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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30 , 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
33-93970
(Commission File Number)
INTERNATIONAL WIRE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1705942
(I.R.S. Employer Identification No.)
101 SOUTH HANLEY ROAD
ST. LOUIS, MO 63105
(314) 719-1000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,000 shares, par value $.01
per share.
INTERNATIONAL WIRE GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002................................. 3
Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002 ...... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002................. 5
Notes to Consolidated Financial Statements............................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk....................................... 22
Item 4. Controls and Procedures......................................................................... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 24
Item 2. Changes in Securities and Use of Proceeds....................................................... 24
Item 3. Defaults upon Senior Securities................................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders............................................. 24
Item 5. Other Information............................................................................... 24
Item 6. Exhibits and Reports on Form 8-K................................................................ 24
SIGNATURES................................................................................................. 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 39,918 $ 2,546
Accounts receivable, less allowance of $7,316 and $7,080 63,148 58,690
Inventories ............................................ 56,782 61,044
Restricted cash......................................... 15,681 --
Prepaid expenses and other ............................. 10,715 10,880
--------- ---------
Total current assets ................................. 186,244 133,160
Property, plant and equipment, net ....................... 120,142 126,486
Goodwill ................................................. 89,390 89,390
Other intangible assets .................................. 4,536 5,028
Deferred financing costs, net ............................ 4,985 4,800
Restricted cash .......................................... 11,483 --
Other assets ............................................. 6,743 4,646
--------- ---------
Total assets ......................................... $ 423,523 $ 363,510
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term obligations ............ $ 16,529 $ 10,133
Accounts payable ....................................... 27,785 23,776
Accrued and other liabilities .......................... 15,664 12,313
Accrued payroll and payroll related items .............. 1,939 3,220
Customers' deposits .................................... 14,215 14,416
Accrued interest ....................................... 3,738 3,003
--------- ---------
Total current liabilities ............................ 79,870 66,861
Long-term obligations, less current maturities ........... 389,233 325,388
Other long-term liabilities .............................. 23,120 23,614
--------- ---------
Total liabilities .................................... 492,223 415,863
Stockholder's deficit:
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding ................... 0 0
Contributed capital .................................... 236,331 236,331
Carryover of predecessor basis ......................... (67,762) (67,762)
Accumulated deficit .................................... (238,940) (220,791)
Accumulated other comprehensive income (loss) .......... 1,671 (131)
--------- ---------
Total stockholder's deficit .......................... (68,700) (52,353)
--------- ---------
Total liabilities and stockholder's deficit .......... $ 423,523 $ 363,510
========= =========
See accompanying notes to the consolidated financial statements.
3
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales .................................... $ 91,327 $ 107,579 $ 191,424 $ 208,022
Operating expenses:
Cost of goods sold ......................... 75,096 84,706 155,999 164,721
Selling, general and administrative expenses 6,467 8,636 14,007 16,870
Depreciation ............................... 5,965 6,245 11,895 12,366
Amortization ............................... 910 755 1,791 1,487
Impairment and plant closing charges ....... 520 -- 520 --
--------- --------- --------- ---------
Operating income ............................. 2,369 7,237 7,212 12,578
Other income (expense):
Interest expense ........................... (9,918) (9,034) (18,895) (18,054)
Amortization of deferred financing costs ... (2,795) (534) (3,350) (1,068)
Other, net ................................. 35 -- 72 --
--------- --------- --------- ---------
Loss from continuing operations before income
tax provision (benefit) and change in
accounting principle ....................... (10,309) (2,331) (14,961) (6,544)
Income tax provision (benefit) ............... 87 (557) 188 (3,443)
--------- --------- --------- ---------
Loss from continuing operations before
change in accounting principle ............. (10,396) (1,774) (15,149) (3,101)
Loss from discontinued operations ............ (3,000) -- (3,000) --
--------- --------- --------- ---------
Loss before change in accounting principle ... (13,396) (1,744) (18,149) (3,101)
Change in accounting for goodwill, net of
$19,408 tax benefit ........................ -- -- -- (54,504)
--------- --------- ---------- ---------
Net loss ..................................... $ (13,396) $ (1,774) $ (18,149) $ (57,605)
========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
4
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
SIX MONTHS
ENDED JUNE 30,
----------------------
2003 2002
-------- --------
Cash flows provided by (used in) operating activities:
Net loss ....................................................... $(18,149) $(57,605)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ................................................. 11,895 12,366
Amortization ................................................. 1,791 1,487
Amortization of deferred financing costs ..................... 3,350 1,066
Provision for doubtful accounts .............................. 432 1,295
Change in accounting for goodwill ............................ -- 54,504
Discontinued operations ...................................... 3,000 --
Fixed asset impairment ....................................... 469 --
Change in assets and liabilities:
Accounts receivable ........................................ (4,010) (12,044)
Inventories ................................................ 4,750 962
Prepaid expenses and other ................................. (745) (2,417)
Accounts payable ........................................... 3,656 2,752
Accrued and other liabilities .............................. 769 (2,880)
Accrued payroll and payroll related items .................. (1,281) (142)
Customers' deposits ........................................ (201) (240)
Accrued interest ........................................... (87) (616)
Other long-term liabilities ................................ (513) (1,569)
-------- --------
Net cash provided by (used in) continuing operations ... 5,126 (3,081)
Net cash provided by (used in) discontinued operations ........ (3,146) 412
-------- --------
Net cash provided by (used in) operating activities 1,980 (2,669)
-------- --------
Cash flows used in investing activities:
Capital expenditures by continuing operations .............. (5,465) (5,878)
-------- --------
Net cash used in investing activities ............. (5,465) (5,878)
-------- --------
Cash flows provided by (used in) financing activities:
Borrowings of long-term obligations ........................ 78,770 6,548
Repayment of borrowings ................................... (7,707) --
Restricted cash ............................................ (27,164) --
Financing fees ............................................. (3,535) --
-------- --------
Net cash provided by financing activities ......... 40,364 6,548
-------- --------
Effects of exchange rate changes on cash and cash equivalents .... 493 (139)
-------- --------
Net change in cash and cash equivalents ........... 37,372 (2,138)
Cash and cash equivalents at beginning of the period ............. 2,546 8,017
-------- --------
Cash and cash equivalents at end of the period ................... $ 39,918 $ 5,879
======== ========
See accompanying notes to the consolidated financial statements.
5
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(Unaudited)
1. BASIS OF PRESENTATION
Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of the
financial position and results of operations of International Wire
Group, Inc. (the "Company"). The results for the three and six months
ended June 30, 2003 are not necessarily indicative of the results that
may be expected for a full fiscal year. These financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 2002.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities," ("VIEs"), an interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," to improve financial
reporting of special purpose and other entities. In accordance with the
interpretation, business enterprises that represent the primary
beneficiary of another entity by retaining a controlling financial
interest in that entity's assets, liabilities, and results of operating
activities must consolidate the entity in their financial statements.
Prior to the issuance of FIN 46, consolidation generally occurred when
an enterprise controlled another entity through voting interests.
Certain VIEs that are qualifying special purpose entities ("QSPEs")
subject to the reporting requirements of SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," will not be required to be consolidated under the
provisions of FIN 46. The consolidation provisions of FIN 46 apply to
VIEs created or entered into after January 31, 2003, and for
pre-existing VIEs in the first reporting period beginning after June
15, 2003. If applicable, transition rules allow the restatement of
financial statements or prospective application with a cumulative
effect adjustment. In addition, FIN 46 expands the disclosure
requirements for the beneficiary of a significant or a majority of the
variable interests to provide information regarding the nature, purpose
and financial characteristics of the entities. Since the Company has no
such VIEs, the adoption of this statement is not expected to impact the
Company's consolidated financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The statement requires
that costs associated with exit or disposal activities must be
recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Such costs include lease
termination costs and certain employee severance costs associated with
a restructuring, discontinued operation or other exit or disposal
activity. This statement is effective for the Company's exit or
disposal activities initiated after December 31, 2002 and the
provisions of this statement are incorporated herein.
In April of 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS
No. 149"). SFAS No. 149 clarifies the definition of a derivative and
amends the implementation guidance of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 149 is effective for contracts
entered into or
6
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
modified after June 30, 2003, except for hedging relationships
designated after June 30, 2003. The provisions of SFAS No. 149, which
amend implementation guidance of SFAS No. 133, are effective for fiscal
quarters that began prior to June 15, 2003. The Company adopted the
provisions of SFAS No. 149 and determined that there is not a financial
impact on the quarter ended June 30, 2003.
On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, or SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS
150 represents the first phase of the FASB's project on liabilities and
equity and requires financial instruments that meet the definitions in
the statement to be classified as liabilities. SFAS 150 requires that
mandatorily redeemable preferred stock be classified and accounted for
as a liability. However, it excludes from its scope convertible
instruments, which will be addressed in the second phase of the FASB
project. SFAS 150 is effective at the beginning of the first interim
period beginning after June 15, 2003. Since the Company has no such
financial instruments, the adoption of this statement will not have an
effect on the Company's consolidated financial position and results of
operations.
2. STOCK OPTION PLANS
As allowed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized as options are issued at exercise prices equal to the market
value at date of grant. Had compensation cost for the respective option
plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed
under SFAS No. 123, the Company's net loss for the six months ended
June 30, 2003 and 2002, would approximate the following:
SIX MONTHS
ENDED JUNE 30,
--------------
PRO FORMA NET LOSS: 2003 2002
-------- --------
Reported net loss ........................................ $(18,149) $(57,605)
Add: Stock-based employee compensation expense
included in reported income, net of related
tax effects -- --
Less: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related tax effects (41) (32)
-------- --------
Pro forma net loss ....................................... $(18,190) $(57,637)
======== ========
3. CHANGE IN ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses financial accounting and reporting
for acquired goodwill and other intangible assets. Under SFAS No. 142,
goodwill is no longer amortized and the rules for measuring goodwill
impairment use a fair-value-based test. Under the new rules, a fair
value of each of the Company's reporting units with assigned goodwill
must be calculated using either market comparables or a discounted cash
flow approach, or a combination thereof. Once the fair value of the
reporting unit has been determined, the fair value of net assets,
including intangibles, of that reporting unit must be compared to the
total market value derived in the first step to determine impairment.
The Company adopted SFAS No. 142 as of January 1, 2002. Accordingly,
the Company stopped the amortization of goodwill effective January 1,
2002.
In completing the impairment test required under SFAS No. 142, the
Company determined the estimated fair value of its various reporting
units and compared that amount to their respective carrying values.
Based on this calculation, the Company determined that an impairment
existed primarily related to insulated wire operations obtained through
the acquisition of Wirekraft Industries, Inc. in 1992 and the
acquisition of a group of affiliated companies collectively referred to
as Dekko Wire Technology Group in 1996. To determine the amount of the
impairment, the Company calculated the "implied fair value" of goodwill
for each impaired reporting unit in the same manner as the amount of
goodwill recognized in a business combination is determined. The
Company then recognized an impairment charge to write-off goodwill in
the amount of $54,504, net of tax benefit of $19,408 in the first
quarter of 2002, representing the excess carrying amount of goodwill
over the "implied fair value" of goodwill for the impaired reporting
units. In the fourth quarter of 2002, an additional impairment of
$24,355 was recorded as a result of a further decline in the fair value
of these reporting units. There was no such impairment in 2003.
4. IMPAIRMENT AND PLANT CLOSING CHARGES
Impairment and plant closing charges for the three months ended June
30, 2003 related to the closing of the Kendallville, Indiana plant in
June 2003 were $520. A portion of the equipment from this facility is
being relocated to the Durango, Mexico plant with the remainder being
taken out of service. As a result, a fixed asset impairment charge of
$469 was recorded in the second quarter of 2003. Additional charges of
$765 are expected to be incurred related to the plant closing. These
charges relate to shut-down expenditures including occupancy costs and
are expected to be incurred over the next eighteen months.
A summary of activity related to plant closings is as follows:
7
INSULATED
WIRE BARE WIRE
CORPORATE PRODUCTS PRODUCTS CONSOLIDATED
--------- --------- -------- ------------
SIX MONTHS ENDED JUNE 30, 2003
Balance, beginning of period .... $ 480 $ 537 $ 219 $ 1,236
Charges to operations:
Facility shut-down costs .... -- -- -- --
Personnel and severance costs -- 51 -- 51
------- ------- ------- -------
-- 51 -- 51
------- ------- ------- -------
Cash payments:
Facility shut-down costs .... (36) (152) (216) (404)
Personnel and severance costs (98) (83) (3) (184)
------- ------- ------- -------
(134) (235) (219) (588)
------- ------- ------- -------
Balance, end of period .......... $ 346 $ 353 $ -- $ 699
======= ======= ======= =======
INSULATED
WIRE BARE WIRE
CORPORATE PRODUCTS PRODUCTS CONSOLIDATED
--------- -------- -------- ------------
SIX MONTHS ENDED JUNE 30, 2002
Balance, beginning of period .... $ 1,920 $ 1,240 $ 1,368 $ 4,528
Charges to operations:
Facility shut-down costs .... -- -- -- --
Personnel and severance costs -- -- -- --
------- ------- ------- -------
-- -- -- --
------- ------- ------- -------
Cash payments:
Facility shut-down costs .... (36) (271) (437) (744)
Personnel and severance costs (769) (194) -- (963)
------- ------- ------- -------
(805) (465) (437) (1,707)
------- ------- ------- -------
Balance, end of period .......... $ 1,115 $ 775 $ 931 $ 2,821
======= ======= ======= =======
8
5. INVENTORIES
The composition of inventories is as follows:
JUNE 30, DECEMBER 31,
2003 2002
------- -----------
Raw materials .......................... $12,980 $15,051
Work-in-process ........................ 15,518 22,561
Finished goods ......................... 28,284 23,432
------- -------
Total ................................. $56,782 $61,044
======= =======
The carrying value of inventories on a last-in, first-out basis, at
June 30, 2003 and December 31, 2002, approximates their current cost.
6. LONG-TERM OBLIGATIONS
The composition of long-term obligations at June 30, 2003 and December
31, 2002 is as follows:
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
Second Amended and Restated Credit Agreement .... $ -- $ 6,995
Senior Secured Notes ............................ 82,000 --
Senior Secured Notes Discount ................... (3,091) --
Senior Subordinated Notes ....................... 150,000 150,000
Series B Senior Subordinated Notes .............. 150,000 150,000
Series B Senior Subordinated Notes Premium ...... 4,168 5,129
Industrial Revenue Bonds ........................ 15,500 15,500
Other ........................................... 7,185 7,897
--------- ---------
405,762 335,521
Less, current maturities ........................ 16,529 10,133
--------- ---------
$ 389,233 $ 325,388
========= =========
The schedule of principal payments for long-term obligations, excluding
premium and discount, at June 30, 2003 is as follows:
2003 ................................................ $ 9,462
2004 ................................................ 6,836
2005 ................................................ 387,137
2006 ................................................ 151
2007 ................................................ 187
Thereafter .......................................... 912
--------
Total ............................................. $404,685
========
Senior Secured Notes and Industrial Revenue Bonds
The Company issued $82,000 principal amount of 10.375% Senior Secured
Notes (the "Senior Secured Notes") due February 28, 2005 at a price of
96.061% under an indenture dated May 30, 2003. Net proceeds from the
issuance of approximately $75,235, after deducting discounts and
expenses, were used: (i) to repay in full the obligations under, and
terminate, the Company's senior secured credit facility; (ii) to cash
collateralize certain of the Company's letters of credit, including the
letters of credit that were issued under the Company's senior secured
credit facility and the letters of credit collateralizing two
industrial revenue bonds related to the Company's acquisition of Camden
Wire Co., Inc. in 1997; (iii) to pay interest on the Company's Senior
Subordinated Notes and other indebtedness; and (iv) for general
corporate purposes, including working capital.
The Company's obligations under the Senior Secured Notes are guaranteed
on a senior secured basis by International Wire Holding Company, the
Company's parent, and by all of the Company's domestic restricted
subsidiaries. The Senior Secured Notes and the guarantees are secured
by first priority mortgages and liens on substantially all of the
Company's and the guarantors' existing and future domestic property and
assets and a portion of the stock of the foreign subsidiaries. The
Senior Secured Notes bear interest at a rate of 10.375% per annum,
requiring a semi-annual interest payment on May 15 and November 15 of
each year. Pursuant to the terms of the indenture under which the
Senior Secured Notes were issued, the Company's ability to incur
additional indebtedness, pay dividends, repurchase or redeem capital
stock, make investments, create liens or enter into sale and leaseback
transactions, dispose of assets, enter into transactions with
affiliates, and to merge or consolidate with or into other persons is
limited.
Pursuant to a registration rights agreement entered into in connection
with this issuance of the Senior Secured Notes, the Company may elect,
but is not obligated, to file an exchange offer registration statement
or, under certain circumstances, a shelf registration statement in
respect of the Senior Secured Notes. If the Company does not consummate
an offer to exchange the Senior Secured Notes for substantially
identical debt securities registered under the Securities Act by May
30, 2004 or fails to comply with certain other provisions of the
registration rights agreement, the Company has agreed to pay additional
interest to the holders of the Senior Secured Notes.
As of June 30, 2003 the Company has a restricted cash balance of
$27,164 which has been used to cash collateralize $26,680 of letters of
credit that were issued to various insurance companies for workers'
compensation programs and certain trustees in respect of two issuances
of Industrial Revenue Bonds ("IRBs"). The Company has notified such
trustees in respect of the IRBs that the Company will not renew the
current letters of credit, $9,000 of which expire in July 2003 and
$6,500 of which expire in February 2004. As a result, pursuant to the
terms of the IRBs the trustees will draw on the letters of credit and
use such proceeds to refund the IRBs. Accordingly, the IRBs of $15,500
and the related restricted cash balance of $15,681 have been classified
as current maturities of long-term obligations and current assets,
respectively.
9
Senior Subordinated Notes and Series B Senior Subordinated Notes
The 11.75% Senior Subordinated Notes due 2005 and the Series B 11.75%
Senior Subordinated Notes (collectively, the "Senior Subordinated
Notes") were issued under similar indentures (the "Indentures") dated
June 12, 1995 and June 17, 1997, respectively. The Senior Subordinated
Notes represent unsecured general obligations of the Company and are
subordinated to all Senior Debt (as defined in the Indentures) of the
Company.
The Senior Subordinated Notes are fully and unconditionally (as well as
jointly and severally) guaranteed on an unsecured, senior subordinated
basis by each subsidiary of the Company (the "Guarantor Subsidiaries")
other than the company's foreign subsidiaries (which include
IWG-Philippines, Inc., IWG International, Inc., Italtrecce-Societa
Italiana Trecce & Affini S.r.l., International Wire SAS, International
Wire Group SAS, Tresse Metallique J. Forissier, S.A., Cablerie E.
Charbonnet, S.A., IWG Services Co., S de RL de CV, IWG Durango, S de RL
de CV (the "Non-Guarantor Subsidiaries")). Each of the Guarantor
Subsidiaries and Non-Guarantor Subsidiaries is wholly owned by the
Company.
The Senior Subordinated Notes mature on June 1, 2005. Interest on the
Senior Subordinated Notes is payable semi-annually on each June 1 and
December 1. The Senior Subordinated Notes bear interest at the rate of
11.75% per annum. The Senior Subordinated Notes are redeemable, at the
Company's option, at the redemption price of 100% of the principal
amount of such notes with accrued interest.
The Senior Subordinated Notes restrict, among other things, the
incurrence of additional indebtedness by the Company, the payment of
dividends and other distributions in respect of the Company's capital
stock, the payment of dividends and other distributions by the
Company's subsidiaries, the creation of liens on the properties and the
assets of the Company to secure certain subordinated debt and certain
mergers, sales of assets and transactions with affiliates.
7. BUSINESS SEGMENT INFORMATION
The Company conducts its operations through one business segment.
8. RELATED PARTY TRANSACTIONS
In connection with the sale of the Company's former wire harness
business to Viasystems International, Inc. ("Viasystems"), the Company
entered into an agreement to supply substantially all of their
insulated wire requirements through December 2003 (which has been
extended to December 2005). At the time of the sale, the Company and
Viasystems were commonly controlled by affiliates of Hicks, Muse, Tate
& Furst, Incorporated. The Company had sales to Viasystems of $7,784
and $10,578 for the three months ended June 30, 2003 and 2002 and
$15,618 and $18,836 for the six months ended June 30, 2003 and 2002,
respectively. The outstanding trade receivables were $8,242 and $6,990
at June 30, 2003 and December 31, 2002, respectively.
In September 2002, the Company began selling a portion of its
production scrap to Prime Materials Recovery, Inc. ("Prime"). Prime is
a closely held company and its majority shareholder, chairman and a
director is the President and Chief Operating Officer of the Company.
In addition, the Vice President - Finance of the Company holds a
minority ownership interest and is a director. The Company had sales to
Prime of $2,577 and $0 for three months ended June 30, 2003 and 2002
and $5,412 and $0 for the six months ended June 30, 2003 and 2002,
respectively. The outstanding trade receivables were $531 and $72 at
June 30, 2003 and December 31, 2002, respectively. Sales to Prime were
made under arms-length prices and terms comparable to those of other
companies in the industry.
10
9. DISCONTINUED OPERATIONS AND LITIGATION
In July 2003, a ruling was rendered in the Circuit Court of Cook
County, Chancery Division (Case No., 02CH2470) located in Chicago,
Illinois, in the matter referred to as the "AIG Litigation." The ruling
was in favor of the Company and ruled that National Union/AIG is
obligated to defend and indemnify and otherwise provide insurance
coverage to the Company and various original equipment manufacturers
for certain claims and damages related to certain water inlet hoses
supplied by and through the Company pursuant to two $25,000 excess
insurance policies issued to the Company by National Union.
Reimbursement for attorney fees was also awarded to the Company.
National Union/AIG are expected to appeal the decision.
The Company has recorded a receivable of $2,429 in respect of
settlements that were previously paid by the Company and which are
covered under the National Union/AIG insurance policies. This amount
has been recorded through discontinued operations as it relates to
coverage for claims paid. After considering this amount, the Company
has recorded a $3,000 charge to discontinued operations during the
three months ended June 30, 2003. This net charge reflects the
anticipated settlement of additional uninsured claims related to
certain water inlet hoses. No amounts have been recorded for the
potential recovery of attorney fees.
10. GUARANTOR SUBSIDIARIES
The Senior Subordinated Notes are fully and unconditionally (as well as
jointly and severally) guaranteed on an unsecured, senior subordinated
basis by each subsidiary of the Company other than the Non-Guarantor
Subsidiaries. Each of the Guarantor Subsidiaries and Non-Guarantor
Subsidiaries is wholly owned by the Company.
The following consolidating financial statements of the Company include
the accounts of the Company, the combined accounts of the Guarantor
Subsidiaries and the combined accounts of the Non-Guarantor
Subsidiaries. Given the size of the Non-Guarantor Subsidiaries relative
to the Company on a consolidated basis, separate financial statements
of the respective Guarantor Subsidiaries are not presented because
management has determined that such information is not material in
assessing the Guarantor Subsidiaries.
11
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
BALANCE SHEET
AS OF JUNE 30, 2003
ASSETS
Cash ........................................ $ -- $ 38,803 $ 1,115 $ -- $ 39,918
Accounts receivable ......................... -- 46,480 16,668 -- 63,148
Inventories ................................. -- 44,563 12,219 -- 56,782
Restricted cash ............................. -- 15,681 -- -- 15,681
Other current assets ........................ -- 9,563 1,152 -- 10,715
--------- --------- --------- --------- ---------
Total current assets ............... -- 155,090 31,154 -- 186,244
Property, plant and equipment, net ........ -- 91,449 28,693 -- 120,142
Investment in subsidiaries .................. 324,002 -- -- (324,002) --
Intangible and other assets ................. 20,183 92,740 4,214 -- 117,137
--------- --------- --------- --------- ---------
Total assets ........................... $ 344,185 $ 339,279 $ 64,061 $(324,002) $ 423,523
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities ......................... $ 4,039 $ 66,928 $ 8,903 $ -- $ 79,870
Long-term obligations, less current
maturities .............................. 387,776 1,457 -- -- 389,233
Other long-term liabilities ................. -- 22,303 817 -- 23,120
Intercompany (receivable) payable ........... (45,021) 13,108 31,913 -- --
--------- --------- --------- --------- ---------
Total liabilities .................. 346,794 103,796 41,633 -- 492,223
--------- --------- --------- --------- ---------
Stockholder's equity (deficit):
Common stock ............................. 0 0 0 0 0
Contributed capital ...................... 236,331 297,105 11,888 (308,993) 236,331
Carryover of predecessor basis ........... -- (67,762) -- -- (67,762)
Retained earnings (accumulated
deficit)............................... (238,940) 6,140 8,869 (15,009) (238,940)
Accumulated other comprehensive
income ............................. -- -- 1,671 -- 1,671
--------- --------- --------- --------- ---------
Total stockholder's equity (deficit) ........ (2,609) 235,483 22,428 (324,002) (68,700)
--------- --------- --------- --------- ---------
Total liabilities and stockholder's
equity (deficit) ............... $ 344,185 $ 339,279 $ 64,061 $(324,002) $ 423,523
========= ========= ========= ========= =========
12
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
BALANCE SHEET
AS OF DECEMBER 31, 2002
ASSETS
Cash ......................................... $ -- $ 846 $ 1,700 $ -- $ 2,546
Accounts receivable .......................... -- 41,034 17,656 -- 58,690
Inventories .................................. -- 50,288 10,756 -- 61,044
Other current assets ......................... -- 9,635 1,245 -- 10,880
--------- --------- --------- --------- ---------
Total current assets ................ -- 101,803 31,357 -- 133,160
Property, plant and equipment, net ......... -- 95,836 30,650 -- 126,486
Investment in subsidiaries ................... 339,887 -- -- (339,887) --
Intangible and other assets .................. 6,373 93,037 4,454 -- 103,864
--------- --------- --------- --------- ---------
Total assets ............................ $ 346,260 $ 290,676 $ 66,461 $(339,887) $ 363,510
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities .......................... $ 11,947 $ 46,851 $ 8,063 $ -- $ 66,861
Long-term obligations, less current
maturities ............................... 308,157 17,231 -- -- 325,388
Other long-term liabilities .................. -- 22,767 847 -- 23,614
Intercompany (receivable) payable ............ 10,616 (49,209) 38,593 -- --
--------- --------- --------- --------- ---------
Total liabilities ................... 330,720 37,640 47,503 -- 415,863
--------- --------- --------- --------- ---------
Stockholder's equity (deficit):
Common stock .............................. 0 0 0 0 0
Contributed capital ....................... 236,331 297,105 11,888 (308,993) 236,331
Carryover of predecessor basis ............ -- (67,762) -- -- (67,762)
Retained earnings (accumulated
deficit) ............................... (220,791) 23,693 7,201 (30,894) (220,791)
Accumulated other comprehensive
loss ................................ -- -- (131) -- (131)
--------- --------- --------- ---------
Total stockholder's equity (deficit) ......... 15,540 253,036 18,958 (339,887) (52,353)
--------- --------- --------- --------- ---------
Total liabilities and stockholder's
equity (deficit) ............... $ 346,260 $ 290,676 $ 66,461 $(339,887) $ 363,510
========= ========= ========= ========= =========
13
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
JUNE 30, 2003
Net sales .................................. $ -- $ 72,701 $ 18,626 $ -- $ 91,327
Operating expenses:
Cost of goods sold ..................... -- 59,914 15,182 -- 75,096
Selling, general and administrative
expenses............................. -- 5,186 1,281 -- 6,467
Depreciation and amortization .......... 144 5,487 1,244 -- 6,875
Impairment and plant closing charges ... -- 520 -- -- 520
-------- -------- -------- -------- --------
Operating income (loss) .................... (144) 1,594 919 -- 2,369
Other income (expense):
Interest income (expense) .............. 1,176 (10,563) (531) -- (9,918)
Amortization of deferred financing costs (2,795) -- -- -- (2,795)
Equity in net income (loss) of
subsidiaries ........................ (11,633) -- -- 11,633 --
Other, net ............................. -- 2 33 -- 35
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before tax provision ...................... (13,396) (8,967) 421 11,633 (10,309)
Income tax provision ....................... -- 1 86 -- 87
-------- -------- -------- -------- --------
Income (loss) from continuing operations ... (13,396) (8,968) 335 11,633 (10,396)
Loss from discontinued operations .......... -- (3,000) -- -- (3,000)
-------- -------- -------- -------- --------
Net income (loss) .......................... $(13,396) $(11,968) $ 335 $ 11,633 $(13,396)
======== ======== ======== ======== ========
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
JUNE 30, 2002
Net sales .................................. $ -- $ 93,603 $ 13,976 $ -- $ 107,579
Operating expenses:
Cost of goods sold ..................... -- 74,639 10,067 -- 84,706
Selling, general and administrative
expenses............................. -- 7,599 1,037 -- 8,636
Depreciation and amortization .......... 177 5,924 899 -- 7,000
--------- --------- --------- --------- ---------
Operating income (loss) .................... (177) 5,441 1,973 -- 7,237
Other income (expense):
Interest expense ....................... 8,885 (17,562) (357) -- (9,034)
Amortization of deferred financing costs (534) -- -- -- (534)
Equity in net income (loss) of
subsidiaries ...................... (9,948) -- -- 9,948 --
--------- --------- --------- --------- ---------
Income (loss) before tax provision
(benefit) ................................ (1,774) (12,121) 1,616 9,948 (2,331)
Income tax provision (benefit) ............. -- (624) 67 -- (557)
--------- --------- --------- ---------
Net income (loss) .......................... $ (1,774) $ (11,497) $ 1,549 $ 9,948 $ (1,774)
========= ========= ========= ========= =========
14
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net sales .................................. $ -- $ 153,436 $ 37,988 $ -- $ 191,424
Operating expenses:
Cost of goods sold ..................... -- 125,460 30,539 -- 155,999
Selling, general and administrative
expenses ............................ -- 11,515 2,492 -- 14,007
Depreciation and amortization .......... 288 11,097 2,301 -- 13,686
Impairment and plant closing charges ... -- 520 -- -- 520
--------- --------- --------- --------- ---------
Operating income (loss) .................... (288) 4,844 2,656 -- 7,212
Other income (expense):
Interest income (expense) .............. 1,374 (19,398) (871) -- (18,895)
Amortization of deferred financing costs (3,350) -- -- -- (3,350)
Equity in net income (loss) of
subsidiaries ........................ (15,885) -- -- 15,885 --
Other, net ............................. -- 2 70 -- 72
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before tax provision ..................... (18,149) (14,552) 1,855 15,885 (14,961)
Income tax provision ....................... -- 1 187 -- 188
--------- --------- --------- --------- ---------
Income (loss) from continuing operations.... (18,149) (14,553) 1,668 15,885 (15,149)
Loss from discontinued operations .......... -- (3,000) -- -- (3,000)
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (18,149) $ (17,553) $ 1,668 $ 15,885 $ (18,149)
========= ========= ========= ========= =========
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 2002
Net sales .................................. $ -- $ 179,165 $ 28,857 $ -- $ 208,022
Operating expenses:
Cost of goods sold ..................... -- 143,199 21,522 -- 164,721
Selling, general and administrative .... -- 14,815 2,055 -- 16,870
expenses
Depreciation and amortization .......... 357 11,729 1,767 -- 13,853
--------- --------- --------- --------- ---------
Operating income (loss) .................... (357) 9,422 3,513 -- 12,578
Other income (expense):
Interest expense ....................... 381 (17,726) (709) -- (18,054)
Amortization of deferred financing costs (1,068) -- -- -- (1,068)
Equity in net income (loss) of
subsidiaries ...................... (56,561) -- -- 56,561 --
--------- --------- --------- --------- ---------
Income (loss) before tax provision (benefit)
and change in accounting principle ....... (57,605) (8,304) 2,804 56,561 (6,544)
Income tax provision (benefit) ............. -- (3,531) 88 -- (3,443)
--------- --------- --------- --------- ---------
Income (loss) before change in accounting
principle for goodwill, net of tax benefit (57,605) (4,773) 2,716 56,561 (3,101)
Change in accounting principle ............. -- (49,794) (4,710) -- (54,504)
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (57,605) $ (54,567) $ (1,994) $ 56,561 $ (57,605)
========= ========= ========= ========= =========
15
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net cash provided by (used in) operating
activities ............................ $(56,757) $ 62,327 $ (3,590) $ -- $ 1,980
-------- -------- -------- -------- --------
Cash flows provided by (used in) investing
activities for capital expenditures ... -- (7,977) 2,512 -- (5,465)
-------- -------- -------- -------- --------
Cash flows provided by (used in) financing
activities:
Borrowing of long-term obligations .... 78,770 -- -- -- 78,770
Repayment of borrowings ............... (6,995) (712) -- -- (7,707)
Restricted cash ....................... (11,483) (15,681) -- -- (27,164)
Financing fees ........................ (3,535) -- -- -- (3,535)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ............................ 56,757 (16,393) -- -- 40,364
-------- -------- -------- -------- --------
Effect of exchange rate changes
on cash and cash equivalents .......... -- -- 493 -- 493
-------- -------- -------- -------- --------
Net change in cash and cash equivalents .. $ -- $ 37,957 $ (585) $ -- $ 37,372
======== ======== ======== ======== ========
TOTAL TOTAL
COMPANY GUARANTOR NON-GUARANTOR ELIMINATIONS TOTAL
------- --------- ------------- ------------ -----
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net cash provided by (used in) operating
activities ............................. $(7,300) $ 2,941 $ 1,690 $ -- $(2,669)
------- ------- ------- ----------- -------
Cash flows used in investing activities for
capital expenditures .................... -- (2,871) (3,007) -- (5,878)
------- ------- ------- ----------- -------
Cash flows provided by (used in) financing
activities for borrowing/(repayment) of
long-term obligations .................. 7,300 (752) -- -- 6,548
------- ------- ------- ----------- -------
Effect of exchange rate changes on cash and
cash equivalents ........................ -- -- (139) -- (139)
------- ------- ------- ----------- -------
Net change in cash and cash equivalents ... $ -- $ (682) $(1,456) $ -- $(2,138)
======= ======= ======= =========== =======
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
this Form 10-Q.
The Company has made forward-looking statements in this Form 10-Q that are based
on management's beliefs and assumptions and on information currently available
to management. Forward-looking statements include the information concerning the
Company's possible or assumed future results of operations, business strategies,
financing plans, competitive position, potential growth opportunities and the
effects of competition. For those statements, the Company claims the protection
of the safe harbor for forward-looking statements provided for by Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements
include all statements that are not historical facts and can be identified by
the use of forward-looking terminology such as the words "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," "intends,"
"plans," "estimates," or the negative of any thereof or other variations thereof
or comparable terminology, or by discussions of strategy or intentions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual
results may differ materially from those expressed in these forward-looking
statements. Undue reliance should not be placed on any forward-looking
statements. The Company does not have any intention or obligation to update
forward-looking statements after it files this Form 10-Q.
Many important factors could cause the Company's results to differ materially
from those expressed in forward-looking statements. These factors include, but
are not limited to, fluctuations in the Company's operating results and customer
orders, unexpected decreases in demand or increases in inventory levels, the
Company's competitive environment, the Company's reliance on its largest
customers, risks associated with the Company's international operations, and
other factors.
GENERAL
The following discussion and analysis includes the results of operations for the
three and six months ended June 30, 2003 compared to the three and six months
ended June 30, 2002.
A portion of the Company's revenues is derived from processing customer-owned
("tolled") copper. The value of tolled copper is excluded from both sales and
costs of sales of the Company, as title to these materials and the related risks
of ownership do not pass to the Company.
The cost of copper has historically been subject to fluctuations. While
fluctuations in the price of copper may directly affect the per unit prices of
the Company's products, these fluctuations have not had, nor are expected to
have, a material impact on the Company's profitability due to copper price
pass-through arrangements that the Company has with its customers. These sales
arrangements are based on similar variations of monthly copper price formulas.
Use of these copper price formulas minimizes the differences between raw
material copper costs charged to the cost of sales and the pass-through pricing
charged to customers.
RESULTS OF OPERATIONS
THREE MONTHS
ENDED JUNE 30,
--------------
2003 2002
---- ----
(In thousands)
Net sales .......................................... $ 91,327 $107,579
Operating expenses:
Cost of goods sold ............................... 75,096 84,706
Selling, general and administrative expenses ..... 6,467 8,636
Depreciation and amortization .................... 6,875 7,000
Impairment and plant closing charges ............. 520 --
-------- --------
Operating income ................................... $ 2,369 $ 7,237
======== ========
17
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net sales were $91.3 million and $107.6 million for the quarters ended June 30,
2003 and 2002, respectively. Sales for the quarter ended June 30, 2003 were
$16.3 million, or 15.1%, below comparable 2002 levels primarily from lower sales
to customers supplying the automotive and appliance industries, partially offset
by a slight increase in the average cost and selling price of copper. The
average price of copper based upon COMEX increased to $0.75 per pound for the
quarter ended June 30, 2003 from $0.74 per pound for the quarter ended June 30,
2002.
Cost of goods sold as a percentage of sales increased to 82.2% for the quarter
ended June 30, 2003, from 78.7% for the same period in 2002. This change was
primarily due to competitive pricing pressures, operational inefficiencies from
lower production levels and increased compound material costs.
Selling, general and administrative expenses were $6.5 million for the quarter
ended June 30, 2003, compared to $8.6 million for the same period in 2002. This
decrease of $2.1 million was the result of continued cost reductions including
headcount reductions, bad debt provisions and reduced accruals for personnel
related costs. These expenses, as a percent of net sales, decreased from 8.0%
for the quarter ended June 30, 2002 to 7.1% for the quarter ended June 30, 2003.
Depreciation and amortization was $6.9 million for the quarter ended June 30,
2003, compared to $7.0 million for the same period in 2002.
Impairment and plant closing charges for the quarter ended June 30, 2003 related
to the closing of the Kendallville, Indiana plant in June 2003 were $0.5
million. A portion of the equipment from this facility is being relocated to the
Durango, Mexico plant with the remainder being taken out of service. As a
result, a fixed asset impairment charge of $0.4 million was recorded in the
second quarter of 2003. Additional charges of $0.8 million are expected to be
incurred related to the plant closing. These charges relate to shut-down
expenditures including occupancy costs and are expected to be incurred over the
next eighteen months. There was no such charge in 2002.
The income tax provision for the quarter ended June 30, 2003 was $0.1 million
compared to a tax benefit of $0.6 million for the quarter ended June 30, 2002. A
full valuation allowance was recorded in the fourth quarter of 2002.
Accordingly, the $0.1 million tax provision in 2003 represents the provision for
certain state and foreign income taxes only.
RESULTS OF OPERATIONS
SIX MONTHS
ENDED JUNE 30,
--------------
2003 2002
---- ----
(In thousands)
Net sales .......................................... $191,424 $208,022
Operating expenses:
Cost of goods sold ............................... 155,999 164,721
Selling, general and administrative expenses ..... 14,007 16,870
Depreciation and amortization .................... 13,686 13,853
Impairment and plant closing charges ............. 520 --
-------- --------
Operating income ................................... $ 7,212 $ 12,578
======== ========
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net sales were $191.4 million and $208.0 million for the six months ended June
30, 2003 and 2002, respectively. Sales for the six months ended June 30, 2003
were $16.6 million, or 8.0%, below comparable 2002 levels primarily from lower
second quarter sales to customers supplying the automotive and appliance
industries, partially offset by a
18
slight increase in the average cost and selling price of copper. The average
price of copper based upon COMEX increased to $0.75 per pound for the six months
ended June 30, 2003 from $0.73 per pound for the six months ended June 30, 2002.
Cost of goods sold as a percentage of sales increased to 81.5% for the six ended
June 30, 2003, from 79.2% for the same period in 2002. This change was primarily
due to competitive pricing pressures and second quarter operational
inefficiencies from lower production levels and increased compound material
costs.
Selling, general and administrative expenses were $14.0 million for the six
months ended June 30, 2003, compared to $16.9 million for the same period in
2002. This decrease of $2.9 million was the result of continued cost reductions
including headcount reductions, bad debt provisions and reduced accruals for
personnel related costs. These expenses, as a percent of net sales, decreased
from 8.1% for the six months ended June 30, 2002 to 7.3% for the six months
ended June 30, 2003.
Depreciation and amortization was $13.7 million for the six months ended June
30, 2003, compared to $13.9 million for the same period in 2002.
Impairment and plant closing charges for the six months ended June 30, 2003
related to the closing of the Kendallville, Indiana plant in June 2003 were $0.5
million. A portion of the equipment from this facility is being relocated to the
Durango, Mexico plant with the remainder being taken out of service. As a
result, a fixed asset impairment charge of $0.4 million was recorded in the
second quarter of 2003. Additional charges of $0.8 million are expected to be
incurred related to the plant closing. These charges relate to shut-down
expenditures including occupancy costs and are expected to be incurred over the
next eighteen months. There was no such charge in 2002.
The income tax provision for the six months ended June 30, 2003 was $0.2 million
compared to a tax benefit of $3.4 million for the six months ended June 30,
2002. A full valuation allowance was recorded in the fourth quarter of 2002.
Accordingly, the $0.2 million tax provision in 2003 represents the provision for
certain state and foreign income taxes only.
LIQUIDITY AND CAPITAL RESOURCES
Inflation has not been a material factor affecting the Company's business. As a
result of the copper price pass-through arrangements that the Company has with
its customers, fluctuations in the price of copper, the principle raw material
used by the Company, have not, nor are expected to have, a material impact on
the Company's profitability. The Company is subject to normal inflationary
pressures with its other raw materials purchased as well as its general
operating expenses, such as salaries, employee benefits and facilities costs.
Working Capital and Cash Flows
Net cash provided by continuing operations was $5.1 million for the six months
ended June 30, 2003, compared to net cash used in continuing operations of $3.1
million for the six months ended June 30, 2002. The increase was primarily the
result of lower working capital requirements for accounts receivable and
inventory.
Net cash used in investing activities for capital expenditures was $5.5 million
for the six months ended June 30, 2003, compared to $5.9 million for the six
months ended June 30, 2002. The decrease primarily related to lower machinery
and equipment upgrade expenditures.
Net cash provided by financing activities was $40.4 million for the six months
ended June 30, 2003, compared to $6.5 million for the six months ended June 30,
2002. The increase was the net result of the issuance of $82.0 million principal
amount of 10.375% Senior Secured Notes as described below.
Financing Arrangements
The Company issued $82.0 million principal amount of 10.375% Senior Secured
Notes (the "Senior Secured Notes") due February 28, 2005 at a price of 96.061%
under an indenture dated May 30, 2003. Net proceeds from the issuance of
approximately $75.2 million, after deducting discounts and expenses, were used:
(i) to repay in full the obligations under, and terminate, the Company's senior
secured credit facility; (ii) to cash collateralize certain of the Company's
letters of credit, including the letters of credit that were issued under the
Company's senior secured credit facility and the letters of credit
collateralizing two industrial revenue bonds related to the Company's
acquisition of Camden Wire Co., Inc. in 1997; (iii) to pay interest on the
Company's Senior Subordinated Notes and other indebtedness; and (iv) for general
corporate purposes, including working capital.
The Company's obligations under the Senior Secured Notes are guaranteed on a
senior secured basis by International Wire Holding Company, the Company's
parent, and by all of the Company's domestic restricted subsidiaries. The Senior
Secured Notes and the guarantees are secured by first priority mortgages and
liens on substantially all of the Company's and the guarantors' existing and
future domestic property and assets and a portion of the stock of the foreign
subsidiaries. The Senior Secured Notes bear interest at a rate of 10.375% per
annum, requiring a semi-annual interest payment on May 15 and November 15 of
each year. Pursuant to the terms of the indenture under which the Senior Secured
Notes were issued, the Company's ability to incur additional indebtedness, pay
dividends, repurchase or redeem capital stock, make investments, create liens or
enter into sale and leaseback transactions, dispose of assets, enter into
transactions with affiliates, and to merge or consolidate with or into other
persons is limited.
19
Pursuant to a registration rights agreement entered into in connection with this
issuance of the Senior Secured Notes, the Company may elect, but is not
obligated, to file an exchange offer registration statement or, under certain
circumstances, a shelf registration statement in respect of the Senior Secured
Notes. If the Company does not consummate an offer to exchange the Senior
Secured Notes for substantially identical debt securities registered under the
Securities Act by May 30, 2004 or fails to comply with certain other provisions
of the registration rights agreement, the Company has agreed to pay additional
interest to the holders of the Senior Secured Notes.
As of June 30, 2003 the Company has a restricted cash balance of $27.2 million
which has been used to cash collateralize $26.7 million of letters of credit
that were issued to various insurance companies for workers' compensation
programs and certain trustees in respect of two issuances of Industrial Revenue
Bonds ("IRBs"). The Company has notified such trustees in respect of the IRBs
that the Company will not renew the current letters of credit, $9.0 million of
which expire in July 2003 and $6.5 million of which expire in February 2004. As
a result, pursuant to the terms of the IRBs the trustees will draw on the
letters of credit and use such proceeds to refund the IRBs. Accordingly, the
$15.5 million of IRBs and the related restricted cash balance of $15.7 million
have been classified as current maturities of long-term obligations and current
assets, respectively.
Liquidity
The principal raw material used in the Company's products is copper. The market
price of copper is subject to significant fluctuations. Working capital needs
change whenever the Company experiences a significant change in copper prices. A
$0.10 per pound change in the price of copper changes the Company's working
capital by approximately $2.9 million. The Company enters into contractual
relationships with most of its customers to adjust its prices based upon the
prevailing market prices on the COMEX. This approach is patterned after the
Company's arrangement with its copper suppliers and is designed to remove the
risk associated with fluctuating copper prices.
As of June 30, 2003, the Company had $39.9 million of unrestricted cash and cash
equivalents and its working capital was $106.4 million.
We anticipate that our primary uses of cash for the next twelve months will be
for working capital requirements, for capital expenditures, estimated at
approximately $18.0 million, plant closing costs and discontinued operations,
estimated at approximately $3.9 million, and for debt servicing, (excluding the
IRB's to be repaid by drawings under letters of credit) estimated at
approximately $45.6 million. The Company's primary sources of liquidity are cash
on hand and cash flows from operations. The Company expects that these sources
of cash will be sufficient to meet its requirements for working capital, capital
expenditures and debt service over the next twelve months. These expectations,
however, assume that the Company's working capital needs do not materially
increase. Such assumption depends on a variety of factors including the general
state of the domestic economy, the market price of copper, the Company's credit
terms with its suppliers and the Company's relations with its customers. In the
event that this assumption is incorrect and the Company's working capital needs
materially increase, the Company may need to seek additional sources of
liquidity through debt or equity financing.
The following table sets forth our contractual obligations at the end of June
2003 for the periods shown (dollars in millions):
REMAINDER
CONTRACTUAL OBLIGATIONS TOTAL OF 2003 2004-2005 2006-2007 THEREAFTER
-------- ------------- --------- --------- ----------
Debt (1) $ 402.5 $ 9.0 $ 393.5 $ 0.0 $ 0.0
Capital lease obligations 2.2 0.5 0.5 0.4 0.8
Operating leases 5.6 1.0 2.0 0.9 1.7
-------- -------- -------- -------- --------
Total contractual cash
obligations $ 410.3 $ 10.5 $ 396.0 $ 1.3 $ 2.5
======== ======== ======== ======== ========
(1) Debt obligations are exclusive of interest.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," ("VIEs"), an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to improve financial reporting of special purpose and other
entities. In accordance with the interpretation, business enterprises that
represent the primary beneficiary of another entity by retaining a controlling
financial interest in that entity's assets, liabilities, and results of
operating activities must consolidate the entity in their financial statements.
Prior to the issuance of FIN 46, consolidation generally occurred when an
enterprise controlled another entity through voting interests. Certain VIEs that
are qualifying special purpose entities ("QSPEs") subject to the reporting
requirements of SFAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," will not be required to be
consolidated under the provisions of FIN 46. The consolidation provisions of FIN
46 apply to VIEs created or entered into after January 31, 2003, and for
pre-existing VIEs in the first reporting period beginning after June 15, 2003.
If applicable, transition rules allow the restatement of financial statements or
prospective application with a cumulative effect adjustment. In addition, FIN 46
expands the disclosure requirements for the beneficiary of a significant or a
majority of the variable interests to provide information regarding the nature,
purpose and financial characteristics of the entities. Since the Company has no
such VIES, the adoption of this statement is not expected to impact the
Company's consolidated financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement requires that costs associated
with exit or disposal activities must be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal plan. Such costs
include lease termination costs and certain employee severance costs associated
with a restructuring, discontinued operation or other exit or disposal activity.
This statement is effective for the Company's exit or disposal activities
initiated after December 31, 2002 and the provisions of this statement are
incorporated herein.
20
In April of 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
clarifies the definition of a derivative and amends the implementation guidance
of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except for
hedging relationships designated after June 30, 2003. The provisions of SFAS No.
149, which amend implementation guidance of SFAS No. 133, are effective for
fiscal quarters that began prior to June 15, 2003. The Company adopted the
provisions of SFAS No. 149 and determined that there is not a financial impact
on the quarter ended June 30, 2003.
On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No.
150, or SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 represents the first
phase of the FASB's project on liabilities and equity and requires financial
instruments that meet the definitions in the statement to be classified as
liabilities. SFAS 150 requires that mandatorily redeemable preferred stock be
classified and accounted for as a liability. However, it excludes from its scope
convertible instruments, which will be addressed in the second phase of the
FASB" project. SFAS 150 is effective at the beginning of the first interim
period beginning after June 15, 2003. Since the Company has no such financial
instruments, the adoption of this statement will not have an effect on the
Company's consolidated financial position and results of operations.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In accordance with Item 305 of Regulation S-K, the Company provided quantitative
and qualitative information about market risk in "Item 7a. Quantitative and
Qualitative Disclosures About Market Risk" of the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2002.
On May 30, 2003, the Company terminated its senior secured credit facility
thereby reducing the amount of the Company's long-term debt bearing interest at
variable rates to $15.5 million. Given the current amount of long-term debt
subject to variable interest rates, the Company does not believe that the
associated interest rate risk is material and is not currently engaged in any
hedging activities.
Except as described above, there have been no material changes to such
information disclosed in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2002.
22
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including its Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of the end of the
period covered by this quarterly report.
There has been no change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that occurred during the Company's fiscal quarter
ended June 30, 2003, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to item 9 in the Notes to Consolidated Financial Statements in
Item 1 of Part I of this Quarterly Report on Form 10-Q, which item is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
4.1 Indenture dated as of May 30, 2003, among International
Wire Group, Inc., International Wire Holding Company, IWG
Resources LLC, Wire Technologies, Inc., Omega Wire, Inc.,
International Wire Rome Operations, Inc., OWI Corporation
and Camden Wire Co., Inc., and Wells Fargo Bank Minnesota,
National Association.*
4.2 Collateral Agreement dated as of May 30, 2003, among
International Wire Holding Company, International Wire
Group, Inc., the Subsidiary Parties identified therein,
and Wells Fargo Bank Minnesota, National Association.*
4.3 Registration Rights Agreement dated as of May 30, 2003
among International Wire Group, Inc., International Wire
Holding Company, Camden Wire Co., Inc., IWG Resources LLC,
International Wire Rome Operations, Inc., OWI Corporation,
Omega Wire, Inc., Wire Technologies, Inc., and Credit
Suisse First Boston LLC.*
31.1 Certification of Principal Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.*
31.2 Certification of Principal Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.*
32.1 Certification of Principal Executive Officer Required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Principal Financial Officer Required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith.
(b) Reports on Form 8-K
On May 29, 2003, the Company filed a Current Report on Form 8-K announcing the
pricing of its offering of $82 million principal amount of 10.375% senior
secured notes due February 28, 2005.
24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERNATIONAL WIRE GROUP, INC.
Dated: August 14, 2003 By: /s/ GLENN J. HOLLER
-----------------------
Name: Glenn J. Holler
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
4.1 Indenture dated as of May 30, 2003, among International Wire Group,
Inc., International Wire Holding Company, IWG Resources LLC, Wire
Technologies, Inc., Omega Wire, Inc., International Wire Rome
Operations, Inc., OWI Corporation and Camden Wire Co., Inc., and Wells
Fargo Bank Minnesota, National Association.*
4.2 Collateral Agreement dated as of May 30, 2003, among International Wire
Holding Company, International Wire Group, Inc., the Subsidiary Parties
identified therein, and Wells Fargo Bank Minnesota, National
Association.*
4.3 Registration Rights Agreement dated as of May 30, 2003 among
International Wire Group, Inc., International Wire Holding Company,
Camden Wire Co., Inc., IWG Resources LLC, International Wire Rome
Operations, Inc., OWI Corporation, Omega Wire, Inc., Wire Technologies,
Inc., and Credit Suisse First Boston LLC.*
31.1 Certification of Principal Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.*
31.2 Certification of Principal Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.*
32.1 Certification of Principal Executive Officer Required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Principal Financial Officer Required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
* FILED HEREWITH.
26