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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 September 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
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 ................ 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 ............................................................ 4
Consolidated Statements of Cash Flows for the nine months ended
September 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 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................... 24
Item 4. Controls and Procedures .............................................................. 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 26
Item 2. Changes in Securities and Use of Proceeds ............................................ 26
Item 3. Defaults Upon Senior Securities ...................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders .................................. 26
Item 5. Other Information .................................................................... 26
Item 6. Exhibits and Reports on Form 8-K ..................................................... 26
SIGNATURES .......................................................................................... 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 43,283 $ 2,546
Accounts receivable, less allowance of $7,208 and $7,080 63,155 58,690
Inventories ............................................ 52,697 61,044
Restricted cash ........................................ 6,677 --
Prepaid expenses and other ............................. 9,485 10,880
------------- -------------
Total current assets ................................. 175,297 133,160
Property, plant and equipment, net ....................... 118,639 126,486
Goodwill ................................................. 89,390 89,390
Other intangible assets .................................. 4,290 5,028
Deferred financing costs, net ............................ 4,588 4,800
Restricted cash .......................................... 11,598 --
Other assets ............................................. 6,618 4,646
------------- -------------
Total assets ......................................... $ 410,420 $ 363,510
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term obligations ............ $ 7,301 $ 10,133
Accounts payable ....................................... 23,523 23,776
Accrued and other liabilities .......................... 20,592 12,313
Accrued payroll and payroll related items .............. 1,253 3,220
Customers' deposits .................................... 11,040 14,416
Accrued interest ....................................... 15,007 3,003
------------- -------------
Total current liabilities ............................ 78,716 66,861
Long-term obligations, less current maturities ........... 389,132 325,388
Other long-term liabilities .............................. 22,676 23,614
------------- -------------
Total liabilities .................................... 490,524 415,863
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 .................................... (250,496) (220,791)
Accumulated other comprehensive income (loss) .......... 1,823 (131)
------------- -------------
Total stockholder's deficit .......................... (80,104) (52,353)
------------- -------------
Total liabilities and stockholder's deficit .......... $ 410,420 $ 363,510
============= =============
See accompanying notes to the consolidated financial statements.
3
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales ..................................... $ 94,080 $ 99,635 $ 285,504 $ 307,657
Operating expenses:
Cost of goods sold .......................... 76,999 79,571 232,998 244,292
Selling, general and administrative expenses 8,109 7,993 22,116 24,863
Depreciation ................................ 5,412 6,294 17,307 18,660
Amortization ................................ 928 821 2,719 2,308
Reorganization expense ...................... 480 -- 480 --
Impairment and plant closing charges ........ 294 -- 814 --
--------- --------- --------- ---------
Operating income .............................. 1,858 4,956 9,070 17,534
Other income (expense):
Interest expense ............................ (11,243) (9,167) (30,138) (27,221)
Amortization of deferred financing costs .... (748) (534) (4,098) (1,602)
Other, net .................................. 63 17 135 17
--------- --------- --------- ---------
Loss from continuing operations before
income tax provision (benefit) and change in
accounting principle ........................ (10,070) (4,728) (25,031) (11,272)
Income tax provision (benefit) ................ (14) (3,046) 174 (6,489)
--------- --------- --------- ---------
Loss from continuing operations before
change in accounting principle .............. (10,056) (1,682) (25,205) (4,783)
Loss from discontinued operations ............. (1,500) -- (4,500) --
--------- --------- --------- ---------
Loss before change in accounting principle .... (11,556) (1,682) (29,705) (4,783)
Change in accounting for goodwill, net of
$19,408 tax benefit ......................... -- -- -- (54,504)
--------- --------- --------- ---------
Net loss ...................................... $ (11,556) $ (1,682) $ (29,705) $ (59,287)
========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
4
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2003 2002
-------- --------
Cash flows provided by (used in)operating activities:
Net loss ................................................... $(29,705) $(59,287)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation .............................................. 17,307 18,660
Amortization .............................................. 2,719 2,308
Amortization of deferred financing costs .................. 4,098 1,602
Deferred income taxes ..................................... -- (3,749)
Provision for doubtful accounts ........................... 542 1,840
Change in accounting for goodwill ......................... -- 54,504
Discontinued operations ................................... 4,500 --
Fixed asset impairment .................................... 469 --
Change in assets and liabilities:
Accounts receivable ...................................... (4,046) (7,085)
Inventories .............................................. 8,904 (1,865)
Prepaid expenses and other ............................... (1,063) (2,538)
Accounts payable ......................................... (636) 6,630
Accrued and other liabilities ............................ 5,630 (3,711)
Accrued payroll and payroll related items ................ (1,967) 380
Customers' deposits ...................................... (3,376) (31)
Accrued interest ......................................... 11,104 7,686
Other long-term liabilities .............................. (955) (575)
-------- --------
Net cash provided by continuing operations ............. 13,525 14,769
Net cash used in discontinued operations .................. (3,625) (2,559)
-------- --------
Net cash provided by operating activities ......... 9,900 12,210
-------- --------
Cash flows used in investing activities:
Capital expenditures by continuing operations ............ (9,295) (8,706)
-------- --------
Net cash used in investing activities ............. (9,295) (8,706)
-------- --------
Cash flows provided by (used in) financing activities:
Borrowings of long-term obligations ...................... 78,770 --
Repayment of borrowings .................................. (16,958) (1,139)
Restricted cash .......................................... (18,275) --
Financing fees ........................................... (3,886) --
-------- --------
Net cash provided by (used in) financing activities 39,651 (1,139)
-------- --------
Effects of exchange rate changes on cash and cash equivalents 481 356
-------- --------
Net change in cash and cash equivalents ........... 40,737 2,721
Cash and cash equivalents at beginning of the period ........ 2,546 8,017
-------- --------
Cash and cash equivalents at end of the period .............. $ 43,283 $ 10,738
======== ========
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 nine months
ended September 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 did not 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 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 September 30,
2003.
6
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 did 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 nine months ended
September 30, 2003 and 2002, would approximate the following:
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2003 2002
-------- --------
PRO FORMA NET LOSS:
Reported net loss $(29,705) $(59,287)
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 ............. (47) (32)
-------- --------
Pro forma net loss ....................................... $(29,752) $(59,319)
======== ========
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.
7
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 a goodwill impairment charge 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 nine months ended
September 30, 2003 related to the closing of the Kendallville, Indiana
plant in June 2003 and other previously closed plants were $814. A
portion of the equipment from these facilities 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 $679 are
expected to be incurred related to the plant closings. These charges
relate to shut-down expenditures including occupancy costs and are
expected to be incurred over the next twelve months.
A summary of activity related to plant closings is as follows:
INSULATED
WIRE BARE WIRE
CORPORATE PRODUCTS PRODUCTS CONSOLIDATED
--------- --------- --------- ------------
NINE MONTHS ENDED SEPTEMBER 30,
2003
Balance, beginning of period ........... $ 480 $ 537 $ 219 $ 1,236
Charges to operations:
Facility shut-down costs ......... -- 61 53 114
Personnel and severance costs .... -- 231 -- 231
------- ------- ------- -------
-- 292 53 345
------- ------- ------- -------
Cash payments:
Facility shut-down costs ......... (42) (281) (269) (592)
Personnel and severance costs .... (137) (434) (3) (574)
------- ------- ------- -------
(179) (715) (272) (1,166)
------- ------- ------- -------
Balance, end of period ................. $ 301 $ 114 $ -- $ 415
======= ======= ======= =======
INSULATED
WIRE BARE WIRE
CORPORATE PRODUCTS PRODUCTS CONSOLIDATED
--------- --------- --------- ------------
NINE MONTHS ENDED SEPTEMBER 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 ......... (52) (306) (874) (1,232)
8
Personnel and severance costs .... (1,173) (289) (73) (1,535)
------- ------- ------- -------
(1,225) (595) (947) (2,767)
------- ------- ------- -------
Balance, end of period ................. $ 695 $ 645 $ 421 $ 1,761
======= ======= ======= =======
5. FINANCIAL ADVISOR AND REORGANIZATION EXPENSE
We have experienced a significant downturn in the industrial/energy and
electronics/data communications markets and increased competitive
pricing pressures in the automotive market that began in 2001 and has
continued through September 30, 2003. The economic downturn and
competitive pricing pressures in the aforementioned markets have
resulted in lower sales and weaker cash flows than we originally
expected. Our liquidity also has been negatively impacted as a result
of costs incurred in connection with the prosecution of the AIG
Litigation (described in Note 10) and the settlement of claims related
to the insurance coverage in question in the AIG Litigation. As a
result of our liquidity position and our capital structure, we have
recently experienced reductions in our credit terms with our suppliers
which we anticipate will further reduce our available working capital
beginning in the fourth quarter of 2003.
In light of those developments, we have retained Rothschild Inc., as
independent financial advisor, to evaluate recapitalization
alternatives that would reduce our debt and strengthen our balance
sheet. During the three and nine months ended September 30, 2003, $480
was incurred for professional fees related to the retention of our
financial advisor.
6. INVENTORIES
The composition of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials ......... $ 11,245 $ 15,051
Work-in-process ....... 18,409 22,561
Finished goods ........ 23,043 23,432
--------- --------
Total $ 52,697 $ 61,044
========= ========
The carrying value of inventories on a last-in, first-out basis, at
September 30, 2003 and December 31, 2002, approximates their current
cost.
7. LONG-TERM OBLIGATIONS
The composition of long-term obligations at September 30, 2003 and
December 31, 2002 is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Second Amended and Restated Credit Agreement ... $ -- $ 6,995
Senior Secured Notes ........................... 82,000 --
Senior Secured Notes Discount .................. (2,670) --
Senior Subordinated Notes ...................... 150,000 150,000
Series B Senior Subordinated Notes ............. 150,000 150,000
Series B Senior Subordinated Notes Premium ..... 3,669 5,129
Industrial Revenue Bonds ....................... 6,500 15,500
Other .......................................... 6,934 7,897
------------- -------------
396,433 335,521
Less, current maturities ....................... 7,301 10,133
------------- -------------
$ 389,132 $ 325,388
============= =============
The schedule of principal payments for long-term obligations, excluding
premium and discount, at September 30, 2003 is as follows:
9
2003 .......... $ 211
2004 .......... 6,836
2005 .......... 387,137
2006 .......... 151
2007 .......... 187
Thereafter .... 912
--------
Total $395,434
========
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 Exchange Act
of 1934 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.
In July 2003, the trustees of an Industrial Revenue Bond ("IRB") drew
on a letter of credit in the amount of $9,000 to refund the related
IRB. As a result, the Company's restricted cash balance, a portion of
which had been used to cash collateralize the letter of credit, was
reduced by $9,004. As of September 30, 2003 the Company has a
restricted cash balance of $18,275 which is being used to cash
collateralize $11,199 of letters of credit that were issued to various
insurance companies for workers' compensation programs and a $6,595
letter of credit that was issued to certain trustees in respect of one
issuance of an IRB. The Company has notified the trustees in respect of
the IRB that the Company will not renew the current letter of credit of
$6,595 which expires in February 2004. As a result, pursuant to the
terms of the IRB, the trustees will draw on the letter of credit and
use such proceeds to refund the IRB. Accordingly, the IRB of $6,500 and
the related restricted cash balance of $6,677 has been classified as a
current maturity of long-term obligations and a current asset,
respectively.
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)
10
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.
8. BUSINESS SEGMENT INFORMATION
The Company conducts its operations through one business segment.
9. 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 $8,302
and $8,907 for the three months ended September 30, 2003 and 2002 and
$23,920 and $27,743 for the nine months ended September 30, 2003 and
2002, respectively. The outstanding trade receivables were $7,602 and
$6,990 at September 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 $2,663 and $318 for three months ended September 30, 2003 and
2002 and $8,075 and $318 for the nine months ended September 30, 2003
and 2002, respectively. The outstanding trade receivables were $373 and
$72 at September 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. 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 trial
court ruled 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.
11
Reimbursement for attorney fees and expenses was also awarded to the
Company. National Union/AIG has filed for an appeal of the decision.
In the quarter ended June 30, 2003, the Company 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. Additionally, the Company recorded a $3,000 charge to
discontinued operations for the three months ended June 30, 2003. This
charge reflects the expected litigation expenses as well as potential
settlement payments related to additional uninsured water inlet hose
claims. No amounts have been recorded for the potential recovery of
attorney fees. In the quarter ended September 30, 2003, the Company
recorded an additional charge of $1,500 for expected litigation
expenses as well as potential settlement payments for water inlet hose
claims. These charges have been recorded through discontinued
operations.
11. RECENT EVENTS
On October 23, 2003, we entered into a ten-year supply agreement with
General Cable to supply certain bare wire products. Such supply
contract related to a substantial amount of the volume which is
currently being produced by General Cable's Taunton, Massachusetts
facility which is scheduled to close within the next few months.
12. 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.
12
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
BALANCE SHEET
AS OF SEPTEMBER 30, 2003
ASSETS
Cash .............................................. $ -- $ 41,154 $ 2,129 $ -- $ 43,283
Accounts receivable ............................... -- 47,982 15,173 -- 63,155
Inventories ....................................... -- 41,397 11,300 -- 52,697
Restricted cash ................................... -- 6,677 -- -- 6,677
Other current assets .............................. -- 8,463 1,022 -- 9,485
------------ ------------ ------------ ------------ ------------
Total current assets ..................... -- 145,673 29,624 -- 175,297
Property, plant and equipment, net ................ -- 89,676 28,963 -- 118,639
Investment in subsidiaries ........................ 315,487 -- -- (315,487) --
Intangible and other assets ....................... 19,757 92,486 4,241 -- 116,484
------------ ------------ ------------ ------------ ------------
Total assets ................................ $ 335,244 $ 327,835 $ 62,828 $ (315,487) $ 410,420
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities ............................... $ 15,302 $ 54,777 $ 8,637 $ -- $ 78,716
Long-term obligations, less current
maturities .................................... 387,704 1,428 -- -- 389,132
Other long-term liabilities ....................... -- 21,967 709 -- 22,676
Intercompany (receivable) payable ................. (53,597) 23,629 29,968 -- --
------------ ------------ ------------ ------------ ------------
Total liabilities ........................ 349,409 101,801 39,314 -- 490,524
------------ ------------ ------------ ------------ ------------
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) ........ (250,496) (3,309) 9,803 (6,494) (250,496)
Accumulated other comprehensive
income ....................................... -- -- 1,823 -- 1,823
------------ ------------ ------------ ------------ ------------
Total stockholder's equity (deficit) .............. (14,165) 226,034 23,514 (315,487) (80,104)
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholder's
equity (deficit) ..................... $ 335,244 $ 327,835 $ 62,828 $ (315,487) $ 410,420
============ ============ ============ ============ ============
13
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL
TOTAL NON-
COMPANY GUARANTOR 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
============ ============ ============ ============ ============
14
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales ............................................. $ -- $ 74,241 $ 19,839 $ -- $ 94,080
Operating expenses:
Cost of goods sold ............................... -- 60,839 16,160 -- 76,999
Selling, general and administrative expenses ..... 1,048 5,798 1,263 -- 8,109
Depreciation and amortization .................... 168 5,066 1,106 -- 6,340
Reorganization expense ........................... 480 -- -- -- 480
Impairment and plant closing charges ............. -- 294 -- -- 294
------------ ------------ ------------ ------------ ------------
Operating income (loss) ............................... (1,696) 2,244 1,310 -- 1,858
Other income (expense):
Interest expense ................................. (2,001) (8,788) (454) -- (11,243)
Amortization of deferred financing costs ......... (748) -- -- -- (748)
Equity in net income (loss) of subsidiaries ...... (8,114) -- -- 8,114 --
Other, net ....................................... 1,003 (1,005) 65 -- 63
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before tax benefit .................................. (11,556) (7,549) 921 8,114 (10,070)
Income tax benefit .................................... -- (1) (13) -- (14)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations .............. (11,556) (7,548) 934 8,114 (10,056)
Loss from discontinued operations ..................... -- (1,500) -- -- (1,500)
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (11,556) $ (9,048) $ 934 $ 8,114 $ (11,556)
============ ============ ============ ============ ============
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales ............................................. $ -- $ 83,410 $ 16,225 $ -- $ 99,635
Operating expenses:
Cost of goods sold ............................... -- 66,963 12,608 -- 79,571
Selling, general and administrative expenses ..... -- 7,056 937 -- 7,993
Depreciation and amortization .................... 174 5,999 942 -- 7,115
------------ ------------ ------------ ------------ ------------
Operating income (loss) ............................... (174) 3,392 1,738 -- 4,956
Other income (expense):
Interest income (expense) ........................ 35 (8,877) (325) -- (9,167)
Amortization of deferred financing costs ......... (534) -- -- -- (534)
Equity in net income (loss) of subsidiaries ...... (1,009) -- -- 1,009 --
Other, net ....................................... -- -- 17 -- 17
------------ ------------ ------------ ------------ ------------
Income (loss) before tax provision
(benefit) ........................................... (1,682) (5,485) 1,430 1,009 (4,728)
Income tax provision (benefit) ........................ -- (3,175) 129 -- (3,046)
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (1,682) $ (2,310) $ 1,301 $ 1,009 $ (1,682)
============ ============ ============ ============ ============
15
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales ............................................. $ -- $ 227,677 $ 57,827 $ -- $ 285,504
Operating expenses:
Cost of goods sold ............................... -- 186,299 46,699 -- 232,998
Selling, general and administrative expenses ..... 1,048 17,313 3,755 -- 22,116
Depreciation and amortization .................... 507 16,112 3,407 -- 20,026
Reorganization expense ........................... 480 -- -- -- 480
Impairment and plant closing charges ............. -- 814 -- -- 814
------------ ------------ ------------ ------------ ------------
Operating income (loss) ............................... (2,035) 7,139 3,966 -- 9,070
Other income (expense):
Interest income (expense) ........................ (2,369) (26,444) (1,325) -- (30,138)
Amortization of deferred financing costs ......... (4,098) -- -- -- (4,098)
Equity in net income (loss) of subsidiaries ...... (24,400) -- -- 24,400 --
Other, net ....................................... 3,197 (3,197) 135 -- 135
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before tax provision ................................ (29,705) (22,502) 2,776 24,400 (25,031)
Income tax provision .................................. -- -- 174 -- 174
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations .............. (29,705) (22,502) 2,602 24,400 (25,205)
Loss from discontinued operations ..................... -- (4,500) -- -- (4,500)
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (29,705) $ (27,002) $ 2,602 $ 24,400 $ (29,705)
============ ============ ============ ============ ============
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales ............................................. $ -- $ 262,575 $ 45,082 $ -- $ 307,657
Operating expenses:
Cost of goods sold ............................... -- 210,162 34,130 -- 244,292
Selling, general and administrative expenses ..... -- 21,871 2,992 -- 24,863
Depreciation and amortization .................... 531 17,728 2,709 -- 20,968
------------ ------------ ------------ ------------ ------------
Operating income (loss) ............................... (531) 12,814 5,251 -- 17,534
Other income (expense):
Interest income (expense) ........................ 416 (26,603) (1,034) -- (27,221)
Amortization of deferred financing costs ......... (1,602) -- -- -- (1,602)
Equity in net income (loss) of subsidiaries ...... (57,570) -- -- 57,570 --
Other, net ....................................... -- -- 17 -- 17
------------ ------------ ------------ ------------ ------------
Income (loss) before tax provision (benefit)
and change in accounting principle .................. (59,287) (13,789) 4,234 57,570 (11,272)
Income tax provision (benefit) ........................ -- (6,706) 217 -- (6,489)
------------ ------------ ------------ ------------ ------------
Income (loss) before change in accounting
principle for goodwill, net of tax benefit .......... (59,287) (7,083) 4,017 57,570 (4,783)
Change in accounting principle ........................ -- (49,794) (4,710) -- (54,504)
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (59,287) $ (56,877) $ (693) $ 57,570 $ (59,287)
============ ============ ============ ============ ============
16
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net cash provided by (used in) operating
activities ......................................... $ (56,110) $ 65,354 $ 656 $ -- $ 9,900
------------ ------------ ------------ ------------ ------------
Cash flows used in investing
activities for capital expenditures ................ -- (8,587) (708) -- (9,295)
------------ ------------ ------------ ------------ ------------
Cash flows provided by (used in)
financing activities:
Borrowings of long-term obligations ............... 78,770 -- -- -- 78,770
Repayment of borrowings ........................... (6,995) (9,963) -- -- (16,958)
Restricted cash ................................... (11,779) (6,496) -- -- (18,275)
Financing fees .................................... (3,886) -- -- -- (3,886)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ......................................... 56,110 (16,459) -- -- 39,651
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes
on cash and cash equivalents ....................... -- -- 481 -- 481
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents ............... $ -- $ 40,308 $ 429 $ -- $ 40,737
============ ============ ============ ============ ============
TOTAL
TOTAL NON-
COMPANY GUARANTOR GUARANTOR ELIMINATIONS TOTAL
------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net cash provided by operating activities ............. $ -- $ 5,680 $ 6,530 $ -- $ 12,210
------------ ------------ ------------ ------------ ------------
Cash flows used in investing activities for
capital expenditures ................................ -- (3,571) (5,135) -- (8,706)
------------ ------------ ------------ ------------ ------------
Cash flows used in financing activities for
repayment of long-term obligations ............... -- (1,139) -- -- (1,139)
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents .................................... -- -- 356 -- 356
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents ............... $ -- $ 970 $ 1,751 $ -- $ 2,721
============ ============ ============ ============ ============
17
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
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 nine months ended September 30, 2003 compared to the three and nine
months ended September 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. Currently, a
$0.10 per pound fluctuation in the price of copper will have a $2.6 million
impact on our working capital. Copper price fluctuations may also affect the per
unit prices of the Company's products, however, copper price 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.
18
RESULTS OF OPERATIONS
THREE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2003 2002
---------------------------
(In thousands)
Net sales ....................................................... $ 94,080 $ 99,635
Operating expenses:
Cost of goods sold ............................................ 76,999 79,571
Selling, general and administrative expenses .................. 8,109 7,993
Depreciation and amortization ................................. 6,340 7,115
Reorganization expense ........................................ 480 --
Impairment and plant closing charges .......................... 294 --
------------ ------------
Operating income ................................................ $ 1,858 $ 4,956
============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net sales were $94.1 million and $99.6 million for the quarters ended September
30, 2003 and 2002, respectively. Sales for the quarter ended September 30, 2003
were $5.5 million, or 5.6%, below comparable 2002 levels primarily from lower
sales to customers supplying the automotive and appliance industries and a
higher proportion of tolled copper in the 2003 period, partially offset by an
increase in the average cost and selling price of copper. The average price of
copper based upon COMEX increased to $0.80 per pound for the quarter ended
September 30, 2003 from $0.69 per pound for the quarter ended September 30,
2002.
Cost of goods sold as a percentage of sales increased to 81.8% for the quarter
ended September 30, 2003, from 79.9% for the same period in 2002. This change
was primarily due to competitive pricing pressures and increased insulating
compound material costs.
Selling, general and administrative expenses were $8.1 million for the quarter
ended September 30, 2003, compared to $8.0 million for the same period in 2002.
Included in the quarter ended September 30, 2003 was a $1.0 million charge for
payments to be made to our former Chief Executive Officer under his employment
agreement. Excluding this charge, selling, general and administrative expenses
decreased $0.9 million which was primarily the result of volume related items,
lower bad debt provision and reduced accruals for personnel related costs. These
expenses, as a percent of net sales, increased from 8.0% for the quarter ended
September 30, 2002 to 8.6% for the quarter ended September 30, 2003.
Depreciation and amortization was $6.3 million for the quarter ended September
30, 2003, compared to $7.1 million for the same period in 2002 from lower
depreciation on property, plant and equipment.
As described below, we have retained Rothschild Inc. as independent financial
advisor. During the three months ended September 30, 2003, $0.5 million was
incurred for professional fees related to the retention of our financial
advisor. There was no similar charge for the 2002 period.
Impairment and plant closing charges for the three months ended September 30,
2003 related to the closing of the Kendallville, Indiana plant in June 2003 and
other previously closed plants were $0.3 million. Additional charges of $0.7
million are expected to be incurred related to the plant closings. These charges
relate to shut-down expenditures including occupancy costs and are expected to
be incurred over the next twelve months.
The income tax benefit for the quarters ended September 30, 2003 and 2002 were
$0.0 million and $3.0 million, respectively. A full valuation allowance was
recorded in the fourth quarter of 2002.
19
RESULTS OF OPERATIONS
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2003 2002
---------------------------
(In thousands)
Net sales ....................................................... $ 285,504 $ 307,657
Operating expenses:
Cost of goods sold ............................................ 232,998 244,292
Selling, general and administrative expenses .................. 22,116 24,863
Depreciation and amortization ................................. 20,026 20,968
Reorganization expense ........................................ 480 --
Impairment and plant closing charges .......................... 814 --
------------ ------------
Operating income ................................................ $ 9,070 $ 17,534
============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net sales were $285.5 million and $307.7 million for the nine months ended
September 30, 2003 and 2002, respectively. Sales for the nine months ended
September 30, 2003 were $22.2 million, or 7.2%, 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 $0.77 per pound for the nine months ended September 30, 2003 from $0.72 per
pound for the nine months ended September 30, 2002.
Cost of goods sold as a percentage of sales increased to 81.6% for the nine
months ended September 30, 2003, from 79.4% for the same period in 2002. This
change was primarily due to competitive pricing pressures, operational
inefficiencies from lower production levels and increased insulating compound
material costs.
Selling, general and administrative expenses were $22.1 million for the nine
months ended September 30, 2003, compared to $24.9 million for the same period
in 2002. Included in the nine months ended September 30, 2003 was a $1.0 million
charge for payments to be made to our former Chief Executive Officer under his
employment agreement. Excluding this charge, selling, general and administrative
expenses decreased $3.8 million which was primarily the result of volume related
items, continued cost reductions including headcount reductions, lower bad debt
provision and reduced accruals for personnel related costs. These expenses, as a
percent of net sales, decreased from 8.1% for the nine months ended September
30, 2002 to 7.7% for the nine months ended September 30, 2003.
Depreciation and amortization was $20.0 million for the nine months ended
September 30, 2003, compared to $21.0 million for the same period in 2002 from
lower depreciation on property, plant and equipment.
As described below, we have retained Rothschild Inc. as independent financial
advisor. During the nine months ended September 30, 2003, $0.5 million was
incurred for professional fees related to the retention of our financial
advisor. There was no similar charge in the 2002 period.
Impairment and plant closing charges for the nine months ended September 30,
2003 related to the closing of the Kendallville, Indiana plant in June 2003 and
other previously closed plants were $0.8 million. A portion of the equipment
from these facilities 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 $0.5 million was recorded in the second quarter of 2003. Additional
charges of $0.7 million are expected to be incurred related to the plant
closings. These charges relate to shut-down expenditures including occupancy
costs and are expected to be incurred over the next twelve months.
The income tax provision for the nine months ended September 30, 2003 was $0.2
million compared to a tax benefit of $6.5 million for the nine months ended
September 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.
20
LIQUIDITY AND CAPITAL RESOURCES
We have experienced a significant downturn in the industrial/energy and
electronics/data communications markets and increased competitive pricing
pressures in the automotive market that began in 2001 and has continued through
September 30, 2003. The economic downturn and competitive pricing pressures in
the aforementioned markets have resulted in lower sales and weaker cash flows
than we originally expected. Our liquidity also has been negatively impacted as
a result of costs incurred in connection with the prosecution of the AIG
Litigation and the settlement of claims related to the insurance coverage in
question in the AIG Litigation. As a result of our liquidity position and our
capital structure, we have recently experienced reductions in our credit terms
with our suppliers which we anticipate will further reduce our available working
capital beginning in the fourth quarter of 2003.
In light of those developments, we have retained Rothschild Inc., as independent
financial advisor, to evaluate recapitalization alternatives that would reduce
our debt and strengthen our balance sheet.
Working Capital and Cash Flows
Net cash provided by continuing operations was $13.5 million for the nine months
ended September 30, 2003, compared to $14.8 million for the nine months ended
September 30, 2002. The decrease was primarily the result of increased working
capital including the effect of higher copper prices.
Net cash used in investing activities for capital expenditures was $9.3 million
for the nine months ended September 30, 2003, compared to $8.7 million for the
nine months ended September 30, 2002. The increase primarily related to
increased machinery and equipment additions and upgrade expenditures.
Net cash provided by financing activities was $39.7 million for the nine months
ended September 30, 2003, compared to net cash used by financing activities of
$1.1 million for the nine months ended September 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.
Liquidity
As of September 30, 2003, we had $43.3 million of unrestricted cash and cash
equivalents and our working capital was $96.6 million.
We anticipate that our cash requirements for the next twelve months will be for
working capital requirements, for capital expenditures (estimated at
approximately $19.1 million), for plant closing costs and discontinued
operations (estimated at approximately $5.1 million), and for debt service
(excluding the IRB to be repaid by drawings under the letter of credit)
(estimated at approximately $45.2 million). Our primary sources of liquidity are
cash on hand and cash flows from operations. We expect that these sources of
cash will be sufficient to meet our requirements for working capital, capital
expenditures and debt service under our Senior Secured Notes over the next
twelve months. However, unless cash flows from operations materially increase or
we are able to obtain an additional source of liquidity including through debt
or equity financings, such sources of cash would not be sufficient to make
required interest payments on our Senior Subordinated Notes over the next twelve
months. In the event the Company would fail to make any required payments under
the Senior Subordinated Notes, the holders of our Senior Secured Notes and/or
our Senior Subordinated Notes could elect to seek acceleration and repayment of
such indebtedness. If such an acceleration would occur, we would not have
sufficient liquidity to repay such indebtedness and we would not expect to be
able to refinance such indebtedness.
The following table sets forth our contractual obligations at the end of
September 2003 for the periods shown (dollars in millions):
REMAINDER OF
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004-2005 2006-2007 THEREAFTER
------- ------------ --------- --------- ----------
Debt (1)................. $ 393.4 $ 0.0 $ 393.4 $ 0.0 $ 0.0
21
Capital lease obligations 2.0 0.3 0.5 0.4 0.8
Operating leases......... 5.6 0.6 2.4 1.0 1.6
------- ------- ------- ------- -------
Total contractual cash
obligations.............. $ 401.0 $ 0.9 $ 396.3 $ 1.4 $ 2.4
======= ======= ======= ======= =======
(1) Debt obligations are exclusive of interest.
Inflation and Copper Pricing
Inflation has not been a material factor affecting our business. 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 we experience a significant change in copper prices. A $0.10 per pound
change in the price of copper changes our working capital by approximately $2.6
million. We enter into contractual relationships with most of our customers to
adjust our prices based upon the prevailing market prices on the COMEX. This
approach is patterned after our arrangement with our copper suppliers and is
designed to remove the risk associated with fluctuating copper prices. We are
subject to normal inflationary pressures with our other raw materials purchased
as well as our general operating expenses, such as salaries, employee benefits
and facilities costs.
Financing Arrangements
We 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, our senior secured credit
facility; (ii) to cash collateralize certain of our letters of credit, including
the letters of credit that were issued under our senior secured credit facility
and the letters of credit collateralizing two industrial revenue bonds related
to our acquisition of Camden Wire Co., Inc. in 1997; (iii) to pay interest on
our Senior Subordinated Notes and other indebtedness; and (iv) for general
corporate purposes, including working capital.
Our obligations under the Senior Secured Notes are guaranteed on a senior
secured basis by International Wire Holding Company, our parent, and by all of
our domestic restricted subsidiaries. The Senior Secured Notes and the
guarantees are secured by first priority mortgages and liens on substantially
all of our 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, our 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, we may elect, but are 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 we do
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
fail to comply with certain other provisions of the registration rights
agreement, we have agreed to pay additional interest to the holders of the
Senior Secured Notes.
In July 2003, the trustees of an Industrial Revenue Bond ("IRB") drew on a
letter of credit in the amount of $9.0 million to refund the related IRB. As a
result, the Company's restricted cash balance, a portion of which has been used
to cash collateralize the letter of credit, was reduced by $9.0 million. As of
September 30, 2003 the Company has a restricted cash balance of $18.3 million
which is being used to cash collateralize $11.2 million of letters of credit
that were issued to various insurance companies for workers' compensation
programs and a $6.6 million letter of credit that was issued to certain trustees
in respect of one issuance of an IRB. The Company has notified the trustees in
respect of the IRB that the Company will not renew the current letter of credit
of $6.6 million which expires in February 2004. As a result, pursuant to the
terms of the IRB, the trustees will draw on the letter of credit and use such
proceeds to refund the IRB. Accordingly, the IRB of $6.5 million and the related
restricted cash
22
balance of $6.7 million has been classified as a current maturity of long-term
obligations and a current asset, respectively.
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 did not 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 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 September 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 did not have an effect on the
Company's consolidated financial position and results of operations.
23
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 $6.5 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.
24
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 September 30,
2003, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to note 10 in the Notes to Consolidated Financial Statements
in Item 1 of Part I of this Quarterly Report on Form 10-Q, which note 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
10.1 Amended and Restated Employment Agreement, dated September 15,
2003, among Joseph M. Fiamingo, International Wire Holding
Company, International Wire Group, Inc. and the subsidiaries
named therein.
10.2 Supply Contract Extension with Viasystems, Inc.
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.
(b) Reports on Form 8-K
(c) None
26
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: November 14, 2003 By: /s/ GLENN J. HOLLER
-------------------------------------------------
Name: Glenn J. Holler
Title: Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
27
EXHIBIT INDEX
Exhibit
Number Description
10.1 Amended and Restated Employment Agreement, dated September 15,
2003, among Joseph M. Fiamingo, International Wire Holding
Company, International Wire Group, Inc. and the subsidiaries
named therein.
10.2 Supply Contract Extension with Viasystems, Inc.
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.