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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 July 31, 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) 361-3000
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 13, 2004: 46,681,672.
ONEIDA LTD.
INDEX
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
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.
2
(a) Exhibits:
10.1 Amended and Restated Mortgage, Assignment of Leases and
Rents and Security Agreement and Fixture Filing in the
amount of $8,432,000.00 dated as of August 18, 2004, between
Oneida Food Service, Inc., The Erie County Industrial
Development Agency and JPMorgan Chase Bank, as collateral
agent.
10.2 Amended and Restated Mortgage, Assignment of Leases and
Rents and Security Agreement and Fixture Filing in the
amount of $6,600,000.00 dated as of August 18, 2004, between
Oneida Food Service, Inc., The Erie County Industrial
Development Agency and JPMorgan Chase Bank, as collateral
agent.
10.3 Amended and Restated Mortgage, Assignment of Leases and
Rents and Security Agreement and Fixture Filing in the
amount of $20,115,000.00 dated as of August 31, 2004,
between Oneida Silversmiths, Inc., The Oneida County
Industrial Development Agency and JPMorgan Chase Bank, as
collateral agent.
10.4 Mortgage Spreader Agreement in the amount of $20,115,000.00
dated as of August 31, 2004, between Oneida Silversmiths,
Inc., The Oneida County Industrial Development Agency and
JPMorgan Chase Bank, as collateral agent.
10.5 Amended and Restated Mortgage, Assignment of Leases and
Rents and Security Agreement and Fixture Filing in the
amount of $20,943,726.74 dated as of August 31, 2004,
between Oneida Silversmiths, Inc., The Oneida County
Industrial Development Agency and JPMorgan Chase Bank, as
collateral agent.
10.6 Mortgage Spreader Agreement in the amount of $20,943,726.74
dated as of August 31, 2004, between Oneida Silversmiths,
Inc.. The Oneida County Industrial Development Agency and
JPMorgan Chase Bank, as collateral agent.
10.7 Amended and Restated Mortgage, Assignment of Leases and
Rents and Security Agreement and Fixture Filing in the
amount of $191,500.00 dated as of August 9, 2004, between
Oneida Ltd. and JPMorgan Chase Bank, as collateral agent
10.8 Agreement with former executive officer of the Company,
Allan H. Conseur, dated July 22, 2004.
10.9 Agreement with former executive officer of the Company,
Harold J. DeBarr, dated August 2, 2004.
10.10 Agreement with executive officer of the Company, Gregg R.
Denny, dated July 28, 2004.
10.11 Agreement with executive officer of the Company, J. Peter
Fobare dated July 28, 2004.
10.12 Agreement with executive officer of the Company, James E.
Joseph, dated July 28, 2004.
10.13 Agreement with executive officer of the Company, Peter J.
Kallet, dated July 28, 2004.
10.14 Agreement with executive officer of the Company, Catherine
H. Suttmeier, dated July 28, 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.
3
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.
(b) Current Reports on Form 8-K:
During the Company's fiscal quarter ended July 31, 2004, the following
Current Reports on Forms 8-K were filed:
Form 8-K dated May 6, 2004 to accompany a press
release announcing the refusal by the Company's
independent auditor, PricewaterhouseCoopers, LLP, to
stand for reelection.
Form 8-K dated May 11, 2004 to accompany a press
release announcing that the Company's stock had been
suspended from trading on the New York Stock Exchange
and that trading of the Company's stock would move to
the Over the Counter Market.
Form 8-K dated May 26, 2004 to accompany a press
release announcing certain of the Company's financial
results for the quarter ended May 1, 2004.
Form 8-K dated June 15, 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.
Form 8-K dated June 25, 2004 to accompany a press
release announcing that the Company had reached an
agreement in principal with its lenders regarding the
comprehensive restructuring of its existing
indebtedness and a new $30 million revolving credit
facility.
Form 8-K dated July 7, 2004 to accompany a press
release announcing the Company's plan to sell
substantially all of the assets of its Encore
Promotions, Inc. subsidiary to Bradshaw
International, Inc.
SIGNATURES
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 For the Six Months Ended
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Net sales ................................... $ 101,020 $ 105,975 $ 211,665 $ 212,147
License fees ................................ 306 350 887 690
--------- --------- --------- ---------
Total Revenues ................................ 101,326 106,325 212,552 212,837
--------- --------- --------- ---------
Cost of sales ................................. 80,206 76,975 160,460 154,303
--------- --------- --------- ---------
Gross Margin .................................. 21,120 29,350 52,092 58,534
--------- --------- --------- ---------
Operating expenses:
Selling, distribution and administrative
expense ............................... 33,567 31,145 66,460 62,084
Restructuring expense .................... (137) (137)
Impairment loss on depreciable assets .... 34,016 34,016
Impairment loss on other assets .......... 2,700 2,700
(Gain) loss on the sale of fixed assets .. (4,823) 43 (4,837) 69
--------- --------- --------- ---------
Total ............................... 65,323 31,188 98,202 62,153
--------- --------- --------- ---------
Operating loss ................................ (44,203) (1,838) (46,110) (3,619)
Other income .................................. (2,390) (525) (66,128) (1,058)
Other expense ................................. 1,764 503 4,656 764
Interest expense including amortization of
deferred financing costs ................... 3,963 4,068 7,733 7,932
--------- --------- --------- ---------
Income (loss) before income taxes ............. (47,540) (5,884) 7,629 (11,257)
Income tax expense (benefit) .................. 751 (2,177) 1,535 (4,165)
--------- --------- --------- ---------
Net income (loss) ............................. $ (48,291) $ (3,707) $ 6,094 $ (7,092)
========= ========= ========= =========
Preferred Stock Dividends ..................... (32) (32) (64) (64)
Net earnings (loss) income available to
common shareholders ........................ $ (48,323) $ (3,739) $ 6,030 $ (7,156)
Earnings (loss) per share of common stock
Net income:
Basic ............................ $ (2.88) $ (.23) $ .36 $ (.43)
Diluted .......................... (2.88) (.23) .36 (.43)
See notes to consolidated financial statements
5
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED BALANCE SHEETS
(Thousand of Dollars)
Unaudited Audited
July 31, Jan. 31,
2004 2004
--------- ---------
ASSETS
Current assets:
Cash ................................................... $ 1,597 $ 9,886
Trade accounts receivables, less allowance for doubtful
accounts of $3,054 and $2,961, respectively .......... 59,430 58,456
Other accounts and notes receivable .................... 3,107 1,890
Inventories ............................................ 124,821 139,448
Other current assets ................................... 5,230 5,361
--------- ---------
Total current assets ............................ 194,185 215,041
Property, plant and equipment, net ............................ 33,234 73,675
Assets held for sale (Note 2).................................. 1,909 3,199
Goodwill ...................................................... 136,394 136,118
Other assets .................................................. 9,462 13,468
--------- ---------
Total assets .................................... $ 375,184 $ 441,501
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ........................................ $ 7,235 $ 7,654
Accounts payable ....................................... 13,181 21,231
Accrued liabilities .................................... 38,608 45,293
Accrued restructuring (Note 2) ......................... 1,471 7,400
Current Portion of Long Term Debt (Note 6).............. 18,409 223,214
--------- ---------
Total current liabilities ....................... 78,904 304,792
Long term debt Note 6 ......................................... 215,948
Accrued postretirement liability (Note 7)...................... 2,437 62,930
Accrued pension liability (Note 7)............................. 35,083 24,259
Deferred income taxes ......................................... 10,696 9,823
Other liabilities ............................................. 12,068 17,097
--------- ---------
Total liabilities ............................... 355,136 418,901
Commitments and contingencies
Stockholders' equity:
Cumulative 6% preferred stock--$25 par value; authorized
95,660 shares, issued 86,036 shares, callable at
$30 per share .............................................. 2,151 2,151
Common stock--$l.00 par value; authorized 48,000,000 shares,
issued 17,928,381 and 17,883,460 shares respectively ....... 17,928 17,883
Additional paid-in capital .................................... 84,572 84,561
Retained (deficit) ............................................ (26,839) (32,933)
Accumulated other comprehensive loss .......................... (36,195) (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: ..................... 20,048 22,600
--------- ---------
Total liabilities and stockholders' equity.. $ 375,184 $ 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 SIX MONTHS ENDED JULY 31, 2004 AND JULY 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....... 45 45 11 56
Minimum pension liability
adjustment, net of tax
benefit of $0................ (7,825) (7,825)
Foreign currency translation
adjustment................... (877) (877)
Net income...................... 6,094 6,094
------ ------- ------ -------- --------- --------- --------- -------
Balance July 31, 2004.......... 17,928 $17,928 $2,151 $84,572 $(26,839) $(36,195) $(21,569) $20,048
====== ======= ====== ======= ========= ========= ========= =======
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) $129,389
Stock plan activity.......... 25 25 184 (578) 907 538
Cash dividends declared
($.02 per share).......... (363) (363)
Foreign currency translation
adjustment................ 2,153 2,153
Net loss..................... (7,092) (7,092)
------ ------- ------ ------- ------- --------- --------- --------
Balance July 26, 2003........ 17,862 $17,862 $2,151 $84,502 $60,374 $(17,037) $(23,227) $124,625
====== ======= ====== ======= ======= ========= ========= ========
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 Six Months Ended
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
--------- ------------ --------- --------
Net income (loss)........................... $(48,291) $(3,707) $ 6,094 $(7,092)
Foreign currency translation adjustments.... (1,925) 2,140 (877) 2,153
Other comprehensive income, net of tax:
Minimum pension liability adjustments.... 61 (7,825)
--------- --------- --------- ---------
Other comprehensive income (loss)........... (1,864) 2,140 (8,702) 2,153
--------- --------- --------- ---------
Comprehensive income (loss)................. $(50,155) $(1,567) $(2,608) $(4,939)
========= ========= ========= =========
Balance at end of quarter................... $(36,195) $(17,037) $(36,195) $(17,037)
========= ========= ========= =========
See notes to consolidated financial statements.
8
PART I. FINANCIAL INFORMATION
ONEIDA LTD.
ITEM 1. CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2004 AND JULY 26, 2003
(Unaudited)
(In Thousands)
Six Months Ended
July 31, July 26,
2004 2003
-------- --------
CASH FLOW USED BY OPERATING ACTIVITIES:
Net income (loss)................................................... $6,094 $(7,092)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
(Gain) loss on disposal of fixed assets........................... (4,837) 375
Depreciation...................................................... 4,328 6,752
Deferred income taxes............................................. 798 166
Impairment of long lived assets................................... 34,016
Impairment of other assets 2,700
Inventory write downs............................................. 9,519
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............................................... (1,798) 12,741
Inventories....................................................... 5,022 (2,542)
Other current assets.............................................. 878 (950)
Other assets...................................................... 851 (427)
Accounts payable.................................................. (8,410) (2,239)
Accrued liabilities............................................... (12,807) (7,411)
Other liabilities................................................. (4,358) (1,660)
--------- ---------
Net cash used by operating activities (28,704) (2,287)
--------- ---------
CASH FLOW PROVIDED (USED) BY INVESTING ACTIVITIES:
Capital expenditures................................................ (2,906) (3,323)
Proceeds from sales of assets....................................... 12,760 137
--------- ---------
Net cash provided (used) in investing activities 9,854 (3,186)
--------- ---------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............................. 210
Increase (decrease) in short-term debt.............................. (616) 227
Proceeds from long-term debt........................................ 11,341 7,642
Dividends paid...................................................... (363)
--------- ---------
Net cash provided by financing activities 10,725 7,716
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................... (164) (605)
--------- ---------
NET (DECREASE) INCREASE IN CASH....................................... (8,289) 1,638
CASH AT BEGINNING OF YEAR............................................. 9,886 2,653
--------- ---------
CASH AT END OF PERIOD................................................. $ 1,597 $4,291
========= =========
Non-cash contribution of treasury shares to ESOP...................... $907
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 six-month period
ended July 31, 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 three and six months ended July
31, 2004 and July 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 operating
losses of $44,203 and $46,110 for the three and six months, respectively, ended
July 31, 2004. During 2004 the Company has undertaken several initiatives to
return to profitability, increase liquidity and compete in a changing
marketplace. These include reducing product costs, reducing benefits,
restructuring debt, and selling assets.
The Company reduced product costs with the closure of the Buffalo, NY
manufacturing facility, and the facilities located in Mexico, Canada , Italy and
China. The Company sold the Buffalo, NY manufacturing facility and the
facilities in Juarez, Mexico, Toluca, Mexico, Niagara Falls, Canada and part of
the Vercelli, Italy facility. The proceeds generated from these sales was used
to reduce the Company's debt. On September 9, 2004 the Company announced that it
is closing its Sherrill, NY flatware factory because of unsustainably high
operating costs that have heavily contributed to substantial losses. The
Sherrill, NY facility will be closed by March 31, 2005. The Company outsourced
the production from the Buffalo, NY and International facilities to lower cost
producers and is currently outsourcing production from the Sherrill, NY
facility.
The Company reduced benefit costs in the first quarter by freezing the
Retirement Plan for the Employees of Oneida Ltd. and terminated the Oneida Ltd
Retiree Group Medical Plan. During the second quarter the company terminated
the Long Term Disability Plan, the Oneida Limited Security Plan, and froze the
Supplemental Executive Retirement Plan. The Company did not issue purchase
options under the Employee Stock Purchase Plan and the 2002 Executive Stock
Option Plan. Additionally the Company announced the co-pays and deductibles
associated with the Oneida Sterling Health Plan will be increased as a result of
the Company's effort to reduce costs.
On August 9, 2004 the Company completed the comprehensive restructuring of the
existing indebtedness with its lenders, along with new covenants based upon
current projections. The restructuring included the conversion of $30 million of
principal amount of debt into an issuance of a total of 29.85 million shares of
the common stock to the individual members of the lender group or their
respective nominees. The common shares were issued in blocks proportionate to
the amount of debt held by each lender. As of August 9, 2004 these shares of
common stock represented approximately 62% of the outstanding shares of common
stock of the Company. In addition to the debt to equity conversion, the Company
received a new $30 million revolving credit facility from the lenders and
restructured the balance of the existing indebtedness into a Tranche A loan of
$125 Million and a Tranche B loan of approximately $80 million. All the
restructured bank debt is secured by a first priority lien over substantially
all of the Company's and its domestic subsidiaries' assets. The Tranche A loan
will mature in three years and require amortization of principle based on
available cash flow for the first two years and fixed amortization of $1,500 per
quarter in the third year. The Tranche B loan will mature in 3 1/2 years with no
required amortization. The debt and equity restructuring constituted a change in
control of the Company. There are several employee benefit plans that have
triggers if a change of control occurs. The appropriate plans were amended to
allow the debt and equity transaction without triggering the change in control
provision. In addition, the Shareholder Rights Plan was terminated.
10
On August 28, 2004 the Company completed the sale of substantially all of the
assets of its Encore Promotions Inc. subsidiary and has entered into a licensing
agreement with the buyer. The proceeds from the sale were used to reduce debt,
additionally the sale created an avenue to offer Oneida-branded products under
the licensing agreement to the supermarket industry.
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 expense
including 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 for employees. Under APB No. 25, compensation
expense is not required to be recognized for the Company's stock-based
compensation plans "if the fair value of the underlying stock is less than or
equal to the option exercise prices on the date of the grant.". Under Statement
of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock
Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation Transaction and Disclosure", 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) (Thousands Except Per Share Amounts)
For the Three Months Ended For the Six Months Ended
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
--------- -------- --------- --------
Net income (loss), as reported............... $(48,291) $(3,707) $6,094 $(7,092)
Deduct: Total stock-based employee
compensation expense determined
under Black-Scholes option pricing
model, net of related income tax
effect.................................. (351) (459) (948) (917)
--------- -------- --------- --------
Pro forma net income......................... $(48,642) $(4,166) $5,146 $(8,009)
========= ======== ========= ========
Earnings (loss) per share:
As reported: Basic.................. $(2.88) $(.23) $.36 $(.43)
Diluted................ (2.88) (.23) .36 (.43)
Diluted...................
Pro forma: Basic.................... (2.90) (.25) .31 (.49)
Diluted.................. (2.90) (.25) .31 (.49)
There was no stock based employee compensation expense included in the
Consolidated Statement of Operations.
11
Recently Issued Accounting Pronouncements
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. FAS 106-2 (FSP 106-2), "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003", which supersedes FSP 106-1. FSP 106-2 provides guidance on the accounting
for the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) for employers that sponsor postretirement health care
plans that provide prescription drug benefits. It also requires certain
disclosures regarding the effect of the federal subsidy provided by the Act.
This FSP is effective for the first interim or annual period beginning after
June 15, 2004. 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. The Company does not have any variable interest
entities, therefore this accounting pronouncement currently does not apply.
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 continues 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. The Shanghai, China and remaining Vercelli, Italy assets are
classified as assets held for sale on the Consolidated Balance Sheet at July 31,
2004. The Niagara Falls, Canada warehouse sale was completed on July 12, 2004
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 July 31, 2004, 1,085 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 and adjustments
inception to date
12
through July 31, 2004 under the restructuring were $7,085 and $445,
respectively, and the remaining liability at the quarter end is $1,471.
On September 9, 2004 the Company announced that it is closing its Sherrill, NY
flatware factory because of unsustainably high operating costs that have heavily
contributed to substantial losses. The Company will continue to market the
products primarily manufactured from this site using independent suppliers.
Approximately 500 employees will be terminated. The Company has not yet
determined the amount of costs related to the closure. The flatware factory
will be closed by March 31, 2005.
3. INCOME TAXES
The provision for income taxes for the three months ended July 31, 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 continues to provide a full valuation allowance against its net
deferred tax assets and has not recorded a tax benefit for its domestic pretax
book losses during the three months ended July 31, 2004 since it is more
likely than not that the asset would not be realized. 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.
Subsequent to the second quarter ended July 31, 2004, the Company has undergone
a change in ownership within the definition of Sec. 382 of the Internal Revenue
Code based upon the completion of a comprehensive restructuring of the existing
indebtedness with its primary lenders. The pre-change net operating loss
carryforward is subject to annual limitation under Sec. 382. The Company had
previously placed a valuation allowance against all its net deferred tax assets.
The provision for income taxes for the six months ended July 31, 2004 was
primarily attributable to foreign tax related to foreign operations and domestic
deferred tax liabilities recognized on indefinite long lived intangibles. During
the first quarter ended May 1, 2004, the Company terminated its retiree group
medical plan and amended two of its pension plans to freeze benefits resulting
in income recognition of $63,277 and a charge of $2,577 to continuing
operations, respectively. The inclusion of these items produced no tax expense
or benefit as a valuation allowance was reversed with respect to the retiree
medical plan and a valuation allowance established with respect to the pension
freeze.
The following table summarizes the Company's provision for income taxes and the
related effective tax rates for the three and six months ended July 31, 2004 and
2003:
For the Three Months Ended For the Six Months Ended
July 31, 2004 July 26, 2003 July 31, 2004 July 26, 2003
------------- ------------- ------------- -------------
Income (loss) before income taxes............. $(47,540) $(5,884) $ 7,629 $(11,257)
(Provision) benefit for income taxes.......... (751) 2,177 (1,535) 4,165
------- ----- ------- -----
Effective tax rate............................ (1.58%) 37.0% 20.12% 37.0%
======= ===== ====== =====
4. INVENTORIES
Inventories by major classification are as follows:
July 31, 2004 January 31, 2004
------------- ----------------
Finished goods................................. $115,732 $122,769
Goods in process............................... 4,125 7,096
Raw materials and supplies..................... 4,964 9,583
-------- --------
Total.................................... $124,821 $139,448
======== ========
13
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 1,515 and 1,414 for the
six-months ended July 31, 2004 and July 26, 2003, respectively.
Under the provisions of the amended revolving credit and note agreements, at
July 31, 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 July 31, 2004 and the preferred dividends in
arrears is $64. The preferred accumulated stock dividends in arrears as of July
31, 2004 is $193.
The following is a reconciliation of basic earnings per share to diluted
earnings per share for the three months ended July 31, 2004 and July 26, 2003:
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
------ --------- ---------- ------- ---------
2004:
Basic earnings (loss) per share............ $(48,291) $(32) $(48,323) 16,773 $(2.88)
Effect of stock options....................
Diluted earnings (loss) per share.......... $(48,291) $(32) $(48,323) 16,773 $(2.88)
2003:
Basic earnings (loss) per share............ $(3,707) $(32) $ (3,739) 16,577 $ (.23)
Effect of stock options.................... 14
Diluted earnings (loss) per share.......... $(3,707) $(32) $ (3,739) 16,591 $ (.23)
The following is a reconciliation of basic earnings per share to diluted
earnings per share for the six months ended July 31, 2004 and July 26, 2003:
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
------ --------- ---------- ------- ---------
2004:
Basic earnings (loss) per share............ $ 6,094 $(64) $ 6,030 16,756 $ .36
Effect of stock options....................
Diluted earnings (loss) per share.......... $ 6,094 $(64) $ 6,030 16,756 $ .36
2003:
Basic earnings (loss) per share............ $(7,092) $(64) $(7,156) 16,566 $(.43)
Effect of stock options.................... 12
Diluted earnings (loss) per share.......... $(7,092) $(64) $(7,156) 16,578 $(.43)
14
6. DEBT
In April 2003, the Company and its lenders entered into amendments to the
revolving credit and note agreements. These amendments extended the maturity
to May 31, 2005 from February 1, 2004, adjusted certain financial covenants and
prohibited 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 obtained further waiver extensions through July 15, 2004 from its
lenders in regard to the Company's financial covenants and in respect to the
above mentioned payments that are due. On June 25, 2004, the Company announced
that it has reached an agreement in principle with its lenders on a
comprehensive restructuring plan for its existing indebtedness and a new $30
million revolving credit facility.
On August 9, 2004 the Company completed the comprehensive restructuring of the
existing indebtedness with its lenders, along with new covenants based upon
current projections. The restructuring included the conversion of $30
million of principal amount of debt into an issuance of a total of 29.85 million
shares of the common stock of the Company to the individual members of the
lender group or their respective nominees. The common shares were issued in
blocks proportionate to the amount of debt held by each lender. As of August 9,
2004 these shares of common stock represented approximately 62% of the
outstanding shares of common stock of the Company. In addition to the debt to
equity conversion, the Company received a new $30 million revolving credit
facility from the lenders and restructured the balance of the existing
indebtedness into a Tranche A loan of $125 Million and a Tranche B loan of
approximately $80 million. All the restructured bank debt is secured by a first
priority lien over substantially all of the Company's and its domestic
subsidiaries' assets. The Tranche A loan will mature in three years and require
amortization of principle based on available cash flow for the first two years
and fixed amortization of $1.5 per quarter in the third year. Interest on the
Tranche A loan will accrue at LIBOR (London Inter Bank Offered Rate) plus
6%-8.25% depending on the leverage to cash flow formula. The Tranche B loan will
mature in 3 1/2 years with no required amortization. Interest on the Tranche B
loan will accrue at LIBOR plus 13% with a maximum interest rate of 17%. The debt
and equity restructuring constituted a change in control of the Company. There
are several employee benefit plans that have triggers if a change of control
occurs. The appropriate plans were amended to allow the debt and equity
transaction without triggering the change in control provision. In addition, the
Shareholder Rights Plan was terminated.
The restructured debt agreement has several covenants including maximum total
leverage ratio, cash interest coverage ratio, total interest coverage ratio, and
consolidated minimum Earnings Before Interest, Taxes, Depreciation, Amortization
and Restructuring Expenses. (EBITDAR). The covenants are effective beginning
with the quarter ending on January 29, 2005.
15
7. RETIREMENT BENEFIT PLANS
Pension Plans
The net periodic pension cost for the Company's United States (US) qualified
defined benefit plans for the three months and six months ended July 31, 2004
and 2003 includes the following components:
For the Three Months Ended For the Six Months Ended
July 31, 2004 July 26, 2003 July 31, 2004 July 26, 2003
------------- ------------- ------------- -------------
Service cost............................... $ 46 $ 339 $ 59 $ 750
Interest cost.............................. 1,065 735 2,010 1,629
Expected Return on Assets.................. (595) (443) (1,148) (980)
Net amortization........................... 339 48 630 107
Curtailment (Gain) Loss.................... 320
----- ----- ------- ------
Net periodic pension cost.................. 854 680 1,871 1,505
One-time recognition of remaining prior
service cost............................. 2,037
One-time charge for QSERP amendment........ 540
----- ----- ------- ------
Total net periodic pension cost............ $ 854 $ 680 $ 4,448 $1,505
===== ===== ======= ======
The Company anticipates filing a request with the Internal Revenue Service
seeking permission to waive expected quarterly funding requirements for the plan
year ended 2004. Final contributions for the plan year ended 2003 will be made.
The Company expects to contribute cash contributions of $4,323 to its US Pension
plans for fiscal year ended 2004. Through the second quarter, $641 has been
contributed.
The net periodic pension cost for the Company's non-United States qualified
defined benefit plans for the three months and six months ended July 31, 2004
and 2003 includes the following components:
For the Three Months Ended For the Six Months Ended
July 31, 2004 July 26, 2003 July 31, 2004 July 26, 2003
------------- ------------- ------------- -------------
Service cost............................... $ 74 $ 7 $ 77 $ 13
Interest cost.............................. 971 32 1,009 64
Expected Return on Assets.................. (658) (21) (684) (42)
Net amortization........................... 584 19 607 38
Curtailment (Gain) Loss.................... 0 0 0 0
----- ---- ------ ----
Net periodic pension cost.................. $ 971 $ 37 $1,009 $ 73
===== ==== ====== ====
The Company expects to contribute cash contributions of $249 to its non-United
States pension plans for the fiscal year ended 2004. Through the second quarter,
$109 has been contributed.
During the first quarter ended May 1, 2004, the Company announced that it has
terminated the Oneida Ltd. Retiree Group Medical Plan resulting in income
recognition of $61,973. Also, the company amended two of its pension plans to
freeze benefit accruals, and as a result recognized a charge of $2,577.
16
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.
Segment information for the six months of 2004 and 2003 were as follows:
2004 2003
---- ----
Revenues Sales to external customers:
Foodservice...................................... $ 96,065 $ 90,456
Consumer......................................... 76,111 79,639
International.................................... 39,489 42,052
-------- --------
Total segment revenues........................... 211,665 212,147
Reconciling items:
License revenues................................. 887 690
-------- --------
Total revenues.......................................... 212,552 212,837
======== ========
Income (loss) before income taxes
Segment contributions before unallocated costs
Foodservice...................................... 29,417 27,789
Consumer......................................... 8,613 11,258
International.................................... (1,001) (1,681)
-------- --------
Total segment contributions...................... 37,029 37,366
Unallocated manufacturing costs......................... (20,057) (15,585)
Unallocated selling, distribution and administrative
costs................................................ (31,340) (25,231)
Restructuring costs..................................... 137 0
Impairment loss on depreciable assets................... (34,016) 0
Impairment loss on other assets......................... (2,700) 0
(Gain) loss on sales of assets.......................... 4,837 (69)
Other income............................................ 66,128 1,058
Other (expense)......................................... (4,656) (764)
Interest expense and deferred financing costs........... (7,733) (7,932)
-------- --------
Income (loss) before income taxes....................... $ 7,629 $(11,157)
======== ========
9. Subsequent Events
On August 9, 2004 the Company completed the comprehensive restructuring of the
existing indebtedness with its lenders, along with new covenants based upon
current projections. The restructuring included the conversion of $30
million of principal amount of debt into an issuance of a total of 29.85 million
shares of the common stock of the Company to the individual members of the
lender group or their respective nominees. The common shares were issued in
blocks proportionate to the amount of debt held by each lender.
On August 28, 2004 the Company completed the sale of substantially all of the
assets of its Encore Promotions Inc. subsidiary which resulted in a loss of
approximately $3,157.
On September 9, 2004 the Company announced that it is closing its Sherrill, NY
flatware factory because of unsustainably high operating costs that have heavily
contributed to substantial losses within the company. The Company will continue
to market the products primarily manufactured from this site using independent
suppliers. An impairment loss of $34,016 was recorded in the consolidated
statement of operations under the caption "impairment loss on depreciable
assets".
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter ended July 31, 2004 compared with
the quarter ended July 26, 2003
(In Thousands)
Executive Summary
The accompanying financial statements for the three and six months ended July
31, 2004 and July 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 operating
losses of $44,203 and $46,110 for the three and six months respectively, ended
July 31, 2004. During 2004 the Company has undertaken several initiatives to
return to profitability, increase liquidity and compete in a changing
marketplace. These include reducing product costs, reducing benefits,
restructuring debt, and selling assets.
The Company reduced product costs with the closure of the Buffalo, NY
manufacturing facility, and the facilities located in Mexico, Canada , Italy and
China. The Company sold the Buffalo, NY manufacturing facility along with the
sale of facilities in Juarez, Mexico, Toluca, Mexico, Niagara Falls, Canada and
part of the Vercelli, Italy facility. The proceeds generated from these sales
was used to reduce the Company's debt. On September 9, 2004 the Company
announced that it is closing its Sherrill, NY flatware factory because of
unsustainably high operating costs that have heavily contributed to substantial
losses within the company. The Sherrill, NY facility will be closed by March 31,
2005. The Company outsourced the production from the Buffalo, NY and
International facilities to lower cost producers and is currently outsourcing
products from the Sherrill, NY facility.
The Company reduced benefit costs in the first quarter by freezing the
Retirement Plan for the Employees of Oneida Ltd. and terminated the Oneida Ltd
Retiree Group Medical Plan. During the second quarter the company terminated the
Long Term Disability Plan, the Oneida Limited Security Plan, and froze the
Supplemental Executive Retirement Plan. The Company did not issue purchase
options under the Employee Stock Purchase Plan and the 2002 Executive Stock
Option Plan. Additionally the Company announced the co-pays and deductibles
associated with the Oneida Sterling Health Plan will be increased as a result of
the Company's effort to reduce costs.
On August 9, 2004 the Company completed the comprehensive restructuring of the
existing indebtedness with its lenders, along with new covenants based upon
current projections. The restructuring included the conversion of $30
million of principal amount of debt into an issuance of a total of 29.85 million
shares of the common stock of the Company to the individual members of the
lender group or their respective nominees. The common shares were issued in
blocks proportionate to the amount of debt held by each lender. As of August 9,
2004 these shares of common stock represented approximately 62% of the
outstanding shares of common stock of the Company. In addition to the debt to
equity conversion, the Company received a new $30 million revolving credit
facility from the lenders and restructured the balance of the existing
indebtedness into a Tranche A loan of $125 Million and a Tranche B loan of
approximately $80 million. All the restructured bank debt is secured by a first
priority lien over substantially all of the Company's and its domestic
subsidiaries' assets. The Tranche A loan will mature in three years and require
amortization of principle based on available cash flow for the first two years
and fixed amortization of $1.5 per quarter in the third year. Interest on the
Tranche A loan will accrue at LIBOR (London Inter Bank Offered Rate) plus
6%-8.25% depending on the leverage to cash flow formula. The Tranche B loan will
mature in 3 1/2 years with no required amortization. Interest on the Tranche B
loan will accrue at LIBOR plus 13% with a maximum interest rate of 17%. The debt
and equity restructuring constituted a change in control of the Company. There
are several employee benefit plans that have triggers if a change of control
occurs. The appropriate plans were amended to allow the debt and equity
transaction without triggering the change in control provision. In addition, the
Shareholder Rights Plan was terminated.
On August 28, 2004 the Company completed the sale of substantially all of the
assets of its Encore Promotions Inc. subsidiary and has entered into a licensing
agreement with the buyer. The sale provides additional liquidity and the avenue
to offer Oneida-branded products under the licensing agreement to the
supermarket industry.
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.
18
For The Three Months Ended
-------------------------------
July 31, 2004 July 26, 2003
------------- -------------
Net Sales:
Foodservice $ 45,654 $ 43,156
Consumer 36,346 39,380
International 19,020 23,439
Total 101,020 105,975
Gross Margin 21,120 29,350
% Net Sales 20.9% 27.7%
Operating Expenses 65,323 31,188
% Net Sales 64.7% 29.4%
Operations
Consolidated net sales for the three months ended July 31, 2004 decreased $4,955
(4.7%) as compared to the same period in the prior year. Sales of Foodservice
products increased by $2,498 (5.7%) over the same period in the prior year
primarily from increased volume to chain restaurant customers. These increases
were offset by a decrease in volume for both the International and Consumer
segments. International and Consumer sales decreased $4,419 (18.9%) and $3,034
(7.7%), respectively, over the same period in the prior year. The International
decline was in the European Consumer and Foodservice segments. Product shortages
in the Consumer segment primarily caused the sales decline.
Gross margin for the three months ended July 31, 2004 was $21,120 or 20.9% as a
percentage of net sales, as compared to $29,350 or 27.7% for the same period in
the prior year. The decrease in gross margins is primarily due to inventory
write downs and decreased sales volumes. The Encore asset sale resulted in an
increase in the inventory reserve of approximately $3,000. The Company recorded
additional inventory reserve of $2,700, the majority of the reserve is for
glassware products.
Operating expenses increased $34,135 or 109.5% for three months ended July 31,
2004 as compared to the same period in the prior year. The increase is primarily
attributable to an impairment of $34,016 in connection with the announcement of
the closing of the Company's flatware factory in Sherrill, New York and
increased Professional fees from outside consultants which amounted to $2,200
for the three months ended July 31, 2004. Additionally, it became apparent that
it is probable that the Company will not use a portion of the remaining
Barter Credits and as a result an impairment of $2,700 was recorded.
Other income was $2,390 for the three months ended July 31, 2004 compared to
$525 a year ago. The increase is the result of the termination of the Long Term
Disability and Oneida Limited Security Plans.
Other expense was $1,764 for the three months ended July 31, 2004 compared to
$503 for the same period in the prior year. The increase is the result of
freezing the Supplemental Executive Retirement Plan and realizing the
unamortized prior service costs.
Interest expense including amortization of deferred financing costs decreased by
$105 or 2.6% for the three months ended July 31, 2004 compared with the same
period a year ago. Capitalized interest was $62 for the three months ended July
31, 2004 and $78 over the same period a year ago.
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. Provision for income taxes as a percentage
of income (loss) before income taxes was 1.58% or $751 for the three months
ended July 31, 2004 as compared to 37.07% or $2,177 for the same period in the
prior year. The provision for income taxes for the three months ended July 31,
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 July 31, 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.
Subsequent to the second quarter ended July 31, 2004, the Company has undergone
a change in ownership within the meaning of Sec. 382 of the Internal revenue
Code (Sec. 382) based upon the completion of a comprehensive restructuring of
the existing indebtedness with its primary lenders. Sec. 382
19
provides that, after an ownership change, the amount of a loss corporation's
taxable income for any post-change year that may be offset by pre-change losses
shall not exceed the Sec. 382 limitation for that year. A loss corporation is
any corporation that has a net operating loss, a net operating loss
carryforward, or a net unrealized built-in loss for the taxable year in which
the ownership change occurs. The Sec.382 limitation generally equals the fair
market value of the old loss corporation multiplied by the long-term tax-exempt
rate. The Company is in the process of determining the annual limitation under
Sec. 382.
The following table summarizes the Company's provision for income taxes and the
related effective tax rates:
For the Three Months Ended
----------------------------------
July 31, 2004 July 26, 2003
------------- -------------
Income (loss) before income taxes $(47,540) $(5,884)
(Provision) benefit for income taxes (751) 2,177
Effective tax rate (1.58%) 37.0%
For the Six Months Ended
-------------------------------
July 31, 2004 July 26, 2003
------------- -------------
Net Sales:
Foodservice $ 96,065 $ 90,456
Consumer 76,111 79,639
International 39,489 42,052
Total 211,665 212,147
Gross Margin 52,092 58,534
% Net Sales 24.6% 27.6%
Operating Expenses 98,202 62,153
% Net Sales 46.4% 29.3%
Consolidated net sales for the six months ended July 31, 2004 decreased $482
(0.2%) as compared to the same period in the prior year. Sales of Foodservice
products increased by $5,609 (6.2%) over the same period in the prior year
primarily from continued increased volume to chain restaurant customers. These
increases were offset by a decrease in volume for both the International and
Consumer segments. International and Consumer sales decreased $2,563 (6.9%) and
$3,523 (4.4%), respectively, over the same period in the prior year. The
International decline was in the European Consumer and Foodservice segment.
Product shortages in the Consumer segment caused the sales decline.
Gross margin for the six months was $52,092 or 24.6% as a percentage of net
sales, as compared to $58,534 or 27.6% for the same period in the prior year.
The decrease is the result of $8,600 in inventory writedowns associated with the
Company's focus on reducing inventory levels and improving cash flow.
Additionally, approximately $3,000 reserve was recorded for the sale of the
Encore assets and $2,700 for glass products.
Operating expenses increased $36,118 or 58.2% for the six months ended July 31,
2004 as compared to the same period in the prior year. The increase is
attributable to an impairment adjustment booked of $34,016 in connection for
the closing of the Company's flatware factory in Sherrill, New York and a $2,700
impairment for the write down of Barter Credits that the Company has determined
they will not be able to use. Professional fees of $3,000 have been incurred
year to date for outside consultants relating to the comprehensive restructuring
plan. Additionally $916 of severance related costs were recorded for the six
months ending July 31, 2004.
Other income was $66,128 for the six months ended July 31, 2004 compared to
$1,058 a year ago. This increase is the result of a decision by the Company to
terminate the Oneida Ltd. Retiree Group Medical Plan, the Long Term Disability
and the Oneida Limited Security Plans. The plan termination resulted in a
one-time benefit of $64,272.
Other expense was $4,656 for the six months ended July 31, 2004 compared to $764
a year ago. This increase is the result of a decision by the Company to freeze
benefit accruals for the Retirement Plans and the Supplemental Executive
Retirement Plan. The plan amendments resulted in a one-time recognition of prior
service cost of $3,565 of freezing the Supplemental Executive Retirement Plan
and realizing the unamortized prior service costs.
20
Interest expense and amortization of deferred financing costs decreased by $199
or 2.5% in the first six-months of 2004 compared with the same period a year
ago. Capitalized interest was $62 for the six-months ended July 31, 2004 and $78
over the same period a year ago.
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 Provision for income taxes as a percentage
of income (loss) before income taxes was 20.12% or $1,535 for the six months
ended July 31, 2004 as compared to 37.0% or $4,165 for the same period in the
prior year. The provision for income taxes for the six months ended July 31,
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 six
months ended July 31, 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 the year to date taxes. 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 year to date
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 year to date domestic tax calculation produced no tax benefit
because a full valuation allowance is recorded against the deferred tax asset
resulting from this item.
Subsequent to the second quarter ended July 31, 2004, the Company has undergone
a change in ownership within the meaning of Sec. 382 of the Internal revenue
Code (Sec. 382) on a deal consummated with its primary lenders. Sec. 382
provides that, after an ownership change, the amount of a loss corporation's
taxable income for any post-change year that may be offset by pre-change losses
shall not exceed the Sec. 382 limitation for that year. A loss corporation is
any corporation that has a net operating loss, a net operating loss
carryforward, or a net unrealized built-in loss for the taxable year in which
the ownership change occurs. The Sec.382 limitation generally equals the fair
market value of the old loss corporation multiplied by the long-term tax-exempt
rate. The Company is in the process of determining the annual limitation under
Sec. 382.
The following table summarizes the Company's provision for income taxes and the
related effective tax rates:
For the Six Months Ended
----------------------------------
July 31, 2004 July 26, 2003
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Income (loss) before income taxes $ 7,629 $(11,257)
(Provision) benefit for income taxes (1,535) 4,165
Effective tax rate 20.12% (37.0%)
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 continues 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. The Niagara Falls, Canada warehouse sale was completed on July 12,
2004 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.
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Under the restructuring plan, approximately 1,150 employees will be terminated.
As of July 31, 2004, 1,085 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 and adjustments
inception to date through July 31, 2004 under the restructuring were $7,085
and $445 and the liability at the quarter end is $1,471.
On September 9, 2004 the Company announced that it is closing its Sherrill, NY
flatware factory because of unsustainably high operating costs that have heavily
contributed to substantial losses within the company. The Company will continue
to market the products primarily manufactured from this site using independent
suppliers. Approximately 500 employees will be terminated. The Company has not
yet determined the amount of costs related to the closure. The flatware factory
will be closed by March 31, 2005.
Fixed Asset Impairments
In conjunction with the announcement on September 9, 2004 that it is closing its
Sherrill flatware factory because of unsustainably high operating costs that
have heavily contributed to substantial losses within the company, the Company
performed an evaluation in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Long Lived Assets" (FASB
144), to determine if the manufacturing facilities assets were subject to a
possible impairment loss. Due to the cash flow being less than the book value,
it was determined that an impairment existed and as a result, an impairment
charge of $34,016 was recorded as a charge in the consolidated statements of
operations under the caption "Impairment loss on depreciable assets" for the
quarter ended July 31, 2004.
Impairment of Other Assets
As a result of the reduced use of barter credits ,it became apparent that it is
probable that the Company will not use all of the remaining barter credits. The
Company performed an evaluation in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Long Lived
Assets" (FASB 144), to determine if the barter credits were subject to a
possible impairment loss. Due to the cash flow being less than the book value,
it was determined that an impairment existed and as a result, a $2,700
impairment was recorded as a charge in the consolidated statements of operations
under the caption "Impairment loss on other assets" for the quarter ended July
31, 2004.
Liquidity & Financial Resources
Cash used in operating activities was $28,749 and $2,287 for the six months
ended July 31, 2004 and July 26, 2003, respectively. The net cash used in
operating activities for the six months ended July 31, 2004 was primarily due to
negative changes in working capital which resulted from vendors requiring
shorter payment cycles.
Cash generated from investing activities was $9,909 for the six months ended
July 31, 2004 compared to cash used of $3,186 for the same period in the prior
year. The sale of Buffalo China on March 12, 2004 generated cash of $5,517, and
the sale of the facilities located in Mexico, Canada and Italy generated cash of
$7,315 which were offset by capital expenditures of $2,923. Cash used in the
prior year was for capital expenditures.
Cash flow from financing activities generated cash of $10,722 for the six months
ended July 31, 2004 compared to cash generated of $7,716 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 was 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.
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These facilities contained 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 obtained further waiver extensions through July 15, 2004 from its
lenders in regard to the Company's financial covenants and in respect to the
above mentioned payments that are due. On June 25, 2004, the Company announced
that it has reached an agreement in principle with its lenders on a
comprehensive restructuring plan for its existing indebtedness and a new $30
million revolving credit facility.
On August 9, 2004 the Company completed the comprehensive restructuring of the
existing indebtedness with its lenders, along with new covenants based upon
current projections. The restructuring included the conversion of $30
million of principal amount of debt into an issuance of a total of 29.85 million
shares of the common stock of the Company to the individual members of the
lender group or their respective nominees. The common shares were issued in
blocks proportionate to the amount of debt held by each lender. As of August 9,
2004 these shares of common stock represented approximately 62% of the
outstanding shares of common stock of the Company. In addition to the debt to
equity conversion, the Company received a new $30 million revolving credit
facility from the lenders and restructured the balance of the existing
indebtedness into a Tranche A loan of $125 Million and a Tranche B loan of
approximately $80 million. All the restructured bank debt is secured by a first
priority lien over substantially all of the Company's and its domestic
subsidiaries' assets. The Tranche A loan will mature in three years and require
amortization of principle based on available cash flow for the first two years
and fixed amortization of $1.5 per quarter in the third year. Interest on the
Tranche A loan will accrue at LIBOR (London Inter Bank Offered Rate) plus
6%-8.25% depending on the leverage to cash flow formula. The Tranche B loan will
mature in 3 1/2 years with no required amortization. Interest on the Tranche B
loan will accrue at LIBOR plus 13% with a maximum interest rate of 17%. The debt
and equity restructuring constituted a change in control of the Company. There
are several employee benefit plans that have triggers if a change of control
occurs. The appropriate plans were amended to allow the debt and equity
transaction without triggering the change in control provision. In addition, the
Shareholder Rights Plan was terminated.
The restructured debt agreement has several covenants including maximum total
leverage ratio, cash interest coverage ratio, total interest coverage ratio, and
consolidated minimum EBITDAR. The new covenants are effective beginning with the
quarter ending on January 29, 2005.
Working capital was $115,281 as of July 31, 2004 as compared to ($89,751)
at January 31, 2004. The negative working capital at January 31, 2004 was
primarily caused by the current classification of the revolving credit and
note agreements.
During the second quarter, the Company has determined it will not make any
scheduled remaining 2004 pension plan contributions in an effort to conserve
cash. The Retirement Plan for Employees of Oneida Ltd. And the Retirement Income
Plan for Employees of Buffalo China were previously frozen in the first quarter.
The anticipated deferred plan contributions are approximately $6,500. This is in
accordance with the Company's strategy of obtaining a waiver from the IRS that
allows current year pension contributions to be deferred. The contributions
related to 2003 plan year can not be waived and they will be made in accordance
with scheduled dates.
Subsequent Events:
On August 9, 2004 the Company completed the comprehensive restructuring of the
existing indebtedness with its lenders, along with new covenants based upon
current projections. The restructuring included the conversion of $30
million of principal amount of debt into an issuance of a total of 29.85 million
shares of the common stock of the Company to the individual members of the
lender group or their respective nominees. The common shares were issued in
blocks proportionate to the amount of debt held by each lender.
On August 28, 2004 the Company completed the sale of substantially all of the
assets of its Encore Promotions Inc. subsidiary which resulted in a loss of
approximately $3,157.
23
On September 9, 2004 the Company announced that it is closing its Sherrill, NY
flatware factory because of unsustainably high operating costs that have heavily
contributed to substantial losses within the company. The Company will continue
to market the products primarily manufactured from this site using independent
suppliers. An impairment loss of $34,016 was recorded in the consolidated
statement of operations under the caption "impairment loss on depreciable
assets".
Accounting Pronouncements
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. FAS 106-2 (FSP 106-2), "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003", which supersedes FSP 106-1. FSP 106-2 provides guidance on the accounting
for the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) for employers that sponsor postretirement health care
plans that provide prescription drug benefits. It also requires certain
disclosures regarding the effect of the federal subsidy provided by the Act.
This FSP is effective for the first interim or annual period beginning after
June 15, 2004. 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.
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 July 31,
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-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.
Based upon that evaluation, each has concluded that at the end of the period
covered by this report, 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. Notwithstanding the foregoing, a control
system, no matter how well designed and operated can provide only reasonable,
not absolute assurance that it will detect or uncover failure within the Company
to disclose material information otherwise required to be set forth in the
Company's periodic reports.
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.
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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: September 14, 2004 By: /s/ GREGG R. DENNY
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Gregg R. Denny
Vice President Finance
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