing gradually to a net rate of 5.0% per year at 2011 and remaining at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects (in thousands): 62
ONE-PERCENTAGE ONE-PERCENTAGE POINT INCREASE POINT DECREASE --------------- ---------------- Effect on total of service and interest cost $ 79 $ (379) Effect on postretirement benefit obligation $ 2,722 $ (3,922)
PLAN ASSETS The Company's pension plan weighted-average asset allocations at December 31, 2003, and 2002, by asset category are as follows:
SUCCESSOR COMPANY PLAN ASSETS AT DECEMBER 31, ------------------------------ ASSET CATEGORY 2003 2002 - ----------------- --------------- ------------- Equity securities 49.9% 42.2% Debt securities 24.0 21.8 Cash and other 26.1 36.0 - ----------------- --------------- ------------- 100.0% 100.0% =============== =============
The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed income investments. Equity investments are diversified across U.S and international stocks as well as small and large capitalizations. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. The asset allocations used for modeling the long-term rate of return assumption were based on 60% equity and 40% income target allocations. CASH FLOWS CONTRIBUTIONS The Company's general funding policy is to contribute annually an amount determined jointly by management and its consulting actuaries that is not less than the minimum amount required by the Internal Revenue Code. As a result of the Reorganization Plan, the Company entered into an agreement with the Pension Benefit Guaranty Corporation ("PBGC") which, among other things, requires certain additional minimum funding contributions and accelerated contributions to be made to the Benefit Plan. Total enhanced contributions of $7 million are required to be paid in addition to the minimum funding requirements by the Employee Retirement Income Security Act of 1974 over the pension plan years 2003-2006. The agreement also requires the Company to provide a letter of credit in the amount of $15 million to the PBGC by January 31, 2008 guaranteeing a portion of the plan's underfunding that is currently guaranteed by Borden. In general, the PBGC agreement will remain in effect until the plan is fully funded or the Company meets certain pre-established credit ratings. The Company expects to contribute $13.5 million to its benefit plan in 2004. 63 ESTIMATED FUTURE BENEFIT PAYMENTS The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Pension Benefits -------- 2004 $ 7,940 2005 8,182 2006 8,437 2007 8,585 2008 8,922 Years 2009 to 2013 46,198 DEFINED CONTRIBUTION PLANS Prior to October 1, 2002, certain employees of the Company were eligible to participate in the Borden Savings Plan. Effective October 1, 2002, the account balances of all current and former WKI employees were transferred to a new 401(k) plan sponsored by the Company (the "WKI Savings Plan"). The WKI Savings Plan provides benefits that are substantially identical to those previously provided under the Borden Savings Plan. Charges to WKI's operations for matching contributions in 2003, 2002, and 2001 amounted to $3.4 million, $3.7 million, and $3.3 million, respectively. LONG-TERM INCENTIVE PLAN On May 29, 2003 the WKI Board of Directors approved a Long-Term Incentive Plan, (the "LTIP") the purpose of which is to motivate and drive behavior that builds long-term shareholder value, reinforce the achievement of specific business goals and performance measures, provide long-term incentive compensation opportunities that are competitive and reward the contribution made by employees to the creation of shareholder value. The LTIP provides the Company the ability to award a specified number of award units of $1,000 each in value to certain key employees of the Company who are expected to make substantial contributions to the success of the ongoing business and thereby provides for stability and continuity of operations. The Award Term commenced on May 29, 2003 and will end on December 31, 2005. Award units will be paid out in cash to plan participants in the first quarter of 2006 contingent upon achieving certain targeted financial performance goals for revenue and EBITDA in 2005. The cash payment will equal $1,000 times the eligible amount of award units earned in the Award Term and is subject to a multiplier which can either increase or decrease the award (from maximum to minimum) based upon financial achievement against the target. The LTIP is subject to certain change of control provisions, which allow for full vesting and payout upon the consummation of any material change in the equity ownership of the Company. Certain employee payments may be accelerated upon the sale of certain assets of the Company. On July 31, 2003, 9,069 award units were granted to 49 key employees. Subsequently, at certain dates in August and September 2003 an additional 165 award units were granted to 4 key employees. The full award amount upon vesting at the end of 2005, if the target performance goals are met, is $9.3 million. The expense is being amortized ratably to the income statement over the period from the date of grant to the employee to the end of the Award Term assuming achievement of targeted goals in 2005. As such, $1.6 million was recorded in the year ended December 31, 2003. 64 KEY EMPLOYEE RETENTION PLAN The Debtors filed certain motions regarding key management employment contracts, a key employee retention program ("KERP I") and related severance policy in an effort to retain employees during the bankruptcy period. KERP I and two of the management contracts were approved by the Court and resulted in the payment of $4.1 million over the course of three primary earnout dates: the Confirmation Date of the Plan (December 23, 2002), December 31, 2002 and December 31, 2003. Accordingly, $2.1 million was earned by December 31, 2002, and paid shortly thereafter, and $2.0 million was earned by December 31, 2003, and paid shortly thereafter. On December 17, 2003 the Board of Directors approved a Key Employee Retention Program ("KERP II"), the purpose of which is to provide certain employees who are expected to make substantial contributions during a restructuring of the Company with financial incentives contingent upon the employee's continued employment. The retention bonus will vest as follows: the first 50% on December 31, 2004 and the second 50% on July 1, 2005, with cash distributions to be made as soon as practicable thereafter. The payment amount will equal the employee's salary times a specified % based upon tiers established within the KERP II. Amounts paid to employees pursuant to KERP II will be deducted from amounts payable, if any, under the Company's annual bonus program. The Company's annual bonus program provides that certain employee participants may receive a percentage of their regular salary as a bonus if the company achieves certain financial goals established by the Board. The maximum amount payable under the provisions of this program is $2.8 million. At its discretion, the Compensation Committee of the Board of Directors may accelerate the vesting and payment date of all or any portion of the Retention Bonuses for one or more participants based upon its evaluation of the Company's achievement of key financial restructuring milestones. In addition to this benefit, participants will be eligible to receive an enhanced severance benefit under certain conditions, of either six or twelve months base salary plus continuation of medical and dental benefits, depending upon the tier that the employee has been placed in. (11) STOCK COMPENSATION PLANS As of the Effective Date, the Successor Company entered into the Management Stock Plan, under which a total of 710,942 shares of new common stock became available for issuance. The Management Stock Plan is designed to attract, retain and motivate key employees and non-employee directors. On May 29, 2003 ("Grant Date") 611,946 options were granted to key employees and non-employee directors at a price of $18.25 a share, which was based off the Reorganization Value. In November 2003, an additional 19,390 options were granted and 18,296 options were cancelled at a price of $18.25 a share. The options vest ratably over four years (which may be accelerated under certain conditions) and expire 10 years from the Grant Date. None of the options were exercisable at December 31, 2003.
Number Weighted of Average Exercise shares Price per Share -------- ----------------- Options outstanding January 1, 2003 -- -- Options granted 631,336 $ 18.25 Options cancelled (18,296) $ 18.25 Options exercised -- $ 18.25 -------- ----------------- Options outstanding December 31, 2003 613,040 $ 18.25 ======== =================
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2003: 4.1% risk free interest rate; 1% expected volatility; 4 year expected life; and no expected dividend yield. The exercise price at the Grant Date for each option was equal to its fair value and, as such, no compensation expense was recorded. Recording the options under the 65 fair value based method would result in only a nominal effect to the financial statements. The Predecessor Company had a stock option plan for key employees and directors who were granted options to purchase Old Common Stock in the Predecessor Company under the Amended and Restated 1998 Stock Purchase and Option Plan for Key Employees (the "Prepetition Stock Purchase and Option Plan"). Options granted under the Prepetition Stock Purchase and Option Plan had exercise prices ranging from $1.00 per share to $5.00 per share and were granted at fair value, vested over five years, and expired ten years from the date of grant. During 2001, 6,550,000 options to purchase Old Common Stock in the Predecessor Company, with an exercise price of $1 per share were granted under the Prepetition Stock Purchase and Option Plan. Those options were accounted for as variable awards. At December 31, 2001, there were 8,172,713 options outstanding and 770,143 exercisable. Had compensation cost for the Prepetition Stock Purchase and Option Plan been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Predecessor Company's net loss applicable to Old Common Stock for the year ended December 31, 2001 would not have been significantly affected. There were no options granted during fiscal year 2002, and certain options were forfeited upon the termination of employment of prior members of the Predecessor Company's management team. In addition, the Prepetition Stock Purchase and Option Plan and all outstanding options were cancelled upon the confirmation of the Plan, in conjunction with the Predecessor Company's emergence from bankruptcy. (12) INCOME TAXES The Company files a consolidated U.S. federal tax return with its domestic subsidiaries. For financial reporting purposes, the Company had the following foreign and domestic income (loss) before income taxes for the years ended December 31.
SUCCESSOR COMPANY PREDECESSOR COMPANY 2003 2002 2001 --------------- ---------- ---------- INCOME (LOSS) BEFORE TAXES ON INCOME (IN THOUSANDS) U.S. Companies $ (65,850) $ 543,873 $(133,534) Foreign companies 9,402 7,010 2,362 --------------- ---------- ---------- Income (loss) before income taxes and cumulative effect of change in accounting principle (56,448) 550,883 (131,172) Cumulative effect of change in accounting principle -- (202,089) -- --------------- ---------- ---------- Income (loss) before income taxes $ (56,448) $ 348,794 $(131,172) =============== ========== ==========
66 The components of income tax expense for the years ended December 31 consist of the following items:
SUCCESSOR COMPANY PREDECESSOR COMPANY ------------ -------------------------- 2003 2002 2001 ------------ ------------ ------------ (IN THOUSANDS) CURRENT AND DEFERRED TAX EXPENSE: Current: U.S. $ -- $ -- $ -- State and municipal 56 -- -- Foreign 2,816 1,979 1,600 Deferred: U.S. -- -- -- State and municipal -- -- -- Foreign 216 -- -- ------------ ------------ ------------ Net tax expense $ 3,088 $ 1,979 $ 1,600 ============ ============ ============
The income tax provision at the effective tax rate differs from the income tax provision at the U.S. federal statutory tax rate in effect during the years ended December 31, 2003, 2002 and 2001 for the following reasons:
SUCCESSOR COMPANY PREDECESSOR COMPANY ---------- -------------------------- 2003 2002 2001 ---------- ------------ ------------ EFFECTIVE TAX RATE RECONCILIATION: U.S. statutory tax rate 35.0% 35.0% 35.0% Increase (reduction) in income taxes resulting from: State taxes, net of federal benefit 5.9 6.0 6.0 Amortization of intangible assets -- -- (1.6) Disallowed interest expense -- -- (10.2) Impairment of intangible assets (25.0) 14.4 -- Reorganization goodwill -- (19.5) -- Cancellation of indebtedness/stock basis difference -- (25.6) -- Other 6.8 -- (8.5) Valuation allowance (28.7) (9.6) (22.5) Taxes on foreign subsidiary and FSC earnings 0.5 (0.1) 0.6 ---------- ------------ ------------ Effective tax rate (5.5)% 0.6% 1.2% ========== ============ ============
In 2002 and 2001, affiliates of the Predecessor Company purchased a portion of the Company's Prepetition Senior Subordinated Notes and Senior Credit Facility loans on the open market at a discount. This purchase caused the Company to incur cancellation of debt ("COD") income for tax purposes of $3.8 million and $38.2 million ($1.3 million and $13.4 million tax effected) in 2002 and 2001, respectively. This COD income was not recognized for tax purposes, and the Company's tax net operating loss ("NOL") carryforwards were reduced by the amount of COD. The tax effects of temporary differences and carry forwards that give rise to the deferred tax assets and liabilities at December 31, 2003 and 2002 are comprised of the following (in thousands): 67
SUCCESSOR COMPANY ---------------------- DEFERRED TAX ASSET: 2003 2002 ---------- ---------- Property and equipment and intangible assets $ 262 $ 40,817 Postretirement, pension and other employee benefits 18,737 23,066 Loss and tax credit carry forwards 173,782 149,936 Inventory reserves 10,079 11,868 Bad debt 1,548 3,406 Restructuring reserve 2,938 6,083 Reorganization costs 6,612 9,390 Deferred financing costs 2,548 6,278 Subpart F income 5,739 3,565 Customer advertising allowances 7,827 6,541 Other 10,999 9,737 ---------- ---------- Gross deferred tax assets 241,071 270,687 Deferred tax assets valuation allowance (221,787) (244,914) ---------- ---------- Net deferred tax assets 19,284 25,773 ---------- ---------- DEFERRED TAX LIABILITIES: Property and equipment (18,577) -- Inventory reserves (183) -- Deferred COD/liabilities subject to compromise (net of new equity) -- (25,340) ---------- ---------- Gross deferred tax liabilities (18,760) (25,340) ---------- ---------- NET DEFERRED TAX ASSETS $ 524 $ 433 ========== ==========
As discussed in Note 1, the Company has adopted Fresh Start Reporting as of December 31, 2002, and accordingly has recorded the effects of the Plan as of such date. Items recognized pursuant to the Plan, including gain from COD, were not recognized for tax purposes until the actual contractual cancellation of debt, the exchange and cancellation of stock and the issuance of stock to new shareholders on the Effective Date. Accordingly, deferred tax items to reflect these differences were recorded at December 31, 2002. As a result of the Plan, the amount of the Company's aggregate indebtedness was reduced on the Effective Date, which generated income from COD for tax purposes of $243.7 million. Since the realization of such income occurred under the Bankruptcy Code, the Company did not recognize income from COD for tax purposes, but instead reduced certain tax attributes the day after the Effective Date as follows: $168.0 million of the Company's stock basis in subsidiaries; $59.1 million of its tax NOL and tax credit carryforwards, with the remaining income from COD reducing its tax basis in depreciable and non-depreciable assets. The Company's tax NOL carryforwards for federal income tax purposes, after such attribute reduction, is $379.9 million. Such net operating loss tax carryforwards expire from 2019 through 2023. At December 31, 2003, net operating loss carryforwards for our foreign subsidiaries are approximately $1.1 million for Australian income tax purposes that have no expiration date, $0.2 million for Brazilian income tax purposes that have no expiration date and that can only be utilized up to the limit of 30.0% of taxable income for the year. Additionally, our foreign subsidiaries had about $1.8 million for Mexican income tax purposes that can be carried forward for 10 years, and $1.7 million for Canadian income tax purposes that can be carried forward for 7 years. Our foreign subsidiaries may be limited in their ability to use foreign tax net operating losses in any single year depending on their ability to generate sufficient taxable income. On the Effective Date, the Company underwent an ownership change pursuant to section 382 of the Internal Revenue Code. As a result, the use of any of the 68 Company's NOL carryforwards and tax credits generated prior to the ownership change that are not reduced pursuant to the provisions discussed above may be subject to an overall annual limitation of $6.0 million. The Company has not yet been able to determine whether or not it will qualify for an exception to this annual limitation. If it does qualify, its NOLs will not be subject to the $6.0 million annual limitation, however, it would be required to reduce its existing NOL carryforward by the amount of the interest expense deducted on indebtedness that was exchanged for the common stock of the Company pursuant to the Plan of $23.2 million. If the Company does not qualify for the exception, the annual limitation will result in the expiration of $132.7 million of its remaining NOL carryforwards at the end of the carryforward period. The net change in the total valuation allowance for years ended December 31, 2003 and 2002 is a decrease of $23.1 million and an increase of $10.3 million, respectively. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. Negative evidence, such as cumulative losses in recent years, suggests that a valuation allowance is needed. Based upon cumulative losses in the current and immediate two proceeding years, the Company determined that a valuation allowance related to domestic and foreign operations of $221.8 million and $244.9 million was warranted in 2003 and 2002, respectively. The Company's reorganization resulted in a significantly modified capital structure by which SOP 90-7 requires the Company to apply Fresh Start Reporting. Under Fresh Start Reporting, reversals of valuation reserves recorded against deferred tax assets that existed as of the Emergence Date will first reduce any goodwill until exhausted, then other intangibles until exhausted and thereafter are reported as a reduction of additional paid in capital. Consequently, the Company will recognize cash tax savings in the year of asset recognition without the corresponding benefit to income tax expense until goodwill and other intangibles are exhausted. Taxes have not been provided on approximately $42.6 million of accumulated foreign unremitted earnings, which are expected to remain invested indefinitely. Should the earnings be remitted as dividends, the Company may be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of any additional taxes that may be payable on the undistributed earnings. (13) RESTRUCTURING AND RATIONALIZATION PROGRAMS During 2002, the Company completed the restructuring and rationalization programs which were begun during 2001. During 2001, the Predecessor Company's Board of Directors approved plans to restructure several aspects of the Company's manufacturing and distribution operations. In addition, the Company implemented an employee headcount reduction program as part of its continuing business realignment and cost savings initiatives. These programs resulted in a restructuring charge of $51.9 million, which was recorded during 2001 on a separate line within operating income. In addition, $18.5 million of rationalization and other charges were recorded in 2001 related to the implementation of these programs. Generally, these costs were recorded as incurred in operating income ($13.2 million in selling, general and administrative expenses and $5.3 million in cost of sales.) The restructuring programs included the following initiatives: (1) The outsourcing of Corningware and Visions product lines. These products were previously produced at the Company's Martinsburg, West Virginia facility (Martinsburg), which was idled as of April 2002 and was sold in December 2003. (2) The outsourcing of the Chicago Cutlery product lines. This product was previously produced at the Company's Wauconda, Illinois facility (Wauconda), which was idled as of September 2001 and was sold in December 2001. 69 (3) The consolidation of warehousing and distribution operations at Waynesboro, Virginia and Plainfield, Indiana into the Company's distribution centers located in Monee, Illinois and Greencastle, Pennsylvania. This consolidation occurred in the second quarter of 2002. The Waynesboro facility was sold in June 2003. (4) The realignment of the production process at the metal bakeware manufacturing facility at Massillon, Ohio to streamline the manufacturing and converting processes. (5) The consolidation of certain international sales and marketing and distribution operations in Canada and the UK, which occurred at the end of 2001 and in January 2002, respectively. (6) The continuation of organizational redesign activities which led to significant employee headcount reductions as a result of rationalizing staff and business support functions, upgrading key capabilities and centralizing executive administrative offices in Reston, Virginia. RESTRUCTURING CHARGES - --------------------- Restructuring details for 2001 activity are as follows (in thousands):
Liability at Restructuring Liability at December 31, Expense Reclassifications December 31, 2000 2001 Cash Paid and Other 2001 ------------- -------------- ------------------- ----------------- ------------ Disposal of assets $ -- $ 26,523 $ (1,243) $ (22,937) $ 2,343 Employee termination costs -- 21,646 (5,628) (2,366) 13,652 Other exit costs -- 3,719 (454) 387 3,652 ------------- -------------- ------------------- ----------------- ------------ $ -- $ 51,888 $ (7,325) $ (24,916) $ 19,647 ============= ============== =================== ================= ============
Restructuring details for 2002 activity are as follows (in thousands):
Liability at Restructuring Liability at December 31, Expense Reclassifications December 31, 2001 2002 Cash Paid and Other 2002 ------------- -------------- ------------------- ---------------- ------------ Disposal of assets $ 2,343 $ -- $ (1,696) $ (647) $ -- Employee Termination costs 13,652 -- (9,670) (3,982) -- Other exit costs 3,652 -- (891) (2,761) -- ------------- -------------- ------------------- ---------------- ------------ $ 19,647 $ -- $ (12,257) $ (7,390) $ -- ============= ============== =================== ================= ===========
DISPOSAL OF ASSETS As part of the restructuring initiative to close or streamline manufacturing, distribution and administrative locations, an impairment charge of $26.5 million was recorded to reflect net realizable value for fixed assets to be sold or scrapped of which approximately $15.4 million related to the closure and sale of the Martinsburg manufacturing facility. The charge represents the difference between book value and estimated fair value of the facility less costs to sell the facility. At December 31, 2001, $24.1 million of the impairment charge had either been settled through the sale of the facilities or recorded against the specific assets involved or was paid. During 2002, $1.7 million was either settled or paid, and the remaining balance reclassified to other current liabilities. 70 EMPLOYEE TERMINATION COSTS As part of the restructuring initiative, the Company recorded $21.6 million related to employee termination costs. The program impacted a total of approximately 750 employees: 450 related to plant shutdowns, 75 related to distribution center consolidation and 225 related to business and staff support function redesign. As of December 31, 2002, all employees had been terminated. During 2002, $9.7 million of severance payments were made. The remaining severance payments were paid through bankruptcy process or otherwise. These remaining amounts have been reclassified to current accrued liabilities on the balance sheet as of December 31, 2002. During 2002, severance payments due to employees who had left the Company prior to the bankruptcy date, were stayed under the bankruptcy proceedings. These payments were paid out under the terms of the Reorganization Plan through the reconciliation of individual claims. The difference between the severance accrual initially recorded as part of the restructure and the paid claims is estimated within the Gain on Reorganization included in the 2002 income statement. (14) SEGMENT INFORMATION The Company manages its business on the basis of one reportable segment - the worldwide manufacturing and marketing of consumer kitchenware products. The Company believes its operating segments have similar economic characteristics and meet the aggregation criteria of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company markets its products chiefly in the United States but also has significant business in international markets such as Canada and Asia. In 2003, 2002, and 2001, Wal-Mart Stores, Inc., accounted for approximately 24%, 23%, and 21%, respectively, of the Company's net sales. Accounts receivable from Wal-Mart Stores, Inc. was approximately $8.4 million and $6.7 million at December 31, 2003 and 2002, respectively. Net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold. The following geographic information is presented in accordance with SFAS No. 131 for the years ended December 31(in thousands).
SUCCESSOR COMPANY PREDECESSOR COMPANY ---------- ---------------------- Net Sales: 2003 2002 2001 - ---------- ---------- ---------- ---------- United States $ 465,874 $ 542,997 $ 590,243 Canada 65,548 64,797 68,641 ---------- ---------- ---------- North America 531,422 607,794 658,884 Other International 77,582 77,052 86,988 ---------- ---------- ---------- Total $ 609,004 $ 684,846 $ 745,872 ========== ========== ==========
The Company is exposed to the risk of changes in social, political, and economic conditions inherent in foreign operations and the value of its foreign assets are affected by fluctuations in foreign currency exchange rates. The following geographic information is presented in accordance with SFAS No. 131 for the years ended December 31(in thousands). 71
SUCCESSOR COMPANY ---------------------------- DECEMBER 31, DECEMBER 31, Long Lived Assets: 2003 2002 - ------------------ ------------- ------------- United States $ 386,652 $ 455,409 Canada 3,659 3,780 ------------- ------------- North America 390,311 459,189 Other International 2,949 3,809 ------------- ------------- Total $ 393,260 $ 462,998 ============= =============
(15) SUBSEQUENT EVENTS On January 12, 2004, nine of the twelve Debtors' Chapter 11 cases were closed by the Court. The remaining three Chapter 11 cases were closed by the Court on February 12, 2004. On January 23, 2004, limited waivers were obtained, through February 29, 2004, for the Company's non-compliance with the EBITDA covenant requirement through December 31, 2003 for both the Revolver and Term loans, which allowed the continued extension of credit for a limited period of time. On February 13, 2004, the Company obtained amendments and waivers from representatives of the Revolver and Term loan bank groups to waive certain EBITDA related year-end 2003 covenants and to revise certain covenants related to 2004 EBITDA levels, seasonal adjustments to the borrowing base calculations and certain other debt ratios. 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. The Company has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. The Company's management, including its Chief Executive and Chief Financial Officer, does not expect that the disclosure controls and procedures will prevent all error and all fraud. No matter how well designed and operated, a control system can provide only reasonable assurance that its objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit of certain controls must be considered relative to cost. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that the design and operation of these disclosure controls and procedures were effective as of December 31, 2003 to provide reasonable assurance that material information relating to the Company would be made known to them to allow timely decisions regarding required disclosures. (b) Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting during the period covered by this annual report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 73 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS Pursuant to the Stockholders' Agreement the new Board of Directors (collectively the "Board") of the Company assumed office on the Effective Date, and consisted of seven members, one being the Chief Executive Officer of Reorganized WKI and one selected by the Borden Entities (as defined in the Stockholders' Agreement). The remaining five directors were selected by the holders of a majority of shares of the New Common Stock issued to the holders of the Bank Loan Claims. No family relationships exist between any executive officers of the Company. The following table sets forth information regarding the executive officers and directors of the Company.
NAME AGE (1) POSITION - ----------------------- ------- ------------------------------------------------- James A. Sharman 44 Director, President and Chief Executive Officer Joseph W. McGarr 52 Senior Vice President and Chief Financial Officer Alexander Lee 43 President, OXO International Raymond J. Kulla 57 Vice President, General Counsel and Secretary Douglas S. Arnold 49 Vice President of Human Resources Terry R. Peets 59 Director and Chairman of the Board John L. Mariotti 62 Director David R. Jessick 50 Director C. Robert Kidder 59 Director James R. Craigie 50 Director William E. Redmond, Jr. 44 Director (1) As of December 31, 2003
James A. Sharman was elected President and Chief Executive Office of the Company effective October 23, 2002 upon the Effective Date he also assumed position as a Director. He had previously held the position of Senior Vice President Household Products Division & Supply Chain Management with the Company since September 2001. Prior to this appointment he held the position of Senior Vice President Supply Chain Operations since April 2001. Prior to starting with the Company, he was Chief Executive Officer of Rubicon Technology, a Chicago-based manufacturing company. Prior to that he served as Senior Vice President, Supply Chain Management of CNH Global N.V., a company created in November 1999 from the merger of Case Corporation and New Holland N.V. Joseph W. McGarr was appointed Senior Vice President & Chief Financial Officer of the Company effective May 7, 2001. Prior to that he was Executive Vice President and Chief Financial Officer of Fort James Corporation in Deerfield, Illinois. During his 19-year career with Fort James, he served in a variety of strategic finance, supply chain and marketing positions. Alexander Lee was appointed President of OXO International on October 14, 1999. Prior to this appointment he was the President of OXO International Division of the General Housewares Corporation. He held various management positions with General Housewares Corporation from September 1994 through October 1999. Raymond J. Kulla was appointed Vice President, General Counsel and Secretary of the Company on November 1, 1999. Prior to that he was the Vice President, General Counsel and Secretary for General Housewares Corporation from October 1995 to September 1999. 74 Douglas S.Arnold was appointed, Vice President of Human Resources effective February 10, 2003. Prior to that, he was Vice-President of Human Resources for U.S.Cellular Corporation from January 1995 through September 2001. Terry R. Peets was elected a Director of the Company in January 2003 and was elected Chairman of the Board in November 2003. He was Chairman of the Board for Bruno's Supermarkets from December 2000 to January 2003 and President and Chief Executive Officer of PIA Merchandising Co. Inc. from August 1997 to September 1999. Mr. Peets also served as Executive Vice President for Ralphs Grocery Company from February 1977 to May 1995 and Executive Vice President for Vons Grocery Company from May 1995 to April 1997. Chairman Peets is currently Vice Chairman of City of Hope, and a director of Doane Pet Care, Inc.; Pinnacle Foods, Inc.; PSC Scanning, Inc.; Ruiz Foods, Inc.; QRS Software, Inc.; and Children's Museum of Orange County. John L. Mariotti was elected Director and Chairman of the Board in January 2003. In November 2003 he stepped down as Chairman of the Board for personal reasons and remained a Director. Since 1994, Mr. Mariotti has been the President and Chief Executive Officer of The Enterprise Group, a coalition of executives and consultants to various companies. David R. Jessick was elected a Director of the Company in January 2003. He is the Chairman of the Board's Audit Committee and Compensation Committee. Mr. Jessick is also a consultant to Rite Aid Corporation where he served as a Senior Executive Vice President and Chief Administrative Officer from December 1999 to June 2002. He was also the Chief Financial Officer for several large retail companies including Fred Meyer, Inc. and Thrifty Payless Holdings, Inc. C. Robert Kidder was elected a Director and Chairman of the Board of World Kitchen, Inc. in April 1998. Following the Emergence Date, Mr. Kidder remained on the Board as the Director selected by the Borden Entities. From November 2001 to March 2003, he was President of Borden Capital, Inc., a company which provided financial and strategic advice to the Borden family of companies. In January 1995, he was elected a Director, Chairman of the Board and Chief Executive Officer of Borden, Inc., and continued in these positions until March 2002. He also is currently Chairman of the Board of Borden Chemical, Inc., Electronic Data Systems Corporation and Morgan Stanley. James R. Craigie was elected Director of the Company in January 2003. Mr. Craigie was the President and Chief Executive Officer of Spalding Sports Worldwide from December 1998 to September 2003 and an Executive Vice President and General Manager of Kraft Foods from 1994 to November 1998. He is currently a director of the Acosta Sales and marketing Company. He was previously a director of Spalding Sports Worldwide and Nielsen Media. William E. Redmond, Jr. was elected a Director of the Company in January 2003. From December 1996 to February 2003, he was Chairman, President and Chief Executive Officer of GardenWay, Incorporated. He is also currently a director of Arch Wireless, Inc. and Gentek, Inc. Each of Messrs Sharman, McGarr, Lee and Kulla served as executive officers, and Mr. Kidder served as a director and chairman of the Board, of the Predecessor Company prior to the filing. AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT The Company has established a separate Audit Committee of the Board of Directors, comprised of three of its members: David Jessick, Robert Kidder and John Mariotti. The Company's Board of Directors has determined that Mr. Jessick qualifies as an audit committee financial expert as defined under Item 401 of Regulation S-K of the Securities Exchange Act of 1934. The Company believes that Mr. Jessick is independent, within the meaning of applicable SEC rules. 75 CODE OF ETHICS The Company has adopted a code of ethics that applies to its principal executive officers, principal financial officer, principal accounting officer or controller and certain other senior financial personnel. The code of ethics is filed as Exhibit 14 to this annual report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The following tables and charts set forth information with respect to benefits made available, and compensation paid, by the Company during the years ended December 31, 2003, 2002 and 2001 for services by each of the chief executive officers and the four other most highly compensated executive officers whose total salary and bonus exceeded $100,000.
Long-Term Compensation --------------------------- Annual Compensation Awards Payouts ----------------------------------------- ----------- -------------- Other Annual Securities Long-Term All Other Name and Bonus Compensation Underlying Incentive Plan Compensation Principal Position Year Salary ($) ($) (1) ($) Options(2) Payouts ($) ($) (3) - ----------------------------- ---- ---------- -------- ------------- ----------- --------------- ------------- JAMES A. SHARMAN 2003 534,937 468,750 -- 140,000 -- 10,820 President and 2002 394,265 135,000 -- -- -- 6,782 Chief Executive Officer 2001 233,910 50,000 -- -- -- 3,021 JOSEPH W. MCGARR 2003 471,306 322,500 -- 70,000 -- 11,000 Senior Vice President and 2002 443,784 205,575 -- -- -- 71,289 Chief Financial Officer 2001 285,205 50,000 -- -- -- 7,643 ALEXANDER LEE 2003 355,846 117,000 -- 50,000 -- 9,137 President, 2002 333,538 222,600 -- -- -- 9,000 OXO International 2001 312,500 59,000 -- -- -- 2,550 RAYMOND J. KULLA 2003 285,842 152,533 -- 30,000 -- 71,270(4) Vice President, 2002 275,115 108,750 -- -- -- 10,837 Secretary and General Counsel 2001 250,000 10,000 -- -- -- 43,523 DOUGLAS S. ARNOLD 2003 232,692 98,750 -- 30,000 -- 16,562 Vice President, 2002 N/A N/A N/A N/A N/A N/A Human Resources 2001 N/A N/A N/A N/A N/A N/A (1) Annual Bonus includes retention bonuses as described in employment agreements or the KERP I. (2) Pursuant to the Plan, all options outstanding on the Effective Date to acquire shares of Old Common Stock were cancelled. The Options granted to the Named Executive Officers during the 2003 fiscal year represent options, granted under the Company's Management Stock Plan (3) All other compensation includes moving costs, and Company contributions for defined benefit plans. (4) The Other Compensation line for 2003 includes a payment of $56,270 to Mr. Kulla that arose from Mr. Kulla's agreement to forego receiving stock options in an amount agreed by him, as required by his agreement, dated December 12, 2002, in return for payment of 60% of a claim relating to the GHC SERP described hereafter. Mr. Kulla was formerly Vice President, General Counsel and Secretary of General Housewares Corporation, Inc.(GHC). GHC was acquired by the Company in October, 1999. As part of his compensation at GHC Mr. Kulla, along with a number of other GHC executives, participated in a Supplemental Income Retirement Plan (the "GHC SERP"). The GHC SERP benefits were frozen as of 12/31/01 and had a net present value for Mr. Kulla's remaining accrued benefit of $ 93,738 in 2002. Mr. Kulla's prior employment agreement provided that, under certain circumstances, he could terminate his employment agreement. As part of his waiver of those conditions, the Company and Mr. Kulla agreed to payment of 60% of his remaining accrued GHC SERP benefits.
76 EMPLOYEE AGREEMENTS WITH NAMED EXECUTIVE OFFICERS Certain compensation, including those arrangements within employment agreements and the LTIP, is triggered by "change of control" events. Change of control is defined as a change in the beneficial ownership of more than 60% of the common stock of the Company as a result of a merger, consolidation or similar transaction or a sale of all or substantially all of the Company's assets; and the acquisition by any person (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities and Exchange Act of 1934) of beneficial ownership of more than 35% of the voting securities of the Company. James A. Sharman Employment Agreement. The Company's employment agreement with Mr. Sharman provides for a three year term, beginning November 25, 2002, with an automatic extension of two additional years unless written notice is given by either party at least six months prior to November 24, 2005. Mr. Sharman's agreement includes, in addition to the annual base salary, an annual bonus based on the achievement of certain operational targets; a retention bonus (which has been paid in full); agreement to permit Mr. Sharman to participate in the Stock Option Plan; enhanced severance in the event of certain early terminations; payment of up to $5.0 million in a "change of control"; and subject to certain specified conditions, a "tax gross up" payment in the event that payments to Mr. Sharman would be subject to the "golden parachute" excise taxes imposed by the Internal Revenue Code. Mr. Sharman also participates in the WKI LTIP. Joseph W. McGarr Employment Agreement. The Company's employment agreement with Mr. McGarr provides for a three year term, beginning November 25, 2002, with an automatic extension of two additional years unless written notice is given by either party at least six months prior to November 24, 2005. Mr. McGarr's agreement includes, in addition to the annual base salary, an annual bonus based on the achievement of certain operational targets; a retention bonus (which has been paid in full); agreement to permit Mr. McGarr to participate in the Stock Option Plan; enhanced severance in the event of certain early terminations; payment of up to $2.0 million in a "change of control"; and subject to certain specified conditions, a "tax gross up" payment in the event that payments to Mr. McGarr would be subject to the "golden parachute" excise taxes imposed by the Internal Revenue Code. Mr. McGarr also participates in the WKI LTIP. Alexander Lee Employment Agreement. The Company's employment agreement with Mr. Lee provides for a two year term, beginning April 15, 2003, with an automatic extension of two additional years unless written notice is given by either party at least 90 days prior to April 14, 2006. Mr. Lee's agreement includes, in addition to the annual base salary, an annual bonus based on the achievement of certain operational targets; agreement to permit Mr. Lee to participate in the Stock Option Plan; enhanced severance in the event of certain early terminations, which include acceleration of his LTIP awards and vesting under the Stock Option Plan; payment of enhanced severance in the event that there is a "change of control" with respect to the Company or a "change of control" with respect to the business Mr. Lee runs and Mr. Lee's employment agreement is not assigned to the successor or Mr. Lee does not retain his position; and, subject to certain specified conditions, a "tax gross up" payment in the event that payments to Mr. Lee would be subject to golden parachute excise taxes imposed by the Internal Revenue Code. Raymond J. Kulla Agreement. The Company's employment agreement with Mr. Kulla provides for a three year term, beginning January 31, 2003, with an automatic extension of two additional years unless written notice is given by either party at least six months prior to January 31, 2006. The agreement includes provisions for an annual base salary, and annual bonus based on the achievement of certain operational targets, and enhanced severance benefits. Douglas S. Arnold Agreement. The Company's employment agreement with Mr. Arnold provides for a three year term, beginning February 10, 2003, with an automatic extension of two additional years unless written notice is given by either party at least six months prior to February 10, 2006. The agreement includes provisions for an annual base salary, and annual bonus based on the achievement of certain operational targets, and enhanced severance benefits. 77
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1) Number of Percent of Total Securities Options Underlying Granted To Options Employees Exercise Expiration Grant Date Name Granted (3) In Fiscal Year Price Date (2) Value (3) - ----------------- ----------- ---------------- --------- ----------- ------------ James A. Sharman 140,000 27.2 $ 18.25 5/29/2013 $ 382,013 Joseph W. McGarr 70,000 13.6 18.25 5/29/2013 191,007 Alexander Lee 50,000 9.7 18.25 5/29/2013 136,433 Raymond J. Kulla 30,000 5.8 18.25 5/29/2013 81,860 Douglas S. Arnold 30,000 5.8 18.25 5/29/2013 81.860 (1) No SARs were granted in 2003 to any of the named executive officers. (2) The options vest, or become exercisable in equal, annual, one-quarter increments commencing on the first anniversary of the grant date. Any exercisable portion of an option that is not exercised will be carried forward through the ten year term of the grant. Notwithstanding the foregoing, , the Option granted shall become immediately exercisable in full in the event of (i) a Change of Control while Optionee is an employee of the Company or any Subsidiary, (ii) a Termination Without Cause, (iii) the termination of Optionee's employment due to Disability or (iv) Optionee's death while Optionee is an employee of the Company or any Subsidiary. (3) The values in this column represent the grant date present value of the options based upon application of the Black-Scholes option pricing model. The material assumptions and adjustments used in estimating the present value pursuant to such model are: (a) a volatility factor of 1%; (b) a dividend yield of 0%; (c) a risk-free rate of return of 4.1%; and (d) an expected option life of 4 years. The actual value an executive officer receives from a stock option is dependent on future market conditions and there can be no assurance that the value ultimately realized by the executive will not be more or less than the amount reflected in the "Grant Date Present Value" column.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Securities Value of Underlying Unexercised In-the-Money Options Options at Fiscal Year End At Fiscal Year End -------------------------- ----------------------------------- Shares Acquired On Value Name Exercise Realized ($) Exercisable Unexercisable Exercisable ($) Unexercisable ($) - ----------------- -------- ------------ ----------- ------------- --------------- ----------------- James A. Sharman -- -- -- 140,000 -- -- Joseph W. McGarr -- -- -- 70,000 -- -- Alexander Lee -- -- -- 50,000 -- -- Raymond J. Kulla -- -- -- 30,000 -- -- Douglas S. Arnold -- -- -- 30,000 -- -- (1) There are no SARs outstanding.
78
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR Performance or Estimated Future Payouts under Other Period Non-Stock Price-Based Plans Until ---------------------------------- Number of Maturation or Name Units Payout Threshold Target Maximum - ----------------- -------------- -------------- ---------- ---------- ---------- James A. Sharman 775.4 12/31/2005 $ 387,700 $ 775,400 $1,550,800 Joseph W. McGarr 192.7 12/31/2005 96,350 192,700 385,400 Alexander Lee 3880.5 12/31/2005 1,040,250 3,880,500 9,561,000 Raymond J. Kulla 86.3 12/31/2005 43,150 86,300 172,600 Douglas S. Arnold 148.3 12/31/2005 74,150 148,300 296,600
LONG TERM INCENTIVE PLANS On May 29, 2003 the WKI Board of Directors approved a Long-Term Incentive Plan (the "LTIP"), the purpose of which is to motivate and drive behavior that builds long-term shareholder value, reinforce the achievement of specific business goals and performance measures, provide long-term incentive compensation opportunities that are competitive and reward the contribution made by employees to the creation of shareholder value. The LTIP provides the Company the ability to award a specified number of award units of $1,000 each in value to certain key employees of the Company who are expected to make substantial contributions to the success of the ongoing business and thereby provides for stability and continuity of operations. The Award Term commenced on May 29, 2003 and will end on December 31, 2005. Award units will be paid out in cash to plan participants in the first quarter of 2006 contingent upon achieving certain targeted financial performance goals for revenue and EBITDA in 2005. The cash payment will equal $1,000 times the eligible amount of award units earned in the Award Term and is subject to a multiplier which can either increase or decrease the award (from a maximum to minimum) based upon financial achievement against the target. In a "change of control" for the Company, LTIP awards would be accelerated and payable at the target level. With respect to Mr. Lee, a "change of control" for the Company results in acceleration of 100% of his LTIP awards, while a "change of control" for his business results in a material but partial acceleration of his LTIP awards at the target level. On July 31, 2003 9,069 award units were granted to 49 key employees. Subsequently, at certain dates in August and September 2003 an additional 165 award units were granted to 4 key employees. The full award amount upon vesting at the end of 2005, if the target performance goals are met, is $9.3 million. The expense is being amortized ratably to the income statement over the period from the date of grant to the employee to the end of the Award Term assuming achievement of targeted goals in 2005. As such, $1.6 million was recorded in the year December 31, 2003. KEY EMPLOYEE RETENTION PLAN The Debtors filed certain motions regarding key management employment contracts, a key employee retention program ("KERP I") and related severance policy in an effort to retain employees during the bankruptcy period. KERP I and two of the management contracts were approved by the Court and resulted in the payment of $4.1 million over the course of three primary earnout dates: the Confirmation Date of the Plan (December 23, 2002), December 31, 2002 and December 31, 2003. 79 Accordingly, $2.1 million was earned by December 31, 2002, and paid shortly thereafter, and $2.0 million was earned by December 31, 2003, and paid shortly thereafter. On December 17, 2003 the Board of Directors approved a Key Employee Retention Program ("KERP II"), the purpose of which is to provide certain employees who are expected to make substantial contributions during a restructuring of the Company with financial incentives contingent upon the employee's continued employment. The retention bonus will vest as follows: the first 50% on December 31, 2004 and the second 50% on July 1, 2005, with cash distributions to made as soon as practicable thereafter. The payment amount will equal the employee's salary times a specified percentage based upon tiers established within the KERP II. Amounts paid to employees pursuant to KERP II will be deducted from amounts payable, if any, under the Company's annual bonus program. The Company's annual bonus program provides that certain employee participants may receive a percentage of their regular salary as a bonus if the company achieves certain financial goals established by the Board. The maximum amount payable under the provisions of this program is $2.8 million. At its discretion, the Compensation Committee of the Board of Directors may accelerate the vesting and payment date of all or any portion of the Retention Bonuses for one or more participants based upon its evaluation of the Company's achievement of key financial restructuring milestones. In addition to this benefit, participants will be eligible to receive enhanced severance benefits under certain conditions, of either six or twelve months base salary plus continuation of medical and dental benefits, depending upon the tier that the employee has been placed. PENSION PLAN Prior to December 31, 2002, certain of the Company's employees were eligible to participate in various non-qualified supplemental pension plans or agreements (collectively, the "Supplemental Pension Plans"), pursuant to which the Company agreed to pay to certain executives amounts approximately equal to the difference between the benefits provided for under the WKI pension plan (or a predecessor thereof) and benefits which would have been provided notwithstanding the limitations on benefits which may be provided under tax-qualified plans, as set forth in the Internal Revenue Code. These benefits were frozen effective April 4, 2002 and the Supplemental Pension Plan was terminated upon the Company's emergence from Chapter 11, giving rise to unsecured claims against the Company by the participants in the Supplemental Pension Plan. Certain named executives have been awarded a special retention opportunity bonus to replace benefits forfeited and or waived by such individuals under the Supplemental Pension Plans. On the Confirmation Date these individuals received a lump-sum payment ranging from 16% to 40% of their salary (and ranging from 50% to 100% of their forfeited/waived benefit). The total cost to Reorganized WKI of the Special Retention Opportunity, if earned in full by each employee covered, is expected to be approximately $180,000. COMPENSATION OF MEMBERS OF BOARD Each non-employee director receives an annual retainer of $25,000. The Chairman of the Board and the Chairman of the Audit Committee each receives an additional annual retainer of $15,000. All retainers are paid quarterly. Each non-employee director receives $3,000 for each in-person Board meeting, $3,000 for each telephonic Board meeting lasting more than two hours, $1000 for each Board Committee Meeting and $1,000 for each other telephonic Board meeting. All meeting fees are paid at or near each meeting date. Members of the Board also receive reimbursement for traveling costs and other out-of pocket expenses incurred in attending Board and Board Committee meetings or other meetings on behalf of the Company. The new Board assumed office on January 31, 2003. From January 31, 2003 to March 31, 2003, certain Directors received compensation of $300 per hour based on time spent to gain knowledge about the Company. 80 On May 29, 2003 the Chairman of the Board, at that time, received 32,316 options and each other non-employee director received 12,926 options under the Management Stock Plan. The options were issued at a price of $18.25 a share and vest ratably over four years (which may be accelerated under certain conditions) and expire 10 years from the Grant Date. On November 26, 2003, the Company announced a change in the Chairman of the Board. On that date, 18,296 options were cancelled for the previous Chairman of the Board and 19,390 options were granted to the new Chairman of the Board. The shares granted on November 26, 2003 were issued at a price of $18.25 a share and vest ratably over four years (which may be accelerated under certain conditions) and expire November 26, 2013. None of the options were exercisable at December 31, 2003. COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors of the Company currently includes Mr. David R. Jessick (Chair), Mr. James Craigie and Mr. William E. Redmond, Jr. In 2003, the Compensation Committee reviewed the key compensation programs in light of the Company's emergence from Chapter 11 bankruptcy protection and the requirements for the Company to retain key talent and successfully implement its near and long term goals. The Compensation Committee negotiated amendments to, or new, employment agreements with various senior executives, implemented the LTIP program, implemented the KERP II and implemented changes to various other compensation and benefits policies and guidelines. The long term incentive and retention programs were put in place to enable the Company to remain competitive in the marketplace. In general, the Compensation Committee strives to pay and incent for performance by placing its plans and programs in the middle of the range for companies of a similar size and composition. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Under rules issued by the SEC, a beneficial owner of a security includes any person who directly or indirectly has shares voting power and/or investment power with respect to such security or has the right to obtain such voting power and/or investment power within 60 days. Except as otherwise noted, each beneficial owner identified in the tables below has sole voting power and investment power with respect to the shares beneficially owned by such person. The following table sets forth information with respect to the beneficial ownership of the Company's New Common Stock as of March 24, 2004 by each person who is known by the Company to beneficially own more than 5% of the Company's New Common Stock. Certain shareholders of the Company are funds or hold a nominee name and the Company may not be aware of the beneficial owners of these shareholders. There are no shares owned by a director or executive officer of the Company. While the directors and certain officers of the Company do hold options to purchase shares, none would hold more than 5% of the Company's New Common Stock if his or her options were fully exercised.
BENEFICIAL PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS - --------------------------------------- ----------- -------- OCM Administrative Services II LLC . . . 1,203,706 20.9% c/o Oak Tree Capital Management 333 S. Grand Avenue, FL 28 Los Angeles, CA 90071 81 KKR Associates, L.P. . . . . . . . . . . 910,167 15.8 c/o Kohlberg Kravis Roberts & Co., L.P. 9 West 57th Street New York, New York 10019 JP Morgan Chase Bank . . . . . . . . . . 686,509 11.9 4 New York Plaza New York, New York 10001 CitiCorp USA Inc. . . . . . . . . . . . 350,408 6.1 599 Lexington Avenue New York, New York 10043
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Interest Expense and Debt Issuance Fees Upon emergence from bankruptcy, certain creditors of the Predecessor Company became beneficial owners of the Successor Company. Certain shareholders of the Company are funds or hold a nominee name and the Company may not be aware of the beneficial owners of these shareholders. During the year ended December 31, 2003, the Company recorded $14.2 million and paid $9.2 million in interest expense. In addition, during 2003 the Company paid $1.4 million in debt issuance fees and $0.2 million monthly banking and letter of credit fees to JP Morgan Chase Bank.
Interest Expense Interest Paid --------- -------------- ($in thousands) OCM Administrative Services II LLC $ 7,604 4,879 KKR Associates, L.P. 1,544 994 JP Morgan Chase Bank 3,155 2,164 CitiCorp USA Inc. 1,880 1,205
In addition, on August 6, 2003, the Company entered into interest rate swaps with JP Morgan Chase Bank. These interest rate swaps have a combined notional amount of $145 million, which expire on March 31, 2008, and convert variable rate interest to an average fixed rate of 3.9% over the terms of the swap agreements. As of December 31, 2003, these swaps had a combined fair value of $(3.9) million, which is included in other comprehensive income and other long-term liabilities on the consolidated balance sheet. During 2003, the Company recorded approximately $0.06 million in interest expense to JP Morgan Chase Bank relating to these swaps and paid this balance in January 2004. See Note 8 of the Consolidated Financial Statements for further information on the Company's debt agreements. 82 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Principal Accounting Firm Fees The following table summarizes the aggregate fees billed to the Company for the fiscal years ended December 31, 2003, and 2002 by the Company's principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the "Deloitte Entities"):
FISCAL YEAR ENDED ($IN THOUSANDS) ------------------------------------- 2003 2002 --------------- -------------------- Audit fees (a) $ 921 $ 874 Audit-related fees (b) 126 300 --------------- -------------------- Total audit and audit related fees 1,047 1,174 Tax fees (c) 2,698 1,734 Other (d) -- 164 --------------- -------------------- Total Fees $ 3,745 $ 3,072 =============== ====================
(a) Fees for audit services billed in 2003 and 2002 consisted of audits of the Company's consolidated annual financial statements and reviews of the Company's quarterly financial statements. (b) Fees for audit related services consisted of bankruptcy services and other audit related services. 1) Fees for bankruptcy-related audit services totaled $0.1 million and $0.2 million in 2003 and 2002, respectively. 2) Fees for other audit related services totaled $0.1 million for employee benefit plan audits in 2003 and 2002. (c) Fees for tax services billed in 2003 and 2002 consisted of tax compliance, tax planning and advice and bankruptcy services. 1) Fees for tax compliances services and tax planning and advise totaled $1.5 million and $1.0 million in 2003 and 2002, respectively. 2) Fees for bankruptcy-related tax services totaled $1.2 million and $0.7 million in 2003 and 2002, respectively. (d) Other fees in 2002 consisted of internal audit consulting services performed at the beginning of 2002 which is now being performed internally. Pre-Approval Policy The services performed by the Deloitte Entities in 2003 were pre-approved by the Audit Committee. It is the Company's policy to require that all fees of any nature paid to the independent auditor must be pre-approved by the Audit Committee. Approvals for interim requests have been delegated to the Chairman of the Audit Committee. In certain cases, a de minimis provision applies, which allows the Chief Financial Officer the ability to obtain retroactive approval for permissible non-audit services where the engagement was not contemplated in the original Audit Committee request and the Company is in need of immediate assistance from the independent auditor when time is of the essence. Updates to 83 requested fees are routinely shared with the Audit Committee at regularly schedule meetings. A written policy was adopted by the Audit Committee in its March 2004 meeting. The majority of the services provided by the independent auditor in 2003 were pre-approved by the Audit Committee in its July 2003 meeting. Certain non-contemplated or additional work was approved at various times later in the year on an interim basis by the Chairman of the Audit Committee, with final approval at a later date by the full Audit Committee. These approval procedures did not apply for the billable fees for 2002. 84 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. A. Documents filed as part of the report: (1) Financial Statements All financial statements of the registrant are set forth under Item 8, Financial Statements and Supplementary Data of this Report on Form 10-K. (2) Financial Statement Schedules Schedule II Valuation accounts and reserves. (3) Exhibits
No. Title - --------- ----------------------------------------------------------------------------------------------- 2.1 Second Amended Joint Plan of Reorganization of World Kitchen, Inc., its Parent Corporation and its Subsidiary Debtors dated November 15, 2002 (incorporated by reference to Exhibit 99.T3F to Application for Qualification of Indenture under the Trust Indenture Act of 1939 on Form T-3 filed November 21, 2002). (1) 2.2 Modifications, dated December 23, 2002, to Second Amended Joint Plan of Reorganization of World Kitchen, Inc., its Parent Corporation and its Subsidiary Debtors dated November 15, 2002. (1) 2.3 United States Bankruptcy Court of the Northern District of Illinois Eastern Division Order, dated November 25, 2002, (A) authorizing the assumption of certain executory contracts with Corning Incorporated and (B) Approving Related Agreement relating to the assumption and modification of Exhibits 2.4 to 2.5. (1) 2.4 Recapitalization Agreement dates as of March 2, 1998, among Corning Consumer Products Company, Coring Incorporated, Borden, Inc. and CCPC Acquisition Corp. (1) 2.5 Amendment to the Recapitalization Agreement dated March 31, 1998 between the Company and Corning. (1) 3.1.1 Amended and Restated Certificate of Incorporation of WKI Holding Company, Inc. (1) 3.1.2 Amended and Restated Certificate of Incorporation of World Kitchen, Inc. (1) 3.1.3 Certificate of Formation of EKCO Group, LLC. (1) 3.1.4 Amended and Restated Certificate of Incorporation of EKCO Housewares, Inc. (1) 3.1.5 Amended and Restated Certificate of Incorporation of EKCO Manufacturing of Ohio, Inc. (1) 3.1.6 Certificate of Formation of WKI Latin America Holding, LLC. (1) 3.1.7 Certificate of Formation of World Kitchen (GHC), LLC. (1) 3.2.1 Amended and Restated Bylaws of WKI Holding Company, Inc. (1) 85 3.2.2 Amended and Restated Bylaws of World Kitchen, Inc. (1) 3.2.3 Limited Liability Company Agreement of EKCO Group, LLC. (1) 3.2.4 Amended and Restated Bylaws of EKCO Housewares, Inc. (1) 3.2.5 Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc. (1) 3.2.6 Limited Liability Company Agreement of WKI Latin America Holding, LLC. (1) 3.2.7 Limited Liability Company Agreement of World Kitchen (GHC), LLC. (1) 4.1 Stockholders' Agreement, dated as of January 31, 2003, by and among WKI Holding Company, Inc., the Senior Lenders, the Subordinated Lenders, the Borden Entities party thereto, the Management Members party thereto and the New Directors party thereto. (1) 4.2 Indenture, dated as of January 31, 2003, among WKI Holding Company, Inc., the Subsidiary Guarantors party thereto, and U.S. Bank National Association, as trustee, relating to 12% Senior Subordinated Notes due 2010. (1) 10.1+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and James A Sharman. (1) 10.1a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding Company, Inc. and James A. Sharman. (1) 10.2+ Employment Agreement, dated January 30, 2003, between WKI Holding Company, Inc. and Joseph W. McGarr. (1) 10.2a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding Company, Inc. and Joseph W. McGarr. (1) 10.3+ Employment Agreement, dated October 14, 1999, between WKI Holding Company, Inc. and Alexander Lee. (1) 10.4+ Modification Agreement, dated September 30, 2002, between WKI Holding Company, Inc. and Alexander Lee. (1) 10.5+ Amendment to Employment Agreement, dated January 29, 2003, between WKI Holding Company, Inc. and Alexander Lee. (1) 10.6+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and Raymond J. Kulla. (1) 10.6a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding Company, Inc. and Raymond J. Kulla. (1) 10.7+ WKI Holding Company, Inc. Stock Option Plan (1) 10.8+ WKI Holding Company, Inc. Key Employee Retention Plan (1) 86 10.9 Agreement, dated as of January 30, 2003, among WKI Holding Company, Inc., BW Holdings, LLC and the Pension Benefit Guaranty Corporation. (1) 10.10 Release and Indemnification Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., its subsidiaries, and the KKR Entities party thereto (1) 10.11 Tax Matters Agreement, dated as of January 31, 2003, between WKI Holding Company, Inc. and CCPC Acquisition Corp. (1) 10.12 Revolving Credit Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (1) 10.13 Term Loan Credit Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (1) 10.14 Guarantee and Collateral Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., JPMorgan Chase Bank, as collateral agent, and the Subsidiary Parties identified therein. (1) 10.15 Sublease, dated June 21, 2001, between Rolls-Royce North America Inc. and WKI Holding Company, Inc. (incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28, 2002). (1) 10.16 Sublease Modification Agreement between Rolls-Royce North America Inc. and WKI Holding Company, Inc. (1) 10.17 Amendment to the Revolving Credit Agreement dated as of June 30, 2003 among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (Incorporated by reference to exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.18(a)+ WKI Holding Company, Inc. Long-Term Incentive Plan (Incorporated by reference to exhibit 10.2(a) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.18(b)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003 through December 31, 2005 Award Term (OXO Guidelines) (Incorporated by reference to exhibit 10.2(b) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.19(c)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003 through December 31, 2005 Award Term (WKI Guidelines) (Incorporated by reference to exhibit 10.2(c) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.20+ Employment Agreement, dated June 18, 2003, between WKI Holding Company, Inc. and Douglas S. Arnold (Incorporated by reference to exhibit 10.3 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.21+ Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Alexander Lee (Incorporated by reference to exhibit 10.4 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 87 10.22+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and James A. Sharman (Incorporated by reference to exhibit 10.5 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.23+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Joseph W. McGarr (Incorporated by reference to exhibit 10.6 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.24+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Raymond J. Kulla (Incorporated by reference to exhibit 10.1 the Quarterly Report on Form 10-Q for the period ended September 29, 2003) 10.25+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Douglas S. Arnold (Incorporated by reference to exhibit 10.2 the Quarterly Report on Form 10-Q for the period ended September 29, 2003) 10.26* Second Amendment and Waiver to the Revolving Credit Agreement dated as of February 13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. 10.27* Amendment and Waiver to the Credit Agreement (Term Loan) dated as of February 13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. 10.28* WKI Holding Company, Inc. Key Employee Retention Program II effective January 1, 2004 14* Code of Ethics 14a* Code of Ethics Addendum 21* Subsidiaries of the Registrant 31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 B. Reports on Form 8-K None ____________________________ * Filed herewith + Management contract or compensatory plan arrangement (1) Incorporated by reference to the corresponding exhibit number to the Quarterly Report on Form 10-Q for the period ended March 30, 2003.
88 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WKI HOLDING COMPANY, INC. By /s/ James A. Sharman President and March 24, 2004 -------------------------- Chief Executive Officer, (James A. Sharman) Director By /s/ Joseph W. McGarr Chief Financial Officer March 24, 2004 --------------------------- (Joseph W. McGarr) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- By /s/ Terry R. Peets Director and Chairman of the March 24, 2004 --------------------------- Board (Terry R. Peets) By /s/ John L. Mariotti Director March 24, 2004 --------------------------- (John L. Mariotti) By /s/ David R. Jessick Director March 24, 2004 --------------------------- (David R. Jessick) By /s/ C. Robert Kidder Director March 24, 2004 --------------------------- (C. Robert Kidder) By /s/ James R. Craigie Director March 24, 2004 --------------------------- (James R. Craigie) By /s/ William E. Redmond, Jr. Director March 24, 2004 --------------------------- (William E. Redmond, Jr.) 89
EXHIBIT INDEX No. Title - --------- ----- 2.1 Second Amended Joint Plan of Reorganization of World Kitchen, Inc., its Parent Corporation and its Subsidiary Debtors dated November 15, 2002 (incorporated by reference to Exhibit 99.T3F to Application for Qualification of Indenture under the Trust Indenture Act of 1939 on Form T-3 filed November 21, 2002). (1) 2.2 Modifications, dated December 23, 2002, to Second Amended Joint Plan of Reorganization of World Kitchen, Inc., its Parent Corporation and its Subsidiary Debtors dated November 15, 2002. (1) 2.3 United States Bankruptcy Court of the Northern District of Illinois Eastern Division Order, dated November 25, 2002, (A) authorizing the assumption of certain executory contracts with Corning Incorporated and (B) Approving Related Agreement relating to the assumption and modification of Exhibits 2.4 to 2.5. (1) 2.4 Recapitalization Agreement dates as of March 2, 1998, among Corning Consumer Products Company, Coring Incorporated, Borden, Inc. and CCPC Acquisition Corp. (1) 2.5 Amendment to the Recapitalization Agreement dated March 31, 1998 between the Company and Corning. (1) 3.1.1 Amended and Restated Certificate of Incorporation of WKI Holding Company, Inc. (1) 3.1.2 Amended and Restated Certificate of Incorporation of World Kitchen, Inc. (1) 3.1.3 Certificate of Formation of EKCO Group, LLC. (1) 3.1.4 Amended and Restated Certificate of Incorporation of EKCO Housewares, Inc. (1) 3.1.5 Amended and Restated Certificate of Incorporation of EKCO Manufacturing of Ohio, Inc. (1) 3.1.6 Certificate of Formation of WKI Latin America Holding, LLC. (1) 3.1.7 Certificate of Formation of World Kitchen (GHC), LLC. (1) 3.2.1 Amended and Restated Bylaws of WKI Holding Company, Inc. (1) 3.2.2 Amended and Restated Bylaws of World Kitchen, Inc. (1) 3.2.3 Limited Liability Company Agreement of EKCO Group, LLC. (1) 3.2.4 Amended and Restated Bylaws of EKCO Housewares, Inc. (1) 3.2.5 Amended and Restated Bylaws of EKCO Manufacturing of Ohio, Inc. (1) 3.2.6 Limited Liability Company Agreement of WKI Latin America Holding, LLC. (1) 3.2.7 Limited Liability Company Agreement of World Kitchen (GHC), LLC. (1) 90 4.1 Stockholders' Agreement, dated as of January 31, 2003, by and among WKI Holding Company, Inc., the Senior Lenders, the Subordinated Lenders, the Borden Entities party thereto, the Management Members party thereto and the New Directors party thereto. (1) 4.2 Indenture, dated as of January 31, 2003, among WKI Holding Company, Inc., the Subsidiary Guarantors party thereto, and U.S. Bank National Association, as trustee, relating to 12% Senior Subordinated Notes due 2010. (1) 10.1+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and James A Sharman. (1) 10.1a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding Company, Inc. and James A. Sharman. (1) 10.2+ Employment Agreement, dated January 30, 2003, between WKI Holding Company, Inc. and Joseph W. McGarr. (1) 10.2a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding Company, Inc. and Joseph W. McGarr. (1) 10.3+ Employment Agreement, dated October 14, 1999, between WKI Holding Company, Inc. and Alexander Lee. (1) 10.4+ Modification Agreement, dated September 30, 2002, between WKI Holding Company, Inc. and Alexander Lee. (1) 10.5+ Amendment to Employment Agreement, dated January 29, 2003, between WKI Holding Company, Inc. and Alexander Lee. (1) 10.6+ Employment Agreement, dated January 28, 2003, between WKI Holding Company, Inc. and Raymond J. Kulla. (1) 10.6a+ Amendment to Employment Agreement, dated April 16, 2003, between WKI Holding Company, Inc. and Raymond J. Kulla. (1) 10.7+ WKI Holding Company, Inc. Stock Option Plan (1) 10.8+ WKI Holding Company, Inc. Key Employee Retention Plan (1) 10.9 Agreement, dated as of January 30, 2003, among WKI Holding Company, Inc., BW Holdings, LLC and the Pension Benefit Guaranty Corporation. (1) 10.10 Release and Indemnification Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., its subsidiaries, and the KKR Entities party thereto (1) 10.11 Tax Matters Agreement, dated as of January 31, 2003, between WKI Holding Company, Inc. and CCPC Acquisition Corp. (1) 10.12 Revolving Credit Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (1) 91 10.13 Term Loan Credit Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (1) 10.14 Guarantee and Collateral Agreement, dated as of January 31, 2003, among WKI Holding Company, Inc., JPMorgan Chase Bank, as collateral agent, and the Subsidiary Parties identified therein. (1) 10.15 Sublease, dated June 21, 2001, between Rolls-Royce North America Inc. and WKI Holding Company, Inc. (incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28, 2002). (1) 10.16 Sublease Modification Agreement between Rolls-Royce North America Inc. and WKI Holding Company, Inc. (1) 10.17 Amendment to the Revolving Credit Agreement dated as of June 30, 2003 among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. (Incorporated by reference to exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.18(a)+ WKI Holding Company, Inc. Long-Term Incentive Plan (Incorporated by reference to exhibit 10.2(a) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.18(b)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003 through December 31, 2005 Award Term (OXO Guidelines) (Incorporated by reference to exhibit 10.2(b) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.19(c)+ WKI Holding Company, Inc. Long-Term Incentive Plan Guidelines for May 29, 2003 through December 31, 2005 Award Term (WKI Guidelines) (Incorporated by reference to exhibit 10.2(c) to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.20+ Employment Agreement, dated June 18, 2003, between WKI Holding Company, Inc. and Douglas S. Arnold (Incorporated by reference to exhibit 10.3 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.21+ Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Alexander Lee (Incorporated by reference to exhibit 10.4 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.22+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and James A. Sharman (Incorporated by reference to exhibit 10.5 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.23+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Joseph W. McGarr (Incorporated by reference to exhibit 10.6 to the Quarterly Report on Form 10-Q for the period ended June 29, 2003) 10.24+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Raymond J. Kulla (Incorporated by reference to exhibit 10.1 the Quarterly Report on Form 10-Q for the period ended September 29, 2003) 92 10.25+ Amended and Restated Employment Agreement, dated July 31, 2003, between WKI Holding Company, Inc. and Douglas S. Arnold (Incorporated by reference to exhibit 10.2 the Quarterly Report on Form 10-Q for the period ended September 29, 2003) 10.26* Second Amendment and Waiver to the Revolving Credit Agreement dated as of February 13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. 10.27* Amendment and Waiver to the Credit Agreement (Term Loan) dated as of February 13, 2004 among WKI Holding Company, Inc., JPMorgan Chase Bank, as administrative agent and collateral agent, J.P. Morgan Securities Inc., as arranger, and the lenders party thereto. 10.28* WKI Holding Company, Inc. Key Employee Retention Program II effective January 1, 2004 14* Code of Ethics 14a* Code of Ethics Addendum 21* Subsidiaries of the Registrant 31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ____________________________ * Filed herewith + Management contract or compensatory plan arrangement (1) Incorporated by reference to the corresponding exhibit number to the Quarterly Report on Form 10-Q for the period ended March 30, 2003.
93 SCHEDULE II
WKI HOLDING COMPANY, INC. VALUATION ACCOUNTS AND RESERVES (IN THOUSANDS) BALANCE AT BALANCE AT YEAR ENDED DECEMBER 31, 2003 12/31/02 ADDITIONS DEDUCTIONS 12/31/03 - -------------------------------------------- ----------- ---------- ------------ ----------- Doubtful accounts and other sales allowances $ 10,932 $ 30,527 $ (33,859) $ 7,600 Inventory reserves 9,818 3,162 (5,745) 7,235 Deferred tax assets valuation allowance. . . 244,914 28,132 (51,259) 221,787 BALANCE AT BALANCE AT YEAR ENDED DECEMBER 31, 2002 12/31/01 ADDITIONS DEDUCTIONS 12/31/02 - -------------------------------------------- ----------- ---------- ------------ ----------- Doubtful accounts and other sales allowances $ 25,346 $ 49,604 $ (64,018) $ 10,932 Inventory reserves 13,482 7,750 (11,414) 9,818 Deferred tax assets valuation allowance. . . 234,568 65,995 (55,739) 244,914 BALANCE AT BALANCE AT YEAR ENDED DECEMBER 31, 2001 12/31/00 ADDITIONS DEDUCTIONS 12/31/01 - -------------------------------------------- ----------- ---------- ------------ ----------- Doubtful accounts and other sales allowances $ 25,567 $ 71,272 $ (71,493) $ 25,346 Inventory reserves 33,227 75,928 (95,673) 13,482 Deferred tax assets valuation allowance. . . 175,582 59,076 -- 234,658
94 EX-10.26 3 doc6.txt EXHIBIT 10.26 EXECUTION COPY AMENDMENT No. 2 AND WAIVER dated as of February 13, 2004 (this "Amendment and Waiver"), to the Revolving -------------------- Credit Agreement dated as of January 31, 2003 (as amended, supplemented or otherwise modified from time to time, the "Revolving Credit Agreement"), among WKI -------------------------- HOLDING COMPANY, INC., a Delaware corporation (the "Borrower"), the financial institutions party to the -------- Revolving Credit Agreement as Lenders (the "Lenders"), ------- and JPMORGAN CHASE BANK, as Administrative Agent and Collateral Agent. A. The Borrower has requested that the Lenders agree to amend and/or waive certain provisions of the Revolving Credit Agreement as set forth herein. B. The Borrower has also informed the Lenders that an Event of Default has occurred as a result of the Borrower's failure to (i) liquidate or dissolve WKI do Brasil Ltda. by December 31, 2003, and (ii) cause clause (b) of the definition of Collateral and Guarantee Requirement to be satisfied with respect to such Subsidiary, as required by Section 5.13(e) of the Revolving Credit Agreement (such Event of Default, the "Specified Event of Default"), and -------------------------- has requested that the Lenders grant a limited waiver of the Specified Event of Default. C. The Lenders are willing to amend the Revolving Credit Agreement and waive certain provisions of the Revolving Credit Agreement, in each case on the terms and subject to the conditions set forth herein. D. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Revolving Credit Agreement, as amended hereby. SECTION 1. Amendments to Section 1.01. (a) The definition of the term -------------------------- "Borrowing Base" in Section 1.01 of the Revolving Credit Agreement is hereby -------------- amended by replacing the proviso in the first sentence of such definition with the following: provided that the amounts derived from clauses (b) and (c) shall at -------- no time (ii) (A) during the period from July 1, 2004, through and including October 31, 2004, 175%, (B) during the first three fiscal quarters of any fiscal year other than fiscal year 2004, 125%, (C) and at all other times, 100%, in each case of the amount derived from clause (a) above. (b) The definition of the term "Consolidated EBITDA" in Section 1.01 of the ------------------- Revolving Credit Agreement is hereby amended by deleting such definition in its entirety and substituting the following therefor: "Consolidated EBITDA" means, for any period, Consolidated Net Income ------------------- for such period PLUS (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) consolidated interest expense for such period, (ii) consolidated income and franchise tax expense for such period, (iii) all amounts attributable to depreciation and amortization for 2 such period, including, without limitation, amortization of intangibles (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period and included in Consolidated EBITDA for such prior period), (iv) any noncash and non-recurring charge for such period, (v) any cash or non-cash charges for such period properly classified as "extraordinary" under GAAP, including, without limitation, charges relating to impairment of intangible assets, (vi) fees and expenses incurred in such period in connection with the Emergence Plan, (vii) charges for such period attributable to the key employee retention plans and longterm incentive plans listed on Schedule 1.01(b) or any other such plan approved by the Required Lenders, provided that the charges -------- associated with this clause (vii) shall not exceed $11,800,000 in the aggregate, (viii) cash and noncash charges for such period that are directly attributable to the closing of any retail store facilities of the Borrower, including, without limitation, severance payments relating to the closing of any headquarters or distribution facilities, (ix) cash and non-cash charges for such period that are directly related to the 2004 restructuring of the Borrower currently contemplated by the Board of Directors with the advice of AlixPartners including, without limitation, severance payments, expenses associated with inventory reductions and consultants' fees and expenses, and (x) fees and expenses of financial advisors, accountants and outside counsel incurred in such period in connection with any asset sale contemplated by the Board of Directors as of February 6, 2004 and MINUS (b) without duplication and to the extent included in determining such Consolidated Net Income, any extraordinary gains for the period, all determined on a consolidated basis in accordance with GAAP. SECTION 2. Amendment to Section 5.13. Paragraph (e) of Section 5.13 of ------------------------- the Revolving Credit Agreement is hereby amended by deleting the text "December 31, 2003" after the text "dissolved by" and substituting the text "June 30, 2004" in lieu thereof. SECTION 3. Amendment to Section 6.12. Section 6.12 is hereby amended ------------------------- by inserting the following text after the text "any new store": , it being understood that changing the location of any existing retail store shall not constitute the opening of a new retail store for the purposes of this Section 6.12 SECTION 4. Amendment to Section 6.14. The table set forth in Section ------------------------- 6.14 of the Revolving Credit Agreement is hereby amended and restated in its entirety as follows:
Period Ratio - ------ ----- January 1, 2004 to March 31, 2004 7.2 : 1.0 April 1, 2004 to June 30, 2004 7.2 : 1.0 July 1, 2004 to September 30, 2004 8.1 : 1.0 3 Period Ratio - ------ ----- October 1, 2004 to December 31, 2004 7.0 : 1.0 January 1, 2005 to March 31, 2005 6.4 : 1.0 April 1, 2005 to June 30, 2005 6.0 : 1.0 July 1, 2005 to September 30, 2005 6.0 : 1.0 October 1, 2005 to December 31, 2005 6.0 : 1.0 January 1, 2006 to March 31, 2006 6.0 : 1.0 April 1, 2006 to June 30, 2006 5.6 : 1.0 July 1, 2006 to September 30, 2006 5.6 : 1.0 October 1, 2006 to December 31, 2006 5.6 : 1.0 January 1, 2007 to March 31, 2007 5.6 : 1.0 April 1, 2007 to June 30, 2007 5.2 : 1.0 July 1, 2007 to September 30, 2007 5.2 : 1.0
SECTION 5. Amendment to Section 6.16. The table set forth in Section ------------------------- 6.16 of the Revolving Credit Agreement is hereby amended and restated in its entirety as follows:
Date Amount - ---- ------ March 31, 2004 $58,000,000 June 30, 2004 $58,000,000 September 30, 2004 $54,000,000 December 31, 2004 $57,000,000 March 31, 2005 $77,500,000 June 30, 2005 $78,000,000 September 30, 2005 $79,700,000 December 31, 2005 $82,100,000 March 31, 2006 $82,500,000 June 30, 2006 $82,900,000 September 30, 2006 $84,400,000 December 31, 2006 $86,500,000 March 31, 2007 $87,000,000 June 30, 2007 $87,400,000 September 30, 2007 $88,900,000
4 SECTION 6. Limited Waiver. The Lenders hereby waive (i) the Specified -------------- Event of Default and (ii) the notice requirement in Section 5.02(a) of the Revolving Credit Agreement with respect to such Specified Event of Default. SECTION 7. Limited Waiver. For the avoidance of doubt, to the extent -------------- that any change in location of a retail store prior to the date hereof would constitute a Default under Section 6.12 of the Revolving Credit Agreement, the Lenders hereby waive (i) compliance with Section 6.12 of the Revolving Credit Agreement with respect to such Default and (ii) the notice requirement in Section 5.02(a) of the Revolving Credit Agreement with respect to such Default. SECTION 8. Representations and Warranties. The Borrower represents and ------------------------------ warrants to the Administrative Agent and to each of the Lenders that: (a) This Amendment and Waiver has been duly authorized, executed and delivered by it and constitutes a legal, valid and binding obligation of such party hereto, enforceable against it in accordance with its terms. (b) After giving effect to this Amendment and Waiver, the representations and warranties set forth in Article III of the Revolving Credit Agreement are true and correct in all material respects on and as of the date hereof with the same effect as if made on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date. (c) After giving effect to this Amendment and Waiver, no Event of Default or Default has occurred and is continuing. SECTION 9. Amendment and Waiver Fee. In consideration of the ------------------------ agreements of the Lenders contained in this Amendment and Waiver, the Borrower agrees to pay the Administrative Agent (payable to the Lenders upon receipt by the Agent of the signatures required by clause (a)(i) of Section 10), for the account of each Lender that delivers an executed counterpart of this Amendment and Waiver prior to 12:00 (noon), New York City time, on February 13, 2004, an amendment and waiver fee (the "Amendment and Waiver Fee") equal to 0.25% of the ------------------------ aggregate amount of the Exposure of such Lender. SECTION 10. Conditions to Effectiveness. This Amendment and Waiver --------------------------- shall become effective as of the date first above written when (a) the Administrative Agent shall have received (i) counterparts of this Amendment and Waiver that, when taken together, bear the signatures of the Borrower and the Lenders having Exposures and unused Commitments representing at least 75% of the total Exposures and unused Commitments and (ii) the aggregate amount of the Amendment and Waiver Fee, (b) the representations and warranties set forth in Section 7 hereof are true and correct and (c) all fees and expenses required to be paid or reimbursed by the Borrower pursuant hereto, the Revolving Credit Agreement or otherwise, including all invoiced fees and expenses of counsel to the Administrative Agent, shall have been paid or reimbursed, as applicable. 5 SECTION 11. Revolving Credit Agreement. Except as specifically -------------------------- amended hereby, the Revolving Credit Agreement shall continue in full force and effect in accordance with the provisions thereof as in existence on the date hereof. After the date hereof, any reference to the Revolving Credit Agreement shall mean the Revolving Credit Agreement as amended hereby. This Amendment and Waiver shall be a Loan Document for all purposes. SECTION 12. APPLICABLE LAW. THIS AMENDMENT SHALL BE -------------- CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. SECTION 13. Counterparts. This Amendment and Waiver may be ------------ executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement. Delivery of an executed signature page to this Amendment and Waiver by facsimile transmission shall be effective as delivery of a manually signed counterpart of this Amendment and Waiver. SECTION 14. Expenses. The Borrower agrees to reimburse the -------- Administrative Agent for its out-of-pocket expenses in connection with this Amendment and Waiver, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore LLP, counsel for the Administrative Agent. SECTION 15. Headings. The headings of this Amendment and Waiver -------- are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be duty executed by their respective authorized officers as of the day and year first written above. WKI HOLDING COMPANY, INC., by: /s/ John Sorensen ---------------------------------- Name: John Sorenson Title: VP and Treasurer JPMORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank, by: ---------------------------------- Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be duty executed by their respective authorized officers as of the day and year first written above. WKI HOLDING COMPANY, INC., by: ---------------------------------- Name: Title: JPMORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank, by: /s/ Jonathan Katz ---------------------------------- Name: Jonathan Katz Title: Vice President SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution GENERAL ELECTRIC CAPITAL CORPORATION ------------------------------------ by /s/ Patrick Flynn ------------------------- Name: Patrick Flynn Title: Duly Authorized Signatory SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution Wells Fargo Foothill ------------------------------------ by /s/ Eunnie Kim ------------------------- Name: Eunnie Kim Title: AVP EX-10.27 4 doc7.txt EXHIBIT 10.27 EXECUTION COPY AMENDMENT No. 1 AND WAIVER dated as of February 13, 2004 (this "Amendment and Waiver"), to the Credit -------------------- Agreement dated as of January 31, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among WKI HOLDING COMPANY, ---------------- INC., a Delaware corporation (the "Borrower"), the -------- financial institutions party to the Credit Agreement as Lenders (the "Lenders"), and JPMORGAN CHASE BANK, as ------- Administrative Agent and Collateral Agent. A. The Borrower has requested that the Lenders agree to amend and/or waive certain provisions of the Credit Agreement as set forth herein. B. The Borrower has also informed the Lenders that an Event of Default has occurred as a result of the Borrower's failure to (i) liquidate or dissolve WKI do Brasil Ltda. by December 31, 2003, and (ii) cause clause (b) of the definition of Collateral and Guarantee Requirement to be satisfied with respect to such Subsidiary, as required by Section 5.13(e) of the Credit Agreement (such Event of Default, the "Specified Event of Default"), and has -------------------------- requested that the Lenders grant a limited waiver of the Specified Event of Default. C. The Lenders are willing to amend the Credit Agreement and waive certain provisions of the Credit Agreement, in each case on the terms and subject to the conditions set forth herein. D. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement, as amended hereby. SECTION 1. Amendment to Section 1.01. The definition of the term ------------------------- "Consolidated EBITDA" in Section 1.01 of the Credit Agreement is hereby amended ------------------- by deleting such definition in its entirety and substituting the following therefor: "Consolidated EBITDA" means, for any period, Consolidated Net Income ------------------- for such period PLUS (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) consolidated interest expense for such period, (ii) consolidated income and franchise tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period, including, without limitation, amortization of intangibles (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period and included in Consolidated EBITDA for such prior period), (iv) any noncash and non-recurring charge for such period, (v) any cash or non-cash charges for such period properly classified as "extraordinary" under GAAP, including without limitation, charges relating to impairment of intangible assets, (vi) fees and expenses incurred in such period in connection with the Emergence Plan, (vii) charges for such period attributable to the key employee retention plans and longterm incentive plans listed on Schedule 1.01(b) or any other such plan approved by the Required Lenders, provided -------- that the charges associated with this 2 clause (vii) shall not exceed $11,800,000 in the aggregate, (viii) cash and noncash charges for such period that are directly attributable to the closing of any retail store facilities of the Borrower, including, without limitation, severance payments relating to the closing of any headquarters or distribution facilities, (ix) cash and non-cash charges for such period that are directly related to the 2004 restructuring of the Borrower currently contemplated by the Board of Directors with the advice of AlixPartners including, without limitation, severance payments, expenses associated with inventory reductions and consultants' fees and expenses, and (x) fees and expenses of financial advisors, accountants and outside counsel incurred in such period in connection with any asset sale contemplated by the Board of Directors as of February 6, 2004 and MINUS (b) without duplication and to the extent included in determining such Consolidated Net Income, any extraordinary gains for the period, all determined on a consolidated basis in accordance with GAAP. SECTION 2. Amendment to Section 5.13. Paragraph (e) of Section 5.13 of ------------------------- the Credit Agreement is hereby amended by deleting the text "December 31, 2003" after the text "dissolved by" and substituting the text "June 30, 2004" in lieu thereof. SECTION 3. Amendment to Section 6.12. Section 6.12 is hereby amended ------------------------- by inserting the following text after the text "any new store": , it being understood that changing the location of any existing retail store shall not constitute the opening of a new retail store for the purposes of this Section 6.12 SECTION 4. Amendment to Section 6.14. The table set forth in Section ------------------------- 6.14 of the Credit Agreement is hereby amended and restated in its entirety as follows:
Period Ratio - ------ ----- January 1, 2004 to March 31, 2004 7.2 : 1.0 April 1, 2004 to June 30, 2004 7.2 : 1.0 July 1, 2004 to September 30, 2004 8.1 : 1.0 October 1, 2004 to December 31, 2004 7.0 : 1.0 January 1, 2005 to March 31, 2005 6.8 : 1.0 April 1, 2005 to June 30, 2005 6.4 : 1.0 July 1, 2005 to September 30, 2005 6.4 : 1.0 October 1, 2005 to December 31, 2005 6.4 : 1.0 January 1, 2006 to March 31, 2006 6.4 : 1.0 April 1, 2006 to June 30, 2006 6.0 : 1.0 July 1, 2006 to September 30, 2006 6.0 : 1.0 3 Period Ratio - ------ ----- October 1, 2006 to December 31, 2006 6.0 : 1.0 January 1, 2007 to March 31, 2007 6.0 : 1.0 April 1, 2007 to June 30, 2007 5.6 : 1.0 July 1, 2007 to September 30, 2007 5.6 : 1.0 October 1, 2007 to December 31, 2007 5.6 : 1.0 January 1, 2008 to March 31, 2008 5.6 : 1.0
SECTION 5. Amendment to Section 6.16. The table set forth in Section ------------------------- 6.16 of the Credit Agreement is hereby amended and restated in its entirety as follows:
Date Amount - ---- ------ March 31, 2004 $58,000,000 June 30, 2004 $58,000,000 September 30, 2004 $54,000,000 December 31, 2004 $57,000,000 March 31, 2005 $72,700,000 June 30, 2005 $73,100,000 September 30, 2005 $74,700,000 December 31, 2005 $76,900,000 March 31, 2006 $77,300,000 June 30, 2006 $77,800,000 September 30, 2006 $79,100,000 December 31, 2006 $81,100,000 March 31, 2007 $81,500,000 June 30, 2007 $82,000,000 September 30, 2007 $83,300,000 December 31, 2007 $85,300,000
SECTION 6. Limited Waiver. The Lenders hereby waive (i) the Specified -------------- Event of Default and (ii) the notice requirement in Section 5.02(a) of the Credit Agreement with respect to such Specified Event of Default. SECTION 7. Limited Waiver. For the avoidance of doubt, to the extent -------------- that any change in location of a retail store prior to the date hereof would constitute a Default under Section 6.12 of the Credit Agreement, the Lenders hereby waive (i) compliance with Section 6.12 of the Credit Agreement with respect to such Default and 4 (ii) the notice requirement in Section 5.02(a) of the Credit Agreement with respect to such Default. SECTION 8. Representations and Warranties. The Borrower represents and ------------------------------ warrants to the Administrative Agent and to each of the Lenders that: (a) This Amendment and Waiver has been duly authorized, executed and delivered by it and constitutes a legal, valid and binding obligation of such party hereto, enforceable against it in accordance with its terms. (b) After giving effect to this Amendment and Waiver, the representations and warranties set forth in Article III of the Credit Agreement are true and correct in all material respects on and as of the date hereof with the same effect as if made on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date. (c) After giving effect to this Amendment and Waiver, no Event of Default or Default has occurred and is continuing. SECTION 9. Amendment and Waiver Fee. In consideration of the ------------------------ agreements of the Lenders contained in this Amendment and Waiver, the Borrower agrees to pay the Administrative Agent (payable to the Lenders upon receipt by the Agent of the signatures of the Borrower and the Required Lenders) for the account of each Lender that delivers an executed counterpart of this Amendment and Waiver prior to 12:00 (noon), New York City time, on February 13, 2004, an amendment and waiver fee (the "Amendment and Waiver Fee") equal to 0.25% of the aggregate amount of the Exposure of such Lender. SECTION 10. Conditions to Effectiveness. This Amendment and Waiver --------------------------- shall become effective as of the date first above written when (a) the Administrative Agent shall have received (i) counterparts of this Amendment and Waiver that, when taken together, bear the signatures of the Borrower and the Required Lenders and (ii) the aggregate amount of the Amendment and Waiver Fee, (b) the representations and warranties set forth in Section 8 hereof are true and correct and (c) all fees and expenses required to be paid or reimbursed by the Borrower pursuant hereto, the Credit Agreement or otherwise, including all invoiced fees and expenses of counsel to the Administrative Agent, shall have been paid or reimbursed, as applicable. SECTION 11. Credit Agreement. Except as specifically amended hereby, ---------------- the Credit Agreement shall continue in full force and effect in accordance with the provisions thereof as in existence on the date hereof. After the date hereof, any reference to the Credit Agreement shall mean the Credit Agreement as amended hereby. This Amendment and Waiver shall be a Loan Document for all purposes. SECTION 12. APPLICABLE LAW. THIS AMENDMENT SHALL BE -------------- CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5 SECTION 13. Counterparts. This Amendment and Waiver may be executed in ------------ two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement. Delivery of an executed signature page to this Amendment and Waiver by facsimile transmission shall be effective as delivery of a manually signed counterpart of this Amendment and Waiver. SECTION 14. Expenses. The Borrower agrees to reimburse the -------- Administrative Agent for its out-of-pocket expenses in connection with this Amendment and Waiver, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore LLP, counsel for the Administrative Agent. SECTION 15. Headings. The headings of this Amendment and Waiver -------- are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be duty executed by their respective authorized officers as of the day and year first written above. WKI HOLDING COMPANY, INC., by: /s/ John Sorensen -------------------------------- Name: John Sorensen Title: VP and Treasurer JPMORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank, by: -------------------------------- Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be duty executed by their respective authorized officers as of the day and year first written above. WKI HOLDING COMPANY, INC., by: -------------------------------- Name: Title: JPMORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank, by: /s/ Jonathan Katz -------------------------------- Name: Jonathan Katz Title: Vice President SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution ABN AMRO BANK N.V. -------------------------------------------------------- by /s/ Steven C. Wimpenny /s/ Clifford S. Blasberg ---------------------- ------------------------ Name: Steven C. Wimpenny Name: Clifford S. Blasberg Title: Group Senior Vice President Title: Group Vice President SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution CREDIT SUISSE FIRST BOSTON INTERNATIONAL -------------------------------------------------------- by /s/ (ILLEGIBLE) -------------------------------- Name: Title: SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution DEBTCO LLC -------------------------------------------------------- by /s/ Alyssa A. Anton -------------------------------- Name: Alyssa A. Anton Title: Asst. Secretary SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution First Dominion Funding I -------------------------------------------------------- by /s/ (ILLEGIBLE) -------------------------------- Name: Title: SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution GENERAL ELECTRIC CAPITAL CORPORATION -------------------------------------------------------- by /s/ Patrick Flynn -------------------------------- Name: Patrick Flynn Title: Duly Authorized Signatory SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution Hour LLC (Clarion Capital Partners) -------------------------------------------------------- by /s/ Marc A. Utay -------------------------------- Name: Marc A. Utay Title: Managing Partner SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: KZH CYPRESSTREE-1 LLC by /s/ Dorian Herrera -------------------------------- Name: Dorian Herrera Title: AUTHORIZED AGENT SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution Morgan Stanley Prime Income Trust -------------------------------------------------------- by /s/ Elizabeth Bodisch -------------------------------- Name: Elizabeth Bodisch Title: Authorized Signatory SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution NATEXIS BANQUES POPULAIRES -------------------------------------------------------- by /s/ Jose M. Cerezo -------------------------------- Name: JOSE M. CEREZO Title: VICE PRESIDENT /s/ Tefta Ghilaga -------------------------------- TEFTA GHILAGA VICE PRESIDENT SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Oaktree Capital Management, LLC, as general partner and/or investment manager of certain funds and Name of Institution accounts it manages -------------------------------------------------------- by /s/ Kenneth Liang -------------------------------- Name: Kenneth Liang Title: Managing Director by /s/ Holly Kim -------------------------------- Name: Holly Kim Title: Senior Vice President SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution Wells Fargo Bank, N.A. -------------------------------------------------------- by /s/ Danny Oliver -------------------------------- Name: Danny Oliver Title: VICE PRESIDENT SIGNATURE PAGE TO AMENDMENT TO REVOLVING CREDIT AGREEMENT To Approve the Amendment and Waiver: Name of Institution Wells Fargo Foothill -------------------------------------------------------- by /s/ Eunnie Kim -------------------------------- Name: Eunnie KIm Title: AVP EX-10.28 5 doc8.txt EXHIBIT 10.28 EXHIBIT 10.28 THE WKI HOLDING COMPANY, INC. KEY EMPLOYEE RETENTION PROGRAM II (EFFECTIVE JANUARY 1, 2004) ARTICLE I - PURPOSE ------------------- The purpose of the Plan is to establish a retention program for designated key employees of the Company. The Plan provides incentives, contingent upon continued employment, to certain key salaried employees who are expected to make substantial contributions during a restructuring of the Company. The Plan also provides enhanced severance benefits to these employees if their job positions are eliminated and their employment is involuntarily terminated for reasons other than death, Disability or Cause on or before July 1, 2005. ARTICLE II - DEFINITIONS ------------------------ When used in this Plan and initially capitalized, the following words and phrases shall have the following respective meanings unless the context clearly requires otherwise: Section 2.1 "Base Salary" means (1) for purposes of the Bonus payments, the ----------- Participant's annual base salary as in effect on the Effective Date (or, if later, on the Participant's date of hire), and (2) for purposes of the Enhanced Severance Benefits, the Participant's monthly base pay rate (excluding overtime, commissions, and shift differentials, if applicable) at the time of his termination of employment. Section 2.2 "Bonus" means a Discretionary Retention Bonus or a Retention ----- Bonus. Section 2.3 "Cause" means any of the following: ----- (a) Participant's commission of a misdemeanor involving fraud, dishonesty, or moral turpitude, or of a felony, (b) Participant's willful or intentional breach of any material obligation under an employment agreement (to the extent such breach is not cured in accordance with the terms of the employment agreement), (c) negligence or intentional misconduct by Participant in the performance of his duties for the Company, (d) Participant's breach of the confidentiality provision set forth in Section 4.5 hereof, (e) the willful or intentional failure by Participant to comply (to the best of his ability) with a specific, written direction of the Chief Executive Officer of the Company that is not inconsistent with the terms of any employment agreement and Participant's responsibilities, provided that such refusal or failure (i) is not cured to the best of Participant's ability within ten (10) business days after the delivery of such direction to Participant and (ii) is not based on Participant's good faith belief, as expressed by written notice to the Chief Executive Officer of the Company, given within such ten (10) business day period, that the implementation of such direction of the Chief Executive Officer would be unlawful or unethical, or (f) regardless of any contrary provision contained in an employment agreement for purposes of this plan, the term "cause" shall mean performance that does not meet the standards and expectations established by management. For the avoidance of doubt, the Committee, in its sole and absolute discretion, will determine whether "Cause" exists in any given situation. Section 2.4 "Committee" means the Compensation Committee of the Board of --------- Directors of WKI Holding Company, Inc. The Committee may delegate any of its powers, duties and responsibilities and any of its discretionary authorities under the Plan to a named administrator or administrators. Section 2.5 "Company" means WKI Holding Company, Inc. ------- Section 2.6 "Designated Beneficiary" means the beneficiary or beneficiaries ---------------------- designated by a Participant in accordance with Section 4.8 hereof to receive the amount, if any, payable under the Plan upon the Participant's death. Section 2.7 "Disability" or "Disabled" means permanent and total disability ---------- -------- under the Company's long term disability plan, as determined under procedures established by the Plan Administrator for purposes of the Plan. Section 2.8 "Discretionary Bonus Participant" means any Employee (other than ------------------------------- a Tier I or Tier II Participant) who is designated by the Plan Administrator to be eligible to receive a Discretionary Retention Bonus under Section 3.2 hereof. Section 2.9 "Discretionary Retention Bonus" means the amounts payable to a ----------------------------- Participant under Section 3.2 hereof. Section 2.10 "Effective Date" means January 1, 2004. -------------- Section 2.11 "Employee" means any person who is classified by the Company as -------- such. Section 2.12 "Enhanced Severance Benefit" means the amounts payable to a -------------------------- Participant under Section 3.3 hereof. Section 2.13 "Payment Date" means any of the dates identified in Section ------------ 3.1(c) upon which an eligible participant earns a bonus award or these dates as modified by the Committee under Section 3.1(d). 2 Section 2.14 "Participant" means a Tier I Participant, a Tier II Participant ----------- or a Discretionary Bonus Participant. Section 2.15 "Plan" means this WKI Holding Company, Inc. Key Employee ---- Retention Program II. Section 2.16 "Plan Administrator" means the Vice President of Human ------------------ Resources of the Company or his delegate. Section 2.17 "Retention Bonus" means the amounts payable to a Participant --------------- under Section 3.1 hereof. Section 2.18 "Severance Policy" means the World Kitchen Severance Guidelines ---------------- as in effect from time to time (or any plan or policy replacing or succeeding the same). Section 2.19 "Tier I Participants" mean the Employees of the Company listed ------------------- on the attached Schedule A as Tier I Employees. Section 2.20 "Tier II Participants" mean the Employees of the Company listed -------------------- on the attached Schedule A as Tier II Employees. ARTICLE III - BENEFITS ---------------------- Section 3.1 Retention Bonus Benefits. ------------------------- (a) Amount. ------ (i) Subject to the provisions of clause (ii) below, the amount of each Participant's Retention Bonus shall be equal to a specified percentage of each Participant's Base Salary, determined in accordance with the following provisions: (A) The amount of the Retention Bonus for a Tier I Participant shall be 60% of Base Salary. (B) The amount of the Retention Bonus for a Tier II Participant shall be 35% of Base Salary. (ii) Notwithstanding the foregoing, the 2004 Annual Incentive Bonus shall be reduced in accordance with the following rules. If a Participant earns a bonus under the Company's Annual Incentive Plan for 2004 (the "2004 Annual Incentive Bonus"), the bonus shall be reduced (not below zero) by an amount equal to the portion of the 2004 Annual Incentive Bonus which does not exceed the target 2004 Annual Incentive Bonus. In furtherance of, but without limiting the foregoing, the 2004 Annual Incentive Bonus will not be reduced by the portion of the Annual Incentive Bonus (if any) which exceeds the target Annual Incentive Bonus. 3 (b) Eligibility/Vesting. ------------------- (i) Except to the extent specifically provided otherwise herein, a Participant will only be eligible to receive a particular Retention Bonus payment if he is actively employed by the Company on the Payment Date therefore described in Subsection (c) below. In furtherance thereof, but without limiting the foregoing, a Participant who voluntarily terminates employment prior to any Payment Date shall not be eligible for any Retention Bonus payments which become payable after such termination of employment. (ii) Notwithstanding the foregoing, in the event that the Company terminates the employment of a Participant without Cause or a Participant dies or becomes Disabled before receiving 100% of the Retention Bonus, such Participant (or his Designated Beneficiary in the event of his death) shall be entitled to receive a pro-rata portion of his Retention Bonus (paid as soon as practicable after the Payment Date(s) described in Subsection (c) below) calculated as follows: (A) Determine the Participant's "service ratio" for a particular installment payment by dividing his complete months of service from the Effective Date through the applicable Payment Date by the total number of months in such time period; and (B) Multiply the service ratio by the percentage of the Retention Bonus payable on such Payment Date. (iii) Participants shall not be vested in any Retention Bonus payment until the Payment Date for such payment described in subsection (c) or (d) hereof. (c) Payment. Retention Bonuses shall be paid in two (2) installments as soon as practicable after the Payment Dates described below: (i) Fifty percent (50%) of the Retention Bonus shall be vested as of, and paid as soon as practicable after, December 31, 2004. (ii) Fifty percent (50%) of the Retention Bonus shall be vested as of, and paid as soon as practicable after, July 1, 2005. (d) Acceleration of Vesting and Payment Date(s). Notwithstanding any provision of the Plan to the contrary, the Committee (in its sole and absolute discretion) may elect to accelerate the vesting and Payment Date of all or any portion of the Retention Bonuses for one or more Participants in the event that the Committee, in its sole and absolute discretion, determines the Company has achieved key financial restructuring milestones. (e) Maximum Payments. The maximum amount payable by the Company pursuant to this Section 3.1 shall be [$2,665,000]. 4 Section 3.2 Discretionary Retention Bonus Payments. -------------------------------------- (a) Amount. Discretionary Bonus Participants shall be eligible to receive a ------ Discretionary Retention Bonus payable in such amount as is determined at the discretion of the Plan Administrator; provided, however, that the total Discretionary Retention Bonus payable to any single Discretionary Bonus Participant shall not exceed thirty-five percent (35%) of such Participant's Base Salary. The aggregate amount of Discretionary Retention Bonuses paid under the Plan shall not exceed $150,000. (b) Payment/Vesting. --------------- (i) Discretionary Retention Bonuses shall be paid on such date or dates as determined by the Compensation Committee. (ii) Discretionary Bonus Participants must be actively employed by the Company and in good standing (meets or exceeds performance standards and expectations as set forth by the Company) on the Payment Date in order to be eligible to receive such payment, provided, however, in the event that the Company involuntarily terminates the employment of a Discretionary Bonus Participant without Cause or such a Participant dies or becomes Disabled after being designated as the recipient of a Discretionary Retention Bonus but before receiving the Discretionary Retention Bonus, the Plan Administrator (in its sole and absolute discretion) may elect to pay such Participant (or his Designated Beneficiary in the event of his death), all, none or a pro-rata portion of such Discretionary Retention Bonus. Section 3.3 Enhanced Severance Benefits. ---------------------------- (a) Amount. Tier I and Tier II Participants shall receive an Enhanced ------ Severance Benefit in accordance with the following schedule, unless there is an existing written agreement between the Company and the Participant providing for a greater severance benefit: (i) Tier I Participants shall receive 12 months' Base Salary. (ii) Tier II Participants shall receive 6 months' Base Salary. (b) Additional Benefits. In addition, provided that the Participant ------------------- continues to pay all applicable premium contributions (at the rate in effect from time to time for similarly situated active Employees), the Participant's medical and dental benefits shall also continue for the duration of the Enhanced Severance Benefits. (c) Eligibility. Tier I and Tier II Participants shall be eligible to ----------- receive the Enhanced Severance Benefits described in Subsection (a) hereof only if (i) the Participant's job position is eliminated, (ii) the Company terminates the employment of the Participant for reasons other than Cause, death or Disability on or before July 1, 2005, (iii) the Participant executes a release in a form satisfactory to the Company and (iv) the 5 Participant is not entitled to any other severance benefits from the Company under an employment agreement or other contractual arrangement. (d) Payment/Termination. Enhanced Severance Benefits shall be paid in the ------------------- form of salary continuation. Such benefits shall cease prior to the end of the enhanced severance period if and when the Participant becomes re-employed on a regular basis with any business unit of the Company or any related entity. (e) Death. In the event that a Participant dies while receiving Enhanced ----- Severance Benefits, the remaining unpaid portion of such Benefits shall be paid to his Designated Beneficiary, in the form of a single lump sum payment, as soon as practicable following his death. ARTICLE IV - GENERAL PROVISIONS ------------------------------- Section 4.1 Administration. The Plan shall be administered by the Plan -------------- Administrator. The Plan Administrator shall have full power and authority to carry out the provisions of the Plan, including the authority to construe, interpret and administer the Plan, to calculate pro-rata Bonus payments, to select the Employees to become Discretionary Bonus Participants in the Plan and to determine the Discretionary Retention Bonus amounts to be provided. Decisions of the Plan Administrator shall be final, binding, and conclusive with respect to all parties, subject to the claims procedure described in Section 4.2. The Plan Administrator may at any time adopt such rules, regulations, policies, or practices as, in his sole discretion, he shall determine to be necessary or appropriate for the administration of, or the performance of his respective responsibilities under, the Plan. The Plan Administrator may at any time amend, modify, suspend, or terminate such rules, regulations, policies, or practices. Section 4.2 Claims Procedure. In the event that any person believes that he ---------------- did not receive the benefit entitled to him under this Plan, the person may file a claim, in writing, with the Committee. The Committee shall conduct a full and fair review of such claim and shall provide the claimant with written notice of its decision with respect thereto within sixty (60) days after the claim is filed. All decisions made by the Committee regarding claims are final, binding and conclusive with respect to all parties. Section 4.3 Reorganization. The obligations of the Company under the Plan -------------- shall be binding upon any successor corporation or organization resulting from merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to any substantial portion (more than thirty-five percent) of the assets and business of the Company measured at the time of sale. The Company will make appropriate provision for the preservation of Participants' rights under the Plan in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets. Section 4.4 Assignment of Benefits. A Participant may not assign, sell, ---------------------- encumber, transfer or otherwise dispose of any rights or interests under the Plan except by will or the laws of descent and distribution. Any attempted disposition in contravention of the preceding sentence shall be null and void. 6 Section 4.5 Confidentiality. This Plan and all the terms thereof are --------------- confidential. A Participant shall not disclose, publicize, or discuss any of the terms or conditions of the Plan (and related agreements) with anyone, except his or her spouse, attorney and/or accountant. In the event the Participant discloses this Plan (or related agreements) or any of their terms or conditions to his or her spouse, attorney and/or accountant, it shall be the Participant's duty to advise said individual(s) of the confidential nature of this Plan (and related agreements) and to direct them not to disclose, publicize, or discuss any of the terms or conditions of this Plan (or related agreements) with any other person. Violation of this confidentiality provision shall result in immediate termination of participation in the Plan, loss of all Bonuses and Enhanced Severance Benefits under the Plan, and to the extent determined by the Company in its sole and absolute discretion, termination of employment for Cause. Section 4.6 No Claim or Right to Plan Participation. No Employee or other --------------------------------------- person shall have any claim or right to be selected as a Participant under the Plan. Neither the Plan nor any action taken pursuant to the Plan shall be construed as giving any person any right to be retained in the employ of the Company or any rights to any benefits whatsoever, except to the extent specifically set forth herein. Section 4.7 Taxes/Withholding. The Company shall deduct from all amounts ----------------- paid under the Plan all foreign, federal, state, local and other taxes required by law to be withheld with respect to such payments. Section 4.8 Designation and Change of Beneficiary. Each Participant may ------------------------------------- designate one or more persons as the Designated Beneficiary who shall be entitled to receive the amounts, if any, payable under the Plan upon the death of the Participant. Such designation shall be in writing to the Plan Administrator. A Participant may, from time to time, revoke or change his Designated Beneficiary without the consent of any prior Designated Beneficiary by filing a written designation with the Plan Administrator. The last such designation received by the Plan Administrator shall be controlling; provided, -------- however, that no designation, or change or revocation thereof, shall be - ------- effective unless received by the Plan Administrator prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. In the event that a Participant has failed to properly designate a Designated Beneficiary, such Participant's Designated Beneficiary shall be his legal surviving spouse or, if none, his estate. Section 4.9 Payments to Persons Other Than the Participant. If the Plan ---------------------------------------------- Administrator shall find that any person to whom any amount is payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, then any payment due to such person (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Plan Administrator so directs, be paid to his spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Plan Administrator, in his sole discretion, to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Company under the Plan therefor. Section 4.10 No Liability of Plan Administrator. The Plan Administrator ---------------------------------- shall not be personally liable by reason of any contract or other instrument related to the Plan executed by the Plan Administrator or on his behalf in his capacity as Plan Administrator, nor for any mistake of 7 judgment made in good faith, and the Company shall indemnify and hold harmless each employee, officer, or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including legal fees, disbursements and other related charges) or liability (including any sum paid in settlement of a claim with the approval of the Board of Directors of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. Section 4.11 Termination or Amendment of the Plan. The Plan may not be ------------------------------------ amended in any way to reduce the benefits payable hereunder to a Participant or otherwise to impair his ability to receive any amount due hereunder, without the prior written consent of the Participant. The Plan will automatically terminate when all payments required by Section 3.1 have been made. Section 4.12 Miscellaneous Provisions ------------------------ (a) Headings of Articles and Sections in this Plan are for convenience only, and do not constitute part of the Plan. (b) Unless the context clearly indicates otherwise, the masculine gender when used in the Plan shall include the feminine, and the singular number shall include the plural and the plural number the singular. (c) The terms of the Plan and all rights thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. (d) In the event that one or more of the provisions of this Plan shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. (e) Amounts paid under the Plan shall not be considered compensation for purposes of any of the Company's pension and welfare benefit plans, programs and arrangements. (f) The Plan is a bonus plan/payroll practice which is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended. (g) The Plan shall not confer employment rights on any person, such that no person shall be entitled by virtue of the Plan to remain in the employment of the Company. Section 4.13 Funding. The Plan is unfunded. Amounts payable hereunder ------- shall be satisfied solely out of the general assets of the Company, which shall remain subject to the claims of its creditors. Each Participant shall be an unsecured creditor of the Company with respect to his benefits under the Plan. A Participant shall have no right, title or interest in any benefit under the Plan unless and until it is vested in accordance with Article III of the Plan. Further, the Company is under no obligation to purchase or maintain any reserve or asset to provide any benefit under the Plan, and any reference to a reserve or other asset in the Company's financial 8 statements is made solely for the purpose of computing the amount of the benefit which may become payable. Section 4.14 Releases; Offsets. As a condition precedent to any payment by - ------------------------------------------------------------------------------ the Company hereunder, a Participant or other recipient will be required to - --------------------------------------------------------------------------- execute a release in a form satisfactory to the Company. The Company shall be - ----------------------------------------------------------------------------- entitled to offset any payments due to a Participant or other recipient - ----------------------------------------------------------------------- hereunder against any amount owed by such Participant or other recipient to the - ------------------------------------------------------------------------------- Company. - -------- WKI HOLDING COMPANY, INC. By: /s/ Doug Arnold ------------------ Title: VP Human Resources 9 EX-14 6 doc2.txt EXHIBIT 14 WORLD KITCHEN CODE OF BUSINESS CONDUCT Standards to work by All the right ingredients. Once you have reviewed the Code of Business Conduct Principles, please sign the attached certificate in the back of this book and return it to your Human Resources representative. CODE OF BUSINESS CONDUCT TABLE OF CONTENTS TOPIC PAGE A Letter from Steve Lamb 1 General Principles Antitrust 2-4 Marketing 5 Environment 6 Global Sourcing 7 Financial Records 8 Trade Secrets/ 9 Confidential Information Foreign Corrupt Practices Act 10 Health and Safety 11 Political Contributions 12 and Activities PERSONAL CONDUCT Anti-Discrimination 13 Harassment 14 Diversity 15 Conflicts of Interest 16 Outside Employment 17 and Activities Gifts, Gratuities 18 and Payments Property World Kitchen 19 Prohibited Substances 20 CONCLUDING REMARKS World Kitchen Hot Line 21 Disciplinary Action 22 PRINCIPLES CODE OF BUSINESS CONDUCT Dear WKI Partner, In today's highly competitive business environment, our success depends largely upon our reputation. World Kitchen's reputation for integrity is a fundamental part of our heritage and one of our most valuable assets. Integrity encompasses all that defines and sustains us as a company-the values we believe in, the high ethical standards we live by, our honesty and behavior in dealing with others, and our commitments to deliver on the promises we make to customers, stakeholders and each other. We must always be aware that every decision we make, every action we take, can affect the reputation of our company, and in turn, our own lives and livelihood. As committed as we are to growth and superior performance, we will never cut corners or compromise our principles in order to achieve business objectives. The following pages outline our Code of Business Conduct, which we take very seriously-any departure from its principles is unacceptable. Every partner must, therefore, strive to maintain the high standards of business ethics and personal integrity our Code requires. At the same time, we must recognize that this document does not provide a set of rules to cover every situation or challenge we may face. Rather, the principles that follow serve as guidance for each of us in making sound, ethical decisions in the best interest of World Kitchen. Please read this document very closely and keep it handy for future reference. If you have any questions, please see your manager, Human Resources representative or our Legal Department. Each of us is expected to adhere to this Code of Business Conduct and use it to guide our behavior at all times. When we behave ethically, honestly, and in the best interest of World Kitchen, as the Code requires, we help ensure that our worldwide reputation for integrity will endure. /s/ Steve Lamb Steve Lamb President & CEO We must delight the customer, but never at the cost of our ethical principles. 1 GENERAL PRINCIPLES YOUR RESPONSIBILITIES - - Never agree with competitors to fix prices or divide markets. - - Never enter into any understanding with a competitor that restricts either party's discretion to manufacture any products or provide any service, or which limits selling to, or buying from, a third party. - - Never enter into any understanding with a dealer or distributor that might: - restrict the dealer's discretion to use or resell one of the company's products without first consulting the Legal Department. - condition the sale of a product or service on the dealer's purchase of another product or service from the company. - - Contact the Legal Department for prior approval before any meeting with a competitor. If you attend a trade association meeting and competitors are prevent, never discuss at the meeting or at any social gathering prices, costs, sales, profits, market shares, or other competitive subjects. If such matters enter into the discussion, stop the discussion, or leave the meeting or social gathering-stating why you are leaving-and notify the Legal Department - - CONTACT THE LEGAL DEPARTMENT if you have any questions concerning compliance with antitrust laws. ANTITRUST Competition is healthy for business and good for consumers. Our antitrust laws are often credited with helping our country achieve our fine standard of living and one of the healthiest economies in the world. World Kitchen's policy is clear: We will compete based on the merits of our products and services and we will comply fully with both the letter and spirit of all U.S. antitrust laws. Antitrust laws prohibit any WKI partner from entering into any kind of agreement or understanding (even oral or informal) with a competitor on any action which affects, limits or restricts competition. This includes: - - Prices, cost, profits, or terms and conditions of sale - - Territories - - Limitations on products or services - - Production facilities or capacity - - Market share - - Customer or supplier allocation or selection - - Distribution methods In addition, there are a number of other business practices that may arise under certain circumstances that would also violate antitrust laws. Some of these potential areas include: MONOPOLIZATION It is illegal for a company to "monopolize" a market. Unfortunately, defining a so-called relevant market for the application of the antitrust laws is very difficult. While World Kitchen believes it does not have a monopolistic position in any relevant market, a desire to achieve, or the reasonable probability of achieving such a monopolistic position. We cannot be sure that a court of law would not define a relevant market so narrowly as to raise a monopolization question for the company. Therefore, all WKI partners should avoid any conduct that could be termed "predatory." Examples include: 2 ANTITRUST (CONTINUED) - - The setting of very low prices in order to drive out a competitor with the intention of raising those prices back up again once the competitor has been driven out of the marketplace. In general, sales below our marginal cost could be presumed to be predatory. - - Taking any other action specifically aimed it harming any individual competitor. Our business decisions and our marketing practices should all be made positively with a view toward increasing our own profits rather than negatively with a view toward reducing some other company's sales or profits. TYING ARRANGEMENTS Tying arrangements exist when the company conditions the sale of one product on the buyer purchasing some other separate and unrelated product. This can raise antitrust implications. World Kitchen's products should all be able to stand up in the marketplace on their own. RESTRICTIONS ON OUR DISTRIBUTORS In general, World Kitchen partners should consider our distributors to be independent businesses that are entitled to make all of their own business decisions. We should not dictate to them: - - The price at which they should sell our products. - - The customers to whom they can or cannot sell. PRICE Discrimination Our antitrust laws can also prohibit us from selling the same product at different prices to different competitors when that price difference might have an adverse effect on competition. In other words, the general rule is that we must treat all similarly situated customers the same. This rule is also subject to numerous exceptions and qualifications. Therefore, World Kitchen's standard pricing practices should be approved by our Legal Department. Any deviations from these standard pricing practices should only occur in accordance with established procedures for price deviations, which will also include a review by the company's lawyers when appropriate. RECIPROCITY Our products should be sold on the basis of price, quality and service. We should be buying the products of others based on those same considerations. We should not attempt to sell our products to other companies on the basis of purchases we may make from those other companies, nor should we allow other companies to attempt to make us buy their products simply because they sell products to us. Violations of this principle-sometimes called "reciprocity"-can raise antitrust implications. 3 ANTITRUST (CONTINUED) RESTRICTIONS ON DEALING GOODS OF A COMPETITOR A company requirement that we will sell our products to a customer only on the condition that the customer refuse to deal in goods of our competitors can raise antitrust implications. It could also be held to be an unfair method of competition. World Kitchen sales people should not condition the sale of our products on our customers' refusal to deal with other suppliers. PARTICIPATION IN TRADE ASSOCIATIONS There is no exemption in our antitrust laws for joint activity taken under the umbrella of a trade association or in connection with a trade association meeting. In fact, in many criminal antitrust prosecutions, at least one trade association meeting is alleged to have been involved in the conspiracy. Because of the possible antitrust difficulties that can arise in conjunction with trade association activities. World Kitchen partners should observe the following guidelines: - - We should not join any trade association or attend any trade association meeting unless there are clear business benefits to be obtained from the trade association and we have satisfied ourselves that the trade association has, and makes use of, competent antitrust counsel. - - World Kitchen partners who attend a trade association meeting or who belong to a trade association must familiarize themselves with antitrust principles and legal pitfalls involved in trade association programs and conduct themselves accordingly. These rules are subject to numerous interpretations and qualifications. Therefore, any questions, or need for clarification, should be directed to our Legal Department. Competition is healthy for business and good for consumers. 4 MARKETING Our marketing and advertising should always be truthful. If we make specific claims about our products or the performance of our products, we should have evidence to substantiate those claims. We should not label or market our products in any way that might cause confusion between our products and those of any of our competitors. Similarly, we should be alert to any situation where a competitor may be attempting to mislead potential customers as to the origin of products and inform appropriate management or the company's Legal Department of any such cases. If we offer advertising or promotional allowances, we should offer them on a proportionately equal basis to all of our customers. Advertising and promotional allowances are subject to very detailed and technical regulation under the Robinson-Patman Act and therefore, should only be offered after approval from the company's lawyers. We should not disparage any of the products, services, or employees of any of our competitors. If we do engage in any comparison of our products against those of our competitors, such comparisons should be fair. Comparative advertising is also subject to some regulation and should, therefore, be cleared with the company's lawyers beforehand. All use of the company's trademarks and trade names should be in accordance with our policies governing such use. We will not use gifts, excessive entertainment, nor any other ways to improperly influence our potential customers. We will market our products on the basis of our price, quality and service. The company will not pay any bribe, gratuity, kickback, or any similar payment to anyone, including agents of our customers or members of their family, in connection with the sale of any of our products. Should any such payments be requested, the company's lawyers should be contacted immediately. Company policy is to forego any business which can only be obtained by improper or illegal payments. The company will not pay "push money," or secret payments, to our customers in order to induce them to sell our products over those of our competitors. YOUR RESPONSIBILITIES - - Ensure our advertising is truthful. - - ALWAYS offer advertising and promotional allowances on a proportionately equal basis to all customers. - - Don't disparage our competitors. - - Never offer a bribe of any sort in connection with the sale of any of our products. 5 Environment World Kitchen is dedicated to preserving and protecting the environment. Most of our activities are regulated by federal, state and local environmental laws. Our policy is clear: comply with the environmental laws and utilize best management practices to further reduce environmental risks. World Kitchen has instituted a pollution prevention program to reduce industrial waste through process changes, recycling and replacement of hazardous raw materials. We encourage our partners to reduce waste and emissions from our processes and operations. All waste products and hazardous materials must be accumulated, handled and disposed of as required by World Kitchen environmental guidelines. If you discover any unsafe storage of hazardous materials, a spill, or other releases, report it immediately to the Environmental Coordinator at your facility. YOUR RESPONSIBILITIES - - Understand and follow World Kitchen environmental guidelines applicable to your work activities. - - Ensure required environmental records and labels are complete, accurate and truthful. - - Properly handle, store, or dispose of hazardous materials in full compliance with the World Kitchen program and applicable regulations. - - Notify supervisory personnel of any violations of World Kitchen environmental guidelines. - - Report any spills and other releases of petroleum or hazardous substances. - - Prevent the risk of spills and other releases of petroleum or hazardous substances. - - Ensure that emissions are within permitted limits and that all permit conditions are complied with. - - Notify supervisory personnel and Plant or Corporate Environmental staff of any apparent violations of regulations, permits, or World Kitchen guidelines. - - Suggest improvements for reducing or eliminating wastes or emissions. - - Consult with Plant or Corporate Environmental staff if you have any questions. World Kitchen realizes its responsibility to nature and its resources, and we take that responsibility seriously. 6 GLOBAL SOURCING World Kitchen's Global Sourcing Principles are tools that help our corporate reputation and, therefore, our commercial success. They assist us in selecting business partners that follow workplace standards and business practices that are consistent with company policies. We expect our business partners to operate workplaces where the following standards and practices are followed. 1. We will seek to identify and utilize business partners who aspire to and conduct their business under a set of ethical standards compatible with our own. 2. We expect our business partners to be law-abiding and to comply with legal requirements relevant to the conduct of their business. 3. We will only do business with partners who share our commitment to the environment and who conduct their business in a way that is consistent with our environmental philosophy and guiding principles. 4. We will only do business with partners whose workers are in all cases present voluntarily, not put at risk of physical harm, fairly compensated, allowed the right of free association and not exploited in any way. In addition, the following specific guidelines will be followed: - Wages and benefits will comply with all applicable law or match prevailing industry practices. - Work hours will not exceed the local norm except for appropriately compensated overtime. - No child labor will be permitted. - No prison or forced labor will be tolerated. - Workers shall be employed on the basis of their ability to do the job, rather than on the basis of personal characteristics or beliefs. - Corporal punishment or other forms of mental or physical coercion will not be tolerated. YOUR RESPONSIBILITIES - - ENSURE that our business partners conduct their operations under a set of ethical standards compatible with those of World Kitchen. - - ENSURE that our business partners are law-abiding, environmentally responsible and utilize fair employment practices. Our Global Sourcing Principles are tools that help our corporate reputation and, therefore, our commercial success. 7 FINANCIAL RECORDS A variety of laws require World Kitchen to record, preserve and report financial information to Investors and government agencies. Partners must record financial information accurately, completely and timely in accordance with generally accepted accounting principles and company procedures. The laws prohibit entries which intentionally conceal or disguise the true nature of any World Kitchen transactions. All receipts and disbursements of funds must be properly and promptly recorded. Financial information must be kept confidential and only released with the approval of the Chief Financial Officer. YOUR RESPONSIBILITIES - - DO NOT MAKE an inaccurate, false, or misleading entry in company books and records. - - IMMEDIATELY REPORT ANY inaccurate, false, or misleading records to your supervisor, the Chief Financial Officer, or the World Kitchen Hot Line at 1-800-818-6524 (See Page 21). - - DO NOT MAKE OR APPROVE PAYMENTS without adequate supporting information, or if any part of the payment is to be used for any purpose other than the purpose described in the supporting documentation. - - If you participate in the preparation of financial reports, KNOW AND FOLLOW World Kitchen accounting policies and internal control procedures. Never "fudge" Company financial records. 8 TRADE SECRETS/ CONFIDENTIAL INFORMATION It is very Important for all World Kitchen partners to appropriately safeguard the company's confidential information and to refuse any Improper access to confidential Information of any other company including our competitors. In terms of our own confidential information, the following should be our guidelines: 1. Any company proprietary information to which we may have access should be discussed with others within the company on a need-to-know basis. 2. If we wish to disclose our own confidential information to any people outside of World Kitchen, it should be done only in conjunction with appropriate confidential information disclosure agreements, which can be provided by our Legal Department. 3. We should always be alert to inadvertent disclosures that may arise, in either social conversations or in normal business relations with our suppliers and customers. 4. All new World Kitchen partners joining us from other organizations must realize that our policy is to fully respect the trade secrets and confidential information of the previous employers of our partners, and that no such information should be brought to us or used by the partner in their work in our organization. Confidential or proprietary information includes any information that is not generally disclosed and that is useful or helpful to the company and/ or which would be useful to competitors. Common examples include such things as: - - Financial data - - Planned new products - - Planned advertising programs - - Wage and salary data - - Any document or drawing labeled confidential or proprietary - - Sales and margin figures - - Expansion plans - - Manufacturing plans - - Supplier and customer list PUBLIC COMMUNICATION World Kitchen prospers not only by our customers' acceptance of our products, but also by the public's acceptance of our conduct. As a company, we respond to public inquiries-including those from the news media, governments, and others - -with prompt, courteous, honest answers. All inquiries of this type should be forwarded to our Director of Corporate Communications, who, along with select members of our executive leadership, is the only World Kitchen partner authorized to speak publicly on behalf of the company. World Kitchen partners have an obligation to maintain trade secrets and confidential information even after they leave the company. 9 FOREIGN CORRUPT PRACTICES ACT The Foreign Corrupt Practices Act prohibits payments or offers of payments of anything of value to foreign officials, political parties or candidates for foreign political office in order to obtain, keep, or direct business. Indirect payments of this nature made through an intermediary, such as a distributor or sales representative, are also illegal. World Kitchen partners and representatives must comply with this Act. This Act also requires that World Kitchen maintain a system of internal accounting controls and keep accurate records of the company's transactions and assets. The following activities are prohibited: - - Maintaining secret or unrecorded funds or assets - - Falsifying records - - Providing misleading or incomplete financial information to an auditor YOUR RESPONSIBILITIES - - COMPLY with World Kitchen procedure and the highest ethical standards of the United States and the foreign country in which World Kitchen is doing business. - - DO NOT MAKE any payment regardless of amount to foreign government officials or personnel. - - COMPLY with World Kitchen accounting policies and internal control procedures. - - DO NOT USE World Kitchen assets for any unlawful or improper purpose. - - DO NOT CREATE OR MAINTAIN a secret or unrecorded fund or asset for any purpose. - - DO NOT MAKE any false or misleading entries in World Kitchen records, or make any payment on behalf of World Kitchen without adequate documentation. - - REPORT violations of World Kitchen financial and accounting policies to your supervisor, the Legal Department, or the World Kitchen Hot Line. (See page 21) - - CONSULT with the Legal Department if you have any questions. World Kitchen is a tough competitor but we will play strictly by the rules. 10 HEALTH AND SAFETY Providing and maintaining a safe and healthy work environment is of primary concern to everyone at World Kitchen. Each of us is responsible for knowing and complying with all safety policies, regulations and rules that apply to our job. Following these requirements helps ensure not only your safety, but also the safety of your co-workers and other persons. Supervisors must know, understand and demand compliance with the safety laws and regulations that apply to their areas of responsibility, and comply with all applicable state health and safety laws and all provisions of the Occupational Safety and Health Act (OSHA). YOUR RESPONSIBILITIES - - ALWAYS COMPLY with World Kitchen health and safety procedures. - - ALWAYS TAKE appropriate safety precautions, including wearing and using safety equipment, and using seatbelts while driving or riding company vehicles. - - NOTIFY your Facility Manager of any hazardous conditions or another partner's failure to use safety equipment or to follow safety procedures. - - HIRE only reputable contractors who agree to abide by state and federal health and safety laws. - - NEVER instruct another partner to disregard safety procedures. - - SUGGEST ways to improve World Kitchen health and safety procedures. Working safely and following the established safety rules is not a matter of choice; it's your primary responsibility. 11 POLITICAL CONTRIBUTIONS AND ACTIVITIES World Kitchen partners are encouraged, as individuals, to engage in political activities, such as voting in federal, state and local elections, or making personal contributions in support of candidates or parties of their choice. You are also encouraged to express your views on government, legislations and other matters of local and national interest. These activities, however, must be undertaken on your own time and at your own expense. Federal laws prohibit World Kitchen from making direct or indirect contributions to a political party or candidate in connection with any federal election. This includes contributions in the form of cash, goods, services, loans, property or the use of World Kitchen facilities. For instance, this law prohibits the company from loaning World Kitchen personnel to a political campaign, the payment for advertising, printing or other campaign expenses and even the purchase of tickets to fund-raising events. Federal law and many state laws permit corporations to establish and support political action committees ("PAC"s). World Kitchen will not attempt to dictate to any partner which political party or view to support. Under no circumstances will any partner be compensated or reimbursed for personal political contributions, or be given or denied employment or promotion as a result of making or failing to make a political contribution. YOUR RESPONSIBILITIES - - DO NOT CONDUCT political activities on World Kitchen time of use World Kitchen property or equipment for this purpose. - - OBEY restrictions imposed by law upon corporate participation in politics. - - MAKE CLEAR that the political views you express are your own, and not those of World Kitchen. WKI partners are free to exercise their rights as U.S. citizens, even though WKI as a corporation cannot participate. 12 PERSONAL CONDUCT ANTI- DISCRIMINATION World Kitchen is committed to the fair and equitable treatment of its partners. A partner's qualifications, skills and achievements or potential are the only factors upon which decisions concerning hiring, performance appraisals and promotions are based. These decisions must be arrived at without regard to race, color, sex, national origin, religion, age, disability, sexual orientation, marital or family status, veteran status, or any other illegal consideration. World Kitchen is also committed to a work environment free of harassment. Employment decisions will not be based on submission to or rejection of conduct indicating hostility or disdain for an individual on any illegal basis. Nor will World Kitchen tolerate conduct that interferes with work performance or creates a hostile, intimidating or offensive work environment. YOUR RESPONSIBILITIES - - DO NOT TREAT any partner differently because of his or her race, color, sex, national origin, age, religion, disability, sexual orientation, marital or family status, veteran status or other illegal consideration. - - UNDERSTAND AND FOLLOW World Kitchen equal employment opportunity guidelines and procedures. - - NOTIFY supervisor personnel, your Human Resource Manager or the Legal Department of any discrimination or harassment. - - DO NOT MAKE OR TOLERATE slurs derogatory remarks, demeaning stereotypes or jokes, or engage in mocking, pranks, or any other conduct of a hostile nature directed at someone because of race, color, sex, national origin, age, religion, disability, sexual orientation, marital or family status, veteran status or any other illegal consideration. Discrimination and harassment have no place at World Kitchen. 13 HARASSMENT World Kitchen has a strict policy against harassment of any kind including any action in the workplace that intimidates, insults, offends, or ridicules a partner because of race, color, gender, age, sexual orientation, religion, national origin, ancestry, disability, marital status, or any other category protected by law. World Kitchen's management is responsible for taking an active and positive role to ensure a harassment-free workplace for all employees. This policy applies to all partners at all locations, company-sponsored social or other events, including activities where you represent World Kitchen. This policy also applies to consultants and temporary workers within World Kitchen. WKI partners who believe this policy has been violated (whether against themselves or another partner) should immediately contact their supervisor, local Human Resources representative or the Vice President of Human Resources. Once a complaint of harassment has been received, an investigation will be conducted. If the investigation reveals that a WKI partner has engaged in conduct constituting harassment or retaliation, management will take appropriate disciplinary action, up to and including immediate termination of employment. WHAT IS HARASSMENT? Harassment is defined as conduct that denigrates or shows hostility towards an individual because of his race, color, gender, religion, sexual orientation, disability, marital status, or ancestry. Examples of harassment may include, but are not limited to: - - Derogatory comments, slurs or epithets. - - Unwelcomed sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. - - Derogatory posters, photography, cartoons, or gestures. - - Physical conduct such as unwanted touching, blocking normal movement or interfering with work directed at you because of your sex or other protected basis. - - Retaliation for opposing, reporting, or threatening to report prohibited harassment or for participating in an investigation. If you feel you have been the target of harassment, immediately report the incident to your supervisor, local Human Resources representative or to the Vice President of Human Resources. Sexual harassment is no laughing matter and will not be tolerated! 14 DIVERSITY Diversity is the variety of people or differences among all people such as age, culture, disability, gender, educational level, national origin, race, organizational levels or any other characteristic that makes us unique individuals. World Kitchen values the diversity of its partners and strives to be representative of today's work force by maintaining policies that encourage diversity and enable World Kitchen to attract, hire, and leverage the best employees at all levels of the company. Promote understanding and respect in all interactions with other partners. All partners have the right to expect a workplace which a free of conduct that is of a harassing or abusive nature. Keep others' sensitivities in mind. Make an affirmative effort to consider candidates that are reflective of today's work force when making hiring and promotional decisions. Base employment decisions on performance. Recruit, hire, train, develop, and promote persons in all job classifications without regard to race, color, religion, sex, national origin, age, disability or veteran status. Be discrimination free. Encourage the use of diverse suppliers. Consider and value them by the same diversity principles and guidelines that we follow for our partners. Participate in the creation of a diversity-friendly work environment. Take personal ownership for making decisions that reflect our diversity principle. When business necessity makes if feasible, look for win/win situations that are work/life compatible. See World Kitchen's Affirmative Action Program and Diversity Plan for further guidance or contact the Vice President of Human Resources. YOUR RESPONSIBILITIES - - PROMOTE understanding and respect in all interactions with partners. - - BASE employment decisions on performance. - - ENCOURAGE the use of diverse suppliers. - - PARTICIPATE in the creation of a diverse work environment at WKI. World Kitchen values the diversity of its partners and strives to be representative of today's workforce. 15 CONFLICTS OF INTEREST Conflicts of interest arise when the personal interests of a World Kitchen partner influence, or appear to influence that partner's judgment or ability to act in World Kitchen's best interest World Kitchen partners are prohibited from taking any action that would create a conflict of interest and should avoid even the appearance of a conflict of interest. Specifically, no World Kitchen partner may hold a position with, or have substantial interest in any business that conflicts with or might appear to conflict with his or her work on behalf of World Kitchen. Likewise, no World Kitchen partner may conduct business with the company for personal benefit or for the benefit of a relative. This applies to any transaction or arrangement in which the World Kitchen partner or his/her relative financially benefits. Before engaging in any activity that would be an actual or potential conflict of interest, all relevant information must be disclosed in writing to your supervisor, who will review the situation with the Legal Department. The World Kitchen partner cannot engage in any such activity without the Legal Department's Approval. YOUR RESPONSIBILITIES - - DO NOT HOLD a position with, or financial interest in, another business that conflicts or appears to conflict with company duties or responsibility. - - DO NOT CONDUCT/TRANSACT company business with a relative unless it is approved by the Legal Department in advance. All partners must maintain independent judgment and high standards of conduct and honesty. - - INFORM your supervisor or the Legal Department of any outside business position, employment or consulting relationship (other than charitable, educational or religious) that might be viewed as conflicting with company duties or responsibilities. - - DISCLOSE any substantial financial interest in or position that you, your spouse or domestic partner have (including work as a consultant or advisor) with any competitor, supplier, customer or other entity or person that has business dealings with World Kitchen. - - REPORT any violations of conflict of interest to your supervisor, the Legal Department or the World Kitchen Hot Line. (see page 21). World Kitchen is committed to upholding high standards of ethical business practices. 16 OUTSIDE EMPLOYMENT AND ACTIVITIES World Kitchen respects the privacy of every partner to conduct his/her personal affairs. However, a full-time partner's primary work obligation is to World Kitchen. Outside activities, such as a second job or self employment, must be kept totally separate from employment with World Kitchen. No World Kitchen partner may run a personal business on World Kitchen time, or using World Kitchen resources. Similarly, no World Kitchen partner can allow such outside activities to detract from his or her job performance or require such long hours that it adversely affects their physical or mental effectiveness. Finally, no World Kitchen partner can perform services for, or serve as an employee, consultant, officer or director, of any competitor, customer, supplier or other entity or person that conducts business with World Kitchen, without first securing the approval of the Legal Department. YOUR RESPONSIBILITIES - - DO NOT USE company time or resources for personal or outside business matters. - - AVOID work on behalf of competitors, suppliers, customers or other entity or person that has business dealings with World Kitchen. - - AVOID any work that would require or create a risk that confidential information would be disclosed. - - CLEAR any potential conflicts involving outside activities or employment with the Legal Department. The primary work responsibility of every full-time partner is To World Kitchen. 17 GIFTS, GRATUITIES AND PAYMENTS World Kitchen provides excellent products and services and we expect the same quality and service from our suppliers and other business partners (including prospective associates). Accordingly, any attempt to influence purchasing or selling decisions with gifts, gratuities or payments to World Kitchen partners is strictly prohibited. Further, this policy equally applies when a World Kitchen associate provides a gift, gratuity or payment to any business partner or an employee of any business partner. WORLD KITCHEN PARTNERS CANNOT ACCEPT THE FOLLOWING FROM SUPPLIERS OR OTHER BUSINESS PARTNERS: - - GIFTS of any kind values at more than $100, or contributions to a World Kitchen-sponsored event that exceeds $100. - - DISCOUNTS on any product or service not available to all partners. - - LOANS of money, co-signature on a loan, or payment for personal cars or other property. However, the Company recognizes that token gifts and meals are courtesies often extended in the course of business dealings. WORLD KITCHEN PARTNERS MAY NOT SOLICIT, BUT MAY ACCEPT THE FOLLOWING FROM SUPPLIERS OR OTHER BUSINESS PARTNERS: - - REFRESHMENTS OR MEALS IN THE ORDINARY COURSE OF BUSINESS, if infrequent and not lavish. - - PROMOTIONAL OR ADVERTISING ITEMS of nominal value that bear the supplier's or other business partner's name or logo and are commonly distributed. - - TICKETS to sporting, theatrical or cultural events, if infrequent. - - RECREATIONAL outings, provided such activities are infrequent, costs for entrance and incidentals are not excessive, World Kitchen partners are on their own time or have their supervisor's permission, and they are accompanied by the supplier or other business partners. A partner who receives a prohibited gift must return it. If that is not possible, the gift should be turned over to a charitable organization. The partner must inform his/her supervisor of this action and, if possible, advise the sender of the gift. Any exceptions to these guidelines must be authorized in writing by the corporate officer to whom your function reports, in advance of the activity, and a copy of the authorization will be retained for your protection in your personnel file. YOUR RESPONSIBILITIES - - NEVER SOLICIT OR ACCEPT prohibited payments, gifts or other favors from suppliers or other business partners, or those who wish to do business with World Kitchen. - - RETURN or politely decline any gift that exceeds $100 in value. - - CLEAR any exceptions in advance with the corporate officer to whom your function reports. - - NEVER PROVIDE a prohibited payment, gift or other favor to a supplier, customer or other business partner, or anyone who wishes to do business with World Kitchen. "Let's do lunch," has its limits. World Kitchen does business based on value, quality and service-nothing else. 18 PROPERTY OF WORLD KITCHEN World Kitchen partners are responsible for protecting World Kitchen owned and leased property and equipment. This extends not only to tangible assets such as money, physical materials and real property, but also to intangible property such as technologies, computer programs, business plans, trade secrets and other confidential or proprietary information of customers and suppliers. Reasonable precautions must be taken by every partner against theft, damage or misuse of World Kitchen property. Generally, World Kitchen property must not be used for any business or purpose other than for World Kitchen. Partners must not borrow, give away, loan, sell or otherwise dispose of World Kitchen property-regardless of condition-WITHOUT SPECIFIC AUTHORIZATION. This includes the unauthorized use or duplication of computer software, whether developed by World Kitchen or purchased from an outside vendor (except for back-up and archival purposes). Any unauthorized use of World Kitchen funds or property could be considered embezzlement. YOUR RESPONSIBILITIES - - EXERCISE appropriate care, custody and control of company property (including supplies, equipment, facilities, files, documents, films and electronically-recorded data or images). - - DO NOT USE company equipment for personal use. - - DO NOT duplicate company software for personal use. - - KEEP CONFIDENTIAL INFORMATION STORED in its proper environment when not being used. - - SUGGEST improvements for the maintenance or security of company property. - - REPORT any theft or misuse of company property to your supervisor, the Legal Department or the World Kitchen Hot Line. (See page 21) Everyone benefits from safeguarding company equipment and property. 19 PROHIBITED SUBSTANCES To protect the safety of employees and World Kitchen operations, the following are strictly prohibited: - - The use, sale, possession, manufacture and dispensing of drugs or controlled substances while performing company business, or while on company premises or in a company vehicle. - - Being under the influence of illegal drugs or substances while conducting company business or duties. - - The abusive use of a legal drug, or reporting to work under the influence of a legal drug, that substantially impairs the employee's job performance or creates a safety risk. The consumption of alcohol in any situation that might impair a partner's ability to perform assigned duties is also prohibited Reporting to work under the influence of alcohol is forbidden. At no time may alcohol be consumed in World Kitchen automobiles or trucks. Alcohol may not be consumed, sold or even possessed on company premises without specific authorization by an executive. World Kitchen retains the right to conduct searches to assure compliance with its policy on prohibited substances, and to perform drug testing as appropriate. Controlled, prohibited or illegal substances will be confiscated by World Kitchen where appropriate, and turned over to the authorities. YOUR RESPONSIBILITIES - - DO NOT BRING illegal drugs or alcohol onto World Kitchen property - - REPORT any violation of World Kitchen guidelines or procedures pertaining to prohibited substances. - - DO NOT BE UNDER THE INFLUENCE of any illegal drugs or alcohol while performing World Kitchen business or while on World Kitchen premises or in a World Kitchen vehicle. This could affect the safety of the people around you and affect the efficiency of World Kitchen operations. World Kitchen is concerned about its employees' well-being and safety. 20 CONCLUDING REMARKS WORLD KITCHEN HOT LINE Throughout this booklet, you've been given advice on where to turn for additional information, or whom to call If you suspect that someone has violated a business conduct guideline. The most important thing to remember is that when you do have a question, DON'T TAKE CHANCES! Get the right answer. Ask your supervisor. If your supervisor doesn't know the answer, it is his or her responsibility to find the answer and get back to you. If, for some reason, you do not feel comfortable talking with your supervisor, you do have options. Contact the Vice President of your functional group, your Human Resources Manager, the Legal Department or call the World Kitchen Hot Line. World Kitchen customers and suppliers also have a responsibility to report World Kitchen partners who violate business and conduct policies. The customers and suppliers can also call the Hot Line. Calls to the Hot Line are kept confidential and may be made anonymously. In either event, the identity of the caller will not be given to anyone except as required by law or as needed for investigative purposes. The company procedure states that any partner who retaliates against another partner, customer or supplier for submitting a question or report of a suspected violation will face disciplinary action. WORLD KITCHEN HOT LINE: PHONE: 1-800-818-6524 Don't take chances. Get the right answers. 21 DISCIPLINARY ACTION Knowingly violating any standard discussed in this manual may constitute a criminal offense, and violators could be subject to criminal prosecution. Further, actions contrary to the Statement of Business Conduct are, by definition, harmful to World Kitchen and its reputation. Accordingly, violations, even in the first instance, can result in disciplinary action, up to and including dismissal. However, the company recognizes that some violations may be technical, inadvertent, or the result of an honest mistake. Therefore, discipline, if any, will vary with seriousness and frequency of the violation, and will take into account all mitigating circumstances. The company reserves the right to interpret this manual and the underlying corporate policies, and to exercise its sole discretion as to appropriate disciplinary action. Further, World Kitchen's Code of Business Conduct is not a partner contract and compliance with it does not create a contract for continued employment. Under appropriate circumstances, the company will assist partners who are subject to investigation and trials to the extent possible. 22 Perforate (line does not print) WORLD KITCHEN, INC. CODE OF BUSINESS CONDUCT CERTIFICATE I certify that I have read and thoroughly understand the requirements of these World Kitchen policies set forth in the Code of Business Conduct. To the best of my knowledge and belief, neither I, nor any member of my family, nor any World Kitchen partner with whom I am associated, is engaged in any activity which is in violation of the elements of this Code. I certify that if I become aware of any activity which might be considered a violation of the elements of this Code, I will contact my Human Resources representative or the Legal Department Accordingly. Signature ---------------------------------------------------- Print Name ---------------------------------------------------- Department or Business Unit ---------------------------------------------------- Date ---------------------------------------------------- Once you have reviewed the Code of Business Conduct Principles, please complete this form and return it to your local Human Resources representative. WORLD KITCHEN EX-14.A 7 doc9.txt Exhibit 14a WKI Holding Company, Inc. Addendum to World Kitchen Code of Business Conduct ------------------------ General: - ------- - - The guidelines for conducting the business of WKI Holding Company, Inc. ("World Kitchen") contained in this Addendum, are in addition to, and not in replacement of any guideline, prohibition, restriction or other provision of the World Kitchen Code of Business Conduct (the "Business Conduct Code"). The World Kitchen Code of Business Conduct, as supplemented by this Addendum, referred to as the "Code of Ethics," for purposes hereof, is intended to qualify as a "code of ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. - - This Addendum applies to all of the members of the Board of Directors of World Kitchen (the "Board of Directors") and World Kitchen's principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions (collectively, the "Senior Officers") and other officers of World Kitchen (together with the Board of Directors and the Senior Officers, the "Addendum Partners"). Waivers of the Addendum: - ----------------------- - - Waivers of the Code of Ethics will be granted on a case-by-case basis and only in extraordinary circumstances. Waivers of the Code of Ethics may be made by disinterested members of the Board of Directors or the appropriate committee of the Board of Directors and will be promptly disclosed to the public (if required by law or regulation) with respect to requests for waivers from any member of the Board of Directors or the Senior Officers. Waivers of the Code of Ethics requested by Addendum Partners other than members of the Board of Directors or the Senior Officers shall be made only by the Chief Financial Officer or the Chief Executive Officer, with advice from the General Counsel. Accuracy of Financial Reports and Other Public Communications: - ------------------------------------------------------------- - - We are required to report our financial results and a great deal of financial and other information about our business to the public and the Securities and Exchange Commission and are subject to various securities laws, regulations and reporting obligations. Both Federal law and our policies require prompt disclosure of accurate and complete information regarding our business, financial condition and results of operations. Inaccurate, incomplete or untimely reporting will not be tolerated and can severely damage World Kitchen and cause legal liability. - - Addendum Partners should be on guard for, and promptly report, evidence of improper financial reporting. Examples of suspicious activities that should be reported include: - Financial results that seem inconsistent with the performance of underlying business transactions; - Inaccurate company records, such as overstated expense reports, or erroneous time sheets or invoices; - Transactions that do not seem to have a good business purpose; and - Requests to circumvent ordinary review and approval procedures. - - World Kitchen's senior financial officers and other employees working in the accounting department have a special responsibility to ensure that all of our financial disclosures are full, fair, accurate, timely and understandable. These employees must understand and strictly comply with generally accepted accounting principles and all standards, laws and regulations for accounting and financial reporting of transactions, estimates and forecasts. Corporate Opportunities: - ----------------------- - - Addendum Partners have an obligation to put the interests of World Kitchen ahead of personal interests and to advance World Kitchen's interests when the opportunity to do so arises. If an Addendum Partner discovers or is presented with a business opportunity that is in World Kitchen's line of business, the Addendum Partner should first present the business opportunity to World Kitchen before pursuing the opportunity in an individual capacity. No Addendum Partner may use corporate property, information or his or her position with World Kitchen for personal gain. Please see "Conflicts of Interests" in the Business Conduct Code. - - Each Addendum Partner should fully disclose to the Chief Financial Officer or the Chief Executive Officer or his or her direct supervisor the terms and conditions of each business opportunity covered by the Addendum that he or she wishes to pursue. The Addendum Partner's supervisor or other contact will contact the Legal Department and the appropriate management personnel to determine whether World Kitchen wishes to pursue the business opportunity. If World Kitchen waives its right to pursue the business opportunity and, in the case of directors, executive officers, the Chief Financial Officer, or the General Counsel, the Board of Directors (or appropriate committee) concurs, the Addendum Partner may pursue the business opportunity on the same terms and conditions as originally proposed and consistent with the other ethical guidelines set forth in the Code. Business opportunities available to directors, executive officers and other principal officers may only be waived by our Board of Directors or the appropriate committee of our Board of Directors and will be promptly disclosed to the public. Compliance With Laws and Regulations: - ------------------------------------ - - Obeying the law, both in letter and spirit, is the foundation on which World Kitchen's ethical standards are built. Each Addendum Partner has an obligation to comply with federal laws and the laws of the cities, states and countries in which World Kitchen operates. World Kitchen will not tolerate any activity that violates laws, rules or regulations applicable to World Kitchen. This includes, without limitation, laws covering bribery and kickbacks, copyrights, trademarks and trade secrets, information privacy, insider trading, illegal political contributions, antitrust prohibitions, foreign corrupt practices, offering or receiving gratuities, environmental hazards, employment discrimination or harassment, occupational health and safety, false or misleading financial information or misuse of corporate assets. Each Addendum Partner is expected to understand and comply with all laws, rules and regulations that apply to his or her job position. If any doubt exists about whether a course of action is lawful, immediately seek advice from a supervisor and the Legal Department. Directors should seek the advice of the General Counsel. Please see the other provisions in the Addendum for guidance on compliance with specific laws and regulations. Conflicts of Interest: - --------------------- - - A conflict of interest occurs when an Addendum Partner's private interest interferes, or appears to interfere, in any way with the interests of World Kitchen as a whole. Addendum Partners should actively avoid any private interest that may influence the ability to act in the interests of World Kitchen or that makes it difficult to perform work objectively and efficiently. It is difficult to list all of the ways in which a conflict of interest may arise. However, the following situations are examples of conflict of interest: - Outside Employment. No Addendum Partner may be employed by, ------------------ serve as a director of, or provide any services to a company that is a material customer, supplier or competitor of World Kitchen. Please see "Outside Employment and Activities" in the Business Conduct Code. - Improper Personal Benefits. No Addendum Partner may obtain -------------------------- improper personal benefits or favors because of his or her position with World Kitchen. Please see "Gifts, Gratuities and Payments" in the Business Conduct Code. - Financial Interests. No Addendum Partner may have a ------------------- substantial interest (ownership or otherwise) in any company that is a material customer, supplier or competitor of World Kitchen. A "substantial interest" means (i) ownership of greater than 1% of the equity of a material customer, supplier or competitor or (ii) an investment in a material customer, supplier or competitor that represents more than 5% of the total assets of the Addendum Partner. Please see "Conflicts of Interest" in the Business Conduct Code. - Loans or Other Financial Transactions. No Addendum Partner ------------------------------------- may obtain loans or guarantees of personal obligations from, or enter into any other personal financial transaction with, any company that is a material customer, supplier or competitor of World Kitchen. This guideline does not prohibit arms-length transactions with recognized banks or other financial institutions. - Service on Boards and Committees. No Addendum Partner should -------------------------------- serve on a board of directors or trustees or on a committee of any entity (whether profit or not-for-profit) whose interests reasonably could be expected to conflict with those of World Kitchen. Addendum Partners must obtain prior approval from the Legal Department before accepting any such board or committee position. World Kitchen may revisit its approval of any such position at any time to determine whether service in such position is still appropriate. Please see "Outside Employment and Activities" in the Business Conduct Code. - - For purposes of the Code, a company is a "material" customer if the company has made payments to World Kitchen in the past year in excess of 5% of World Kitchen's gross revenues. A company is a "material" supplier if the company has received payment from World Kitchen in the past year in excess of $200,000 or 5% of the supplier's gross revenues, whichever is greater. A company is a "material" competitor if the company competes in World Kitchen's line of business and has annual gross revenues from such line of business in excess of $1,000,000 (one million dollars). If uncertain whether a particular company is a material customer, supplier or competitor, please contact the Legal Department for assistance. EX-21 8 doc3.txt EXHIBIT 21 EXHIBIT 21 WKI HOLDING COMPANY, INC. SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 2003 ARE LISTED BELOW: 1. World Kitchen, Inc. (Delaware) 2. EKCO Group, LLC. (Delaware) 3. EKCO Housewares, Inc. (Delaware) 4. EKCO Manufacturing of Ohio, Inc. (Delaware) 5. World Kitchen Canada (GHC), Inc. 6. WKI Latin America Holding, LLC (Delaware) 7. World Kitchen Canada, Inc. (Canada) 8. World Kitchen Canada (EHI), Inc. 9. World Kitchen (Asia Pacific) Pte. Ltd. (Singapore) 10. World Kitchen (Asia Pacific) Sdn Bdh (Malaysia) 11. World Kitchen ATG (M) SDN BHD (Malaysia) 12. World Kitchen Australia Pte. Ltd. (Australia) 13. World Kitchen (Korea) Co., Ltd. (Republic of Korea) 14. World Kitchen Mexico, S. de R. L. de CV fka VIA American (Mexico) 15. WKM, S. dw. L. de. C. V. (Mexico) 16. World Kitchen do Brasil Ltda. (Brazil) EX-31.1 9 doc4.txt EXHIBIT 31.1 ------------ CERTIFICATION ------------- I, James A. Sharman, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2003 of WKI Holding Company, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 24, 2004 By: /s/ James A. Sharman ------------------- James A. Sharman President and Chief Executive Officer EX-31.2 10 doc5.txt EXHIBIT 31.2 ------------ CERTIFICATION ------------- I, Joseph W. McGarr, certify that: 1. I have reviewed this annual report on Form 10-K for the year ending December 31, 2003 of WKI Holding Company, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 24, 2004 By: /s/ Joseph W. McGarr ------------------- Joseph W. McGarr Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----