UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
Commission file number 1-5452
ONEIDA LTD.
(Exact name of Registrant as specified in its charter)
NEW YORK 15-0405700
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
ONEIDA, NEW YORK 13421
(Address of principal executive offices) (Zip code)
(315) 361-3636
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock as of June 10, 2004: 16,824,047.
ONEIDA LTD.
FORM 10-Q
FOR THE THREE MONTHS ENDED MAY 1, 2004
INDEX
EXPLANATORY NOTE
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED STATEMENT OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective May 11, 2004, the Company's common stock
has been suspended from the New York Stock Exchange
(NYSE) and is being traded on the Over the Counter
Market.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Limited Waiver and Amendment No. 13 to Amended and Restated
Credit Agreement dated as of April 27, 2001 between Oneida
Ltd., JPMorgan Chase Bank and the various lenders named in
the Agreement and/or their successors or assigns. The
Limited Waiver and Amendment No. 13 is dated as of
April 30, 2004.
10.2 Amendment No. 14 to Amended and Restated Credit Agreement
dated as of April 27, 2001 between Oneida Ltd., JPMorgan
Chase Bank and the various lenders named in the Agreement
and/or their successors or assigns. Amendment No. 14 is
dated as of April 30, 2004.
10.3 Waiver Letter to Amended and Restated Credit Agreement dated
as of April 27, 2001 between Oneida Ltd., JPMorgan Chase
Bank and the various lenders named in the Agreement and/or
their successors or assigns. The Waiver Letter is dated as
of May 19, 2004.
10.4 Limited Waiver and Amendment No. 11 to 2001 Amended and
Restated Note Purchase Agreement dated as of May 31, 2001,
between Oneida Ltd., THC Systems, Inc., Allstate Life
Insurance Company, Allstate Insurance Company and Pacific
Life Insurance Company. Limited Waiver and Amendment No. 11
is dated as of April 30, 2004.
10.5 Waiver Letter to 2001 Amended and Restated Note Purchase
Agreement dated as of May 31, 2001, between Oneida Ltd., THC
Systems, Inc., Allstate Life Insurance Company, Allstate
Insurance Company and Pacific Life Insurance Company. The
Waiver Letter is dated as of May 19, 2004.
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Current Reports on Form 8-K:
During the Company's fiscal quarter ended May 1, 2004, the following
Current Reports on Forms 8-K were filed:
Form 8-K dated March 1, 2004 to accompany a press release announcing
the receipt from the Company's lenders of further waivers of certain
financial covenants and the further deferral of certain payments.
Form 8-K dated March 9, 2004 to accompany a press release announcing
the rescheduling of the announcement of the Company's year-end
results.
3
Form 8-K dated March 12, 2004 to accompany press releases announcing
the receipt from the Company's lenders of further waivers of certain
financial covenants and the further deferral of certain payments and
the completion of the sale of the Company's Buffalo China factory.
Form 8-K dated March 17, 2004 to accompany a press release announcing
certain of the Company's financial results for the year ended January
31, 2004.
Form 8-K dated March 31, 2004 to accompany a press release announcing
the receipt from the Company's lenders of further waivers of certain
financial covenants and the further deferral of certain payments and
that the Company is no longer in discussions with a potential private
equity investor.
Form 8-K dated April 14, 2004 to accompany a press release announcing
the receipt from the Company's lenders of further waivers of certain
financial covenants and the further deferral of certain payments.
Form 8-K dated April 30, 2004 to accompany a press release announcing
the receipt from the Company's lenders of further waivers of certain
financial covenants and the further deferral of certain payments.
SIGNATURES
CERTIFICATIONS
4
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars, except per share data)
(Unaudited)
For the Three Months Ended
May 1, April 26,
2004 2003
---- ----
Revenues:
Net sales ......................................... $110,645 $107,021
License fees ...................................... 581 340
-------- --------
Total Revenues ..................................... 111,226 107,361
-------- --------
Cost of sales ....................................... 80,254 77,515
-------- --------
Gross Margin ........................................ 30,972 29,846
Operating expenses:
Selling, distribution and administrative
expense ..................................... 32,894 31,676
(Gain) loss on the sale of fixed assets ........ (14) 26
-------- --------
Total ...................................... 32,880 31,702
-------- --------
Operating loss ...................................... (1,908) (1,856)
Other income ........................................ (63,738) (400)
Other expense ....................................... 2,890 53
Interest expense and amortization of
deferred financing costs .......................... 3,771 3,864
-------- --------
Income (loss) before income taxes ................... 55,169 (5,373)
Provision for income taxes .......................... (784) 1,988
-------- --------
Net income (loss) ................................... $ 54,385 $ (3,385)
======== ========
Preferred Stock Dividends ........................... (32) (32)
Net earnings (loss) income available to
common shareholders ................................. $ 54,353 $ (3,417)
-------- --------
Earnings (loss) per share of common stock
Net income:
Basic ........................................... $3.25 $(.21)
Diluted ......................................... 3.25 (.21)
See notes to consolidated financial statements.
5
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED BALANCE SHEETS
(Thousand of Dollars)
Unaudited Audited
May 1, Jan. 31,
2004 2004
--------- --------
ASSETS
Current assets:
Cash............................................................................ $ 5,215 $ 9,886
Trade accounts receivables, less allowance for doubtful
accounts of $2,791 and $2,961, respectively.......................... 62,266 58,456
Other accounts and notes receivable...................................... 3,318 1,890
Inventories.............................................................. 128,173 139,448
Other current assets..................................................... 5,198 5,361
-------- --------
Total current assets.............................................. 204,170 215,041
Property, plant and equipment,net............................................... 67,297 73,675
Assets held for sale............................................................ 5,816 3,199
Goodwill........................................................................ 136,888 136,118
Other assets.................................................................... 11,857 13,468
-------- --------
Total assets...................................................... $426,028 $441,501
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................................... $ 6,166 $ 7,654
Accounts payable......................................................... 18,165 21,231
Accrued liabilities ..................................................... 32,918 45,293
Accrued restructuring.................................................... 3,389 7,400
Long term debt classified as current..................................... 232,048 223,214
-------- --------
Total current liabilities......................................... 292,686 304,792
Accrued postretirement liability................................................ 2,338 62,930
Accrued pension liability ...................................................... 35,488 24,259
Deferred income taxes .......................................................... 10,248 9,823
Other liabilities............................................................... 15,078 17,097
-------- --------
Total liabilities................................................. 355,838 418,901
Commitments and contingencies...................................................
Stockholders' equity:
Cumulative 6% preferred stock--$25 par value; authorized 95,660
shares, issued 86,036 shares, callable at $30 per share
respectively............................................................. 2,151 2,151
Common stock--$l.00 par value; authorized 48,000,000 shares,
issued 17,916,032 and 17,883,460 shares respectively..................... 17,916 17,883
Additional paid-in capital...................................................... 84,571 84,561
Retained earnings (deficit)..................................................... 21,452 (32,933)
Accumulated other comprehensiveloss............................................. (34,331) (27,493)
Less cost of common stock held in treasury; 1,285,679 and
1,285,679 shares, respectively........................................... (21,569) (21,569)
-------- --------
Total stockholders' equity: 70,190 22,600
-------- --------
Total liabilities and stockholders' equity................... $426,028 $441,501
======== ========
See notes to consolidated financial statements.
6
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND APRIL 26, 2003
(Thousands of Dollars)
(Unaudited)
Accum.
Add'l Other
Common Common Preferred Paid-in Retained Comp. Treasury
Shares Stock Stock Capital Earnings Inc(Loss) Stock Total
------ ------- --------- ------- -------- --------- -------- -------
Balance January 31, 2004...... 17,883 $17,883 $2,151 $84,561 $(32,933) $(27,493) $(21,569) $22,600
Stock plan activity........... 33 33 10 43
Minimum pension liability
adjustment, net of tax
benefit of $0................. (7,886) (7,886)
Foreign currency
translation adjustment........ 1,048 1,048
Net income.................... 54,385 54,385
------ ------- ------ ------- -------- -------- -------- -------
Balance May 1, 2004........... 17,916 $17,916 $2,151 $84,571 $ 21,452 $(34,331) $(21,569) $70,190
====== ======= ====== ======= ======== ======== ======== =======
Accum.
Add'l Other
Common Common Preferred Paid-in Retained Comp. Treasury
Shares Stock Stock Capital Earnings Inc(Loss) Stock Total
------ ------- --------- ------- -------- --------- -------- -------
Balance January 25, 2003...... 17,837 $17,837 $2,151 $84,318 $68,407 $(19,190) $(24,134) $129,389
Stock plan
activity...................... 9 9 93 102
Cash dividends declared ($.02
per share).................... (363) (363)
Foreign currency translation
adjustment.................... 13 13
Net loss...................... (3,385) (3,385)
------ ------- ------ ------- ------- -------- -------- --------
Balance April 26, 2003........ 17,846 $17,846 $2,151 $84,411 $64,659 $(19,177) $(24,134) $125,756
====== ======= ====== ======= ======= ======== ======== ========
See notes to consolidated financial statements.
7
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Thousands of Dollars)
Three Months Ended
May 1, April 26,
2004 2003
-------- ---------
Net income (loss)............................................ $ 54,385 $ (3,385)
Foreign currency translation adjustments, net of tax......... 1,048 13
Other comprehensive income, net of tax:
Minimum pension liability adjustments........................ (7,886)
-------- --------
Other comprehensive income (loss)............................ (6,838) 13
-------- --------
Comprehensive income (loss).................................. $ 47,547 $ (3,372)
-------- --------
Balance at end of quarter.................................... $(34,331) $(19,177)
======== ========
See notes to consolidated financial statements.
8
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 1, 2004 AND APRIL 26, 2003
(Unaudited)
(In Thousands)
Three months ended
May 1, April 26,
2004 2003
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 54,385 $(3,385)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
(Gain) loss on disposal of fixed assets..................................... (14) 26
Depreciation and amortization............................................... 2,217 4,027
Deferred income taxes....................................................... 1,099 159
Pension plan amendment (Note 7)............................................. 2,577
Post retirement health care plan amendment (Note 7)......................... (63,277)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (5,623) 7,307
Inventories................................................................. 11,907 (6,804)
Other current assets........................................................ 141 451
Other assets................................................................ (1,297) (1,955)
Accounts payable............................................................ (3,533) 3,176
Accrued liabilities......................................................... (11,102) (4,699)
Other liabilities........................................................... (3,477) (3,210)
-------- -------
Net cash used by operating activities (15,997) (4,907)
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (1,279) (2,307)
Proceeds from sales of assets................................................. 5,517
-------- -------
Net cash provided (used) in investing activities 4,238 (2,307)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........................................ 43 102
Increase (decrease) in short-term debt........................................ (980) 459
Payment of long-term debt..................................................... (769)
Proceeds from issuance of long-term debt...................................... 9,000 8,073
Dividends paid................................................................ (363)
-------- -------
Net cash provided by financing activities 7,294 8,271
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (206) (553)
NET (DECREASE) INCREASE IN CASH................................................. (4,671) 504
CASH AT BEGINNING OF YEAR....................................................... 9,886 2,653
-------- -------
CASH AT END OF PERIOD........................................................... $ 5,215 $ 3,157
======== =======
See notes to consolidated financial statements.
9
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands)
1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Oneida
Ltd. (the "Company,") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended May 1, 2004 are not necessarily indicative of the results that may
be expected for the year ending January 29, 2005. For further information, refer
to the consolidated financial statements and notes thereto included in the
annual report on Form 10-K for the year ended January 31, 2004.
Going Concern
The accompanying financial statements for the fiscal quarter ended May 1, 2004
and April 26, 2003, respectively have been prepared on a going concern basis
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The Company experienced a net loss of $99.2
million for the year ended January 31, 2004 and has provided a full valuation
allowance for its deferred tax assets in 2004. This has resulted in a deficit in
retained earnings as of January 31, 2004. In addition, the Company has violated
interest coverage ratio, leverage ratio, and net worth covenants for the second,
third and fourth quarter in fiscal 2004 and first of quarter fiscal 2005.
Additionally, the Company violated a covenant for the year ending January 31,
2004 requiring an unqualified report from the Company's independent public
accountant. During the first quarter ending May 1, 2004, the Company reported
earnings of $54,385 of which $56,293 was non-operating. First quarter earnings
brought the Company's retained earnings back into a positive position. The
lenders have waived the covenant violations through June 15, 2004 and deferred
the required pay down of total indebtedness which amounts to $45 million at
May 1, 2004. In addition, $3.9 million due to senior note holders has been
deferred. Under the amended and restated agreement, covenant violations, if
not corrected, could cause the lenders to declare the principal outstanding
to be payable immediately. Accordingly, the entire bank debt has been reported
as current in the accompanying balance sheet. On March 31, 2004, the Company
announced that negotiations with a potential investor had been terminated.
These factors raise substantial doubt as to the Company's ability to continue
as a going concern.
The Company has undertaken several initiatives to return to profitability,
increase liquidity and compete in a changing marketplace. These include:
o The closure and sale of the Buffalo, NY manufacturing facility, the
closure and sale of facilities in Mexico and Italy and the closure and
pending sale of facilities in China, Italy and Canada;
o The outsourcing of production from these facilities to lower cost
producers or entering into a favorable supply agreement as is the case
with the new owners of Buffalo China;
o The implementation of lean manufacturing and related work force
reduction;
o Plan changes in post-retirement and pension benefits;
o On-going discussions with the banking group to extend their commitment
with covenants the Company can meet.
The Company's viability is dependent upon the execution of these plans and the
forbearance of its banks. The Company's revenues and costs are also dependent
upon some factors that are not entirely within its control such as changes in
the economy and increased competition. Due to the uncertainties of these
factors, actual revenue and costs may vary from expected amounts, possibly to a
material degree, and such variations could affect future funding requirements.
10
If the Company is unable to achieve its operating and strategic plans and
objectives, the Company may need to raise additional capital, obtain further
covenant waivers from its lenders or seek additional investors. There can be no
assurance that the Company will be successful in any or all of these endeavors,
and failure may affect the Company's ability to continue to operate its
business.
Reclassifications
Certain reclassifications have been made to the prior year's information to
conform to the current year presentation. In 2003, shipping and handling costs
have been reclassified from net sales to cost of sales. Selling expense for the
Company owned European retail shops has been reclassified from cost of sales to
selling, distribution and administrative expenses. Amortization of deferred
financing costs has been reclassified from other expense to interest and
amortization of deferred financing costs. Additionally prior years' cash flows
have been reclassified to accurately report the effect of foreign currency
translation on cash.
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income", requires companies to report a
measure of operations called comprehensive income. This measure, in addition to
net income, includes as income or loss, the following items, which if present
are included in the equity section of the balance sheet: unrealized gains and
losses on certain investments in debt and equity securities; foreign currency
translation; gains and losses on derivative instruments designated as cash flow
hedges; and minimum pension liability adjustments. The Company has reported
comprehensive income in the Consolidated Statements of Comprehensive Income
(Loss).
Stock Option Plans
The Company has elected to continue following APB No. 25 in accounting for its
stock-based compensation plans. Under APB No. 25, compensation expense is not
required to be recognized for the Company's stock-based compensation plans.
Under Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock Based Compensation", compensation expense is recognized
for the fair value of the options on the date of grant over the vesting period
of the options.
Application of the fair-value based accounting provision of SFAS 123 results in
the following pro forma amounts of net income (loss) and earnings (loss) per
share:
(Thousands Except Per Share Amounts)
For the Three Months Ended
May 1, April 26,
2004 2003
-------- --------
Net income (loss), as reported.................................. $54,385 $(3,385)
Deduct: Total stock-based employee compensation expense
determined under Black-Scholes option pricing model, net
of related income tax effect............................... (596) (554)
------- -------
Pro forma net income............................................ $53,789 $(3,939)
Earnings (loss) per share:
Basic........................................ $3.25 $(.21)
Diluted...................................... 3.25 (.21)
Pro forma: Basic........................................ 3.21 (.24)
Diluted...................................... 3.21 (.24)
There was no stock based employee compensation expense included in the
Consolidated Statement of Operations.
11
Accounting Pronouncements
In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1,
"Accounting and Disclosure requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003", which permits the sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. As a result of the
Company's decision to terminate the postretirement health care plan as discussed
in Note 7, this accounting pronouncement will not apply.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In December 2003 the FASB issued
FIN 46R. The objective of FIN No. 46 is to improve financial reporting by
companies involved with variable interest entities. FIN No. 46 changes certain
consolidation requirements by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The Interpretation outlines
disclosure requirements for variable interest entities in existence prior to
January 31, 2003, and requires consolidation of variable interest entities
created after January 31, 2003. In addition, FIN 46R requires consolidation of
variable interest entities created prior to January 31, 2003 for fiscal periods
ending after March 15, 2004.
2. RESTRUCTURING
As a result of the substantial manufacturing inefficiencies and negative
manufacturing variances, it was determined at the end of the third quarter of
fiscal year ending January 31, 2004 to close and sell the following factories:
Buffalo China dinnerware factory and decorating facility in Buffalo NY;
dinnerware factory in Juarez, Mexico; flatware factory in Toluca, Mexico;
hollowware factory in Shanghai China; and hollowware factory in Vercelli, Italy.
The Company will continue to market the products from these sites, using
independent suppliers. The Toluca, Mexico; Shanghai, China; and Vercelli, Italy
facilities closings were completed during the fourth quarter of the year ended
January 31, 2004. The Buffalo, NY factory buildings and associated materials and
supplies were sold to Niagara Ceramics Corporation on March 12, 2004. The
Buffalo China name and all other active Buffalo China trademarks and logos
remain the property of the Company. Niagara Ceramics is an independent supplier
to the Company. The Juarez Mexico factory sale was completed on April 22, 2004,
and the Toluca Mexico factory sale was completed on June 2, 2004. Additionally,
the warehouse located in Niagara Falls, Canada, will be sold during the second
quarter of fiscal 2005, and part of the Vercelli Italy properties has been sold.
The restructuring plans are intended to reduce costs, increase the Company's
liquidity and better position the Company to compete under the current economic
conditions.
Under the restructuring plan, approximately 1,150 employees will be terminated.
As of May 1, 2004, 1,060 of those terminations have occurred while 65 employees
have accepted employment with Niagara Ceramics who are now the new owners of
Buffalo China. Termination benefits have been recorded in accordance with
contractual agreements or statutory regulations. The Company recognized a charge
of $9,001 in the Statement of Operations under the caption "Restructuring
Expense" in the year ended January 31, 2004. Cash payments during the quarter
ended May 1, 2004 under the restructuring were $4,009 and the remaining
liability at the quarter end is $3,389.
3. INCOME TAXES
During the quarter ended October 25, 2003, the Company established a full
valuation allowance against its net deferred tax assets and continues to
maintain a full valuation allowance. The provision for income taxes for the
three months ended May 1, 2004 was primarily attributable to foreign tax related
to foreign operations and domestic deferred tax liabilities recognized on
indefinite long lived intangibles (these liabilities cannot be used to offset
deferred tax assets in determining the amount of valuation allowance needed for
the quarter). The Company did not record a tax benefit for the domestic losses
during the three months ended May 1, 2004. The Company will continue to maintain
a valuation allowance against all of its remaining deferred tax assets until
sufficient evidence exists to support its reversal.
12
During the first quarter ended May 1, 2004, the Company recognized two
significant events that impact taxes. As discussed in Note 7, the Company
announced that it has terminated the Oneida Ltd. Retiree Group Medical Plan,
resulting in income recognition of $63,277. The inclusion of this income in the
first quarter domestic tax calculation produced no tax expense since the
deferred tax asset is realized and the valuation allowance previously recognized
against that asset is reversed. Also, the Company amended two of its pension
plans to freeze benefit accruals, and as a result recognized a charge of $2,577.
The inclusion of this charge in the first quarter domestic tax calculation
produced no tax benefit because a full valuation allowance is recorded against
the deferred tax asset resulting from this item.
The following table summarizes the Company's provision for income taxes and the
related effective tax rates:
For the Three Months Ended
May 1, 2004 April 26, 2003
----------- --------------
Income (loss) before income taxes ............ $55,169 $(5,373)
(Provision) benefit for income taxes ......... (784) 1,988
Effective tax rate ........................... 1.42% 36.87%
4. INVENTORIES
Inventories by major classification are as follows:
May 1, 2004 January 31, 2004
----------- ----------------
Finished goods ............................... $117,879 $122,769
Goods in process ............................. 4,057 7,096
Raw materials and supplies ................... 6,237 9,583
-------- --------
Total ........................................ $128,173 $139,448
======== ========
5. EARNINGS PER SHARE
Basic and diluted earnings per share are presented for each period in which a
statement of operations is presented. Basic earnings per share is computed by
dividing net income less preferred stock dividends earned, even if not declared,
by the weighted average shares actually outstanding for the period. Diluted
earnings per share include the potentially dilutive effect of shares issuable
under the employee stock purchase and incentive stock option plans.
The shares used in the calculation of diluted EPS exclude options to purchase
shares where the exercise price was greater than the average market price of
common shares for the period. Such shares aggregated 884 and 1,715 for the three
months ended May 1, 2004 and April 26, 2003, respectively.
Under the provisions of the amended revolving credit and note agreements, at May
1, 2004, the Company was able to declare dividends on its 6% Cumulative
Preferred Stock up to $32 per quarter. However, no dividend was declared on the
preferred stock for quarter ended May 1, 2004 and the preferred dividends in
arrears is $32. The preferred accumulated stock dividends in arrears as of May
1, 2004 is $161.
13
The following is a reconciliation of basic earnings per share to diluted
earnings per share for the three months ended May 1, 2004 and April 26, 2003:
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
------ --------- ---------- ------- ---------
2004:
Basic earnings (loss) per share........... $54,385 $(32) $54,353 16,740 $3.25
Effect of stock options...................
Diluted earnings (loss) per share......... 54,385 (32) 54,353 16,740 3.25
2003:
Basic earnings (loss) per share........... $(3,385) $(32) $(3,417) 16,556 $(.21)
Effect of stock options................... 10
Diluted earnings (loss) per share......... (3,385) (32) (3,417) 16,566 (.21)
6. DEBT
In April 2003, the Company and its required lenders entered into amendments to
the revolving credit and note agreements. These amendments extend the maturity
to May 31, 2005 from February 1, 2004, adjust certain financial covenants and
prohibit payment of dividends on common stock. In addition, the commitment under
the revolving credit facility reduced to $225,000 upon signing of the amendment
with further reductions to $220,000 on July 25, 2003, $215,000 on November 3,
2003, $205,000 on January 30, 2004, $185,000 on February 7, 2004, $175,000 on
May 3, 2004 and $165,000 on November 1, 2004.
These facilities contain certain financial covenants, including a restriction
limiting the Company's total debt outstanding to a pre-determined multiple of
the prior rolling twelve months earnings before interest, taxes, depreciation
and amortization. A default in compliance with these covenants, if unremedied,
could cause the lenders to declare the principal outstanding to be payable
immediately. Since October 25, 2003, the Company has been in violation of the
interest coverage ratio, leverage ratio and net worth covenants and received a
series of waivers from its required lenders that expire June 15, 2004. The
waivers also postponed the $45 million reductions in the revolving credit
facility until June 15, 2004. The Company did not pay any compensation for these
waivers. The Company's senior note holders agreed to defer until June 15, 2004 a
$3.9 million payment that was due October 31, 2003. On June 15, 2004, the
Company expects to have provided lenders with updated financial information
regarding operations and restructuring plans and request waivers to incorporate
a number of changes. These changes include the amendment of the financial
covenants and permit certain transactions. The Company expects there will be a
further deferral of the reductions and payments until such amendments are agreed
upon. The Company's outstanding borrowings are classified as current as the
waiver has not been agreed upon and more restrictive covenants must be met as of
July 31, 2004 under the existing agreement and it is probable that the Company
will fail to meet those covenants. Total interest costs incurred by the Company
are presented net of capitalized interest of $26 and $8 for three months ended
May 1, 2004 and April 26, 2003.
Under the provisions of the amendments, at May 1, 2004, the Company was able to
declare dividends on its 6% cumulative preferred stock up to $32 per quarter.
However, no dividend was declared on the preferred stock for the first quarter
of 2004.
14
7. RETIREMENT BENEFIT PLANS
Pension Plans
On April 22, 2004 the Company announced that the Retirement Plan for Employees
of Oneida Ltd. and the Retirement Income Plan for Employees of Buffalo China,
Inc. have been amended to freeze benefit accruals under the Plans effective June
7, 2004. Historically, the valuation of the Company's pension plan was prepared
and reported on an annual basis. As a result of the amendment to freeze the
benefit accrual, there has been a substantial change in the components of the
pension plan from originally reported at January 31, 2004. Based upon this
change, the Company has revalued the pension plan for the quarter ended May 1,
2004 and has disclosed the component below for the quarter ended May 1, 2004,
along with the audited annual valuation for the prior two years for comparative
purposes.
The net periodic pension cost for the Company's various defined benefit plans
for May 1, 2004, January 31, 2004 and January 25, 2003 were as follows:
Audited Audited
Three Months Ended Year Ended Year Ended
May 1, 2004 January 31, 2004 January 25, 2003
----------- ---------------- ----------------
Service cost ......................................... $ 13 $ 1,383 $ 1,062
Interest cost ........................................ 945 3,004 2,656
Expected return on plan assets ....................... (553) (1,808) (2,008)
Curtailment loss ..................................... 320 383
Net amortization ..................................... 292 197 (118)
------ ------- -------
Net periodic pension cost ............................ $1,017 $ 3,159 $ 1,592
One-time recognition of remaining prior service cost.. 2,037 0 0
One-time charge for QSERP amendment .................. 540 0 0
------ ------- -------
Total net periodic pension cost ...................... 3,594 3,159 1,592
====== ======= =======
In determining the net periodic pension cost, the weighted average discount rate
was 6.25% for the three months ended May 1, 2004 and 6.75%, and 6.90% for the
January years ended 2004 and 2003, respectively. The one-time recognition of
prior service cost and QSERP amendment is recorded in other expense.
15
Plan assets consist primarily of stocks, bonds, and cash equivalents. The
following table presents a reconciliation of the funded status of the plans and
assumptions, based on valuations performed at May 1, 2004, January 31, 2004 and
January 25, 2003.
Three Months Audited Audited
Ended Year Ended Year Ended
May 1, 2004 Jan. 31, 2004 Jan. 25, 2003
------------ ------------- -------------
Benefit obligation-beginning of year ... $(61,778) $(45,593) $(44,373)
Service cost ........................... (13) (1,383) (1,062)
Interest cost .......................... (945) (3,004) (2,656)
Benefits paid .......................... 641 2,566 2,375
Amendment .............................. (540) (1,624)
Curtailment gain ....................... 182
Actuarial (loss) gain .................. (6,994) (14,364) 1,747
-------- -------- --------
Benefit obligation ..................... $(69,447) $(61,778) $(45,593)
======== ======== ========
Change in plan assets:
Fair value of plan assets .............. $ 26,336 $ 20,849 $ 24,432
Actual return on plan assets ........... (610) 3,524 (3,238)
Employer contribution .................. 642 4,529 2,030
Benefits paid .......................... (641) (2,566) (2,375)
-------- -------- --------
Fair value of plan assets .............. $ 25,727 $ 26,336 $ 20,849
======== ======== ========
Funded status .......................... $(43,720) $(35,442) $(24,744)
Unrecognized net losses ................ 26,306 20,090 7,820
Unrecognized prior service cost ........ 43 2,425 2,951
Unrecognized net asset ................. 1,297 (195) (345)
-------- -------- --------
Accrued benefit cost ................... (16,074) (13,122) (14,318)
Additional minimum liability ........... (27,646) (22,141) (9,178)
-------- -------- --------
Total accrued benefit cost ............. $(43,720) $(35,263) $(23,496)
======== ======== ========
Current portion accrued benefit cost.... 8,232 11,004 4,604
======== ======== ========
Long-term portion accrued benefit cost.. $(35,488) $(24,259) $(18,892)
======== ======== ========
Range of weighted average assumptions: May 1, 2004 Jan. 31, 2004 Jan. 25, 2003
----------- ------------- -------------
Discount rate .......................... 6.25% 6.25% 6.75%
Expected return on plan assets ......... 8.0-8.5% 8.0-8.5% 8.0-8.5%
Rate of compensation increase .......... 0-2.5% 0-2.5% 2.5-4.0%
The accumulated benefit obligation for the defined benefit plans for May 1, 2004
and January 31, 2004 was $69,447 and $61,778, respectively.
FASB 87 "Employers' Accounting for Pensions" requires recognition in the balance
sheet of an additional minimum liability for pension plans with accumulated
benefit obligation in excess of plan assets. At May 1, 2004 and January 2004
respectively, the accumulated benefit obligation exceeded the plan assets
resulting in the recognition of an additional minimum pension liability of
$27,646 and $22,141, an intangible asset of $43 and $2,425 and a charge to
shareholders' equity, net of tax benefit, of $7,886 and $13,695. A deferred tax
asset valuation allowance was recorded to continuing operations for the deferred
tax asset associated with the additional minimum pension liability. In
accordance with ERISA regulations, in fiscal year 2005, the Company will defer
$1,780 in contributions. Expected contributions by the Company to the defined
benefit plans for the remainder of fiscal 2005 are $8,232.
16
Postretirement Health Care and Life Insurance Benefits
On April 27, 2004, the Company announced that it has terminated the Oneida Ltd.
Retiree Group Medical Plan (the Plan) effective May 31, 2004. Historically, the
valuation of the Company's post retirement plan was prepared and reported on an
annual basis. As a result of the amendment to terminate the Plan, there has been
a substantial change in the components of the Plan. Based upon this change, the
Company has revalued the Plan for the quarter ended May 1, 2004 and has
disclosed the component below for the quarter ended May 1, 2004, along with the
audited annual valuation for the prior two years for comparative purposes.
Net periodic postretirement benefit cost for May 1, 2004, January 31, 2004 and
January 25, 2003 were as follows:
Audited Audited
Three Months Ended Year Ended Year Ended
May 1, 2004 January 31, 2004 January 25, 2003
-------------------- ---------------- ----------------
Service cost ............................. $112 $1,398 $1,491
Interest cost ............................ 752 5,945 5,916
Net amortization ......................... (919) 984 1,006
Curtailment gain ......................... 0 (556) 0
-------- ------ ------
Net periodic postretirement benefit cost.. (55) 7,771 8,413
One-time plan termination benefit ........ (61,973)
-------- ------ ------
Total postretirement expense (benefit).... $(62,028) $7,771 $8,413
======== ====== ======
In determining the net periodic postretirement benefit cost, the weighted
average discount rate was 6.25% for the three months ended May 1, 2004 and
6.75%, and 6.90% for the January years ended 2004 and 2003, respectively. The
one-time plan termination benefit is recorded in other income.
The following table sets forth the status of the Company's postretirement plans,
which are unfunded based on valuations performed at May 1, 2004, January 31,
2004 and January 25, 2003, respectively:
Audited Audited
Three Months Ended Year Ended Year Ended
May 1, 2004 Jan. 31, 2004 Jan. 25, 2003
-------------------- ------------- -------------
Change in benefit obligation
Benefit obligation - beginning of year.. $(97,019) $(92,758) $(78,524)
Service cost ........................... (112) (1,398) (1,491)
Interest cost .......................... (752) (5,945) (5,916)
Benefits paid .......................... 1,157 5,108 5,191
Employee contributions ................. (231) (1,018) (766)
Amendments/special terminations ........ 45,565 2,076 0
Curtailments/settlements................ 47,602
Actuarial loss ......................... 0 (3,084) (11,252)
------- -------- --------
Benefit obligation ..................... $(3,790) $(97,019) $(92,758)
======= ======== ========
Funded status .......................... $(3,790) $(97,019) $(92,758)
Unrecognized net losses ................ 24 32,498 33,263
Unrecognized prior service cost ........ (222) (2,446) (3,713)
------- -------- --------
Accrued postretirement benefit cost..... (3,988) (66,967) (63,208)
Less current portion ................ 1,650 4,037 3,500
------- -------- --------
Accrued postretirement benefit cost .... $(2,338) $(62,930) $(59,708)
======= ======== ========
Weighted average assumptions: May 1, 2004 Jan. 31, 2004 Jan. 25, 2003
----------- ------------- -------------
Discount rate .......................... 6.25% 6.25% 6.75%
Healthcare inflation rate .............. 8.00% 8.0% 10.0%
Prescription drug inflation rate ....... 6.0-9.0% 6.0-9.0% 6.0-10.0%
17
The remaining liability at May 1, 2004 represents estimated benefits through May
31, estimated incurred but not reported claims (IBNR) and the actuarial value of
a purchased life insurance plan for retirees.
The Company previously maintained a separate liability for employees that had
vested postretirement health care benefits and were no longer employed by the
Company. This liability has been reversed as a result of the plan termination
and other income of $1,254 was recorded.
8. OPERATIONS BY SEGMENT
During fiscal 2004, the Company determined that it should have historically been
reporting three reportable segments, as defined in SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information": Foodservice, Consumer
and International. Foodservice and Consumer segments operate in the US. The
Company previously reported that its Tableware segment was grouped around three
major product categories. The prior year disclosures have been restated to
report these three segments. This change in segment reporting has no effect on
reported earnings.
The Company's Consumer segment sells directly to a broad base of retail outlets
including department stores, mass merchandisers, Oneida Home stores and chain
stores. The Company's Foodservice segment sells directly or through distributors
to Foodservice operations, including hotels, restaurants, airlines, cruise
lines, schools and healthcare facilities. The Company's International segment
sells to a variety of distributors, foodservice operations and retail outlets.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its segments based on revenue, and reports
segment contributions before unallocated manufacturing costs, unallocated
selling, distribution and administrative costs, interest, other income/expenses,
corporate expenses and income taxes. The Company does not track its assets by
segment and, therefore, is unable to present assets by segment. The Company does
not derive more than 10% of its total revenues from any individual customer,
government agency or export sales.
18
Segment information for the first quarter of 2004 and 2003 were as follows:
2004 2003
---- ----
Revenues
Sales to external customers:
Foodservice ........................................... $ 50,411 $ 47,300
Consumer .............................................. 39,765 40,259
International ......................................... 20,469 19,462
-------- --------
Total segment revenues ................................ 110,645 107,021
Reconciling items:
License revenues ...................................... 581 340
-------- --------
Total revenues ........................................... 111,226 107,361
Income (loss) before income taxes
Segment contributions before unallocated costs
Foodservice ........................................... 16,294 13,896
Consumer .............................................. 4,913 4,936
International ......................................... (508) (525)
-------- --------
Total segment contributions ........................... 20,699 18,307
Unallocated manufacturing costs .......................... (8,445) (6,992)
Unallocated selling, distribution and administrative costs (14,176) (13,197)
(Gain) loss on sales of assets ........................... 14 26
Other income ............................................. 63,738 400
Other (expense) .......................................... (2,890) (53)
Interest expense and deferred financing costs ............ (3,771) (3,864)
-------- --------
Income (loss) before income taxes ........................ $ 55,169 $ (5,373)
======== ========
9. SUBSEQUENT EVENTS
Sale of Juarez, Mexico
On April 22, 2004, the Company completed the sale of the Juarez, Mexico factory
for $2,475, which resulted in a gain of approximately $986.
Sale of Toluca, Mexico
On June 2, 2004, the Company completed the sale of the Toluca, Mexico factory
for $1,750, which resulted in a gain of approximately $970.
Due to the statutory filing requirements, the Mexican facilities operate on a
calendar fiscal year and these sales are recorded in the second quarter of the
year ending January 29, 2005.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter ended May 1, 2004 compared with
the quarter ended April 26, 2003
(In Thousands)
2004 2003
---- ----
Net Sales:
Foodservice ......................... $50,411 $47,300
Consumer ............................ 39,765 40,259
International ....................... 20,469 19,462
------ ------
Total ............................ 110,645 107,021
Gross Margin ........................... 30,972 29,846
% Net Sales ......................... 28.0% 27.9%
Operating Expenses ..................... 32,880 31,702
% Net Sales ......................... 29.7% 29.6%
Quarterly Review
The accompanying financial statements for the fiscal quarter ended May 1, 2004
and April 26, 2003, respectively have been prepared on a going concern basis
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The Company experienced a net loss of $99.2
million for the year ended January 31, 2004 and has provided a full valuation
allowance for its deferred tax assets in 2004. This has resulted in a deficit in
retained earnings as of January 31, 2004. In addition, the Company has violated
interest coverage ratio, leverage ratio, and net worth covenants for the second,
third and fourth quarter in fiscal 2004 and first of quarter fiscal 2005.
Additionally, the Company violated a covenant for the year ending January 31,
2004 requiring an unqualified report from the Company's independent public
accountant. During the first quarter ending May 1, 2004, the Company reported
earnings of $54,385 of which $56,293 was non-operating. First quarter earnings
brought the Company's retained earnings back into a positive position. The
lenders have waived the covenant violations through June 15, 2004 and deferred
the required pay down of total indebtedness which amounts to $45 million at
May 1, 2004. In addition, $3.9 million due to senior note holders has been
deferred. Under the amended and restated agreement, covenant violations,
if not corrected, could cause the lenders to declare the principal outstanding
to be payable immediately. Accordingly, the entire bank debt has been reported
as current in the accompanying balance sheet. On March 31, 2004, the Company
announced that negotiations with a potential investor had been terminated.
These factors raise substantial doubt as to the Company's ability to continue
as a going concern.
The Company has undertaken several initiatives to return to profitability,
increase liquidity and compete in a changing marketplace. These include:
o The closure and sale of the Buffalo, NY manufacturing facility, the
closure and sale of facilities in Mexico and Italy and the closure and
pending sale of facilities in China, Italy and Canada;
o The outsourcing of production from these facilities to lower cost
producers or entering into a favorable supply agreement as is the case
with the new owners of Buffalo China;
o The implementation of lean manufacturing and related work force
reduction;
o Plan changes in post-retirement and pension benefits;
o On-going discussions with the banking group to extend their commitment
with covenants the Company can meet.
The Company's viability is dependent upon the execution of these plans and the
forbearance of its banks. The Company's revenues and costs are also dependent
upon some factors that are not entirely within its control such as changes in
the economy and increased competition. Due to the uncertainties of these
factors, actual revenue and costs may vary from expected amounts, possibly to a
material degree, and such variations could affect future funding requirements.
If the Company is unable to achieve its operating and strategic plans and
objectives, the Company may need to raise additional capital, obtain further
covenant waivers from its lenders or seek additional investors. There can be no
assurance that the Company will be successful in any or all of these endeavors,
and failure may affect the Company's ability to continue to operate its
business.
20
Consolidated net sales for the three months ended May1, 2004 increased $3,624
(3.4%) as compared to the same period in the prior year. Sales of Foodservice
products increased by $3,111 (6.6%) over the same period in the prior year
primarily from increased volume to chain restaurant customers. International
sales increased $1,007 (5.2%) over the prior year which was attributable to the
general economic improvement in the first three months of the current year.
These increases were slightly offset by a decrease in sales volume in the
Consumer segment. During the first quarter, order volumes continued to increase,
which resulted in short term product shortages.
Gross margin for the first three months was $30,972 or 28.0% as a percentage of
net sales, as compared to $29,846 or 27.9% for the same period in the prior
year. The increase in gross margins is due to increased sales volumes. The
closure of the manufacturing facilities and implementation of lean manufacturing
at the Sherrill, NY manufacturing facility resulted in reduced unfavorable
manufacturing variances. This was offset by a $3,200 inventory write-down in
conjunction with the Company's focus on reducing warehousing costs, inventory
levels and improving cash flow.
Operating expenses increased $1,172 or 3.7% for three months ended May 1, 2004
as compared to the same period in the prior year. The increase is attributable
to professional fees the Company has incurred investigating financing
alternatives.
Other income was $63,738 for the quarter ended May 1, 2004 compared to $400 a
year ago. This increase is the result of a decision by the Company to terminate
the Oneida Ltd. Retiree Group Medical Plan. The plan termination resulted in a
one-time benefit of $61,973.
Other expense was $2,890 for the three months ended May 1, 2004 compared to $53
a year ago. This increase is the result of a decision by the Company to freeze
benefit accruals for the Retirement Plans. The plan amendment resulted in a
one-time recognition of prior service cost of $2,577.
Interest expense and amortization of deferred financing costs decreased by $93
or 2.4% in the first quarter of 2004 compared with the same period a year ago.
Capitalized interest was $26 in the quarter ended 2004 and $8 over the same
period a year ago. The decrease is due to slightly lower average borrowings and
lower prevailing interest rates.
Provision for income taxes as a percentage of income (loss) before income taxes
was 1.42% or $784 for the three months ended May 1, 2004 as compared to 36.87%
or $1,988 for the same period in the prior year. During the quarter ended
October 25, 2003, the Company established a full valuation allowance against its
net deferred tax assets and continues to maintain a full valuation allowance.
The provision for income taxes for the three months ended May 1, 2004 was
primarily attributable to foreign tax related to foreign operations and domestic
deferred tax liabilities recognized on indefinite long lived intangibles (these
liabilities cannot be used to offset deferred tax assets in determining the
amount of valuation allowance needed for the quarter). The Company did not
record a tax benefit for the domestic losses during the three months ended May
1, 2004. The Company will continue to maintain a valuation allowance against all
of its remaining deferred tax assets until sufficient evidence exists to support
its reversal.
During the first quarter ended May 1, 2004, the Company recognized two
significant events that impact taxes. As discussed in Note 7, the Company
announced that it has terminated the Oneida Ltd. Retiree Group Medical Plan,
resulting in income recognition of $61,973. The inclusion of this income in the
first quarter domestic tax calculation produced no tax expense since the
deferred tax asset is realized and the valuation allowance previously recognized
against that asset is reversed. Also, the Company amended two of its pension
plans to freeze benefit accruals, and as a result recognized a charge of $2,577.
The inclusion of this charge in the first quarter domestic tax calculation
produced no tax benefit because a full valuation allowance is recorded against
the deferred tax asset resulting from this item.
The following table summarizes the Company's provision for income taxes and the
related effective tax rates:
For the Three Months Ended
May 1, 2004 April 26, 2003
----------- --------------
Income (loss) before income taxes ............ $55,169 $(5,373)
(Provision) benefit for income taxes ......... (784) 1,988
Effective tax rate ........................... 1.42% 36.87%
21
Restructuring and Lean Manufacturing
As a result of the substantial manufacturing inefficiencies and negative
manufacturing variances, it was determined at the end of the third quarter of
fiscal year ending January 31, 2004 to close and sell the following factories:
Buffalo China dinnerware factory and decorating facility in Buffalo NY;
dinnerware factory in Juarez, Mexico; flatware factory in Toluca, Mexico;
hollowware factory in Shanghai China; and hollowware factory in Vercelli, Italy.
The Company will continue to market the products primarily manufactured from
these sites, using independent suppliers. The Toluca, Mexico; Shanghai, China;
and Vercelli, Italy facilities closings were completed during the fourth quarter
of the year ended January 31, 2004. The Buffalo, NY factory buildings and
associated materials and supplies were sold to Niagara Ceramics Corporation on
March 12, 2004. The Buffalo China name and all other active Buffalo China
trademarks and logos remain the property of the Company. Niagara Ceramics is an
independent supplier to the Company. The Juarez Mexico factory sale was
completed on April 22, 2004, and the Toluca Mexico factory sale was completed on
June 2, 2004. Additionally, the warehouse located in Niagara Falls, Canada, will
be closed during the second quarter of fiscal 2005, and part of the Vercelli
Italy properties have been sold. The restructuring plans are intended to reduce
costs, increase the Company's liquidity and better position the Company to
compete under the current economic conditions.
Under the restructuring plan, approximately 1,150 employees will be terminated.
As of May 1, 2004, 1,060 of those terminations have occurred while 65 employees
have accepted employment with Niagara Ceramics who are now the new owners of
Buffalo China. Termination benefits have been recorded in accordance with
contractual agreements or statutory regulations. The Company recognized a charge
of $9,001 in the Statement of Operations under the caption "Restructuring
Expense" in the year ended January 31, 2004. Cash payments during the quarter
ended May 1, 2004 under the restructuring were $4,009 and the liability at the
quarter end is $3,389.
The Company is implementing a lean manufacturing approach at its Sherrill, NY
manufacturing facility in an effort to reduce manufacturing and overhead costs.
The lean manufacturing conversion is projected to be completed by July 30, 2004
and expected annual savings are $18 million. Lean manufacturing is a process
that eliminates all costs that do not add value to the finished product. The
savings will be achieved through the continual elimination of overhead positions
and increased manufacturing efficiencies associated with lean manufacturing. The
forks and spoons that are manufactured by the lean manufacturing lines are on
plan and have resulted in cost reductions. The remaining metal products to be
converted need to result in similar cost savings as the forks and spoons in
order for the Sherrill, NY facility to remain operational.
Liquidity & Financial Resources
Cash used in operating activities was $15,997 and $4,907 for the three months
ended May 1, 2004 and April 26, 2003, respectively. The net cash used in
operating activities for the three months ended May 1, 2004 was primarily due to
negative changes in working capital of which the largest components were
accounts receivables and accrued liabilities offset by positive change in
inventory.
Cash generated from investing activities was $4,238 for the three months ended
May 1, 2004 compared to cash used of $2,307 for the same period in the prior
year. The sale of Buffalo China on March 12, 2004 generated cash of $5,517,
which were offset by capital expenditures of $1,279. Cash used in the prior year
was for capital expenditures.
Cash flow from financing activities generated cash of $7,294 for the three
months ended May 1, 2004 compared to cash generated of $8,271 for the same
period in the prior year. The increase in cash was a result of additional debt
proceeds used to fund working capital needs.
In April 2003, the Company and its required lenders entered into amendments to
the revolving credit and note agreements. These amendments extend the maturity
to May 31, 2005 from February 1, 2004, adjust certain financial covenants and
prohibit payment of dividends on common stock. In addition, the commitment under
the revolving credit facility reduced to $225,000 upon signing of the amendment
with further reductions to $220,000 on July 25, 2003, $215,000 on November 3,
2003, $205,000 on January 30, 2004, $185,000 on February 7, 2004, $175,000 on
May 3, 2004 and $165,000 on November 1, 2004.
22
These facilities contain certain financial covenants, including a restriction
limiting the Company's total debt outstanding to a pre-determined multiple of
the prior rolling twelve months earnings before interest, taxes, depreciation
and amortization. A default in compliance with these covenants, if unremedied,
could cause the lenders to declare the principal outstanding to be payable
immediately. Since October 25, 2003, the Company has been in violation of the
interest coverage ratio, leverage ratio and net worth covenants and received a
series of waivers from its required lenders that expire June 15, 2004. The
waivers also postponed the $45 million reductions in the revolving credit
facility until June 15, 2004. The Company did not pay any compensation for these
waivers. The Company's senior note holders agreed to defer until June 15, 2004 a
$3.9 million payment that was due October 31, 2003. On June 15, 2004, the
Company expects to have provided lenders with updated financial information
regarding operations and restructuring plans and request waivers to incorporate
a number of changes. These changes include the amendment of the financial
covenants and permit certain transactions. The Company expects there will be a
further deferral of the reductions and payments until such amendments are agreed
upon. The Company's outstanding borrowings are classified as current as the
waiver has not been agreed upon and more restrictive covenants must be met as of
July 31, 2004 under the existing agreement and it is probable that the Company
will fail to meet those covenants. Total interest costs incurred by the Company
are presented net of capitalized interest of $26 and $8 for three months ended
May 1, 2004 and April 26, 2003.
Under the provisions of the amendments, at May 1, 2004, the Company was able to
declare dividends on its 6% cumulative preferred stock up to $32 per quarter.
However, no dividend was declared on the preferred stock for the first quarter
of 2004. The accumulated preferred stock dividends in arrears as of May 1, 2004
is $161.
Working capital was ($88,516) as of May 1, 2004 as compared to ($89,751) at
January 31, 2004. The negative working capital is caused by the current
classification of the revolving credit and note agreements. As of May 1, 2004
the Company had unused bank lines of credit of $11,951.
Subsequent Events:
On April 22, 2004, the Company completed the sale of the Juarez, Mexico factory
for $2,475, which resulted in a gain of approximately $986. Additionally, on
June 2, 2004, the Company completed the sale of the Toluca, Mexico factory for
$1,750, which resulted in a gain of approximately $970.
Due to the statutory filing requirements, the Mexican facilities operate on a
calendar fiscal year and the sales are recorded in the second quarter of the
year ending January 29, 2005.
Accounting Pronouncements
In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1,
"Accounting and Disclosure requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003", which permits the sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. As a result of
the Company's decision to terminate the postretirement health care plan as
discussed in Note 7, this accounting pronouncement will not apply.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In December 2003 the FASB issued
FIN 46R. The objective of FIN No. 46 is to improve financial reporting by
companies involved with variable interest entities. FIN No. 46 changes certain
consolidation requirements by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The Interpretation outlines
disclosure requirements for variable interest entities in existence prior to
January 31, 2003, and requires consolidation of variable interest entities
created after January 31, 2003. In addition, FIN 46R requires consolidation of
variable interest entities created prior to January 31, 2003 for fiscal periods
ending after March 15, 2004.
23
Quantitative and Qualitative Disclosures about Market Risk
The Company's market risk is impacted by changes in interest rates and foreign
currency exchange rates. Pursuant to the Company's policies, the Company does
not hold or issue any significant derivative financial instruments.
The Company's primary market risk is interest rate exposure in the United
States. Historically, the Company manages interest rate exposure through a mix
of fixed and floating rate debt. The majority of the Company's debt is currently
at floating rates. Based on floating rate borrowings outstanding at May 2004, a
1% change in the rate would result in a corresponding change in interest expense
of $2.4 million.
The Company has foreign exchange exposure related to its foreign operations in
Mexico, Canada, Italy, Australia, the United Kingdom and China. See Note 8 to
the Notes to Consolidated Financial Statements for details on the Company's
foreign operations. Translation adjustments reported in the income statement
were not of a material nature.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer have carried out an
evaluation, with the participation of the Company's management, of the design
and operation of the Company's "disclosure controls and procedures" (as defined
in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) within 90 days of the date of this report. That evaluation
included consideration of those controls in light of the just completed review
of the Company's financial statements for the prior 8 quarters. Based upon that
evaluation, each has concluded that the Company's "disclosure controls and
procedures" are effective to insure that information required to be disclosed in
the reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the Securities and
Exchange Commission's rules and regulations.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, nor any significant
deficiencies or material weaknesses in such controls requiring corrective
actions, subsequent to the date of their evaluation.
Forward Looking Information
With the exception of historical data, the information contained in this Form
10-Q, as well as those other documents incorporated by reference herein, may
constitute forward-looking statements, within the meaning of the Federal
securities laws, including but not limited to the Private Securities Litigation
Reform Act of 1995. As such, the Company cautions readers that changes in
certain factors could affect the Company's future results and could cause the
Company's future consolidated results to differ materially from those expressed
or implied herein. Such factors include, but are not limited to: changes in
national or international political conditions; civil unrest, war or terrorist
attacks; general economic conditions in the Company's own markets and related
markets; difficulties or delays in the development, production and marketing of
new products; the impact of competitive products and pricing; certain
assumptions related to consumer purchasing patterns; significant increases in
interest rates or the level of the Company's indebtedness; inability of the
Company to maintain sufficient levels of liquidity; failure of the company of
obtain needed waivers and/or amendments relative to it's finance agreements;
foreign currency fluctuations; major slowdowns in the retail, travel or
entertainment industries; the loss of several of the Company's key executives,
major customers or suppliers; underutilization of or negative variances at, some
or all of the Company's plants and factories; the Company's failure to achieve
the savings and profit goals of any planned restructuring or reorganization
programs; international health epidemics such as the SARS outbreak; impact of
changes in accounting standards; potential legal proceedings; changes in pension
and medical benefit costs; and the amount and rate of growth of the Company's
selling, general and administrative expenses.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONEIDA LTD.
(Registrant)
Date: June 10, 2004 By: /s/ GREGG R. DENNY
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Gregg R. Denny
Chief Financial Officer
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