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 October 25, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of December 5, 2003: 16,645,563
ONEIDA LTD.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 25, 2003
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(a) Limited Waiver and Amendment No. 5 to Amended and Restated Credit
Agreement dated as of April 27, 2001 between Oneida Ltd.,
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank)
and the various lenders named in the Agreement. The Limited
Waiver and Amendment No. 5 is dated as of October 31, 2003.
10(b) Limited Waiver and Amendment No. 4 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 Limited Waiver and Amendment No. 4 is dated as of October 31,
2003.
10(c) Limited Waiver and Amendment No. 6 to Amended and Restated Credit
Agreement dated as of April 27, 2001 between Oneida Ltd.,
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank)
and the various lenders named in the Agreement. The Limited
Waiver and Amendment No. 6 is dated as of November 21, 2003.
10(d) Limited Waiver 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 Limited
Waiver is dated as of November 21, 2003.
10(e) Amendment No. 2 to Pledge Agreement dated as of April 27, 2001
between Oneida Ltd., the subsidiaries of Oneida Ltd. which are
signatories to the Agreement and JPMorgan Chase Bank (formerly
known as The Chase Manhattan Bank), as collateral agent for the
Secured Parties named in the Agreement. Amendment No. 2 is dated
as of November 20, 2003.
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.
(b) Current Reports on Form 8-K:
A Form 8-K, dated as of August 27, 2003, was filed August 27, 2003, under
Item 9, relating to a Press Release in which the Company disclosed
selected, unaudited financial information related to the second quarter of
its fiscal year ended January 2004.
SIGNATURES
3
PART I
ITEM 1.
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in Thousands except OCT 25, OCT 26, OCT 25, OCT 26,
per share amounts) 2003 2002 2003 2002
-------- -------- -------- --------
REVENUES:
Net sales .................... $117,146 $126,898 $331,304 $358,748
Licensing fees ............... 354 324 1,044 1,003
-------- -------- -------- --------
TOTAL REVENUES ................. 117,500 127,222 332,348 359,751
COSTS AND EXPENSES:
Cost of sales (Note 9) ....... 99,055 86,627 253,946 243,536
Selling, distribution and
administrative expenses ..... 32,878 33,004 96,536 96,555
Restructuring charges (Note 4) 10,050 10,050
Impairment loss on depreciable
assets (Notes 6,7) 17,519 17,519
Impairment loss
on Goodwill (Note 7) 1,300 1,300
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES ....... 160,802 119,631 379,351 340,091
LOSS (GAIN) ON SALE OF
FIXED ASSETS ................. (2,842) 13 (2,773) 39
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS .. (40,460) 7,578 (44,230) 19,621
Other income ................... 89 66 970 5,000
Other expense .................. 572 649 1,009 1,890
Interest and amortization of
deferred financing costs ...... 3,966 4,475 11,897 12,938
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (44,909) 2,520 (56,166) 9,793
PROVISION FOR
INCOME TAXES (Note 2) ........ 29,856 929 25,691 3,640
-------- -------- -------- --------
NET INCOME (LOSS) .............. $(74,765) $ 1,591 $(81,857) $ 6,153
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK:
Net income (loss):
Basic ...................... $(4.50) $ .09 $(4.94) $ .37
Diluted (NOTE 3)............ (4.50) .09 (4.94) .37
SHARES USED IN PER SHARE DATA:
Basic ...................... 16,631 16,543 16,588 16,538
Diluted (NOTE 3) ........... 16,631 16,579 16,588 16,577
CASH DIVIDENDS DECLARED (Common) $.00 $.02 $.02 $.06
See notes to consolidated financial statements.
4
ONEIDA LTD.
CONSOLIDATED BALANCE SHEETS
OCTOBER 25, 2003 AND JANUARY 25, 2003
(Dollars in Thousands)
OCT 25, JAN 25,
2003 2003
(Unaudited) (Unaudited)
--------- ---------
ASSETS
CURRENT ASSETS:
Cash............................................... $ 11,541 $ 2,653
Accounts receivable, net of allowance for doubtful.
accounts of $2,883 and $2,963 .................... 71,278 75,810
Other accounts and notes receivable ............... 1,872 2,196
Inventories:
Finished goods ................................... 134,006 145,836
Goods in process ................................. 10,974 12,531
Raw materials and supplies ....................... 9,185 9,206
-------- --------
Total inventory ................................. 154,165 167,573
-------- --------
Other current assets .............................. 2,334 8,515
Assets held for sale .............................. 3,199
-------- --------
Total current assets ........................... 244,389 256,747
-------- --------
PROPERTY, PLANT AND EQUIPMENT-At cost:
Land and buildings ................................ 65,524 70,265
Machinery and equipment ........................... 148,606 156,513
Tooling ........................................... 27,314 30,727
Less accumulated depreciation ..................... (163,788) (155,139)
-------- --------
Property, plant and equipment-net............... 77,656 102,366
-------- --------
OTHER NON-CURRENT ASSETS:
Goodwill .......................................... 133,818 133,944
Deferred income taxes ............................. 18,575
Other assets ...................................... 15,251 13,488
-------- --------
TOTAL ......................................... $471,114 $525,120
======== ========
See notes to consolidated financial statements.
5
ONEIDA LTD.
CONSOLIDATED BALANCE SHEETS
OCTOBER 25, 2003 AND JANUARY 25, 2003
(Dollars in Thousands)
OCT 25, JAN 25,
2003 2003
(Unaudited) (Unaudited)
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt .............................. $ 6,117 $ 8,510
Accounts payable ............................. 29,230 25,711
Accrued liabilities .......................... 41,578 35,459
Dividends payable ............................ 363
Current installments of long-term debt ....... 237,572 6,406
-------- --------
Total current liabilities ................. 314,497 76,449
-------- --------
LONG-TERM DEBT ................................ 219,037
-------- --------
OTHER NON-CURRENT LIABILITIES:
Accrued postretirement liability ............. 62,410 59,708
Accrued pension liability .................... 17,777 20,045
Deferred income taxes ........................ 6,204
Other liabilities ............................ 20,072 20,492
-------- --------
Total ..................................... 106,463 100,245
-------- --------
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 $1 par value; authorized
48,000,000 shares, issued 17,882,382
and 17,836,571 shares ....................... 17,883 17,837
Additional paid-in capital ................... 84,557 84,318
Retained earnings (deficit) .................. (14,391) 68,407
Accumulated other comprehensive loss ......... (16,819) (19,190)
Less cost of common stock held in treasury;
1,237,677 shares and 1,285,679 shares ....... (23,227) (24,134)
-------- --------
Stockholders' Equity ....................... 50,154 129,389
-------- --------
TOTAL .................................... $471,114 $525,120
======== ========
See notes to consolidated financial statements.
6
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 25, 2003
(In Thousands)
Accumulated
Comp. Add'l
Income Common Common Pref'd Paid-in Retained
(Unaudited) (Loss) Shares Stock Stock Capital Earnings
----------------------------------------------------------
Balance at Jan 25, 2003.. 17,837 $17,837 $2,151 $84,318 $68,407
Exercise of stock
options ................ 46 46 239
Contribution of treasury
shares to ESOP ......... (578)
Cash dividends declared
($.02 per share) ..... (363)
Net loss .............. $(81,857) (81,857)
Cumulative translation
adjustment ............. 2,371
-------
Comprehensive loss ..... $(79,486)
=======
--------------------------------------------
Balance at Oct 25, 2003 . 17,883 $17,883 $2,151 $84,557 $(14,391)
============================================
Accumulated
Other Comp Treasury
Income(Loss) Stock
---------------------------------------------------------
Balance at Jan 25, 2003.. $(19,190) $(24,134)
Contribution of treasury
shares to ESOP ......... 907
Cumulative translation
adjustment ............. 2,371
--------------------------------------------------------
Balance at Oct 25, 2003.. $(16,819) $(23,227)
========================================================
See notes to consolidated financial statements.
7
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 26, 2002
(In Thousands)
Accumulated Add'l
Comp. Common Common Pref'd Paid-in Retained
(Unaudited) Income Shares Stock Stock Capital Earnings
----------------------------------------------------------
Balance at Jan 26, 2002.. 17,809 $17,809 $2,151 $83,965 $60,638
Exercise of stock
options ................ 20 20 186
Cash dividends declared
($.06 per share) ..... (1,089)
Net income .............. $ 6,153 6,153
Cumulative translation
adjustment ............. 1,261
-------
Comprehensive income .... $ 7,414
=======
--------------------------------------------
Balance at Oct 26, 2002.. 17,829 $17,829 $2,151 $84,151 $65,702
============================================
Accumulated
Other Comp Treasury
Income(Loss) Stock
--------------------------------------------------------
Balance at Jan 26, 2002.. $(16,328) $(24,134)
Cumulative translation
adjustment ............. 1,261
--------------------------------------------------------
Balance at Oct 26, 2002.. $(15,067) $(24,134)
========================================================
See notes to consolidated financial statements.
8
ONEIDA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 25, 2003 AND OCTOBER 26, 2002
(Unaudited)
(In Thousands) FOR THE NINE MONTHS ENDED
OCT 25, OCT 26,
2003 2002
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $(81,857) $ 6,153
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 11,094 12,566
Loss (gain) on sale of fixed assets ............... (2,773) 39
Inventory charge .................................. 12,506
Restructuring charge .............................. 10,050
Impairment charge ................................. 18,819
Deferred income taxes ............................. 24,627 (16)
Changes in operating assets and liabilities:
Accounts receivable .............................. 6,419 (1,015)
Inventories ...................................... 2,785 (11,945)
Other current assets.............................. 4,078 (1,056)
Other assets ..................................... (4,526) (4,196)
Accounts payable ................................. 3,217 2,696
Accrued liabilities .............................. (3,472) (3,139)
Other liabilities ................................ (2,479) 5,331
------- -------
Net cash (used in) provided by operating
activities .................................... (1,512) 5,418
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (4,326) (6,796)
Proceeds from sale of fixed assets ................. 4,484 430
Proceeds from sale of marketable securities ........ 8,399
------- -------
Net cash provided by investing
activities .. ................................. 158 2,033
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 285 206
Decrease in short-term debt ........................ (2,535) (774)
Increase (decrease) in long-term debt .............. 11,827 (15,494)
Dividends paid ..................................... (363) (1,089)
------- -------
Net cash provided by (used in) financing
activities .................................... 9,214 (17,151)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............. 1,028 1,261
------- -------
NET INCREASE (DECREASE) IN CASH ...................... 8,888 (8,439)
CASH AT BEGINNING OF YEAR ............................ 2,653 11,112
------- -------
CASH AT END OF PERIOD ................................ $11,541 $ 2,673
======= =======
NON-CASH CONTRIBUTION OF TREASURY SHARES TO ESOP ..... $907
See notes to consolidated financial statements.
9
ONEIDA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands)
1. The consolidated financial statements for the three and nine months ended
October 25, 2003 and October 26, 2002 are unaudited; in the opinion of
management such unaudited statements include all adjustments (which comprise
only normal recurring accruals except as described elsewhere herein, see Notes
5, 6, 7, and 9) necessary for a fair presentation of the results of such
periods. The results of operations for the three and nine months ended October
25, 2003 are not necessarily indicative of the results of operations to be
expected for the year ending January 31, 2004. The interim financial information
does not include all information required by accounting principles generally
accepted in the United States for complete financial presentation. The
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes for the years
ended in January 2003 and 2002 included in the Company's January 25, 2003 Annual
Report to the Securities and Exchange Commission on Form 10-K. The January 25,
2003 balance sheet data was derived from audited financial statements.
The Company may need to raise additional capital to reduce its outstanding debt
obligations as required by the amended revolving credit and note agreements. Our
revenue and costs may be dependent upon factors that are not within our control.
Due to the uncertainty of these factors, actual revenue and costs may vary from
expected amounts, possibly to a material degree, and such variations could
affect our future liquidity. Should factors differ materially, management may
delay capital expenditures, reduce overhead, selling, distribution and
administrative expenses, sell assets or seek alternative financing. Provided the
above amendments or waivers are obtained, operating results improve as a result
of the restructuring activities and implementation of lean manufacturing, and
the additional capital raised, management believes there will be sufficient
liquidity to support the Company's funding requirements over the next year from
future operations as well as from available bank lines of credit. If the
amendments or waivers are not received, potential additional capital not raised,
or operating results do not improve, the Company may not continue as a going
concern.
Certain reclassifications have been made to the prior year's information to
conform to the current year presentation. In 2002, shipping and handling costs
have been reclassified from net sales to cost of sales. This reclassification
resulted in an increase in net sales and cost of sales of $2,415 and $6,842 for
the three and nine months ended October 26, 2002, respectively. Selling expense
for the company owned retail shops in the UK has been reclassified from cost of
sales to selling, distribution and administrative expenses. This
reclassification resulted in a decrease in cost of sales and an increase in
selling, distribution and administrative expenses of $597 and $1,722 for the
three and nine months ended October 26, 2002, respectively. Additionally,
amortization of deferred financing costs has been reclassified from other
expense to interest and amortization of deferred financing costs. This
reclassification resulted in a decrease in other expense and an increase in
interest and amortization of deferred financing costs of $434 and $1,020 for the
three and nine months ended October 26, 2002, respectively.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
10
disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation"
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
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
because the fair value equals the option price. Under SFAS 123 as amended by
SFAS 148, 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 for the three and nine months ended October 25, 2003 and October 26, 2002:
(Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended
Oct 25, Oct 26, Oct 25, Oct 26,
2003 2002 2003 2002
-------- -------- -------- -------
Net income (loss), as reported $(74,765) $1,591 $(81,857) $6,153
Deduct: Total stock-based
employee compensation expense
determined under Black-Scholes
option pricing model, net of
related income tax effect (634) (862) (1,901) (2,587)
--------- -------- --------- -------
Pro forma net income (loss) $(75,399) $ 729 $(83,758) $3,566
Earnings (loss) per share:
As reported: Basic $(4.50) $ .09 $(4.94) $ .37
Diluted (4.50) .09 (4.94) .37
Pro forma: Basic (4.54) .04 (5.06) .21
Diluted (4.54) .04 (5.06) .21
There was no stock based employee compensation expense included in the
Consolidated Statements of Operations for any of the periods presented.
2. As a result of restructuring costs incurred during the three months ended
October 25, 2003, the Company recorded a non-cash charge to establish a
valuation allowance of $39,452 against net deferred tax assets of $33,248 (the
Company is required to exclude deferred tax liabilities relative to indefinite
long-lived intangibles from the calculation). The charge was calculated in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109), which requires an assessment of
both positive and negative evidence when measuring the need for a valuation
allowance. Evidence, such as operating results during the most recent three-year
period, is given more weight when due to our current lack of visibility, there
is a greater degree of uncertainty that the level of future profitability needed
to record the deferred tax assets will be achieved. Our results over the most
recent three-year period were heavily affected by our recent business
restructuring activities. The Company's cumulative loss in the most recent
three-year period, inclusive of the loss for the quarter ended October 25, 2003,
represented sufficient negative evidence to require a valuation allowance under
the provisions of SFAS 109. The Company will maintain a valuation allowance
until sufficient positive evidence exists to support its reduction or reversal.
11
During the three months ended October 25, 2003, the Company provided $5,510 of
deferred tax expense on $14,891 of retained earnings of certain international
subsidiaries. The charge was recorded in accordance with the provisions of APB
23, Accounting for Income Taxes - Special Areas. An income tax provision had not
been recorded previously as it was determined that these earnings would be
reinvested in properties and plants and working capital. Restructuring
activities taking place in the quarter ended October 25, 2003 have changed that
determination. Deferred taxes on retained earnings of the remaining
international subsidiaries have not been recognized as the income is determined
to be permanently reinvested.
The following table summarizes our provision for income taxes and the related
effective tax rates for the current three and nine months ended October 25, 2003
and October 26, 2002:
(Thousands)
Three Months Ended Nine Months Ended
Oct 25, Oct 26, Oct 25, Oct 26,
2003 2002 2003 2002
Income (Loss) before income taxes ... $(44,909) $2,520 $(56,166) $9,793
Provision for income taxes .......... 29,856 929 25,691 3,640
Effective tax rate .................. (66.48)% 36.87% (45.74)% 37.17%
The effective tax rate for the three and nine months ended October 25, 2003 was
significantly more than the U.S. statutory rate primarily due to recognition of
a deferred tax liability for certain unrepatriated foreign earnings of $5,510
under APB 23, Accounting for Income Taxes - Special Areas, and a non-cash charge
of $39,452 to provide a full valuation allowance on our remaining net deferred
tax assets. The Company also recorded in the third quarter of 2003, a tax
benefit of $748, which reflects the impact through nine months of the carryback
of a U.S. loss to recover prior year taxes. The effective tax rate for the three
and nine months ended October 26, 2002 was higher than the U.S. statutory rate
primarily due to non-deductible financial expense items for tax.
3. 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 (loss) income less preferred stock dividends by the weighted
average shares actually outstanding for the period. Diluted earnings per share
includes the potentially dilutive effect of shares issuable under the employee
stock purchase and incentive stock option plans.
The preferred dividends in arrears for the three months ended October 25, 2003
is $32, or $.375 per cumulative preferred stock share.
The following is a reconciliation of basic (loss) earnings per share to diluted
(loss) earnings per share for the three months ended October 25, 2003 and
October 26, 2002:
12
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
--------------------------------------------------------------------------------
2003:
Basic earnings (loss)
per share ............. $(74,765) $(32) $(74,797) 16,631 $(4.50)
Effect of stock options.
Diluted earnings (loss)
per share ............. (74,765) (32) (74,797) 16,631 (4.50)
--------------------------------------------------------------------------------
2002:
Basic earnings
per share ............. $1,591 $(32) $1,559 16,543 $.09
Effect of stock options. 36
Diluted earnings
per share ............. 1,591 (32) 1,559 16,579 .09
--------------------------------------------------------------------------------
The preferred dividends in arrears for the nine months ended October 25, 2003 is
$97, or $1.13 per cumulative preferred stock share.
The following is a reconciliation of basic (loss) earnings per share to diluted
(loss) earnings per share for the nine months ended October 25, 2003 and October
26, 2002:
Net Preferred Adjusted Earnings
Income Stock Net Income Average (Loss)
(Loss) Dividends (Loss) Shares Per Share
--------------------------------------------------------------------------------
2003:
Basic earnings (loss)
per share ............. $(81,857) $(97) $(81,954) 16,588 $(4.94)
Effect of stock options.
Diluted earnings (loss)
per share ............. (81,857) (97) (81,954) 16,588 (4.94)
--------------------------------------------------------------------------------
2002:
Basic earnings
per share ............. $6,153 $(97) $6,056 16,538 $.37
Effect of stock options. 39
Diluted earnings
per share ............. 6,153 (97) 6,056 16,577 .37
--------------------------------------------------------------------------------
4. 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, deprecation and
amortization. A default in compliance with these covenants, if unremedied, could
cause the lenders to declare the principal outstanding to be payable
immediately. As of October 25, 2003, the Company was in violation of the
interest coverage
13
ratio, leverage ratio and net worth covenants and received waivers from its
required lenders that expired November 21, 2003. The waivers also postponed the
$5 million reduction in the revolving credit facility until November 21, 2003.
The Company did not pay any compensation for these waivers. The Company's senior
note holders agreed to defer until November 21, 2003 a $3.9 million payment that
was due October 31, 2003. On November 21, 2003, the Company obtained further
waivers from its lenders in regard to the interest coverage ratio, leverage
ratio and net worth covenants, and $5 million reduction in the revolving credit
facility until December 12, 2003. The Company did not pay any compensation for
these waivers. In addition, the senior note holders have agreed to further defer
the $3.9 million payment until December 12, 2003. At that time, the Company
expects to have provided lenders with updated financial information regarding
operations and restructuring plans and request amendments to the existing
revolving credit and note agreements to incorporate a number of changes. These
changes include the amendment of the financial covenants to permit certain
transactions. The Company anticipates 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 amendment has not been
agreed upon and more restrictive covenants must be met as of January 31, 2004
under the existing agreement and it is probable that the Company will fail to
meet those covenants.
As of October 25, 2003 the Company had unused bank lines of credit of $7,000.
Under the provisions of the amended revolving credit and note agreements, at
October 25, 2003, 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 three quarters of 2003.
In addition to the restructuring described in Note 4, the Company is continuing
its implementation of lean manufacturing and improving efficiencies as well as
reducing headcount in the Sherrill, NY manufacturing facility. The results of
the Company's actions are intended to reduce costs, increase the Company's
liquidity and better position the Company to compete under the current economic
conditions. The Company intends to liquidate the facilities that will shut down
as a result of the restructuring.
The Company may need to raise additional capital to reduce its outstanding debt
obligations as required by the amended revolving credit and note agreements. Our
revenue and costs may be dependent upon factors that are not within our control.
Due to the uncertainty of these factors, actual revenue and costs may vary from
expected amounts, possibly to a material degree, and such variations could
affect our future liquidity. Should factors differ materially, management may
delay capital expenditures, reduce overhead, selling, distribution and
administrative expenses, sell assets or seek alternative financing. Provided the
above amendments or waivers are obtained, operating results improve as a result
of the restructuring activities and implementation of lean manufacturing, and
the additional capital raised, management believes there will be sufficient
liquidity to support the Company's funding requirements over the next year from
future operations as well as from available bank lines of credit. If the
amendments or waivers are not received, potential additional capital not raised,
or operating results do not improve, the Company may not continue as a going
concern.
5. As a result of the substantial inefficiencies in plant operations which led
to negative manufacturing variances, it was determined at the end of the third
quarter to close 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
14
these sites, using independent suppliers. The factory closings are expected to
be completed during the fourth quarter of Oneida's current fiscal year.
Additionally, the warehouse located in Niagara Falls, Canada will be closed. The
Company's 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, 1,134 employees will be terminated
and termination benefits have been recorded in accordance with contractual
agreements or statutory regulations.
--------------------------------------------------------------------------------------
Amount accrued in
Total Amount the three months Cumulative
Expected to ended October 27, incurred to
be Incurred 2003 date
--------------------------------------------------------------------------------------
Termination benefits $10,048 $10,048 $10,048
--------------------------------------------------------------------------------------
Other associated costs $928 $2 $2
--------------------------------------------------------------------------------------
Other associated costs include expenses related to the dissolution of the
Maquiladora programs in Mexico.
At October 25, 2003, outstanding liabilities related to the restructuring
totaled $10,050 and are included in accrued liabilities in the accompanying
Balance Sheets. There have been no restructuring related costs paid or otherwise
settled. It is expected that termination benefits will paid by May 31, 2004.
6. In conjunction with the closures associated with the restructuring described
in Note 4, 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 fixed assets were subject to an
impairment loss. Due to the negative cash flow it was determined that an
impairment existed and as a result, the Company valued the assets at fair market
value. An impairment charge of $11,382 was identified and recorded in the
statement of operations under the caption "Impairment loss on depreciable
assets" for the three months and nine months ended October 25, 2003. The Buffalo
China manufacturing assets are held for sale in the consolidated balance sheet
at October 25, 2003 in the amount of $3,199.
In conjunction with the Company's effort to reduce SKUs and operate in a
profitable and cost efficient fashion, several glass and crystal product lines
have been discontinued. Additionally, domestic metalware production has been
reengineered under the lean manufacturing effort and certain patterns have been
outsourced. The Company performed a FASB 144 evaluation to determine if the
fixed assets associated with these product lines were subject to an impairment
loss. Due to the negative cash flow, it was determined that an impairment
existed. The fixed assets are specific to these product lines and do not have a
market and therefore no market value, and as a result, an impairment charge of
$4,385 was identified. The charge is recorded in the statement of operations
under the caption "Impairment loss on depreciable assets" for the three months
and nine months ended October 25, 2003.
As a result of the reduced operating results and negative cash flow associated
with the Oneida Home outlet stores (the "Stores"), the Company performed a FASB
144 evaluation to determine if the fixed assets were subject to a possible
impairment loss. Due to the negative cash flow it was determined that an
15
impairment existed. The impaired fixed assets are designed and manufactured
specifically for the Stores or are improvements made to leased facilities and as
a result, they do not have a market or market value. An impairment charge of
$1,222 was identified, which was recorded as a charge in the statement of
operations under the caption "Impairment loss on depreciable assets" for the
three months and nine months ended October 25, 2003.
The Company has land use rights in connection with its Shanghai operation. As a
result of the restructuring, the Company will shut down the Shanghai operation
and the land use rights are impaired. An impairment charge of $530 was
identified and recorded as a charge in the statement of operations under the
caption "Impairment loss on depreciable assets" for the three months and nine
months ended October 25, 2003.
7. Effective January 27, 2002, the Company adopted the provisions of SFAS No.
142 (FAS 142), Goodwill and Other Intangible Assets, which requires companies to
cease amortizing goodwill and certain intangible assets deemed to have an
indefinite useful life. Instead, FAS 142 requires that goodwill and intangible
assets deemed to have an indefinite useful life to be reviewed for impairment
upon adoption of FAS 142 and annually thereafter, or if there is a triggering
event. Under FAS 142, goodwill is deemed to be potentially impaired if the net
book value of a reporting unit exceeds its estimated fair value.
The Company has determined that a goodwill impairment exists as of October 25,
2003 at its UK operation. Based on an independently performed valuation, the
Company recognized an impairment charge of $1,300 in the third quarter of 2003.
The fair value of the UK Operations was determined through a combination of
three valuation analyses: business enterprise, debt and equity. The charge is
recorded as a charge in the statement of operations under the caption
"Impairment loss on goodwill" for the three months and nine months ended
October 25, 2003.
8. In connection with the restructuring, the number of employees accumulating
benefits under the defined benefit plans will be reduced significantly.
Furthermore, the Company continues to reduce employment at its Sherrill, NY
manufacturing facility, which also resulted in the number of employees
accumulating benefits to be reduced significantly. The impact of these
curtailments is a pension charge of $229 and a postretirement gain of $297,
which were recorded in the three months ended October 25, 2003.
9. Included in cost of sales is a charge of $12,506 as a result of the Company's
SKU rationalization program which was implemented to reduce inventory levels and
warehouse space.
10. The Company's operations and assets are in one principal segment; tableware
products. The Company's tableware segment is grouped around the manufacture and
distribution of three major product categories: metal tableware, china
dinnerware and glass tabletop products. The Company also distributes a variety
of other tableware accessories. These products are sold directly to a broad base
of retail outlets including department stores, mass merchandisers, Oneida Home
stores and chain stores. Additionally, these products are sold to special sales
markets, which include customers who use them as premiums, incentives and
business gifts. The Company also sells directly or through distributors to
foodservice operations worldwide, including hotels, restaurants, airlines,
cruise lines, schools and healthcare facilities. The Company's operations are
located in the United States, Canada, Mexico, Italy, Australia, The United
Kingdom and China.
16
Sales by product category for the quarter and first nine months of 2003 and 2002
were as follows:
(Dollars in Thousands)
Third Quarter
-------------
Metal Dinnerware Glass Other Total
-------- ---------- ------- ------ --------
2003 Net Sales $ 67,600 $ 36,900 $ 9,600 $3,046 $117,146
2002 Net Sales 73,200 43,200 8,300 2,198 126,898
Year to date
------------
Metal Dinnerware Glass Other Total
--------- ---------- ------- ------ --------
2003 Net Sales $199,800 $101,600 $23,900 $6,004 $331,304
2002 Net Sales 215,300 113,900 23,200 6,348 358,748
11. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company currently does
not hold any financial instruments that should be considered for transition from
equity to liabilities.
On January 17, 2003 the FASB issued Financial Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. 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, the
Interpretation requires consolidation of variable interest entities created
prior to January 31, 2003 for fiscal periods beginning after December 15, 2003.
The Company does not expect the adoption of this standard to have a material
impact on its financial condition or results of operations.
17
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter ended October 25, 2003 compared with
the quarter ended October 26, 2002
(In Thousands)
Operations
Net Sales by Product Line:
Three Months Ended October
2003 2002 %Change
------- ------- ------
Metal products....... $ 67,600 $ 73,200 (7.7)
Dinnerware products.. 36,900 43,200 (14.6)
Glass products....... 9,600 8,300 15.7
Other Products....... 3,046 2,198 38.6
-------- -------- -----
Total............... $117,146 $126,898 (7.7)
======== ======== =====
Quarterly Review
18
Consolidated net sales for the quarter ended October 25, 2003 decreased by
$9,752 or 7.7% over the same period a year ago. Metal products net sales
decreased by $5,600 or 7.7% over the second quarter of 2002. Dinnerware products
net sales decreased by $6,300 or 14.6% over the same period a year ago. The
sales decline in metal and dinnerware is mainly attributable to the economic
climate as consumer confidence remains weak and the hotel and restaurant
industries continue to be soft. Glass products net sales increased by $1,300 or
15.7% and other products net sales increased by $848 or 38.6% over the third
quarter of 2002 as a result of an aggressive pricing strategy.
Gross margin as a percentage of net sales was 15.4% in the third quarter of 2003
as compared to 31.7% for the same period of 2002. Lower net sales resulted in
the manufacturing plants operating at lower volumes generating inefficiencies
and unfavorable factory and related variances of $10.8 million. Also
contributing to the decrease in gross margin and factory utilization was a trend
towards less expensive, lower margin sourced product. In conjunction with the
Company's focus on reducing warehousing costs and inventory levels, an inventory
charge of $12,506 was recorded to adjust certain inventory to its expected net
realizable value. The identified inventory will be aggressively marketed through
non traditional channels and liquidators.
Total selling, distribution and administrative expenses were flat compared to
the same quarter last year. As a percentage of sales, operating expenses were
28.1% compared to 26.0% in 2002. Total operating expenses as a percentage of
sales will decline as sales return to expected levels.
Gain on sale of fixed assets was $2,842 for the quarter ended October 25, 2003
compared to a loss of $13 a year ago. The gain was principally generated on the
sale of non-operating assets.
Interest expense and amortization of deferred financing costs decreased by $509
or 11.4% in the third quarter of 2003 compared with the same period a year ago.
Capitalized interest was $40 in the quarter ended 2003 and $31 over the same
period a year ago.
As a result of restructuring costs incurred during the three months ended
October 25, 2003, the Company recorded a non-cash charge to establish a
valuation allowance of $39,452 against net deferred tax assets of $33,248 (the
Company is required to exclude deferred tax liabilities relative to indefinite
long-lived intangibles from the calculation). The charge was calculated in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109) which requires an assessment of
both positive and negative evidence when measuring the need for a valuation
allowance. Evidence, such as operating results during the most recent three-year
period, is given more weight when due to our current lack of visibility, there
is a greater degree of uncertainty that the level of future profitability needed
to record the deferred tax assets will be achieved. The Company's results over
the most recent three-year period were heavily affected by our recent business
restructuring activities. The Company's cumulative loss in the most recent
three-year period, inclusive of the loss for the quarter ended October 25, 2003,
represented sufficient negative evidence to require a valuation allowance under
the provisions of SFAS 109. The Company intends to maintain a valuation
allowance until sufficient positive evidence exists to support its reversal.
During the three months ended October 25, 2003, the Company provided $5,510 of
deferred tax expense on $14,891 of retained earnings of certain international
subsidiaries. The charge was recorded in accordance with the provisions of APB
19
23, Accounting for Income Taxes - Special Areas. An income tax provision had not
been recorded previously as it was determined that these earnings would be
reinvested in properties and plants and working capital. Restructuring
activities taking place in the quarter ended October 25, 2003 have changed that
determination. Deferred taxes on retained earnings of the remaining
international subsidiaries have not been recognized as the income is determined
to be permanently reinvested.
The following table summarizes our provision for income taxes and the related
effective tax rates for the third quarter ended:
(Thousands)
Three Months Ended
Oct 25, Oct 26,
2003 2002
Income (Loss) before income taxes ........... $(44,909) $2,520
Provision for income taxes .................. 29,856 929
Effective tax rate .......................... (66.48%) 36.87%
The effective tax rate for the current quarter was significantly more than the
U.S. statutory rate primarily due to recognition of a deferred tax liability for
certain unrepatriated foreign earnings of $5,510 under APB 23, Accounting for
Income Taxes - Special Areas, and a non-cash charge of $39,452 to provide a full
valuation allowance on our remaining net deferred tax assets. The Company also
recorded in the third quarter of 2002, a tax benefit of $748, which reflects the
impact through nine months of the carryback of a U.S. loss to recover prior year
taxes. The effective tax rate for the three months ended October 26, 2002 was
higher than the U.S. statutory rate primarily due to expenses that are
non-deductible for tax.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months ended October 25, 2003 compared with
the Nine Months ended October 26, 2002
(In Thousands)
Operations
Net Sales by Product Line:
Nine Months Ended October
2003 2002 %Change
------- ------- ------
Metal products....... $199,800 $215,300 (7.2)
Dinnerware products.. 101,600 113,900 (10.8)
Glass products....... 23,900 23,200 3.0
Other Products....... 6,004 6,348 (5.4)
-------- -------- ----
Total............... $331,304 $358,748 (7.6)
======== ======== ====
Nine month review
Consolidated net sales for the nine months ended October 25, 2003 decreased by
$27,444 or 7.6% over the same period a year ago. A sluggish economy combined
with an aggressive pricing strategy utilized to maintain market share resulted
in lower net sales. Metal products net sales decreased by $15,500 or 7.2% and
dinnerware products net sales decreased by $12,300 or 10.8% over the same period
a year ago. Glass products net sales increased by $700 or 3.0% and other
products net sales decreased by $344 or 5.4% over 2002.
Gross margin as a percentage of net sales was 23.3% for the first nine months of
2003 as compared to 32.1% for the same period of 2002. The aggressive pricing
strategy coupled with the manufacturing plants operating at lower volumes
resulted in lower gross margins. Also contributing to the decrease in gross
margin was a trend towards less expensive, lower margin sourced product and a
slight cost increase in procured product. In conjunction with the Company's
focus on reducing warehousing costs and inventory levels, an inventory charge of
$12,506 was recorded to adjust certain inventory to its expected realizable
value. The identified inventory will be aggressively marketed through non
traditional channels and liquidators.
Total selling, distribution and administrative expenses were flat compared to
the first nine months of the prior year.
Gain on sale of fixed assets was $2,773 for the nine months ended October 25,
2003 compared to a loss of $39 a year ago. The gain was principally generated on
the sale of non-operating assets.
Other income for the period was $970 compared to $5,000 for the nine months
ended October 26, 2002. Other income for the nine months ended October 26, 2002
was principally generated from insurance proceeds of $3,000 and gain on sale of
Prudential stock of $1,300.
Interest expense and amortization of deferred financing costs decreased by
$1,041 or 8.0% in the first nine months of 2003 compared with the same period a
year ago. The decrease is due to slightly lower average borrowings and lower
prevailing interest rates. Capitalized interest was $118 for the nine months
ended October 25, 2003 and $87 over the same period a year ago.
21
As previously discussed, the Company established a full valuation allowance of
$39,452 against our net deferred tax assets during the current quarter and
reflected in the nine months ended October 25, 2003. The following table
summarizes our provision for income taxes and the related effective tax rates
for the nine months ended:
(Thousands)
Nine Months Ended
Oct 25, Oct 26,
2003 2002
Income (Loss) before income taxes ............ (56,166) $9,793
Provision for income taxes ................... 25,691 3,640
Effective tax rate ........................... (45.74%) 37.17%
The effective tax rate for the nine months ended was significantly more than the
U.S. statutory rate primarily due to recognition in the current quarter of a
deferred tax liability of $5,510 under APB 23, a non-cash charge of $39,452 to
provide a full valuation allowance on our remaining net deferred tax assets and
a carryback tax benefit of $748. The effective tax rate for the nine months
ended October 26, 2002 was higher than the U.S. statutory rate primarily due to
expenses that are non-deductible for tax.
Restructuring & Lean Manufacturing
As a result of the substantial manufacturing inefficiencies and negative
manufacturing variances, it was determined at the end of the third quarter to
close 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 Juarez, Mexico; Toluca, Mexico;
Shanghai, China; and Vercelli, Italy facilities closings are expected to be
completed during the fourth quarter of Oneida's current fiscal year. The
Buffalo, NY factory closing is expected to be completed by the second quarter of
the Company's fiscal year. Additionally, the warehouse located in Niagara Falls,
Canada will be closed. The Company's 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, 1,134 employees will be terminated and termination
benefits have been recorded in accordance with contractual agreements or
statutory regulations. The Company recognized a charge of $10,050 in the third
quarter ended October 25, 2003. The Company may not receive full value of all
assets as the factories are shutdown and an additional charge of $3,889 may be
incurred in the fourth quarter.
These cost saving activities are expected to reduce operating expenses by
approximately $12 million annually.
The Company is implementing a lean manufacturing approach at its Sherrill, NY
manufacturing facility in an effort to reduce manufacturing and overhead costs.
In August, approximately 70 overhead positions were eliminated at the Sherrill,
N.Y. flatware manufacturing operation. The affected employment primarily
involved supporting positions that are no longer needed under the Company's
continued conversion to a lean manufacturing system. In addition, 30 direct
labor positions
22
were reduced as a result of lower demand. In December 2003, approximately 70
positions will be eliminated. The lean manufacturing conversion is projected to
be complete by April 24, 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.
Fixed Asset Impairments
In conjunction with the closures associated with the restructuring, 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 fixed assets were subject to a possible impairment
loss. Due to the negative cash flow it was determined that a possible impairment
existed and as a result, the Company valued the assets at fair market value. An
impairment charge of $11,382 was identified and recorded as a charge in the
consolidated statements of operations under the caption "Impairment loss on
depreciable assets" for the three months and nine months ended October 25, 2003.
In conjunction with The Company's effort to reduce SKUs and operate in a
profitable and cost efficient fashion, several glass and crystal product lines
have been discontinued. Additionally, domestic metalware production has been
reengineered under the lean manufacturing effort and certain patterns have been
outsourced to low cost producers. The Company performed a FASB 144 evaluation to
determine if the fixed assets associated with these product lines were subject
to a possible impairment loss. Due to the negative cash flow it was determined
that a possible impairment existed. The fixed assets are specific to these
product lines and do not have a market and therefore no market value, and as a
result, an impairment charge of $4,385 was identified. The charge is recorded in
the consolidated statements of operations under the caption "Impairment loss on
depreciable assets" for the three months and nine months ended October 25, 2003.
As a result of the reduced operating results and negative cash flow associated
with the Oneida Home outlet stores (the "Stores"), the Company performed a FASB
144 evaluation to determine if the fixed assets were subject to a possible
impairment loss. Due to the negative cash flow it was determined that an
impairment existed. The impaired fixed assets are designed and manufactured
specifically for the Stores or are improvements made to leased facilities and as
a result, they do not have a market or market value. An impairment charge of
$1,222 was identified, which was recorded as a charge in the consolidated
statements of operations under the caption "Impairment loss on depreciable
assets" for the three months and nine months ended October 25, 2003.
The Company has land use rights in connection with its Shanghai operation. As a
result of the restructuring, the Company will shut down the Shanghai operation
and the land use rights are impaired. An impairment charge of $530 was
recognized and recorded as a charge in the consolidated statements of operations
under the caption "Impairment loss on depreciable assets" for the three months
and nine months ended October 25, 2003.
Impairment of Intangible Assets
The Company has determined that a goodwill impairment exists as of October 25,
2003 at its UK operation. Reduced personal and business travel and restaurant
activity combined with weak consumer confidence has led to lower revenue,
operating profits and cash flow. Based on an independently performed valuation,
23
the Company recognized an impairment charge of $1,300 in the third quarter of
2003. The fair value of the Company was determined through a combination of
three valuation analyses: business enterprise, debt and equity. The charge is
recorded as a charge in the consolidated statements of operations under the
caption "Impairment loss on goodwill" for the three months and nine months ended
October 25, 2003.
Liquidity & Financial Resources
Cash flow used in operating activities was $1,512 for the nine months ended
October 25, 2003 as compared to cash provided by operating activities of $5,418
in the first nine months of 2002. The net cash used in operating activities
during the nine months ended October 25, 2003 was primarily due to net losses
offset by positive changes in operating assets and liabilities of $6,022. The
net cash provided by operating activities for the nine months ended October 26,
2002 was the result of net income offset by negative changes in operating assets
and liabilities of $13,324.
Net cash provided by investing activities was $158 for the nine months ended
October 25, 2003 compared with net cash provided of $2,033 for the same period
of 2002. Net cash used in investing activities for the nine months ended October
25, 2003 was related to the sale of fixed assets offset by capital expenditures.
Capital spending for the remainder of 2003 is anticipated to be approximately
$3,500, supporting the lean manufacturing effort in Sherrill, NY. Net cash
provided by investing activities for the nine months ended October 26, 2002 is
the result of the sale of marketable equity securities offset by capital
expenditures.
Net cash provided by financing activities was $9,214 for the nine months ended
October 25, 2003 compared to net cash used in financing activities of $17,151 in
the first nine months of 2002. Net cash provided by financing activities for the
nine months ended October 25, 2003 was primarily related to borrowings under the
revolving credit agreement. The net cash used in financing activities for the
nine months ended June 27, 2002 was primarily related to debt reduction. In
April 2003, the Company and its required lenders entered into amendments to the
revolving credit and note agreements. The 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, deprecation and
amortization. A default in compliance with these covenants, if unremedied, could
cause the lenders to declare the principal outstanding to be payable
immediately. As of October 25, 2003, the Company was in violation of the
interest coverage ratio, leverage ratio and net worth covenants and received
waivers from its required lenders that expired November 21, 2003. The waivers
also postponed the $5 million reduction in the revolving credit facility until
November 21, 2003. The Company did not pay any compensation for these waivers.
The Company's senior note holders agreed to defer until November 21, 2003 a $3.9
million payment that was due October 31, 2003. On November 21, 2003, the Company
obtained further waivers from its lenders in regard to the interest coverage
ratio, leverage ratio
24
and net worth covenants, and $5 million reduction in the revolving credit
facility until December 12, 2003. The Company did not pay any compensation for
these waivers. In addition, the senior note holders have agreed to further defer
the $3.9 million payment until December 12, 2003. At that time, the Company
expects to have provided lenders with updated financial information regarding
operations and restructuring plans and request amendments to the existing
revolving credit and note agreements to incorporate a number of changes. These
changes include the amendment of the financial covenants to 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 amendment has not been
agreed upon and more restrictive covenants must be met as of January 31, 2004
under the existing agreement and it is probable that the Company will fail to
meet those covenants.
Working capital was $(70,108) as of October 25, 2003 as compared to $180,298 at
January 25, 2003. The decrease in working capital as of October 25, 2003 was
caused by the current classification of the revolving credit and note
agreements. As of October 25, 2003, the Company had unused bank lines of credit
of $7,000. Under the provisions of the amended revolving credit and note
agreements, at October 25, 2003 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 three quarters of 2003.
In addition to the restructuring, the Company is continuing its implementation
of lean manufacturing and improving efficiencies as well as reducing headcount
in the Sherrill, NY manufacturing facility. The results of the Company's actions
are intended to reduce costs, increase the Company's liquidity and better
position the Company to compete under the current economic conditions. The
Company intends to liquidate the facilities that will shut down as a result of
the restructuring and the lenders have approved the liquidation.
The Company may need to raise additional capital to reduce its outstanding debt
obligations as required by the amended agreements. Our revenue and costs may be
dependent upon factors that are not within our control. Due to the uncertainty
of these factors, actual revenue and costs may vary from expected amounts,
possibly to a material degree, and such variations could affect our future
liquidity. Should factors differ materially, management may delay capital
expenditures, reduce overhead, selling, distribution and administrative
expenses, sell assets or seek alternative financing. Provided the above
amendments or waivers are obtained, operating results improve as a result of the
restructuring activities and implementation of lean manufacturing, and the
additional capital raised, management believes there is sufficient liquidity to
support the Company's funding requirements over the next year from future
operations as well as from available bank lines of credit. If the amendments or
waivers are not received, potential additional capital not raised, or operating
results do not improve, the Company may not continue as a going concern.
Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim
25
period beginning after June 15, 2003. The Company currently does not hold any
financial instruments that should be considered for transition from equity to
liabilities.
On January 17, 2003 the FASB issued Financial Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. 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, the
Interpretation requires consolidation of variable interest entities created
prior to January 31, 2003 for fiscal periods beginning after December 15, 2003.
The Company does not expect the adoption of this standard to have a material
impact on its financial condition or results of operations.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123, Accounting for Stock-Based Compensation, to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
ITEM 3.
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 October
2003, a 1% change in the rate would result in a corresponding change in
annualized interest expense of $2.2 million.
The Company has foreign exchange exposure related to its foreign operations in
Mexico, Canada, Italy, Australia, the United Kingdom and China. Translation
adjustments recorded in the income statement for the three and nine months ended
October 25, 2003 and October 26, 2002 were not of a material nature.
ITEM 4.
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
26
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")) as of the end of the period. 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
action, 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 to
obtain needed waivers and/or amendments relative to its financing 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; the 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.
27
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: December 9, 2003
/s/ GREGG R. DENNY
------------------
Gregg R. Denny
Chief Financial Officer
28