The
Consolidated Financial Statements of Waterford Wedgwood plc (the
"
Company
") and its subsidiaries
(together the "
Group
"), which form
part of this annual report, are prepared in euro
("
€
"). References to
"
US dollars
" or
"
$
" are to United States dollars,
references to "
IR£
" are to Irish
pounds, the former currency of the Republic of Ireland prior to March
1, 2002; "
¥
" and
"
yen
" means the currency of Japan and
references to "
£
" or
"
pounds
" are to UK pounds sterling.
References to "
€
" are to
the euro, the currency of the European Monetary Union, which, as from
March 1, 2002 is the exclusive currency in the twelve nations of the
eurozone, including the Republic of Ireland. References to
"c" are to euro cents. References to
"we", "us",
"our", and other similar terms refer to the
Group, unless the context otherwise requires. Our Consolidated
Financial Statements are prepared in accordance with accounting
principles generally accepted in the Republic of Ireland
("
Irish GAAP
"), which differ in
certain significant respects from accounting principles generally
accepted in the United States ("
US
GAAP
"). The principal differences between Irish GAAP
and US GAAP that are relevant to us are explained in note 31 to the
Consolidated Financial Statements.
The Noon Buying Rate in New
York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the
"
Noon Buying Rate
") on March
31, 2005 was €1.00 = $1.30. On September 16, 2005,
the Noon Buying Rate was €1.00 = $1.22. For further
information on exchange rates between the euro and the US dollar, see
"
Item 3—Key Information—Exchange
Rates
" and the discussion in "
Item
5—Operating and Financial Review and Prospects—Principal
Factors that Affect Our Results of Operations and Financial
Condition—Exchange rate fluctuations
" and
"
—Results of Operations
".
Unless the content indicates otherwise, the term
"
Ceramics Group
" refers to our
Ceramics business and products sold under the Wedgwood
®
,
Royal Doulton
®
and Rosenthal
®
brands.
The term "
Waterford Crystal
" refers
to our Crystal operations and products sold under the
Waterford
®
crystal, John Rocha at
Waterford
®
crystal, Marquis
®
by
Waterford, Stuart
®
crystal and Jasper Conran at
Waterford
®
Crystal brands. The term
"
Rosenthal
" refers to the Rosenthal AG
Group of companies and their respective operations and products sold
under the Rosenthal studio-line
®
,
Rosenthal
®
, Thomas
®
and
Hutschenreuther
®
brands. The term
"
All-Clad
" refers to the All-Clad
Group of companies and their respective operations and products sold
under the All-Clad Stainless
®
,
Cop-R-Chef
®
, LTD
®
, Copper
Core
®
, and MC2
®
brands. The term
"
WW UK
" refers to Waterford Wedgwood
U.K. plc and its subsidiaries and the term
"
Wedgwood
" refers to the Wedgwood
division of our Ceramics Group. The term "
Royal
Doulton
" refers to the Royal Doulton division of our
Ceramics Group.
WW UK, of which the Company holds 100% of
the ordinary share capital, is registered in England and Wales. Its
assets consist primarily of the entire issued ordinary share capital of
Wedgwood Limited (formerly Wedgwood plc) and 99% of the issued
share capital of Waterford Wedgwood Inc., held through its interests in
Waterford Wedgwood Partners.
References in this annual report to
the names "Waterford",
"Wedgwood", "Royal
Doulton", "Rosenthal" and
"All-Clad" are not intended as generic or
descriptive references to either crystal or fine bone china, fine
earthenware, stoneware, stainless steel or copper cookware.
Forward-Looking Statements
This annual report on Form 20-F
contains certain forward-looking statements as defined in Section 21E
of the United States Securities Exchange Act of 1934 with respect to
our financial condition, results of operations and business and certain
of the plans and objectives of our management with respect thereto,
including, but not limited to, the restructuring of our Ceramics
business, interest rate movements, foreign exchange fluctuations,
particularly that of the US dollar against the euro, and our hedging
4
activities with respect to foreign exchange
fluctuations. These statements may generally, but not always, be
identified by the use of words such as
"anticipates",
"should",
"expects",
"estimates" or similar expressions including
but not limited to, statements contained in or implied by the
discussion under "
Item 4—Information on the
Company
", "
Item 5—Operating and
Financial Review and Prospects
", "
Item
8—Financial Information
", and
"
Item 11—Quantitative and Qualitative Disclosures
about Market Risk
".
By their nature,
forward-looking statements involve risk and uncertainty because they
reflect current expectations and assumptions as to future events and
circumstances that may not prove accurate. The factors described in the
context of such forward-looking statements, and other factors referred
to in this annual report on Form 20-F; particularly in
"
Item 3—Key Information—Risk
Factors
", "
Item 5—Operating and
Financial Review and Prospects—Overview of Our
Business
", "
—Principal Factors
that Affect Our Results of Operations and Financial
Condition
", "
—Results of
Operations—Capital Resources
" and
"
Item 11—Quantitative and Qualitative
Disclosures about Market Risk
" could cause actual
results and developments to differ materially from those expressed in
or implied by such forward-looking statements.
Statements
Regarding Competitive Position
Statements made in
"
Item 4—Information on the
Company
" and "
Item 5—Operating
and Financial Review and Prospects
" referring to our
competitive position are based on the Company's belief, and in
some cases rely on a range of sources including investment
analysts' reports, independent market studies and the
Company's internal assessment of market share based on publicly
available information about the financial results and performance of
market participants.
Item 1—Identity of Directors, Senior
Management and Advisers
Not applicable.
Item
2—Offer Statistics and Expected Timetable
Not
applicable.
Item 3—Key Information
Selected
Financial Data
The selected consolidated financial data set
forth below should be read in conjunction with, and are qualified in
their entirety by reference to, the Consolidated Financial Statements
and notes thereto included elsewhere in this annual report. Certain
prior period amounts have been reclassified to reflect current year
presentation.
Our Consolidated Financial Statements are prepared
in accordance with Irish GAAP, which differ in certain significant
respects from US GAAP. Details of the principal differences between
Irish GAAP and US GAAP are set out in note 31 to the Consolidated
Financial Statements.
We changed our financial year end from
December 31, to March 31, by reporting a transition period of three
months ended March 31, 2002.
5
Year
ended
December 31,
3 months
ended March
31,
Year ended March
31,
2000
2001
2002
2003
2004
2005
(€
in millions except per share and per ADS
amounts)
Consolidated
Income Statement Data
Amounts in Accordance with
Irish
GAAP:
Net
sales
1,084.4
1,012.0
207.2
951.3
831.9
732.6
Cost
of
sales
(547.9
)
(580.2
)
(115.0
)
(509.8
)
(448.7
)
(480.1
)
Gross
profit
536.5
431.8
92.2
441.5
383.2
252.5
Distribution
and administrative
expenses
(434.6
)
(433.6
)
(102.9
)
(416.8
)
(397.7
)
(450.2
)
Other
operating
income/(expenses)
2.5
0.7
0.2
(3.1
)
(0.3
)
2.0
Operating
income/(loss)
(i)
104.4
(1.1
)
(10.5
)
(21.6
)
(14.8
)
(195.7
)
Gain
arising on conversion of
US$
loans
—
—
—
9.7
—
—
Gain
on sale of property, plant and
equipment
—
—
—
5.1
6.0
3.8
Gain
on sale of All-Clad
business
(ii)
—
—
—
—
—
103.2
Deficit
arising on closed
pension
plan
—
—
—
(3.9
)
—
—
Amount
written off
investments
(iii)
—
(16.2
)
—
—
—
—
Makewhole
payment
—
—
—
—
(3.7
)
(5.6
)
Net
interest
expense
(24.8
)
(26.0
)
(5.5
)
(25.3
)
(32.4
)
(54.9
)
Net
income/(loss) before taxes and minority
interests
79.6
(43.3
)
(16.0
)
7.2
(44.9
)
(149.2
)
Taxes
on
(income)/credits
(14.1
)
1.1
0.2
(4.9
)
(4.7
)
(12.3
)
Net
income/(loss) after taxes before minority
interests
65.5
(42.2
)
(15.8
)
2.3
(49.6
)
(161.5
)
Minority
interests
(0.8
)
(0.4
)
0.4
(0.5
)
0.3
2.1
Net
income/(loss)
64.7
(42.6
)
(15.4
)
1.8
(49.3
)
(159.4
)
Basic
income/(loss) per
ordinary
share
6.92c
(4.48c
)
(1.60c
)
0.19c
(4.75c
)
(10.50c
)
Basic
income/(loss) per
ADS
69.23c
(44.85c
)
(16.02c
)
1.86c
(47.54c
)
(105.04c
)
Diluted
income/(loss)
per ordinary
share
6.86c
(4.48c
)
(1.60c
)
0.19c
(4.75c
)
(10.50c
)
Diluted
income/(loss) per
ADS
68.61c
(44.85c
)
(16.02c
)
1.86c
(47.54c
)
(105.04c
)
Amounts
in Accordance with
US
GAAP
(iii)(iv)
:
Net
sales
1,084.4
1,012.0
207.2
951.3
831.9
732.6
Net
income/(loss) before
taxes
73.6
(69.1
)
(19.2
)
18.5
(55.7
)
(257.5
)
Net
income/(loss)
57.9
(71.0
)
(21.9
)
0.2
(60.8
)
(270.8
)
Continuing
operations
57.6
(70.5
)
(22.4
)
(14.0
)
(68.4
)
(362.8
)
Discontinued
operations
0.3
(0.5
)
0.5
14.2
7.6
92.0
Basic
income/(loss) per
ordinary
share
6.20c
(7.47c
)
(2.28c
)
0.02c
(5.86c
)
(17.85c
)
Continuing
operations
6.16c
(7.42c
)
(2.33c
)
(1.45c
)
(6.59c
)
(23.91c
)
Discontinued
operations
0.04c
(0.05c
)
0.05c
1.47c
0.73c
6.06c
Basic
income/(loss) per
ADS
61.95c
(74.74c
)
(22.78c
)
0.21c
(58.63c
)
(178.45c
)
Continuing
operations
61.58c
(74.22c
)
(23.30c
)
(14.47c
)
(65.95c
)
(239.08c
)
Discontinued
operations
0.37c
(0.52c
)
0.52c
14.68c
7.32c
60.63c
Diluted
income/(loss) per
ordinary
share
6.14c
(7.47c
)
(2.28c
)
0.02c
(5.86c
)
(17.85c
)
Continuing
operations
6.10c
(7.42c
)
(2.33c
)
(1.45c
)
(6.59c
)
(23.91c
)
Discontinued
operations
0.04c
(0.05c
)
0.05c
1.47c
0.73c
6.06c
Diluted
income/(loss) per
ADS
61.40c
(74.74c
)
(22.78c
)
0.21c
(58.63c
)
(178.45c
)
Continuing
operations
61.08c
(74.22c
)
(23.30c
)
(14.47c
)
(65.95c
)
(239.08c
)
Discontinued
operations
0.32c
(0.52c
)
0.52c
14.68c
7.32c
60.63c
Dividends
per
share
0.02
0.02
0.00
0.02
0.00
0.00
Dividends
per share
$
0.02
0.02
0.00
0.02
0.00
0.00
6
Year
ended
December 31,
3 months
ended
March
31,
Year ended March
31,
2000
2001
2002
2003
2004
2005
(€
in millions except no. of
shares)
Consolidated
Balance Sheet
Data
Amounts in
Accordance with Irish GAAP:
Cash and short-term
deposits
66.2
119.6
88.1
84.0
51.6
20.0
Working
capital
311.9
353.0
345.6
325.7
337.8
209.8
Total
assets
964.2
993.5
963.9
874.8
848.2
723.4
Short
and long-term
debt
398.7
483.6
478.3
440.7
434.5
299.4
Shareholders'
equity
(iv)
304.5
253.3
240.0
199.8
194.3
126.4
Total
assets less current
liabilities
728.5
749.1
739.4
665.9
659.5
541.5
Amounts
in Accordance with US GAAP
(iii)
:
Cash
and short-term
deposits
66.2
119.6
88.1
84.0
51.6
20.0
Working
capital
321.4
308.1
296.4
179.5
285.7
175.9
Total
assets
1,119.3
1,121.6
1,091.7
995.7
988.9
764.2
Short
and long-term
debt
398.7
483.6
478.3
440.7
459.5
315.2
Shareholders'
equity
(iv)
450.3
370.3
356.9
220.9
249.8
35.0
Total
assets less current
liabilities
883.7
867.9
857.7
686.6
800.6
581.6
Weighted
average number of shares as adjusted to reflect Rights Issue,
December
2004
934.6
949.9
961.2
967.2
1,037.0
1,517.5
Notes
to Selected Financial Data
(i)
In
the year ended December 31, 2001, as a consequence of acquisition
activity and the growth in the number of retail stores, we undertook a
review of accounting estimation techniques in the areas of (a)
application of overheads to inventory in manufacturing and to inventory
held at retail stores and (b) the useful economic lives attributed to
fixed assets. The outcome of this review resulted in changes to the way
in which certain of our companies made these estimates and accordingly
operating income for the year ended December 31, 2001 improved by
€15 million. The €15 million included
€7.8 million in respect of changes in methodologies for
applying transportation costs of inventory prior to sale, goods
handling and other warehousing costs along with indirect costs relating
to these activities.
Under Irish GAAP, in
accordance with Statement of Standard Accounting Practice 24
"Accounting for pension costs"
("SSAP24"), the pension surplus identified in
the actuarial valuation of the Wedgwood Group Pension Plan as at
December 31, 1999 was being amortized over the average remaining
service lives of plan members. In the year ended December 31, 2001,
this resulted in a reduction in the pension cost charged to the
Consolidated Statement of Income of €8.4 million (3
months to March 31, 2002: €2.1 million). Following a
significant decline in the market value of pension plan assets, it was
decided with effect from April 1, 2002, to no longer amortize the
pension surplus. The effect of this change on the results for the year
ended March 31, 2003 was to reduce income by €7.8 million.
As at March 31, 2005, our pension plans on an FRS 17 basis were in
deficit by €173.4 million. Please note, Financial
Reporting Standard 17 "Retirement Benefits"
("FRS 17") is currently a disclosure
requirement and will have no impact on our Consolidated Financial
Statements until the year ended March 31, 2006. For additional
information see also note 23 to the Consolidated Financial
Statements.
The expansion in the number of
Rosenthal factory outlet stores has enabled Rosenthal to generate a
higher average selling price for its slow moving and obsolete inventory
and, as a result, provisions amounting to €4.9 million
under Irish GAAP were no longer required and were released to income
under both Irish GAAP and US GAAP in the year ended March 31, 2003.
During the year ended March 31, 2004 we
reviewed the basis of valuation of inventory resulting in an increase
in values by €5.7 million and the reduction of inventory
provisions by €2.6 million, thereby benefiting the
Consolidated Statement of Income by €8.3 million.
7
In the year ended
December 31, 2001 we incurred exceptional restructuring charges of
€61.8 million, comprising €24.3 million for
the reduction of manufacturing capacity, €19.6 million to
restructure our other operating costs, €12.5 million to
write-off surplus inventories and €5.4 million to close
under performing retail stores.
In the
year ended March 31, 2003 we incurred exceptional charges of
€35.7 million, comprising €15.0
million in inventory write-downs, €13.5 million in respect
of property, plant and equipment impairments and
€7.2 million in respect of head count reduction and
other restructuring costs.
In the year
ended March 31, 2004 we incurred exceptional charges of
€36.5 million, comprising €30.4
million for capacity reduction and other head count reductions,
€3.3 million for inventory write-downs and
€2.8 million for earthenware outsourcing set-up costs.
In the year ended March 31, 2005 we incurred
exceptional charges of €108.0 million, of which
€54.7 million related to our working capital
reduction program, €40.1 million to the impairment of
intangible assets and €13.2 million to severance, early
retirement and related costs.
See note 6 to
the Consolidated Financial Statements.
(ii)
On July 27, 2004, we disposed of
the All-Clad business, realising a gain under Irish GAAP of
€103.2 million.
(iii)
In
2001 we wrote down our investment in Royal Doulton plc to its then
market value, giving rise to a charge of €16.2 million
under Irish GAAP. Under US GAAP the investment is recorded at fair
market value and temporary unrealized gains and losses are reported as
a separate component of other comprehensive income until realized.
Under US GAAP declines in fair value below cost which are judged to be
other than temporary are included in the Consolidated Statement of
Income even where such declines are not judged to be permanent.
(iv)
Under Irish GAAP goodwill
must be capitalized and amortized through the income statement on a
systematic basis over its useful life, subject to a maximum write-off
period of 20 years. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142")
which suspends the amortization of goodwill. No amortization is charged
under US GAAP in respect of this goodwill from January 1, 2002.
The goodwill arising on the All-Clad
acquisition on June 30, 1999, of €88.0 million was
capitalized and amortized over 20 years, its useful economic life,
under both Irish and US GAAP. No further amortization was charged under
US GAAP from January 1, 2002.
With
effect from July 1, 2001 we acquired 86.5% of the issued share
capital of the Ashling Corporation. The goodwill arising of
€10.3 million was capitalized under Irish and US GAAP, and
is being amortized under Irish GAAP over a period of 20 years. No
amortization has been charged under US GAAP in respect of this
goodwill.
On November 4, 2002 we
acquired the Cashs Mail Order brand, related intellectual property
rights, and mail order list for a consideration of €22.7
million, €5.6 million payable in stock units and
€17.1 million in cash. The brand and related
intellectual property rights were capitalized under Irish and US GAAP
at €14.9 million and are being amortized over their
estimated useful life of 20 years. The mail order list was capitalized
under Irish and US GAAP at €1.5 million and is being
amortized over its estimated useful life of five years.
With effect from January 17, 2005 we
acquired the balance of 78.84% of the issued share capital of
Royal Doulton plc that we did not already own for a consideration of
€45.3 million payable in cash. The Royal Doulton brands
and related intellectual property rights were capitalized at
€39.6 million and are being amortized over their estimated
useful life of 20 years. Goodwill arising of €93.2 million
was capitalized on the Consolidated Balance Sheet and is being
amortized over a period of 20 years under Irish GAAP. No goodwill
amortization is charged under US GAAP.
There have been other smaller
acquisitions during the periods reported above.
During the year ended March 31, 2005 a
review was carried out on the carrying value of the Group's
intangible assets resulting in an impairment charge of
€40.1 million under Irish GAAP.
8
The value in
use has been calculated using the discounted present value of expected
future cash flows. The cash flows are based upon the Group's
three year plan together with an assumption of a stable growth rate for
the period beyond three years, discounted to net present value using a
discount rate of 11%.
The annual impairment review of
goodwill and intangible assets undertaken at March 31, 2005 resulted in
an additional impairment charge under US GAAP of €99.8
million.
See "
Item
5 — Operating and Financial Review and Prospects — Critical
Accounting Policies and Estimation Techniques — Goodwill and
intangible
assets".
The
impairment charges arose due to reductions in projected sales and net
income, arising from the continued economic uncertainty following the
events of September 11, 2001, the armed conflict in Iraq and ongoing
acts of international terrorism.
Exchange Rates
The
following table shows for the period from January 1, 2000 through
September 16, 2005 the high, low, average and period end Noon Buying
Rates in the City of New York for cable transfers of euro as certified
for customs purposes by the Federal Reserve Bank of New York expressed
as dollars per €1.00 (the "Noon Buying
Rate").
Period
End
Average
Rate(i)
High
Low
Year
ended December
31
2000
0.94
0.92
1.03
0.83
2001
0.89
0.89
0.95
0.83
3
months ended March
31
2002
0.87
0.87
0.90
0.86
Year
ended March
31
2003
1.09
0.99
1.11
0.87
2004
1.23
1.25
1.29
1.21
2005
1.30
1.27
1.36
1.18
Month
ended
March
2005
1.35
1.29
April
2005
1.31
1.29
May
2005
1.29
1.23
June
2005
1.23
1.20
July
2005
1.22
1.19
August
2005
1.24
1.21
September
2005 (as at September 16,
2005)
1.25
1.22
Notes
to Selected Financial Data
(i) The average of the Noon
Buying Rates on the last day of each full month during the period.
On September 16, 2005 the Noon Buying Rate for euro was
€1 = $1.22.
The above rates may differ from the
actual rates used in the preparation of the Consolidated Financial
Statements and other financial information appearing in this annual
report. Our inclusion of these exchange rates is not meant to suggest
that the euro amounts actually represent such dollar amounts or that
such amounts could have been converted into dollars at any particular
rate, if at all.
Dividends
(See also
"
Item 8—Financial
Information—Dividends
")
The following
table sets forth the net amounts of the interim, final and total
dividends that we have paid in respect of each year indicated and
translated into dollars per ADS (each representing ten stock
9
units) at the Noon Buying Rate on each of the
respective payment dates for such interim and final dividends on the
stock
units:
Per
ordinary share €
(1)
Per ADS
$
(1)
Interim
Final
Total
Interim
Final
Total
Year
ended December
31
2000
0.0052
0.0189
0.0241
0.0444
0.1498
0.1942
2001
0.0055
0.0189
0.0244
0.0497
0.1874
0.2371
Year
ended March
31
2003
0.0055
0.0094
0.0149
0.0597
0.1041
0.1638
(1)
Number
of shares and ADS's adjusted to reflect the Rights Issue. See
"
Item 5—Operating and Financial Review and
Prospects—New Capital Structure.
"
No
dividends were paid in respect of financial years ended March 31, 2004
or March 31, 2005. There is no current intention to pay dividends. Our
debt agreements do not permit dividends to be paid unless consolidated
profit before tax for the year exceeds €20
million.
Our ability to pay dividends in the future will
be dependent upon our future trading, levels of indebtedness and
financial condition, including applicable restrictions in our current
financing agreements.
Risk Factors
Risk factors which
may affect us include the following:
Acts of international
terrorism and armed conflict have had and could continue to have a
material adverse effect on our sales.
The events of September
11, 2001, the ensuing armed conflicts, the rise in international
terrorism and related geopolitical uncertainty have all continued to
have a negative impact on our sales. Concern over future terrorist
acts, which has resulted in a significant reduction in global tourist
activity, particularly in the number of US tourists visiting Europe and
Japanese tourists visiting Europe or our Far East territories, and
department store sales (through which a majority of our sales in the US
are made), has adversely affected the sales of our products. Any future
act of terrorism and continued geopolitical uncertainty could have
further adverse effects on our sales and, in turn, on our results of
operations and on our ability to continue as a going concern.
We face strong competition in various markets, which could result
in an erosion of our market share, sales and/or profit margins.
The market for crystal, premium cookware, linens and luxury gifts
and particularly for ceramic tableware is highly competitive. Our
competitive position varies from market to market and by product
category. In the US, where Waterford Crystal has significant market
share, there is a risk that competitors may produce similar products at
lower prices which could result in an erosion of our market share,
sales and/or profit margins. In the ceramic industry there is a risk
that overcapacity and consolidation could result in even more
aggressive competitive pricing in the short-term and in the longer term
in the emergence of stronger competitors than exist at present. In
addition, our products face competition from competitors'
products manufactured in countries with significantly lower labor
costs, such as the People's Republic of China. This competition
led to our decision in 2003 to restructure our earthenware business, by
closing two earthenware manufacturing facilities in the UK, and to
source the majority of those products from the People's Republic
of China. Should we be unable to continue to compete effectively in our
various markets our market share and/or profit margins in those markets
could be adversely affected.
Changes in exchange rates could
adversely affect our reported earnings and cash flow.
Our
results of operations can be affected by movements in exchange rates,
particularly between the dollar, the yen, the pound and the euro. A
substantial portion of our net sales, particularly crystal sales,
10
are denominated in dollars, while our
corresponding costs are denominated largely in euros. In addition, a
portion of our net sales, particularly ceramic sales, are denominated
in yen while our corresponding costs are incurred in pounds. As a
result, the weakening of the dollar against the euro or the weakening
of the yen against the pound could have a material adverse effect on
our operating results. We maintain a policy of selling currency
forwards in respect of a portion of our revenues, where it is deemed
appropriate to do so, as a means of hedging our revenues against
fluctuation caused by exchange rate movements, but this does not
eliminate our exchange rate risk. We estimate that if we did not hedge
our currency exposure, a one cent decline in the value of the dollar
against the euro would increase our operating loss by approximately
€0.6 million in a full year and a ten yen decline in the
yen against the UK pound would increase our operating loss by
approximately €1.7 million in a full year. We estimate
that the hedges currently in place for the year ended March 31, 2006
cover 91.3% of our dollar to euro exposure and 57.3% of
our yen to UK pound exposure which includes structures whereby there is
a guaranteed downside rate and potential to gain from favorable
currency movements. However, by their nature, the hedges currently in
place only provide short-to medium-term protection from adverse
fluctuations in exchange rates.
Sales of luxury goods are
particularly susceptible to general economic downturns. In recent years
economic downturns in the US, Europe and Japan have had and could
continue to have a material adverse effect on our sales.
Purchases of luxury products are typically
discretionary for consumers and are particularly affected by negative
trends in the general economy. The success of our operations depends to
a significant extent on a number of factors relating to discretionary
consumer spending and/or affecting disposable consumer income, such as
employment, wages and salaries, business conditions, interest rates,
exchange rates, availability of credit and taxation. In addition, a
significant portion of our sales in Europe are derived from tourists
from the US and Japan. In recent years economic downturns in the US,
Europe and Japan, which accounted for 41.6%, 42.0% and
9.4%, respectively, of our net sales during fiscal 2005, have
had an adverse impact on our sales. A continuation or an aggravation of
the economic downturn could have an adverse impact on our sales and, in
turn, on our results of operations and financial condition.
Our
indebtedness could adversely affect our business and financial
position.
As of March 31, 2005, we had outstanding consolidated
net indebtedness of €279.4 million. The proceeds of the
fully underwritten 7 for 11 rights issue completed on July 18, 2005
will be used for funding additional restructuring actions and will not
result in a material reduction in debt. The level of consolidated
indebtedness and related debt services obligations, could have
important negative consequences to us. For example, it could:
•
limit our ability to fund future working
capital requirements, capital expenditures, investments, dividends and
acquisitions;
•
require us to dedicate
a substantial portion of our cash flow from operations to payments on
our debt;
•
limit our flexibility in
planning for, or reacting to, changes in our business and the
industries in which we operate;
•
place
us at a competitive disadvantage compared to competitors that are less
leveraged than we are;
•
increase our
vulnerability to general adverse economic and industry conditions;
and
•
limit our ability to borrow
additional funds and subject us to financial and other restrictive
covenants.
A portion of our debt bears interest at variable
rates. An increase in the interest rates on our variable rate debt will
increase the amounts needed to service this debt and will reduce the
funds available to meet our obligations and to develop current and
future business opportunities. See "
Item
5—Operating and Financial Review and Prospects—Capital
Resources
".
11
The terms of our indebtedness restrict
our ability to access additional financing, make distributions to our
shareholders and enter into certain business and financial
transactions.
Our debt facility agreement (the
"Facility Agreement") contains covenants
requiring us to achieve certain financial targets and restricting our
ability to incur additional indebtedness, make distributions to our
shareholders and to enter into some business and financing
transactions. This agreement imposes on us, among others, the following
obligations:
•
we are required to
maintain certain minimum values of net worth and trading cash
flows;
•
we may not declare or
distribute dividends that exceed certain threshold amounts and unless
our consolidated income before taxes for the relevant financial year is
in excess of €20
million;
•
we are limited in the amount,
ranking and terms of any future indebtedness we may incur;
•
we are limited in our ability to
collateralize or otherwise create security interests over our assets;
and
•
we are restricted in our ability
to enter into a merger transaction, effect asset sales, enter into
sale-leaseback transactions, make loans, redeem our ordinary or
preference share capital, transact with affiliates and issue
guarantees.
These restrictions purport to safeguard the prompt
repayment of our outstanding indebtedness but could adversely affect
our ability to expand our business and maximize the returns to our
shareholders. In addition, if we breach such covenants, we could be
forced to negotiate new arrangements with our existing creditors and/or
seek additional financing at higher interest rates and under more
onerous covenants, which could, in turn, increase our interest expense
and divert management's attention from the implementation of our
business strategy and place further restrictions on the conduct of our
business and returns to shareholders.
Our Mezzanine Notes also
restrict our ability to incur additional indebtedness, except in
certain specified circumstances. For additional information on the
covenants and other provisions contained in our debt instruments, see
"
Item 5—Operating and Financial Review and
Prospects—Capital Resources.
"
A
deterioration in our credit ratings could increase the cost of future
financings.
We have recently experienced several lowerings of
our credit rating.
On July 13, 2004, Standard & Poor's
Rating Service lowered its long term corporate credit rating of the
Company to 'B' from 'B+'. On October 21, 2004,
Standard & Poor's lowered its long term corporate rating of
the Company to 'B-' from 'B' and on March 15,
2005 to 'CCC+ 'from 'B-', the outlook remaining
negative.
Standard & Poor's similarly downgraded our
subordinated debt on July 13, 2004, to CCC+ from 'B', on
October 21, 2004, to 'CCC' and on March 15, 2005, to
'CCC-'.
Further deterioration in our credit rating
could significantly increase the cost of future financings, or affect
our ability to obtain alternative sources of finance.
Our ADSs
have recently been delisted by NASDAQ and thus stockholders face a less
liquid market in our stock
On March 10, 2005 the Company was
advised by NASDAQ that for the previous 32 consecutive business days,
the bid price of the Company's ADSs had closed below the minimum
$1.00 per share requirement for inclusion under NASDAQ Marketplace Rule
4450(a)(5) ("the Rule"). Therefore, in
accordance with Marketplace Rule 4450 (e)(2) the Company was provided
with 180 calendar days, or until September 6, 2005 to regain
compliance. If at any time before September 6, 2005 the bid price of
the Company's ADSs closed at $1.00 or more per share for a
minimum
of 10 consecutive business days, Staff would provide
written notification that it had achieved compliance with the Rule.
The minimum bid price of $1.00 was not achieved within the specified
time period and consequently the Company's ADSs were delisted
from NASDAQ with effect from September 20, 2005. The Company currently
does not intend to seek reinstatement of its NASDAQ listing.
12
If we fail or are unable to adequately
protect our intellectual property rights, our competitive position
could be adversely affected.
The protection of the
Waterford
®
, Wedgwood
®
, Royal
Doulton
®
and Rosenthal
®
brand names is
extremely important to our business. Even though we have registered our
brand names in the major economies in which we operate, it is normally
necessary for us to defend our intellectual property rights in order to
prevent others from misappropriating or infringing on our brand names
or registering Internet domain names in an attempt to sell similar
products with similar names over the Internet or through other channels
of distribution. In the past, cyber-squatters have registered domain
names similar to those of several of our brand names. In each case we
have sought, through litigation if necessary, to protect our brand and
domain names. Should we be unable to adequately protect our brand names
our competitive position could be adversely affected.
The
luxury lifestyle goods market is exposed to frequent changes in
consumer tastes and fashion, which could materially and adversely
affect our business if we do not properly anticipate and adapt to such
changes.
Our strategy is to position ourselves as a luxury
lifestyle goods company, which may increasingly expose our products and
brands to frequent changes in consumer tastes and fashion. If we fail
to anticipate changes in consumer tastes and fashion correctly and fail
to market products that are popular with such affluent customers, our
business could be materially and adversely affected.
Our
business is dependent on product innovation, which could materially and
adversely affect our business if we do not continue to develop new
products acceptable to the market.
Returning to profitability
will depend significantly and increasingly on our ability to develop
and market new products quickly and successfully. Developing and
marketing these products requires continued investment. If we are
unable to develop new innovative products or if our new products are
not accepted by the market our competitive position and profitability
may suffer.
If we fail to successfully manage our costs, our
results of operations could be materially and adversely affected.
Decreased sales of our products and increased competition from low
cost producers have required us to continually readjust our cost base
in recent years. Our ability to timely reduce our costs during periods
of declining sales in order to address competitive pressures is
critical to the maintenance of our profit margins. If we are unable to
continue to adjust our cost base accordingly, our profit margins could
suffer.
A large portion of our costs are fixed as a result of
the large capital and infrastructure investments required for our
production and distribution facilities. Consequently, we need to ensure
that we minimize unused capacity. If we are unable to optimise the use
of our production and distribution capacity, either through increased
demand for our products, acquiring other brands to be produced and
distributed by our facilities, third party production or otherwise
through effective management of our production capacity, it could have
an adverse impact on the results of our operations and on our ability
to continue as a going concern.
We are dependent on continued
capital expenditures for our future growth.
Decreased sales of
our products and the increased cost of servicing our debts could result
in a reduction in the amount of cash available for our capital
expenditures. Our ability to support the maintenance of our plant and
equipment, the renewal of our product lines, the opening of additional
flagship stores in key markets and the refurbishment of other retail
floor space requires adequate capital expenditures. If we fail to
invest adequately in product line renewal and infrastructure
modernization our current level of sales, market share and growth
prospects could be materially and adversely affected.
Our
operations are subject to a variety of environmental and other
international trade and customs regulations. Any failure to comply with
those regulations could materially and adversely affect our results of
operations.
We are subject to a variety of environmental
regulations in Ireland, the UK, the US and Germany and to a variety of
international trade and customs regulations in each of the markets in
which we operate.
13
If we should fail to comply with any present
or future regulations we could be subject to liabilities or the
suspension of manufacturing operations or of product sales, which could
materially and adversely affect our results of operations.
We
depend to a certain extent on outside suppliers of raw materials. If
those supplies cease or are materially interrupted it could disrupt our
ability to manufacture many of our products.
We depend on
outside suppliers for raw materials used in the production of our
crystal, fine bone china, porcelain, earthenware and stoneware
products. Although significant proportions of raw materials (such as
calcinated animal bone and ash) are purchased from one or two
suppliers, we believe that we could obtain adequate supplies from other
sources if necessary. However, should the supply of raw materials from
suppliers cease or be materially interrupted, it could disrupt our
ability to manufacture some of our crystal, fine bone china, porcelain,
earthenware and stoneware products. This could have an adverse impact
on our sales and, in turn, on our results of operations.
We
depend on unaffiliated manufacturers for many of our outsourced
products. The inability of such manufacturers to deliver our products
in a timely manner or maintain our high-quality standards could have an
adverse effect on our sales and results of operations.
We
currently outsource the production of approximately 34% of our
Waterford Crystal products and 26% of our Ceramics products, by
net sales, to a small number of carefully chosen high-quality contract
manufacturers. As part of the management of our production capacity we
may increase the amount of production that we outsource to unaffiliated
manufacturers, particularly of our mid-price casual crystal and
ceramics. Such products are currently manufactured to our
specifications by manufacturers in Germany and other European countries
and Asia and we may outsource the manufacture of more of our products
in Asia. The inability of such manufacturers to deliver our products in
a timely manner or maintain our high-quality standards could adversely
affect our ability to deliver products to our customers in a timely
manner. Delays in delivery could have an adverse effect on our sales
and results of operations.
Potential benefits from integration
of our operations with the operations of Royal Doulton may not be
achieved to the extent or within the time period that is currently
anticipated and we may encounter additional costs and difficulties in
integrating Royal Doulton's operations, which would reduce or
delay the realisation of cost savings and operational benefits.
Following the acquisition of Royal Doulton in January 2005, we
intend to integrate its operations with our existing operations. Our
goal in integrating these operations is to achieve cost savings through
the transfer of production of the Royal Doulton and Minton brands to
our Barlaston facility, rationalization of retail operations and
integration of administration functions. We may encounter unanticipated
costs and difficulties integrating Royal Doulton's operations
with our existing operations and fail to achieve the cost savings and
synergies that we expect. Possible costs include the need to implement,
integrate and harmonise various business-specific operating procedures
and systems, as well as company-wide financial, accounting, information
and other systems. These costs may be higher than we currently
anticipate. In addition, the need to deal with integration issues could
also divert management's attention from day-to-day business. Any
difficulties or delays in achieving the successful integration of Royal
Doulton's operations could have an adverse effect on our results
of operations and financial condition or on our ability to continue as
a going concern.
Significant declines in the market value of
our pension plan assets could lead to an increase in our pension costs
and adversely affect our results of operations and liquidity.
We have defined benefit pension plans, therefore cash cost and
accounting cost are affected by equity and bond prices and
returns.
We acquired an additional €74.4 million of
defined benefit pension liabilities as part of the acquisition of Royal
Doulton plc.
Significant declines in the market value of plan
assets or increases in the projected benefit obligations could lead to
an increase in our cash pension cost, adversely affecting our results
of operations and liquidity.
14
See notes 19 and 23 to the Consolidated
Financial Statements for more information concerning our pension
liabilities.
If we are not able to implement the requirements of
Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and the rules and
regulations of the SEC thereunder in a timely manner or with adequate
compliance, our independent auditors may not be able to attest to the
effectiveness of our internal control over financial reporting and we
may be subject to sanctions or investigation by regulatory
authorities.
The management certification and auditor
attestation requirements of Section 404 of the U.S. Sarbanes-Oxley Act
of 2002 and the rules and regulations of the SEC thereunder, which we
refer to as Section 404, will initially apply to the Company and WW UK
for its annual report on Form 20-F for the year ended March 31, 2007.
If we are not able to implement the requirements of Section 404 in a
timely manner or with adequate compliance, our independent auditors may
not be able to attest to the effectiveness of our internal control over
financial reporting and we may be subject to sanctions or investigation
by regulatory authorities, such as the SEC. As a result, there could be
a negative reaction in the financial markets due to a loss of
confidence in the reliability of our finanical statements. In addition,
we may be required to incur costs in improving our internal control
system. Any such action could negatively affect our results and have a
significant adverse effect on our results of operations.
Item
4—Information on the Company
Introduction
The legal and commercial names of the registrants are Waterford
Wedgwood plc and Waterford Wedgwood U.K. plc. Waterford Wedgwood plc
was incorporated as Waterford Glass Limited on April 2,
1947, in Dublin, Ireland under the laws of the Republic of Ireland,
became a publicly listed company in 1967 and re-registered as a public
limited company on April 12, 1984. Waterford Wedgwood U.K. plc was
incorporated on September 25, 1986 in Cardiff, Wales under the laws of
England and Wales.
The address and telephone number of the
registered offices of the registrants are Kilbarry, Waterford, Ireland,
telephone number 011 353 51 332200 and Barlaston, Stoke-on-Trent,
Staffordshire, ST12 9ES, telephone number 011 44 1782 204141,
respectively. The office of Waterford Wedgwood USA. Inc., our US
agents, is at 1330 Campus Parkway, PO Box 1454, Wall, New Jersey,
telephone number (732) 938-5800.
We are one of the world's
leading designers, manufacturers and marketers of branded luxury
lifestyle products; primarily high-quality crystal, ceramics (including
fine bone china, fine porcelain and earthenware) and premium cookware.
Our portfolio of established luxury lifestyle brands includes
Waterford
®
Crystal, Wedgwood
®
, Royal
Doulton
®
and Royal Albert
®
fine bone
china, Rosenthal
®
porcelain, and Spring
TM
premium
cookware, among others. In addition, we have well established
co-branding relationships with a range of leading designers and
celebrities, including Versace, John Rocha, Jasper Conran, Vera Wang,
the Andy Warhol Foundation, Bvlgari and Paul Costelloe.
Our brands have a long history of excellence.
Waterford
®
Crystal, which traces its origins to Ireland
in 1783, is a world leading brand of crystal, Wedgwood
®
and Royal Doulton
®
, which trace their origins to England
in 1759 and 1815, respectively, are among the leading brands of fine
china in the world. Rosenthal
®
, which was established in
Selb, Germany in 1879, is one of the leading brands of porcelain in
Germany.
We operate three principal segments, Waterford Crystal,
Ceramics Group and W-C Designs & Spring. In the fiscal year ended
March 31, 2005, Waterford Crystal accounted for 30% of our net
sales (€221.7 million), of which Waterford
®
branded products (including Marquis
®
by Waterford)
accounted for 85% of such net sales; the Ceramics Group
accounted for 60% of our net sales (€441.5
million), of which Wedgwood
®
branded products accounted
for 52% of such net sales and Rosenthal
®
branded
products accounted for 41% of such net sales; and W-C Designs
& Spring accounted for 6% of our net sales
(€45.2 million). Sales from the discontinued operation
All-Clad accounted for the remaining 4% of our net sales
(€24.2 million). In July 2004, we completed the sale of
All-Clad to Groupe SEB.
We manufacture approximately three
quarters of our products at our manufacturing facilities in Ireland
(primarily crystal), the UK (primarily fine bone china and
earthenware), Germany (primarily
15
porcelain) and Indonesia. We outsource the
manufacture of the remaining one-quarter of our products to contract
manufacturers in Germany and other European countries (primarily
mid-priced crystal, porcelain and giftware) and Asia (primarily linens,
mid-priced earthenware and Spring premium cookware). Prior to the sale
of All-Clad, a large proportion of our premium cookware was
manufactured in the US.
Our products are sold across a wide
range of geographical markets. During the fiscal year ended March 31,
2005, 41.6% of our net sales were in the US, 42.0% of our
net sales were in Europe (principally in the UK, Germany and Ireland),
9.4% of our net sales were in Japan and 7.0% of our net
sales were in the rest of the world.
The table below sets out in
more detail our net sales by geographic market for the years ended
March 31, 2003, 2004, and 2005.
Net
Sales
Year
ended March
31,
2003
2004
2005
(€
in millions)
Republic of
Ireland
42.5
33.8
33.8
United
Kingdom
125.8
92.4
106.0
United
States of
America
479.8
411.2
304.7
Japan
73.5
74.5
68.5
Germany
104.6
99.3
97.7
Rest
of
World
125.1
120.7
121.9
Total
951.3
831.9
732.6
We
sell our products through a multi-channel distribution network,
including, on a wholesale basis, through selected department and
specialty store groups and, on a retail basis, through our concessions
at department and specialty stores, our flagship stores and our
outlets, as well as directly to consumers via the Internet and our mail
order business.
History of Our Company
Crystal making came to Waterford in 1783 on land
adjacent to Merchants' Quay in the heart of the Irish harbor town
of Waterford. Its founders were two brothers, William and George
Penrose, who were important developers and principal exporters in the
city. Their vision was to "create the finest quality
crystal for drinking vessels and objects of beauty for the
home". By the early 19th century, Waterford had become one
of the best-known and respected of Irish crystal makers. Unfortunately,
in 1851, Waterford was forced to close because of, among other reasons,
the imposition of an excise tax in Ireland. Almost 100 years later, on
April 2, 1947, Waterford Crystal was re-established as Waterford Glass
Ltd. Since then Waterford Crystal has grown into one of the leading
manufacturers of high-quality crystal products in the world.
Wedgwood, a leading English manufacturer of high-quality ceramic
tableware and giftware, was founded in 1759 in Stoke-on-Trent, England
by Josiah Wedgwood. In the 18th century, Wedgwood introduced its
signature Jasper
TM
and Queen's Ware
®
earthenware pieces to England. In the 19th century it also commenced
the production of bone china. During the period of 1966 to 1973,
Wedgwood expanded the scope of its business with the acquisition of
some of the leading names in the English tableware industry, such as
Coalport and Johnson Brothers.
In 1967, Waterford became a
publicly listed company under the corporate name of Waterford Glass
Limited, and listed its ordinary shares on the Irish Stock
Exchange.
The company was re-registered as Waterford Glass Group
plc in 1984.
In 1986 Waterford acquired Wedgwood to create our
present company and at the same time became listed on both the Irish
Stock Exchange and the London Stock Exchange. Prior to the acquisition,
we listed our American Depositary Receipts (evidencing 10 of our stock
units (each evidencing one of our ordinary shares and one of our income
shares)) on the NASDAQ National Market System. In October 1989, we
changed our corporate name to Waterford Wedgwood plc, a public limited
company organized in Ireland with unlimited duration.
16
Our business grew organically and, from
the mid 1990s, through strategic acquisitions. These acquisitions
included principally:
•
Stuart
& Sons Limited, a UK manufacturer of premium crystal with a strong
presence in the UK market, which we acquired in 1995;
•
Rosenthal AG, a leading German
manufacturer of ceramic and porcelain tableware and giftware, which was
founded in 1879 in Selb, Germany, in which we acquired a 61.5%
stake in 1997 (which we increased to 84.6% in 1998 and
89.8% in 2001);
•
All-Clad Holdings, Inc., a leading
US manufacturer of premium cookware and kitchenware, based in
Canonsburg, Pennsylvania, which we acquired in 1999 and subsequently
sold in 2004;
•
the
Hutschenreuther
®
brand, a renowned German brand of
porcelain tableware and giftware, which we acquired in 2000;
•
Ashling Corporation, which owns,
among other things, W-C Designs, a US distributor of fine linens. We
acquired 86.5% of Ashling in 2001 from Fitzwilton Limited, a
company controlled by Sir Anthony O'Reilly and Peter Goulandris,
two of our principal shareholders and Chairman and Deputy Chairman,
respectively, of our Board of Directors. See "
Item
7—Major Shareholders and Related Party
Transactions
";
•
Spring USA Corporation, a small
premium cookware company, in which we acquired a 60% stake in
2002, together with certain assets, including the Spring brand, of
Spring AG;
•
Cashs Mail Order
Limited, an Irish mail order business targeting US mail order
customers, which we acquired in 2002 and through which we sell our own
products, as well as products under license;
and
•
Royal Doulton plc, one of
the world's leading chinaware manufacturers and owner of the
Royal Doulton, Minton and Royal Albert brands, which we acquired in
January 2005.
In recent years we have had to refocus our
business in response to changing consumer patterns,
primarily:
•
In 2002, we
instituted a restructuring program to reduce our fixed costs through
the closure of certain of our production facilities, work-force
reductions and the outsourcing of certain of our manufacturing
operations. Our restructuring efforts continued during 2003, and were
complemented by implementing a new capital structure which reduced
total and senior debt through a rights issue, a bond issue and a new
senior debt
facility;
•
In May 2004,
we entered into a contract to dispose of our US subsidiary All-Clad to
the French cookware and domestic appliance company Groupe SEB, which
was concluded in July 2004. The net proceeds from the sale of
approximately €179.4 million were used to reduce
indebtedness. Peter Cameron, the former chief executive officer of
All-Clad, remained with us as chief operating officer of the Company
and he has recently been appointed chief executive officer;
•
In January 2005 we raised
a net €94.5 million cash from a rights issue which was
used principally to acquire Royal Doulton plc, which we are now in the
process of integrating with our existing Wedgwood operations.
•
In July 2005 we raised a
further €96.5 million in cash from a rights issue, which
is principally being used to fund a cost restructuring program
throughout our operations.
Segmental Information
As a result of our growth and consolidation, we have become
one of the leading designers, manufacturers and marketers of
high-quality crystal, ceramics and premium cookware, and one of the
world's leading luxury lifestyle goods
companies.
Following the sale of the cookware company
All-Clad and the acquisition of the ceramics business Royal Doulton, we
have realigned our reporting segments into the following: Waterford
Crystal, the Ceramics Group (incorporating the recently acquired Royal
Doulton with Wedgwood and Rosenthal) and W-C Designs &
Spring.
17
Year
ended March 31,
2003
Segment
Waterford
Crystal
Ceramics
Group
All-Clad
W-C
Designs
&
Spring
Common
Costs
Inter-
segment
adjustment
Consolidated
Total
(€
in millions)
Net
sales
302.8
483.7
114.1
50.7
—
—
951.3
Depreciation/amortization.
19.8
20.3
6.0
0.6
—
—
46.7
Operating
income/(loss) before exceptional
charges
39.2
11.6
22.2
(3.2
)
(12.5
)
—
57.3
Exceptional
charges
(4.5
)
(31.2
)
—
—
—
—
(35.7
)
Operating
income/(loss) after exceptional
charges
34.7
(19.6
)
22.2
(3.2
)
(12.5
)
—
21.6
Gains
arising on conversion of US$
loans
9.7
Gain
on sale of property, plant and
equipment
5.1
Deficit
arising on closed pension
scheme
(3.9
)
Net
interest
expense
(25.3
)
Net
income before
taxes
7.2
Total
assets at year
end.
535.0
484.8
209.0
24.7
—
(378.7
)
874.8
Capital
expenditure
8.8
12.7
0.3
0.4
—
—
22.2
Year
ended March 31,
2004
Segment
Waterford
Crystal
Ceramics
Group
All-Clad
W-C
Designs
&
Spring
Common
Costs
Inter-
segment
adjustment
Consolidated
Total
(€
in millions)
Net
sales
253.8
438.2
88.6
51.3
—
—
831.9
Depreciation/amortization
18.2
16.2
5.2
0.8
—
—
40.4
Operating
income/(loss) before
exceptional
charges
16.3
6.4
13.1
(2.4
)
(11.7
)
—
21.7
Exceptional
charges
(7.7
)
(28.8
)
—
—
—
—
(36.5
)
Operating
income/(loss) after exceptional
charges
8.6
(22.4
)
13.1
(2.4
)
(11.7
)
—
(14.8
)
Gain
on sale of property, plant and
equipment
6.0
Makewhole
payment
(3.7
)
Net
interest
expense
(32.4
)
Net
loss before
taxes
(44.9
)
Total
assets at year
end
584.1
514.9
197.9
24.2
—
(472.9
)
(848.2
)
Capital
expenditure
18.0
16.7
0.5
0.1
—
—
35.3
18
Year
ended March 31,
2005
Segment
Waterford
Crystal
Ceramics
Group
All-Clad
W-C
Designs
&
Spring
Common
Costs
Inter-
segment
adjustment
Consolidated
Total
(€
in millions)
Net
sales
221.7
441.5
24.2
45.2
—
—
732.6
Depreciation/amortization
15.7
20.8
1.7
0.8
—
—
39.0
Operating
income/(loss) before exceptional
charges
(21.7
)
(52.7
)
1.0
(1.2
)
(13.1
)
—
(87.7
)
Exceptional
charges
(27.0
)
(65.2
)
(8.4
)
(7.4
)
—
(108.0
)
Operating
(loss)/income after exceptional
charges
(48.7
)
(117.9
)
1.0
(9.6
)
(20.5
)
—
(195.7
)
Gain
on sale of property, plant and
equipment
3.8
Gain
on sale of All-Clad
business
103.2
Makewhole
payment
(5.6
)
Net
interest
expense
(54.9
)
Net
loss before
taxes
(149.2
)
Total
assets at year
end
631.6
576.9
—
14.9
—
(500.0
)
723.4
Capital
expenditure
5.8
6.1
0.0
0.2
—
—
12.1
Waterford
Crystal includes the manufacture and distribution of
Waterford
®
Crystal, Stuart
®
Crystal and
Cashs Mail Order products. Ceramics Group includes the manufacture and
distribution of our ceramics products including
Wedgwood
®
, Royal Doulton
®
and
Rosenthal
®
.
All-Clad operations were discontinued
on July 27, 2004, their date of sale.
Operating income is the
segmental measure of income reviewed by the chief operating decision
maker.
Non-allocable overhead costs, such as those incurred by
our head office are included under the heading common costs.
The
inter-segment adjustment refers to inter-segment loans and trade
balances.
Geographic
Information
Net
Sales
Long lived
assets
Year ended March
31,
Year ended March
31,
2003
2004
2005
2003
2004
2005
(€
in millions)
Republic of
Ireland
42.5
33.8
33.8
57.2
59.1
50.8
United
Kingdom
125.8
92.4
106.0
87.2
89.1
98.3
United
States of
America
479.8
411.2
304.7
18.3
14.0
4.4
Japan
73.5
74.5
68.5
1.9
1.8
3.6
Germany
104.6
99.3
97.7
43.4
41.1
36.2
Rest
of
World
125.1
120.7
121.9
1.5
1.1
1.3
Total
951.3
831.9
732.6
209.5
206.2
194.6
Net
Sales are attributed to countries based on the location of customers.
There is no revenue from a single external customer that is 10%
or more of our total revenues.
19
Waterford Crystal
Brands
We market a wide variety of high-quality crystal products under
several brand names, primarily in the premium price segments of the
crystal market. The majority of our crystal is produced at our
manufacturing facilities in Ireland.
Waterford
®
Crystal
Waterford Crystal is our premium brand of crystal and
its products comprise prestigious giftware, stemware, lighting, studio
pieces, sporting trophies and commemorative items, all of which command
leading market shares in their respective markets, especially in the
US.
In 1997, award-winning fashion designer John Rocha was
commissioned to design a range of contemporary crystalware for
Waterford Crystal, to extend our franchise to younger, more style
conscious consumers. Designed by John Rocha and crafted by Waterford
Crystal, the John Rocha at Waterford
®
crystal range of
stemware and giftware was launched in Ireland, the UK and Canada in
1997, and is now also distributed in mainland Europe and the
Asia-Pacific region (including Australia).
Waterford Crystal is
a leading brand of crystal in the US. Waterford Crystal won the
commission to create the six foot in diameter New Year's Eve
crystal ball used during the New Year's Eve millennium
celebration at Times Square in New York City. We expect that Waterford
Crystal will continue to be a key participant in future Times Square
New Year's Eve celebrations through the continuing use of the
Times Square Waterford Crystal ball.
Marquis
®
by
Waterford
Marquis
®
by Waterford is a separate
brand of mid-priced high-quality crystal and fine glassware that is
clearly differentiated from Waterford crystal products through
distinctive design, styling and brand identity, which focuses on
contemporary styling at more modest prices. The Marquis
®
by Waterford brand was launched in 1991 and, since its introduction,
has expanded into a comprehensive range of stemware and giftware
patterns. Marquis
®
by Waterford products are designed by
Waterford and produced to Waterford's strict design and quality
specifications in some of the finest crystal and glass factories in
continental Europe.
Stuart
®
In 1995 we
purchased the Stuart
®
crystal brand, a UK brand of
premium crystal with a long established history of crystal production
and a particularly strong presence in the UK and Australian markets.
Stuart Crystal now markets a wide range of crystal that is
differentiated by price, positioning and design from the
Waterford
®
crystal and Marquis
®
by
Waterford brands and comprises stemware, giftware, tableware and
decorativeware focused on contemporary shapes incorporating traditional
designs. In 1999, Jasper Conran was commissioned to design contemporary
premium crystalware to update the Stuart Crystal range. This range was
rebranded Jasper Conran at Waterford
®
Crystal in
2005.
The table below sets out the approximate percentage of net
sales of Waterford Crystal by brand for the year ended March 31,
2005.
Year
ended
March 31,
2005
Waterford
73
%
Marquis
by
Waterford
11
%
Stuart
2
%
Other
group
products
14
%
Total
100
%
20
Products
Giftware
The
giftware category is of increasing importance and accounts for a
growing proportion of overall sales across all of our Waterford Crystal
brands. It includes table items, barware, decanters, bowls, vases,
personal collectables and decorative giftware, corporate and executive
giftware and Christmas items.
Stemware
There are
approximately one hundred and fifty stemware patterns within the
Waterford
®
range. Patterns are usually developed into
suites, including wine glasses, water goblets, tumblers, spirit glasses
and champagne flutes. Waterford
®
crystal patterns tend
toward classical styles at premium prices and Marquis
®
by Waterford tends towards contemporary styling at more modest prices.
John Rocha at Waterford
®
crystal offers a range of pure,
simple designs, whose character is youthful and stylish.
Stuart
®
crystal styling offers contemporary forms
incorporating traditional designs and cutting patterns.
Lighting
Our principal lighting products are Waterford
Crystal's chandeliers, wall fixtures, portable lighting, table
lamps, candelabra and candlesticks. Chandeliers presently appear in
locations ranging from Westminster Abbey in London to the Kennedy
Center in Washington, D.C. The John Rocha at Waterford
®
crystal and the Jasper Conran at Waterford
®
Lighting
ranges also include contemporary designer lightingware.
Commemorative items
Waterford Crystal designs and produces
distinctive and unique presentation pieces for many of the
world's most prestigious sporting events and to commemorate major
international events and achievements in culture, the arts, matters of
state, industry and science.
Studio pieces
Each year
Waterford Crystal designs and crafts a limited number of unique
exhibition pieces to showcase the highest artistic achievements in
crystal design and crafting.
Writing Instruments
The
licensed Waterford
®
and Marquis
®
by
Waterford Writing Instruments ranges include roller-ball, ballpoint,
fountain and purse pens. Waterford models, sourced in Germany, are
Lismore, Cavendish, Alana, Glendalough and Kilbarry. The
Marquis
®
by Waterford Writing Instruments range, sourced
in Taiwan, includes the Claria and Arcadia patterns.
Waterford
®
Writing Instruments are also sold under an
exclusive licensing agreement with Hampton Haddon of Philadelphia.
Waterford Holiday Heirlooms
®
In 1997,
Waterford Holiday Heirlooms
®
was launched as a further
extension to the Waterford
®
brand. Waterford Holiday
Heirlooms
®
comprise three categories—Mouth-Blown
Glass Ornaments, Holiday Home Decor and Ceramic Giftware. Holiday Home
Decor consists of pre-decorated trees, kissing balls and wreaths.
Ceramic Giftware is hand-painted in gold. Holiday Heirlooms are
designed with details from the Waterford Archives and stamped with the
Waterford name.
Other Waterford licensed
products
Waterford
®
Fine Flatware and
Waterford
TM
Silver Gifts are produced under license by Reed
& Barton.
Other Group Products
Waterford
®
Fine China was launched as an extension to
the Waterford
®
brand at the New York 1997 Table Top
Show. Waterford Crystal also sells other group products in its retail
and outlet stores.
21
Manufacturing
The manufacture of
Waterford
®
crystal is based on a European 18th century
hand crafting process, established in Waterford, Ireland in 1783.
In the recent past the traditional manual steps in the creation of
Waterford Crystal products have been skillfully blended with new
technology to create three "techno-craft"
process platforms of melting and forming, cutting and acid polishing.
These platforms, integrated with the Waterford Crystal hand crafting
heritage of blowing, cutting and engraving, have ensured the
high-quality of Waterford Crystal products.
The first process is
melting and forming. Melting utilizes tank furnace technology while
forming is carried out by skilled craft personnel with the help of
forming equipment. This combination has enabled the crystal yield to be
considerably increased, quality enhanced and waste reduced, enabling
Waterford Crystal products to be produced more cost effectively than by
previous processes.
The second process platform combines the
traditional hand cutting craft used to decorate each piece, utilizing
diamond tipped cutting wheels to produce sharp incisive wedges and
broad flat cuts, creating the intricate patterns characteristic of
Waterford Crystal, with a proprietary six axis grinding process
developed to both extend the design range and significantly reduce
manufacturing cost.
The third process platform involves the acid
polishing of each individual item to enhance the cut pattern.
The internationally recognized standards of ISO 9001 for quality and
ISO 14001 for environmental management are in full operation throughout
our Waterford Crystal manufacturing plants.
Our main crystal
manufacturing plant is located in Kilbarry in Waterford, Ireland. A
proportion of Waterford
®
crystal and
Stuart
®
crystal and substantially all
Marquis
®
by Waterford, equivalent to approximately
34% of our crystal products by net sales value, are outsourced
to a small number of carefully chosen high-quality contract
manufacturers worldwide. The selection of each external manufacturer is
rigorous, in order to ensure that our high-quality standards are
upheld.
Geographic Information
The US accounted for
approximately three quarters of Waterford Crystal net sales in the year
ended March 31, 2005. In addition, a substantial portion
of Waterford Crystal net sales outside the US is also to US residents
traveling abroad.
The table below sets out the percentage of our
net sales of Waterford Crystal by geographic market for the year ended
March 31,
2005.
Year
ended
March 31, 2005
North
America
78
%
Europe
21
%
Rest
of the
World
1
%
Total
100
%
Design
and product development
Brand repositioning
The brand
repositioning strategy pursued in recent years has resulted in a marked
shift in sales patterns away from stemware toward giftware, to the
extent that giftware is now our single most important product category.
At the same time, an increasing proportion of annual net sales is
represented by new product introductions made within the previous
twelve months.
New products and marketing
New products
have been instrumental in driving annual net sales growth. The US
continues to be by far the largest market for Waterford Crystal
products. New crystal product introductions accounted for
22
21% of net sales in the year ended
March 31, 2005. The performance of our new crystal products is based on
a combination of continued emphasis on new product development,
marketing strategies and enhanced customer service.
New product
introductions, primarily giftware items, including vases, bowls and
barware, but also stemware items, together with Christmas products,
form an important and growing sub-category. The gold and platinum
banding of some of Waterford Crystal's most successful stemware
patterns, which we commenced in 1994, has become a well established
feature of stemware in the marketplace.
The development of new
Waterford
®
crystal, Marquis
®
by Waterford
and John Rocha at Waterford
®
crystal products is
facilitated by efficiencies in our Irish manufacturing facilities
combined with access to outsourced products with enhanced profit
margins.
The acquisition of Cashs Mail Order business has
provided us with a new direct mail-order and marketing channel in the
US.
The Waterford Crystal Visitor Centre located at our main
Kilbarry premises in Ireland is a showcase and retail shop for
Waterford Crystal products and other brands, in addition to being a
major tourist attraction in Ireland in its own right with over 300,000
visitors touring the facility annually. The visitor experience is
enhanced by a factory tour, a product gallery, a self-service
restaurant, concession shops and a tourist office.
Ceramics
Group
Brands
We market a wide variety of premium
tableware, giftware and collectables in fine bone china, earthenware,
stoneware and porcelain under a number of different brand names, the
most important of which are described below. The majority of our
tableware and giftware is produced at our manufacturing facilities in
England, Germany and Indonesia.
Wedgwood
®
Wedgwood
®
is a leading premium brand with an unbroken
history of over 240 years. Its principal products are formal and casual
tableware (which are produced in fine bone china, Queen's
Ware
®
and porcelain), giftware, characterware (which are
produced in fine bone china and earthenware, Jasper
TM
,
Queen's Ware
®
and Black Basalt
®
)
and jewelry. There are separate ranges of products sold under the
Wedgwood
®
brand which are offered specifically to the
corporate sector, particularly hotels, restaurants and airlines. In
addition, the licenses granted to international designers Vera Wang and
Jasper Conran have further strengthened the Wedgwood
®
brand.
Royal Doulton
®
Royal Doulton is a
premium brand of contemporary quality ceramic and glassware products
for the giftware, collectables and table top markets. Royal
Doulton's principal brands are Royal Doulton
®
,
Minton
®
and Royal Albert
®
.
Rosenthal
®
Rosenthal
®
is a
high-quality brand that offers a range of classic, sophisticated and
traditional porcelain tableware and gifts. The
Rosenthal
®
brand has been in existence since 1879 when
Philipp Rosenthal first signed his painted porcelainware. The brand has
developed to include not only table and giftware, but also art pieces
and limited editions by world renowned artists in porcelain and
crystal. Today the Rosenthal
®
brand includes Rosenthal
studio-line
®
, Rosenthal classic
®
and
Thomas
®
, as well as the licensed collections
"Rosenthal meets Versace",
"Bvlgari Home Designs" and
"Laura Ashley by Hutschenreuther".
Since the 1950s, Rosenthal studio-line
®
has led the
industry in modern, avant-garde design. Internationally renowned
designers and artists such as Walter Gropius, Timo Sarpaneva, Tapio
Wirkkala,
23
Mario Bellini and Bjorn Wiinblad have all
contributed to building Rosenthal's
®
brand name.
Recent collaborations with designers Jasper Morrison and Platt and
Young have led to many new product innovations. For example, Rosenthal
secured the worldwide license for reproductions of Andy Warhol's
works and designs in crystal and ceramics.
During 1994,
Rosenthal launched four exclusive porcelain patterns endorsed by the
late Italian designer Gianni Versace. These patterns, as well as those
more recently introduced by his sister, Donatella Versace, compete
against Hermès and Cartier among others at the premium end of
the tableware market.
Rosenthal also launched a new collection
in Spring 1999 in co-operation with Bvlgari, the luxury Italian
jeweler. This range of products includes premium porcelain table and
giftware, decorated with the design of watercolor artist Davide
Pizzigoni.
Hutschenreuther
®
We acquired
the Hutschenreuther
®
brand in August 2000. The product
positioning of this brand is complementary to the Rosenthal range while
extending Rosenthal's casual and gift offerings. Our acquisition
of this brand made Rosenthal one of the largest ceramics manufacturers
and suppliers in Germany. In autumn 2002, Hutschenreuther introduced a
new lifestyle collection with three new patterns licensed from the
archives of the British fashion and interior company Laura Ashley.
Johnson Brothers
®
Johnson
Brothers
®
brand, which was established in the UK over a
century ago, offers fine earthenware tableware and giftware in the
mid-price casual tableware market.
Other brands
Wedgwood acquired many of the most famous names in the English
ceramics industry prior to its acquisition by Waterford in 1986. This
has provided us with an array of recognized brand names (such as
Coalport
®
, Crown Staffordshire
TM
,
Tuscan
TM
, J&G Meakin, Midwinter
®
and Bull
in a China Shop
TM
), all of which are registered trademarks
in the UK and other territories, and which can be used for special
product lines or promotions. Early 20th century designs by Clarice
Cliff and Susie Cooper have recently been revived and are currently
enjoying popularity as collectors' items.
Franciscan
®
is the key brand we use for our earthenware
tableware in the US market, where the brand has higher consumer
recognition than our other earthenware brands. Royal
Doulton
®
and Coalport
®
are our key brands
in the prestige UK figurine and collectables market and have shown
market share advances in recent years. Mason's
Ironstone
TM
, another of our ceramics earthenware brands with
a long established history, comprises a distinctive highly colorful and
decorative, yet traditionally English style of tableware and giftware.
Thomas
®
, a brand with a strong European style, is
directed towards the casual tableware and kitchenware market using
contemporary shapes, with particular success in whiteware.
24
The table below sets out the approximate
percentage of net sales of the Ceramics Group by brand for the year
ended March 31,
2005.
Year
ended
March 31,
2005
Wedgwood
45
%
Rosenthal
37
%
Royal
Doulton
7
%
Others
11
%
Total
100
%
Royal
Doulton net sales are for the period from its acquisition on January
17, 2005, to March 31, 2005.
Products
Tableware
Tableware constitutes the largest
proportion of our Ceramics Group business. We currently have in excess
of one hundred patterns of fine bone china, fine earthenware, porcelain
and stoneware in production across our range of brands. Most of our
tableware patterns are developed into a range of items, including
dinner and side plates, cups and saucers, tea and coffee pots, creamers
and sugar boxes, and soup, dessert and serving dishes.
Wedgwood
®
, Royal Doulton
®
,
Minton
®
, Royal Albert
®
,
Rosenthal
®
, Thomas
®
and
Hutschenreuther
®
offer products across the whole
spectrum of the ceramics market from mid-range to the highest prestige
items, such as Bvlgari.
Rosenthal has worked closely with many
internationally renowned designers to create tableware designs such as
"TAC" by Walter Gropius,
"Suomi" by Timo Sarpaneva,
"Moon" by Jasper Morrison and
"Medusa" by Gianni Versace.
Over
recent years, shifting consumer demand in the premium market has seen a
greater emphasis on the development of less formal, more contemporary
styles, resulting in more competitive pricing across most markets and
sectors and has led to the introduction of mid-price collections, for
example Wedgwood's Sarah's Garden and Grand Gourmet.
Wedgwood has recently worked with designers such as Vera Wang, Nick
Munro, Paul Costelloe and Jasper Conran in order to develop its
business in these sectors.
Giftware
Giftware is an
important and growing proportion of our ceramic sales. Items such as
vases, bowls, clocks and picture frames are produced to complement some
of our major tableware patterns. In addition, we also have a large
range of single giftware items in fine bone china, stoneware and
non-ceramic materials, most notably Wedgwood's signature ceramic
body—the stoneware Jasper
®
, and the figurine
collections sold under the Royal Doulton
®
and
Coalport
®
brand names. Giftware is a central theme of
the Rosenthal studio-line
®
range. That brand has a
strong heritage in limited edition art pieces due to its experience
with a wide range of international designers, such as Frank Stella,
James Rizzi, Victor Vasarely, Henry Moore, Roy Lichtenstein and
Salvador Dalì. Rosenthal studio-line reproduces the artwork of
Andy Warhol and James Rizzi on unique gift lines. In May 2003,
Rosenthal launched a new limited art collection by 17 internationally
renowned artists commemorating the late Philip Rosenthal. Characterware
includes Royal Doulton's "Bunnykins"
and Wedgwood gift and tableware products, produced mainly in
earthenware, which illustrate classic childhood characters, the most
famous of which is Beatrix Potter's "Peter
Rabbit".
Collectables
We produce many
ceramic figures and figurines in our collectable ranges, from familiar
nursery figures to children's storybook favourites, ladies of
fashion and elegance, limited edition and subscription only
products.
25
Licensed Product
Wedgwood
licences the use of its Wedgwood
®
brand name to endorse
various high-quality items such as tea, coffee, gourmet foods and
linens. Over 90% of the sales of these items are in Japan. Total
sales of food products were €10.4 million for the year
ended March 31, 2005. Wedgwood flatware is produced in the US under
licence by Oneida Limited.
Crystal
The
Rosenthal
®
crystal brand offers a range of
sophisticated, modern and avant-garde crystal marketed under its own
name, as well as under the Rosenthal studio-line
®
and by
licensing agreements under the names of Versace and Bvlgari. Production
of these items is outsourced. All of the crystal items in these ranges
are designed to complement and extend the existing ranges of Rosenthal
studio-line, Versace and Bvlgari ceramic and non-ceramic products.
Furniture
Rosenthal's furniture program is devoted to
three main themes: furniture for hospitality, furniture for home and
office, and furniture that combines functional design with artistic
expression. For its furniture concepts Rosenthal works with artists and
designers of international renown, including Peter Luthersson, Cini
Boeri, Andreas Weber, Erwin Nagel and Jochen Flacke. One of our most
prestigious orders was completed in 2000: Rosenthal supplied the
furniture for the conference rooms, meeting rooms and other areas of
the new German Government buildings (Bundesrat) in Berlin.
As
well as marketing furniture, Rosenthal also markets high-quality
table-top accessories such as linens, cutlery and candles under its
brand name.
Manufacturing
The main ingredients of all
ceramicwares are clay, feldspar and, in the case of fine bone china,
calcinated animal bone (constituting approximately 50% by
weight). In recent years, dust pressing has been introduced to replace
the traditional methods for the production of flatware. In this process
liquid clay is "spray dried" in a powerful
stream of heated air to produce clay granules, which are compressed in
isostatic presses to form the ware between the press membranes.
Whether produced in the traditional manner or by dust press, our
ceramicware is allowed to dry before being fired, glazed, fired again,
decorated and fired for a third time. For many traditional designs,
particularly in the case of fine bone china, we apply decorations by
hand using decals ("lithos"). Our most
exclusive items may be hand decorated, gilded and fired several times
over, as successive layers of decoration are added.
Most of our
contemporary fine bone china and earthenware patterns now have
decoration applied by multi-color printing. In the case of our
earthenware and some bone china ware this is done after the first
firing and before glazing so that only two firings are required in
total.
Our ceramic manufacturing sites are currently located at
Barlaston and Longton in Stoke-on-Trent in the UK, at
Rosenthal-am-Rothbühl and Thomas-am-Kulm in Germany and at Jakarta
in Indonesia. We outsource approximately 26%, by net sales value
of our Ceramic Group products.
Manufacturing development
We are committed to maintaining our position at the forefront of
manufacturing technological development in ceramics. In recent years
many new techniques have been introduced to the manufacturing process,
which have reduced process and handling times and manual labor content.
We have consolidated our ceramic production into dedicated production
facilities allowing each facility to specialize in either flatware,
holloware or castware, rather than manufacturing the whole product
range.
Our technical developments in recent years include the
extension of dust pressing to the majority of our flatware production,
the introduction of fast fire biscuit kilns (which reduce firing time
from twenty
26
four hours to seven and one half hours) and
fast firing decorating kilns (which reduce firing times from 8 hours to
just sixty minutes), the development of automated casting, pressure
casting, automated glazing and the extension of the use of
multi-printing for earthenware and many fine bone china tableware
patterns.
We have made significant investment on casting and
glazing machines, automated cup cells, new earthenware glost kilns,
six-color printing and automated handling machinery. Developments
continue in many areas, particularly glaze technology, dust pressing,
automated casting, automated handling, automated decoration and lining,
our use of computer-aided design and modeling, die making, and heat
release pattern application.
We pursue an active policy of
providing safe systems of work and high standards of environmental
management. ISO 9002, the internationally recognized quality standard,
has been in operation throughout our UK based manufacturing operations
since 1997. We continue to invest in the latest manufacturing
technology
Geographic Information
In the year
ended March 31, 2005, the UK was the largest sales market for ceramics
followed by Germany, Japan, then the US.
The table below sets
out the percentage of our net sales of ceramics by geographic market
for the year ended March 31,
2005.
Year
ended
March 31,
2005
Europe
58
%
Asia-Pacific.
23
%
North
America
18
%
Rest of
World
1
%
Total
100
%
Design
and Product Development
Wedgwood
We believe that
Wedgwood's brand name enjoys a high level of international
customer awareness. In recent years, we have refreshed core patterns
and developed new product ranges of both tableware, such as
Sarah's Garden, Nantucket Basket, Grand Gourmet and Night and
Day, as well as giftware, in order to reflect current market trends
towards casual luxury living and more accessible price points, while
complementing existing ranges.
The ranges of Vera Wang at
Wedgwood and Jasper Conran at Wedgwood both launched strong new
patterns in the US, UK and elsewhere in Europe to further critical
acclaim with the first entry into the casual sector for a Wedgwood
designer association.
Royal Doulton
Royal Doulton is a
classic English brand name in tableware and ceramics with an operating
history dating back to 1815. Creativity and craftsmanship have always
been essential ingredients in the brand's success. Today the
brand stays abreast of the latest lifestyle trends with major figures
from the world of fashion, such as modern fashion icon Zandra Rhodes
and award winning designer Julien MacDonald.
Two further leading
brands—Minton
®
and Royal
Albert
®
—complete the Royal Doulton stable of
brands.
Since it was established in 1793, Minton's design
and production work has been characterised by a bold mix of innovation
and tradition, aesthetic design and new technology, Englishness and
27
cosmopolitanism. Its most popular design,
Hadden Hall tableware, was launched in 1948 and is still in production
today. Royal Albert, taking its name from Prince Albert, who ascended
to the English throne in 1936 as King George VI, is responsible for the
most popular bone china tableware pattern in the world. Old Country
Roses, launched in 1962, has since sold over 100 million pieces
worldwide and remains an exemplary product of the potter's art.
Royal Albert continues to update its romantic, fashionable image
through a license agreement with English fashion icon Zandra
Rhodes.
Rosenthal
Rosenthal has a reputation for
working extensively with internationally renowned designers, and for
avant-garde design particularly in the Rosenthal
studio-line
®
range and the "Rosenthal meets
Versace" collection. Product development is based on
creating products that are suited to the various lifestyles of targeted
end-consumers. Our relationships with internationally recognized
lifestyle labels and brands, such as Versace and Bvlgari, aim at
utilizing the competencies and skills of all parties—the quality,
skill and beauty of Rosenthal products with the strength and flair of
other strong market leaders in their respective fields.
Rosenthal has sought to lead the industry in modern, avant-garde
design by enlisting the help of internationally renowned designers and
artists such as Walter Gropius, Timo Sarpaneva, Tapio Wirkkala, Mario
Bellini and Bjorn Wiinblad to design Rosenthal products and build
Rosenthal's brand name.
In February 2002, Rosenthal
launched the first collection in its Andy Warhol range. Rosenthal has
secured the worldwide license for reproduction of the entire portfolio
of Andy Warhol's works and designs in crystal and ceramics. New
products for Rosenthal studio-line
®
focus on giftware
from the studios of internationally recognized designers such as Jasper
Morrison, Platt and Young, Michael Young and Stefanie Hering. The
heritage collection of the Rosenthal range continues to create the
elegant acid-etched patterns for which Rosenthal is famous. Rosenthal
also continues to work with the Versace design team to introduce new
designs from the Versace portfolio.
Rosenthal also continues to
streamline its products and ranges, in order to allow new products to
play an increasingly important role in the further development of our
ceramic business.
All-Clad
We disposed of All-Clad on
July 27, 2004 and consequently our results of operations only include
All-Clad for the period from April 1, 2004 to July 27, 2004.
W-C Designs & Spring
Brands
Waterford
®
Linens was launched in 1995 as an
extension to the Waterford
®
brand and is sold under a
licensing agreement which is held by W/C Imports, Inc., trading as W-C
Designs, a 100% subsidiary of Ashling Corporation. On July 1,
2001, we acquired 86.5% of the outstanding stock of Ashling
Corporation from Fitzwilton Limited, a company controlled by Sir
Anthony O'Reilly and Peter John Goulandris, two of our principal
shareholders and the Chairman and Deputy Chairman of our Board of
Directors, respectively. The sales of Ashling Corporation were
approximately $30.3 million in 2001, the year of acquisition, and were
$40.8 million in the year ended March 31, 2005. See
"
Item 7—Major Shareholders and Related Party
Transactions
".
We market Premium cookware under
Spring
TM
cookware brand name.
Spring
TM
In May 2002, we acquired certain
assets—including, most notably, the Spring
TM
brand—of Spring AG, a Swiss luxury cookware company, which
specialized in high-quality household cookware as well as professional
cookware and food serving equipment for elite restaurants and
hotels.
28
The table below sets out the approximate
percentage of our Sales of W-C Designs & Spring by brand for the
year ended March 31,
2005.
Year
ended
March 31, 2005
W-C
Designs
72
%
Spring
28
%
Total
100
%
Products
Waterford
®
Linens
W-C Designs markets
Waterford
®
Linens under licence from Waterford Crystal.
Using linen, cotton sateen and damask in both contemporary and
traditional designs, the collections include tablecloths, placemats,
table runners and napkins to complement and complete collections of our
dinnerware, glassware and lifestyle products.
Cookware
Spring
TM
cookware comprises a range of premium items in
the top price point range and are aimed specifically at the
professional chef and enthusiastic amateur.
Manufacturing
W-C Designs and Waterford Linens are outsourced to specialist
manufacturers primarily located in the Far East.
Sourcing
All Spring
TM
products are
outsourced, primarily in the Far East.
Products
Geographic Information
W-C Designs & Spring net
sales are predominantly in the US. The table below sets out the
percentage of our net sales of W-C Designs & Spring by geographic
market for the year ended March 31,
2005.
Year
ended
March 31, 2005
North
America
86
%
Europe
11
%
Asia-Pacific
1
%
Rest
of
World
2
%
Total
100
%
Design
and Product Development
Waterford Linens are regularly being
developed in close conjunction with the design and marketing teams at
both W-C Designs and Waterford Wedgwood USA.
The
Spring
TM
brand is recognized in Switzerland and parts of
continental Europe and we plan to develop its presence in the US.
Marketing, Distribution and Retail Network
We
employ our own sales forces in the Republic of Ireland, the UK, the US,
Japan, Hong Kong, Singapore, Taiwan, Australia, Canada, Germany and
Italy. In other markets, we use independent
29
representatives or we sell directly to
retailers. We reinforce our marketing efforts through an advertising
program, particularly in the US, the UK, Asia, Germany, Italy and
Ireland, advertising primarily in quality magazines. We also use a
variety of other advertising methods and media, including the
Internet.
We have a strong retail network in the UK, US, Japan,
Australia, Germany and the Asia-Pacific region with the majority of
sales being made through specialty retail outlets that are either
independently owned, wholly-owned by us or operated through in-store
concessions whereby we rent space in a store
("
shop-in-shop
"). As at March 31,
2005, we had 689 outlets throughout the world of which 494 were
shop-in-shop locations. We operate a program of regular refurbishment
of these outlets in order to ensure that the presentation of our
products in these retail stores is maintained at a consistently high
level.
Historically, we have distributed our products through
separate established distribution channels, so as to specifically
target consumers of those products. More recently, we have begun to use
the existing distribution networks of our premier brands to market and
sell more of our other products through the same distribution
channels.
Waterford, Wedgwood and Royal Doulton
Our
sales in the US are made primarily through department stores and
specialty retailers. A significant part of department store and
specialty retailer sales are made through bridal registries. We also
operate business divisions to operate our own retail stores and to
expand the hotelware, executive gifts and incentives businesses. There
are currently 57 wholly-owned Waterford Wedgwood outlets in the US,
with plans for selective further growth in target locations. Waterford
Crystal also sells its products through catalogs mailed into the
US.
Sales in the UK, the Republic of Ireland and the rest of
Europe are made primarily through a broad range of retail outlets. A
significant portion of our sales in the Republic of Ireland are made to
tourists. The Waterford Crystal Visitor Center at the main Waterford
Crystal manufacturing facility in the Republic of Ireland maintained
its position as one of the top Irish tourist attractions and a
significant source of retail sales for us. We continue to develop our
tourist related business.
In the Asia-Pacific region we have
companies or branch offices with distribution, marketing and sales
operations in Japan, Hong Kong, Singapore and Taiwan. Japan is a key
market for Wedgwood branded products, where it is the leading imported
premium ceramic brand. Japanese citizens traveling abroad have also
generated significant retail sales for the Wedgwood brand in locations
as far as Hong Kong, London and Hawaii. However, the significant
reduction of tourism in recent years has had a detrimental impact on
both Wedgwood's and Royal Doulton's retail sales in these
tourist areas.
Rosenthal
Rosenthal's brand
awareness and sales strengths lie primarily in Europe, specifically in
the German speaking countries and in Italy and Scandinavia. Rosenthal
subsidiaries distribute both Rosenthal
®
and
Wedgwood
®
branded products in Italy, France, Sweden,
Austria and Switzerland. Rosenthal operates its own distribution system
in the US market. Distribution arrangements for Rosenthal in Canada,
Japan and the UK are undertaken by Wedgwood.
All-Clad and
Spring
Substantially all of our premium cookware sales up to
July 27, 2004 were made by All-Clad in the US, through department
stores and specialty retailers. However, we have begun to expand into
other retail outlets and non-US markets with our Spring brand,
following the disposal of All-Clad in July 2004.
Competition
We compete worldwide, primarily with
other international manufacturers of high-quality crystal and ceramics
and other premium gift and luxury lifestyle products including premium
cookware, kitchenware, bakeware and linen. Competition is based
principally on product design, quality, brand image and reputation and
price. National markets tend to be fragmented with indigenous producers
accounting for
30
the greater part of sales in those markets.
In addition, our products are in competition with other luxury branded
products such as fashion accessories, clothing, jewelry, perfumes,
giftware and homeware. In all cases, the brands or the manufacturers of
such products have consumer-identifiable prestigious reputations.
One of the prime objectives of the crystal business in developing
the Marquis
®
by Waterford brand was to gain crystal
market share by offering consumers products with a Waterford Crystal
endorsement in a price and design segment of the market in which
Waterford Crystal previously had no product offering. The marketing of
new Waterford Crystal products at lower price points, the introduction
of John Rocha at Waterford
®
crystal, Jasper Conran at
Waterford
®
Crystal, Sarah's Garden, Grand Gourmet,
Jasper Conran Casual and 101 and the development of mid-price designer
ranges by Rosenthal are all designed to meet the increase in consumer
demand for less formal, mid-price point products, without compromising
our premium brands Waterford
®
, Wedgwood
®
,
Royal Doulton
®
, Rosenthal
®
, and
Spring
TM
.
Our products, whether Waterford
crystal
®
, Rosenthal
®
porcelain,
Wedgwood
®
or Royal Doulton
®
fine bone
china, are characterized by having significant market shares in many of
the markets in which they operate.
In the US,
Waterford
®
is the leading brand of fine crystal, with an
estimated 39% market share including Marquis.
Wedgwood
®
is ranked as the number two brand of formal
dinnerware by sales, with an estimated 19% market share in the
US. Waterford
®
Fine China is ranked as the number four
brand of fine china by net sales, with an estimated 8% market
share. The combined market share of Wedgwood
®
and
Waterford
®
Fine China in the US is estimated to be
approximately 27% of the formal china market and is second only
to Lenox, which is estimated to have a 41% share of that
market.
In the UK, we estimate that Wedgwood
®
is
ranked as the number one brand of fine bone china by net sales with an
estimated 20% market share. We estimate Royal
Doulton
®
has a 10% share of the UK fine bone
china market. In independent research Waterford
®
crystal
was ranked as the number one brand for quality in the UK. In addition,
we believe that Waterford
®
and Stuart
®
are ranked as the number one brands of high-quality crystal by sales,
with an estimated 25% to 30% market share.
In
Germany, Rosenthal
®
is ranked as the number one brand of
ceramicware by sales, with an estimated 38% market share. In
Japan, Wedgwood
®
is ranked as the leading brand by sales
of imported fine china. In the Republic of Ireland, we believe that
Waterford
®
is ranked as the number one brand of
high-quality crystal by sales, with an estimated 60% to
65% market share.
Suppliers
We depend on outside
suppliers for the raw materials used in the production of our crystal,
fine bone china, fine earthenware, stoneware, stainless steel, copper
and aluminum products.
Although a significant portion of our raw
material supplies for crystal, ceramics and premium cookware products
are purchased from a limited number of sources, we believe that we
could obtain adequate supplies from alternative sources and that the
termination of relations with any particular supplier would not have a
material adverse effect on our business.
We use outside
suppliers for a variety of finished products, including crystal,
ceramics, premium cookware, holiday heirlooms, linen, gourmet foods,
flatware and writing instruments.
Crystal
The
principal ingredients in the manufacture of Waterford crystal are soft
batch and silica sand. Soft batch consists of prills containing
litharge, potash and other minor materials and has been patented
jointly by Waterford Crystal and a UK supplier. Currently silica sand
is purchased in Belgium.
Outsourced products accounted for
34% of net sales of crystal in the year ended March 31, 2005.
The number of sources for crystal outsourced products at March 31, 2005
amounted to less than 10, primarily in Germany and other European
countries. We do not believe that the termination of relations with any
particular supplier would have a material adverse effect on our
business.
Ceramics
The main ingredients of all
ceramicware are various clays, feldspar and, in the case of bone china,
calcinated animal bone. Approximately two-thirds of the suppliers of
the raw materials for Wedgwood's
31
fine bone china and fine earthenware
products are based in the Potteries region, in the vicinity of
Wedgwood's and Royal Doulton, premises in the UK, with a majority
of the balance based in the rest of the UK. Rosenthal obtains
approximately 15% of its raw materials from Spain. Historically,
neither Wedgwood nor Rosenthal has experienced difficulties in
obtaining any of their ceramic raw materials.
Premium
cookware
Spring premium cookware is all outsourced. We
do not believe that the termination of relations with any particular
supplier would have a material adverse effect on our business.
Our Restructuring Program
The economic downturns in
the US, Europe and Japan in recent years, the terrorist attacks in the
US on September 11, 2001 and the geopolitical instability and armed
conflicts that have followed have had an adverse impact on our sales,
as consumers reduced purchases of luxury items in the face of difficult
economic conditions. Further, the related decline in tourism has also
had an adverse impact on our sales. We have responded by restructuring
and refocusing our business.
Waterford restructuring
program
On November 7, 2001, we announced a
restructuring program for our Waterford operations aimed at lowering
our operating costs, by reducing labor costs and maximizing our use of
technology. This was achieved by reducing our fixed production
capacity, closing our Stuart crystal manufacturing plant in Stourbridge
in the West Midlands in the UK and transferring a portion of this
production to our existing crystal factories in Ireland and outsourcing
the remainder. See note 6.(a) to our Consolidated Financial
Statements.
In July 2003, we announced a further restructuring
of the Waterford operations in Ireland, allowing us to further reduce
our ongoing operating costs and decrease the number of employees. The
key elements of this package were to maximise the utilization of the
existing technology asset base, to reduce premium cost overtime and
shiftwork, to reduce associated overhead cost structures and other
efficiency and cost improvement measures.
In September 2004, we
announced a period of seven weeks short-time working up to March 31,
2005 to further reduce costs and inventories.
Wedgwood
restructuring program
In 2001, we announced a restructuring
program for our Wedgwood operations with the objective of lowering our
operating costs and improving operating efficiencies by consolidating
our warehousing operations in the UK, making greater use of technology
and devolving certain Wedgwood central sales and administrative
functions to operations in the markets. See note 6.(a) to our
Consolidated Financial Statements.
In June 2003, we announced a
further restructuring of our Wedgwood operations. The restructuring
program included the closing, during calendar year 2003, of two of our
earthenware manufacturing plants in Stoke-on-Trent, in the UK, the
consolidation of our Wedgwood branded fine earthenware production at
our existing factories in Barlaston and Longton in Stoke-on-Trent and
the related lay-off of approximately 1,000 employees. At the same time,
we entered into an outsourcing agreement with a high-quality contract
manufacturer in the People's Republic of China for the
manufacture of our Johnson Brothers branded earthenware.
Rosenthal restructuring program
During the year ended March
31, 2003, we completed the integration of Hutschenreuther's
operations into those of Rosenthal which has allowed us to reduce our
costs and decrease the number of our employees. See note 6.(b) to our
Consolidated Financial Statements.
2005 Restructuring
program
In our trading update on March 14, 2005, we indicated
that we were reviewing our fixed cost base in order to seek to return
to sustainable profitability at existing demand levels and current
exchange rates.
32
The resulting restructuring program
announced on May 4, 2005, which is being financed by a rights issue, is
designed to remove excess capacity, improve manufacturing efficiency
and to enable a more complete integration of the Wedgwood division with
Royal Doulton.
Key features of the proposed restructuring
program are as
follows:
•
€90 million
restructuring investment will be targeted across the Group with the
objective of achieving annualized savings of approximately
€90 million once fully implemented. We expect to largely
achieve the savings by December
2006;
•
it is anticipated that the total
number of personnel employed by the Group will reduce by about 1,800
when the proposed restructuring is
completed;
•
removal of excess capacity:
about €30 million will be spent on restructuring at
Waterford Crystal and Rosenthal in order to remove excess capacity. At
Waterford Crystal, the Dungarvan plant will be
closed;
•
overhead reduction: investment
of €24 million is planned to reduce overheads at Waterford
Crystal, Rosenthal and at Group level and to upgrade manufacturing
facilities in Waterford Crystal and
Rosenthal;
•
the combined effect of
these proposed actions is expected to be a reduction in the number of
employees at Waterford Crystal by 485, at Rosenthal by 160 and across
the wider Group by 200;
and
•
Wedgwood-Royal Doulton integration
savings: following completion of the acquisition of Royal Doulton on
January 17, 2005, the Group has identified opportunities for more
savings than originally envisaged. We plan to invest a total of
€36 million (of which €6.5 million had been
spent at June 16, 2005) to achieve savings in manufacturing, retail
operations, administration, and warehousing efficiencies. These
proposed actions are expected to reduce the numbers employed by
Wedgwood and Royal Doulton by a combined total of 950 worldwide, of
which about 450 had left the business as at June 16, 2005.
Distribution
Our products are distributed from our
principal distribution centers located in the Republic of Ireland, the
UK, Germany and the US and from smaller distribution facilities located
in Japan, Australia, Canada, Italy, France, Taiwan, Switzerland,
Sweden, Hong Kong and Singapore.
Intellectual Property
The names "Waterford
®
",
"Wedgwood
®
",
"Royal Doulton
®
",
"Minton
®
", "Royal
Albert
®
",
"Rosenthal
®
",
"Spring
TM
", Waterford
Crystal's seahorse device, Wedgwood's
"W" device, and Rosenthal's crossed
swords device are our principal trademarks.
Waterford
®
is registered as a trademark for our
crystal products in over fifty countries, including the Republic of
Ireland, the US, Japan, Australia, the member states of the E.U., and
many others. In conjunction with the Waterford mark, the seahorse
device appears on all of our products where feasible. This device is
also registered in numerous jurisdictions throughout the world.
Registration of the Marquis
®
by Waterford trademark has
been obtained in all the principal classifications in the US, Ireland,
the UK and Australia. The Stuart
®
crystal trademark is
also registered in all principal classifications in the US, Ireland,
the UK and Australia. In addition, a logo trademark for each of these
brands is registered in the same jurisdictions. Many stemware suite
names and product names are also protected by trademark registration in
numerous countries. Such names include Lismore, Colleen, Araglin, John
Rocha at Waterford
®
crystal, Geo and Imprint.
The
name "Wedgwood
®
" is the
trademark carried by the fine bone china, fine stoneware and fine
earthenware products of Wedgwood Limited and its subsidiaries and is
registered in most countries in the world in which we operate or sell
product including the UK, the US, Japan, Australia and Canada. The
Wedgwood W device symbol appears on the reverse side of all Wedgwood
fine bone china products.
33
Other registered trademarks of Wedgwood
Limited include Coalport
®
, Adams, Mason's
Ironstone
TM
, Jasper
TM
, Johnson
Brothers
®
and Franciscan
®
. Many Wedgwood
patterns and pattern names are registered selectively, mainly in Japan
and the US.
Royal Doulton
®
,
Minton
®
, Royal Albert
®
and Doulton &
Co.
®
are the principal trademarks applied to the fine
bone china and fine bone china products of Royal Doulton (U.K.) Ltd and
its subsidiaries, and they are registered in most of the countries in
the world where we have operations, or sell product.
Rosenthal
®
and Thomas
®
are the
principal trademarks applied to the porcelain products of Rosenthal AG
and its subsidiaries. Rosenthal
®
,
Thomas
®
, Hutschenreuther
®
and
Rosenthal's crossed swords device, are registered trademarks in
many countries around the world, principally in Europe and North and
South America.
Spring
TM
is the principal trademark
carried by our premium cookware products. Spring
TM
is a
registered trademark in many countries including the US, the UK and
Switzerland.
The trademarks Versace and Bvlgari are owned by
Versace SpA and Bvlgari SpA, respectively, and licensed to us for use
in our co-branded products.
We believe that our intellectual
property is material to our business and it is our policy to register
and protect by all lawful means our principal trademarks, including
common law protection, wherever possible. We seek to protect our
intellectual property rights by registering appropriate Internet domain
names and by taking such steps as are necessary, including litigation,
to ensure that Internet cyber-squatters do not use domain names that
might impair our intellectual property rights.
Health and
Safety
We pursue an active policy of providing safe systems of
work and on-the-job safety training for all relevant employees. The
effectiveness of our Health & Safety Policy is maintained by each
division through systematic review.
Environmental Policy
Our principal manufacturing facilities in Ireland, the UK, Germany
and the US are subject to numerous national and E.U. environmental laws
and regulations concerning emissions to air, discharges to surface
water, noise emission, proper disposal of waste products and other
environmental issues.
In 2004, Waterford Crystal Limited was
fined €3,000 for non-compliance with its Integrated
Pollution Control licence. Waterford Crystal is now compliant.
Based on the evidence of periodic environmental auditing, we believe
that our operations are in compliance in all material respects with
applicable environmental laws and regulations. We are not aware of any
pending legal proceedings relating to environmental regulations that
are likely to have a material adverse effect on our consolidated
financial position or results of operations.
Organizational
Structure
Listed below are the principal subsidiary companies
that comprise the Group, as at September 16,
2005.
Name
Registered
office and jurisdiction of
incorporation
Nature of
business
Manufacturing
Josiah
Wedgwood & Sons Limited
Barlaston, Stoke-on-Trent,
England
Ceramic tableware/giftware
manufacturer
P. T.
Doulton
Tangerang, Indonesia
Ceramic tableware/giftware
manufacturer
Rosenthal
AG
Selb, Germany
Ceramic tableware/giftware
manufacturer
34
Name
Registered
office and jurisdiction of
incorporation
Nature of
business
Waterford Crystal
Limited
(1)(2)
Kilbarry, Waterford,
Ireland
Crystal glass manufacturer and
distributor
Distribution
Stuart
& Sons Limited
(1)
Barlaston, Stoke-on-Trent,
England
Distributor
Waterford Wedgwood
Australia Limited
Barlaston, Stoke-on-Trent,
England
Distributor
Waterford Wedgwood
Canada Inc
Toronto,
Canada
Distributor
Waterford Wedgwood USA,
Inc
New York,
USA
Distributor
Waterford Wedgwood Japan
Limited
Tokyo,
Japan
Distributor
Waterford Wedgwood Retail
Limited
Barlaston, Stoke-on-Trent,
England
Retailer
Josiah Wedgwood & Sons
(Exports) Limited
Barlaston, Stoke-on-Trent,
England
Exporter
Josiah Wedgwood (Malaysia)
Sdn. Bhd
Kuala Lumpur,
Malaysia
Retailer
Waterford Wedgwood Trading
Singapore Pte.
Limited
Singapore
Distributor
Waterford
Wedgwood (Taiwan) Limited
Taipei,
Taiwan
Distributor
Wedgwood
GmbH
Selb, Germany
Sales Office
W/C
Imports Inc
California, USA
Linen
Distributor
Spring Switzerland
GmbH
(1)
Switzerland
Distributor
Spring
USA Corporation
Delaware,
USA
Distributor
Cashs Mail Order
Limited
(1)(2)
Kilbarry, Waterford,
Ireland
Distributor
Royal Doulton (U.K.)
Limited
Stoke-on-Trent,
England
Distributor
Royal Doulton Australia
Pty. Limited
Sydney,
Australia
Distributor
Royal Doulton Canada
Limited
Toronto,
Canada
Distributor
Royal Doulton Hong Kong
Limited
Hong Kong
Distributor
Royal
Doulton Japan KK
Tokyo,
Japan
Distributor
Royal Doulton USA,
Inc
New Jersey,
USA
Distributor
Finance
Statum
Limited
Barlaston, Stoke-on-Trent,
England
Finance
Other
Waterford
Wedgwood UK plc
(1)
Barlaston, Stoke-on-Trent,
England
Subsidiary holding company
Wedgwood
Limited
Barlaston, Stoke-on-Trent, England
Subsidiary
holding company
Waterford Wedgwood
Inc
Delaware, USA
Subsidiary holding
company
Waterford Glass Research
and
Development
Limited
(1)(2)
Kilbarry, Waterford,
Ireland
Research and development
Dungarvan
Crystal Limited
(1)(2)
Kilbarry, Waterford,
Ireland
Dormant
Waterford Crystal
(Manufacturing) Limited
(2)
Kilbarry,
Waterford, Ireland
Dormant
Waterford
Wedgwood Employee Share Ownership Plan (Jersey)
Limited
(1)
St. Helier, Jersey
Trustee
company
Waterford Wedgwood GmbH
Selb,
Germany
Subsidiary holding company
Waterford
Wedgwood Linens Inc.
(1)
Delaware,
USA
Subsidiary holding company
Ashling
Corporation
California, USA
Subsidiary holding
company
Royal Doulton plc
Stoke-on-Trent,
England
Subsidiary holding
company
(1)
Immediate subsidiaries
of Waterford Wedgwood plc. Our other subsidiaries are included in the
financial statements in accordance with Regulation 4(1)(d) of the
European Communities (Companies: Group Accounts) Regulations, 1992.
With the exception of Rosenthal AG, of which we own 89.8%,
Ashling Corporation, of which we own 86.5%, Spring USA
Corporation, of which we own 60% and PT Doulton of which we own
95%, all subsidiary companies are 100% owned. All
companies operate primarily in their country of incorporation with the
exception of Waterford Wedgwood Australia Limited, which operates in
Australia.
35
(2)
Companies covered by
guarantees in accordance with Section 17 of the Companies (Amendment)
Act, 1986 of the Republic of Ireland. See note 24 to our Consolidated
Financial Statements.
Property, Plant and Equipment
Through our subsidiary companies, we hold freehold or leasehold
interests in premises used for manufacturing, warehousing, wholesaling,
retailing or administration in Ireland, the UK, Germany, the US,
Canada, Japan, Australia, Hong Kong, Singapore, Taiwan, France, Italy,
Sweden, Austria, Belgium and Switzerland. The table below identifies
our principal properties as at September 16,
2005:
Location
Approximate
sq. ft. area
Title
Nature of
Activities
Indonesia
Tangerang,
Indonesia
463,000
Freehold
Manufacture
and warehousing of fine china.
Includes administration
facility.
Ireland
Kilbarry,
Waterford
565,000
Freehold*
Manufacture
and warehousing of crystal glass.
Includes administration
facility.
Dungarvan
175,000
Freehold*
Manufacture
of crystal glass.
Includes administration
facility.
UK
Barlaston,
Stoke-on-Trent
874,000
Freehold*
Manufacture of
fine bone china and earthenware.
Includes administration
facility.
Longton,
Stoke-on-Trent
185,000
Freehold*
Manufacture
and warehousing of fine bone china and
earthenware.
Stone,
Staffordshire
213,000
Operating
Lease
Warehousing. Includes administration
facility.
Germany
Rosenthal-am-Rothbuhl
565,000
Freehold
Manufacture
and warehousing of porcelain.
Includes administration
facility.
Thomas-am-Kulm
337,000
Freehold
Manufacture
and warehousing of porcelain.
Includes administration
facility.
US
Wall,
NJ
255,000
Operating lease
Warehousing.
Includes administration
facility.
*
Pledged
as collateral for obligations under our Facility Agreement and our
Mezzanine Notes.
Item 5—Operating and Financial Review and
Prospects
You should read the following discussion together
with our Consolidated Financial Statements and their related notes
contained in this annual report. We have prepared our Consolidated
Financial Statements in accordance with Irish GAAP, which differs in
certain significant respects from US GAAP. A discussion of the
principal differences relevant to our Consolidated Financial Statements
and a reconciliation to US GAAP of our net income and
shareholders' equity for certain of the financial periods
discussed in this section is set forth in note 31 to our Consolidated
Financial Statements included elsewhere in this annual report.
Some of the information set forth below and elsewhere in this annual
report includes forward-looking statements that involve risks and
uncertainties. See "
Forward-Looking
Statements
" and "
Item 3—Key
Information—Risk Factors
" for a discussion of
important factors that could cause actual results to differ materially
from the results described in such forward-looking statements as may be
contained in this annual report.
When we use
"we", "us",
"our" or other similar terms in Item 5, we
are referring to Waterford Wedgwood plc and its subsidiaries, unless
the context requires otherwise.
Overview of Our Business
We are one of the world's leading designers, manufacturers and
marketers of branded luxury lifestyle products, including high-quality
crystal, ceramics (including fine bone china, fine porcelain and
36
earthenware) and premium cookware. Our
portfolio of established luxury lifestyle brands includes
Waterford
®
crystal, Wedgwood
®
, Royal
Doulton
®
and Royal Albert
®
fine bone
china, Rosenthal
®
porcelain and Spring
TM
premium cookware, among others. In addition, we have well established
co-branding relationships with a range of leading designers and
celebrities, including Versace, John Rocha, Jasper Conran, Vera Wang,
Emeril Lagasse, the Andy Warhol Foundation, Bvlgari and Paul
Costelloe.
We operate four principal segments: Waterford
Crystal, Ceramics Group, W-C Designs & Spring and Common costs. In
the fiscal year ended March 31, 2005, Waterford Crystal accounted for
30% of our net sales (€221.7 million), of which
Waterford
®
branded products (including
Marquis
®
by Waterford) accounted for 85% of such
net sales; Ceramics Group accounted for 60% of our net sales
(€441.5 million), of which Wedgwood
®
branded products
accounted for 52% of such net sales and Rosenthal
®
branded
products accounted for 41% of such net sales; W-C Designs &
Spring accounted for 6% of our net sales (€45.2
million), of which W-C Designs products accounted for 72% of
such net sales; and discontinued operations account for 4% of
our net sales, all of which relate to our former All-Clad business.
Net sales by segment
We generated net sales of
€951.3 million, €831.9 million and
€732.6 million in the years ended March 31, 2003,
2004 and 2005 respectively.
Waterford Crystal
Waterford Crystal has accounted for a decreasing percentage of our
net sales in recent years, primarily due to the strong growth of our
All-Clad cookware business and as a result of the decrease in demand
for luxury lifestyle products. In the fiscal years ended March 31,
2003, 2004 and 2005, crystal accounted for 31.8%
(€302.8 million), 30.5% (€253.8
million) and 30.3% (€221.7 million) of our net
sales, respectively.
Ceramics Group
Ceramics
Group has generally accounted for an increasing percentage of our net
sales in recent years, primarily as a result of the sale of our
All-Clad business in 2004 and declining sales and adverse currency
movements in our Waterford Crystal Business. See
"
—Principal Factors that Affect Our Results of
Operations and Financial Condition—Strong competition in the
ceramics market
". In the fiscal years ended March 31,
2003, 2004 and 2005, ceramics accounted for 50.8%
(€483.7 million), 52.7% (€438.2
million) and 60.3% (€441.5 million) of our net
sales, respectively.
All-Clad
Until the sale of
All-Clad in July 2004, All-Clad sales accounted for an increasing
percentage of our net sales in recent years, primarily due to the
introduction of new product lines, such as Emerilware. In the fiscal
years ended March 31, 2003, 2004 and 2005, All-Clad accounted for
12.0% (€114.1 million), 10.7%
(€88.6 million) and 3.3% (€24.2
million for the four months to July 26, 2004) of our net sales,
respectively.
W-C Designs & Spring
W-C
Designs & Spring has accounted for an increasing percentage of our
net sales in recent years, primarily as a result of declining sales and
adverse currency movements in our Waterford Crystal Business. In the
fiscal years ended March 31, 2003, 2004 and 2005, W-C Designs &
Spring accounted for 5.3% (€50.7 million),
6.2% (€51.3 million) and 6.2%
(€45.2 million) of our net sales, respectively.
Principal Factors that Affect Our Results of Operations and
Financial Condition
Economic conditions in our principal
markets
Purchases of our luxury lifestyle products are often
discretionary for consumers and are particularly affected by trends in
the general economy. In times of economic growth, net sales of our
products tend
37
to increase, while in times of economic
downturn or uncertainty, our net sales are affected by the rationing of
consumers' discretionary spending.
In recent years the
challenging trading conditions in the US, Europe and Japan (accounting
for 41.6%, 42.0%, and 9.4%, respectively, of our
net sales in the year ended March 31, 2005), the continued weakness of
the US dollar against the euro and UK pound sterling, the terrorist
attacks in the US on September 11, 2001 and the geopolitical
instability and armed conflict which have followed have had an adverse
impact on our sales, particularly on our sales of Waterford Crystal and
Ceramics Group, during the fiscal periods covered in this section, as
consumers have reduced purchases of luxury items.
Our net sales
of Waterford Crystal and Ceramics Group products in the US, where our
products have traditionally been distributed largely through department
stores, have also been affected by the recent decline in US department
store sales generally, reflecting in part the increasing interest by US
consumers in alternative shopping forums, including outlet and discount
stores, specialty stores, the Internet and mail order catalogs. Our
efforts to leverage and broaden our multi-channel distribution network
are intended to counteract this trend by attempting to distribute more
of our luxury lifestyle products through alternative shopping forums
such as specialty stores, through the Internet and our mail order
business.
Exchange rate fluctuations
We are subject to
risks from exchange rate fluctuations, since a substantial portion of
our net sales are denominated in currencies other than our reporting
currency, the euro, particularly US dollars, UK pounds sterling, and
Japanese yen, while our expenses are denominated largely in euro and UK
pounds sterling. For example, during the year ended March 31, 2005,
approximately 42% of our net sales were in US dollars,
24% were in euro, 14% were in UK pounds sterling,
9% were in Japanese yen and the balance was in other currencies,
while approximately 48% of our operating costs were denominated
in euro, since the majority of our manufacturing facilities are located
in Ireland and Germany. In general, when currencies in which we incur
our costs strengthen against other currencies in which we earn
revenues, our results of operations are negatively affected to the
extent we are unable to recover our increased costs through price
increases in the countries in which we earn revenues. Conversely,
depreciation of the currencies in which we incur our costs has a
positive impact on our results of operations. Our net sales of
Waterford Crystal are particularly exposed to fluctuations in the rate
of exchange between the US dollar and the euro because a significant
portion of those sales occurs in the US. Our net sales of ceramics are
less exposed to fluctuations in the value of the euro because a higher
proportion of Ceramics Group sales occur within the euro zone. To the
extent that our net sales of Ceramics Group are exposed to the
fluctuations in the value of the euro, this is primarily with respect
to the value of the euro against the yen since we sell a substantial
portion of our Ceramics Group products in Japan. Our net sales of
Spring/W-C Designs are exposed to fluctuations in the rate of exchange
between the US dollar and the euro because nearly all of those sales
occur in the US. However, such fluctuations in the exchange rate do not
have a material impact on our Spring/W-C Designs operating income
because we purchase significantly all of our product using US
dollars.
We also incur exchange rate risk whenever we enter into
any other transaction, including borrowing funds, in a currency other
than euro.
It is our policy to protect future revenues by
selling currency forward in respect of a portion of our revenues, as a
means of hedging our future revenues against fluctuations caused by
exchange rate movements. We net our expected future trading flows by
currency and, where we consider it appropriate, we partially hedge up
to three years in advance. During the year ended March 31, 2003 we
elected to cancel a portion of our outstanding forward currency
contracts for 2003. Gains from the use or cancellation of such hedging
instruments helped to counteract the fall in value of the US dollar
versus the euro and a fall in the value of the Japanese yen versus the
UK pound sterling in 2003, and contributed to an improvement in our
operating income for the year ended March 31, 2003 of approximately
€10.4 million.
During the year ended March
31, 2004 we elected to cancel a portion of our outstanding future years
forward cover, resulting in a further gain of €1.2 million
during fiscal 2004.
38
For the year ended March 31, 2005 we
realized our US dollar receipts at an average exchange rate of US$1.25
to €1.00 and we realized our Japanese yen receipts at an
average exchange rate of ¥192.66 to £1.00.
Currently,
for the year ending March 31, 2006, we have hedged 91.3% of our
anticipated US dollar receipts at an average exchange rate no worse
than $1.31 to €1.00 and 57.3% of our anticipated
Japanese yen receipts at an average exchange rate of ¥186.17 to
£1.00.
If we did not hedge our currency exposures, we
estimate that in the year ended March 31, 2005 a one cent (¢1)
decline in the value of the US dollar against the euro would have
increased our operating loss by €0.6 million and a ten yen
(¥10) decline in the yen against the UK pound sterling would have
increased our operating loss by €1.7 million.
Capital structure
During the year ended March 31, 2004, we
entered into a refinancing package designed to improve the
Group's liquidity, extend the maturity of its indebtedness and
provide it with a more stable long-term capital structure (the
"
2003 Refinancing
"). The principal
elements of the 2003 Refinancing were (1) an offering of
€166 million in principal amount of
9 7/8% Mezzanine Notes due 2010 (the
"
Mezzanine Notes
"), (2) the issuance
of 3 new stock units (each comprising a new Ordinary Share of the
Company and a new Income Share in WW UK which are
"stapled" together) for every 11 stock units
at a price of €0.18 per new stock unit (the
"
2003 Rights Issue
"), (3) entry into
the Second Amendment and Restatement Agreement for the
€347,542,854 Revolving Credit Facility and Bilateral
Facilities for Waterford Wedgwood plc, Waterford Wedgwood UK plc,
certain of their subsidiaries, the Governor and Company of the Bank of
Ireland and The Royal Bank of Scotland, as mandated lead arrangers,
dated November 26, 2003 (the "
Amended Revolving Credit
Facility
") (which included certain Bilateral
Facilities on a committed basis), (4) entry into an Amendment and
Restatement Agreement in relation to $95 million of 8.75%
Secured Senior Notes due 2008 of Waterford Wedgwood Finance, Inc. (the
"
Secured Senior Notes
"), dated
November 26, 2003 (the "
Amended Purchase
Agreement
") and (5) a new term loan for Rosenthal.
On November 25, 2003, we issued the Mezzanine Notes, which are
guaranteed by certain of the Company's subsidiaries. The net
proceeds from the offering of the Mezzanine Notes, after deducting the
estimated expenses of the offering and the applicable underwriting
discounts and commissions, were approximately €156.8
million.
On November 26, 2003, we entered into the Amended
Revolving Credit Facility. The terms of the Amended Revolving Credit
Facility required that €81.5 million of the net proceeds
of the offering of the Mezzanine Notes and €26.4 million
of the net proceeds of the 2003 Rights Issue be applied to the
repayment of amounts then outstanding under the Company's
original credit facility. In addition, €4.9 million of the
proceeds of the Mezzanine Notes were used to repay amounts under
certain facilities related to the Amended Revolving Credit Facility.
Following such repayments, borrowings under the Amended Revolving
Credit Facility were reduced to €226.2 million.
On
November 26, 2003, we entered into the Amended Purchase Agreement with
holders of the Secured Senior Notes to amend the Secured Senior Notes.
The Amended Purchase Agreement served to amend the terms of a series of
substantially identical note purchase agreements which had originally
been executed on November 18, 1998 with the purchasers named therein,
pursuant to which Waterford Wedgwood Finance, Inc. issued US$95 million
in aggregate principal amount of notes on a private placement basis.
Pursuant to the Amended Purchase Agreement, €20.8 million
of the proceeds of the offering of the Mezzanine Notes and
€6.7 million of the net proceeds of the 2003 Rights Issue
were applied to the repayment of such amount of principal then
outstanding under the Secured Senior Notes (as well as
€3.7 million for certain related redemption payments).
After such repayments, there was an aggregate of approximately
€54.3 million (US$62.9 million) of principal outstanding
under the Secured Senior Notes.
In December 2003, we completed
the 2003 Rights Issue. The 2003 Rights Issue resulted in the issuance
of 213,640,119 new stock units and raised approximately
€35.3 million, net of expenses (including underwriting
commissions).
39
As part of the 2003 Refinancing, new
credit facilities were granted to Rosenthal and Waterford Wedgwood
GmbH. Following a total repayment of €5.0 million of the
facility granted to Waterford Wedgwood GmbH, which was financed from
the net proceeds of the Mezzanine Notes, and a further partial
repayment of €1.6 million of the facility granted to
Rosenthal, which was financed from Rosenthal's short-term
deposits and cash, the new external facility in the amount of
€13.4 million was put in place for the Rosenthal group of
companies.
In addition to the use of the proceeds of the
Mezzanine Notes to repay certain of our indebtedness, as described
above, we retained the balance of the net proceeds from the offering of
the Mezzanine Notes (approximately €41.2 million) to
discharge the various expenses of the refinancing of the long-term debt
(€12.5 million) and for general working capital purposes
and additional liquidity (€28.7 million).
On May
28, 2004, we procured banking facilities of up to €40
million by way of subordinated loans.
Subordinated debt of
€32.5 million was provided by Anglo Irish Bank Corporation
plc ("Anglo Irish") to the Company and
subordinated debt of €7.5 million was provided by Anglo
Irish to Rosenthal A.G. (a German company in which the Company has a
majority interest) by term loan agreements dated May 28, 2004 and June
25, 2004 respectively. By agreement dated May 28, 2004 and June 25,
2004 between Anglo Irish and Lionheart Ventures (Overseas) Limited, a
Cyprus incorporated company controlled by Sir Anthony O'Reilly
("Lionheart"), Anglo Irish has options to put
these loans at par plus accrued interest to Lionheart. Sir Anthony
O'Reilly and Mr. Peter John Goulandris have entered into
undertakings dated May 28, 2004 and June 25, 2004 in favour of Anglo
Irish pursuant to which they severally undertake as to one half of any
amount required (i) to pay to Lionheart sufficient funds to
ensure that Lionheart is in position to discharge its obligations under
the put options or (ii) to pay to Anglo Irish, in discharge of
Lionheart's obligations, the amount of the obligations of
Lionheart under the put options.
On July 27, 2004 we disposed of
the All-Clad business for €179.4 million ($250
million).The proceeds were used to repay €147.0 million
outstanding under the Amended Revolving Credit Facility and
€32.4 million outstanding under the Private
Placement Notes.
On September 30, 2004, the Company and
substantially all of its operating subsidiaries entered into a Facility
Agreement (the "
Facility Agreement
")
with certain financial institutions and Burdale Financial Limited, as
agent for such financial institutions (the
"
Agent
"). On September 30, 2004, the
Company borrowed €134.0 million under the Facility
Agreement and used the proceeds to repay its entire indebtedness under
the Amended Revolving Credit Facility Agreement, the Secured Senior
Notes and the Rosenthal Facilities, amounting to €85.7
million, €25.5 million and €22.8 million,
respectively, at the time of such repayment (the "
2004
Refinancing
"). In connection with the 2004
Refinancing, the Amended Revolving Credit Facility, the Amended Note
Purchase Agreement and the Rosenthal Facilities were terminated.
By agreement dated December 14, 2004, the commitment of Burdale
Financial Limited, under the Facility Agreement was increased from
€140 million to €155 million upon cash
support ("
CS
") being provided in favor
of the agent under the facility for an amount of €25
million. The CS was provided by Sir Anthony O'Reilly. In February
2005, the CS was replaced with cash deposited with Wachovia, N.A. by
Glandore Limited, a Cayman Island company wholly owned by Sir Anthony
O'Reilly.
In December 2004 the Company raised
€94.5 million of equity (net of €5.2 million
expenses) by the issue of 5 new stock units for every 3 stock units at
a price of €0.06 per stock unit (the "
2004
Rights Issue
").
The proceeds of the 2004 Rights
Issue were used to acquire the balance of Royal Doulton stock that we
did not already own (€45.3 million), to retire the
existing indebtedness of Royal Doulton (€29.3 million), to
pay costs associated with the acquisition (€4.9 million)
and the balance was used to fund working capital requirements.
On July 18, 2005 the Company raised €96.5 million (net
of €5 million expenses) by the issue of 7 new stock units
for every 11 stock units at a price of €0.06 per stock
unit (the "
2005 Rights Issue
"). Of the
net proceeds approximately €90 million has been allocated
to the Cost Restructuring Program (see below). The balance of
approximately €6.5 million will be used for general
working capital purposes.
40
Recent acquisitions
Historically, we have grown through a combination of organic growth
of our existing businesses and strategic acquisitions. As a result of
the increase in our net sales, cost of sales and other expenses and our
assets and liabilities after each such acquisition, our income
statement, balance sheet and cash flow statement information included
in this annual report may not be directly comparable from period to
period. Our principal acquisitions during the periods discussed below
include the following:
Spring
With effect from
May 1, 2002, we acquired the Spring
TM
brand from the
administrator of Spring AG, a Swiss luxury cookware company, together
with the related assets and intellectual property rights for a purchase
price of €3.7 million. The acquisition of the
Spring
TM
brand contributed €7.7 million to our
net sales in the year ended March 31, 2003. We capitalized the value of
the Spring
TM
brand and related intellectual property rights
in the amount of €1.0 million and began to amortize this
cost over 20 years. See note 15.(a) to our Consolidated Financial
Statements.
Cashs Mail Order
On November 4,
2002, we acquired Cashs Mail Order business and mailing lists, together
with other related assets and intellectual property, from Fairway
Investments Limited for a purchase price of €22.7
million. The acquisition of the Cashs Mail Order business contributed
approximately €12.0 million to our net sales in the year
ended March 31, 2003. We capitalized the value of the Cashs'
brand and related intellectual property rights in the amount of
€14.9 million and began to amortize this cost over 20
years. We also capitalized the value of Cashs' mailing lists in
the amount of €1.5 million and began to amortize this cost
over five years. See note 15.(a) to our Consolidated Financial
Statements.
Royal Doulton
With effect from
January 17, 2005, we acquired Royal Doulton plc, one of the
world's leading chinaware manufacturers and owner of the Royal
Doulton
®
, Minton
®
and Royal
Albert
®
Brands. The purchase price of the 78.84%
of the outstanding stock of Royal Doulton plc that we did not then own
was €45.3 million. See note 15.(b) to our Consolidated
Financial Statements.
Strong competition in the ceramics
market
The market for ceramics is highly competitive. In the
ceramics industry, particularly in the mid-price earthenware market,
competition from low-cost producers and the recent difficult economic
conditions have led to strong competitive pressures on our pricing and
margins. As a result, the net operating loss after exceptional items of
our Ceramics Group business increased in the year ended March 31, 2005,
from €22.4 million in the year ended March 31, 2004 to
€117.9 million in the year ended March 31, 2005. The net
operating loss after exceptional items of our Ceramics Group business
was €29.4 million in the year ended March 31, 2003.
Exceptional restructuring charges included within these net losses
amounted to €65.2 million in the year ended March 31,
2005, €28.8 million in the year ended March 31, 2004 and
€31.2 million in the year ended March 31, 2003.
These competitive pressures led us to seek to lower our operating
costs and reduce our in-house ceramics production capacity in calendar
year 2003, which resulted in our decision to close two manufacturing
plants in the UK and to outsource the manufacture of our Johnson
Brothers
®
brand to the People's Republic of China
during 2003. See "
—Effect of recent
restructuring
".
These competitive conditions
also influenced our decision to acquire Royal Doulton, which was
effectively completed on January 17, 2005.
41
Effect of recent restructuring
In 2003 we announced:
•
the closure of two of our
earthenware factories in Stoke-on-Trent in the UK during 2003, and the
consolidation of our Wedgwood branded fine earthenware production at
our existing factories in Barlaston and Longton in Stoke-on-Trent in
the UK and the subsequent outsourcing of production to Asia, as well as
the restructuring of our European retail operations, which resulted in
exceptional charges of €28.5 million (involving property,
plant, equipment, building and inventory write-downs) in the year ended
March 31, 2003 (see note 6.(b) to our Consolidated Financial
Statements);
•
the completion of the
integration of Hutschenreuther's operations into those of
Rosenthal, which resulted in a restructuring charge of
€2.7 million in the year ended March 31, 2003 (see note
6.(b) to our Consolidated Financial Statements);
•
the restructuring of our Waterford
operations in Ireland, which resulted in a restructuring charge of
€3.0 million in the year ended March 31, 2003 (see note
6.(b) to our Consolidated Financial Statements); and
•
headcount reduction in our selling and
distribution operations, which resulted in a restructuring charge of
€1.5 million in the year ended March 31, 2003 (see note
6.(b) to our Consolidated Financial Statements).
These
restructuring measures resulted in exceptional restructuring charges in
an aggregate amount of €35.7 million for the year ended
March 31, 2003.
Further restructuring activities have taken
place during the year ended March 31,
2004:
•
redundancies at two of our
earthenware factories in Stoke-on-Trent in the UK, the closure of which
was announced in 2003 (see note 6.(c) to our Consolidated Financial
Statements)
•
implementation of an early
retirement and re-deployment program and further automation and
rationalization of manufacturing operations in Ireland (see note 6.(c)
to our Consolidated Financial Statements).
These restructuring
measures resulted in exceptional charges of €36.5 million
for the year ended March 31, 2004. See "
Item
4—Information on the Company—Our Restructuring
Program
".
In determining net income for the
year ended March 31, 2005, the following exceptional items were charged
to the operating loss:
•
as part of our
continuing initiative to lower operating costs, we incurred a charge of
€13.2 million relating to redundancy and early retirement
programs in our key operating divisions;
•
in June 2004, we announced that we were
working with Accenture, the international business consultants, on a
program to simplify working capital management and manufacturing
process. The objective of the program was to reduce our investment in
inventories and receivables and to rationalize manufacturing runs in
order to enhance cash flow. By March 31, 2005, this project has largely
been accomplished having delivered a significant reduction in inventory
and a 50% reduction in the number of actively available products
(stock-keeping units-SKUs). As a result of the rationalization of SKUs,
lower levels of production (which led to a significant under recovery
of overheads) and the write-down of inventory to its net realizable
value, we incurred a charge of €50.5 million together with
program management and other costs of €4.2
million.
Cost Restructuring Program
In our trading
update on March 14, 2005, we indicated that we were reviewing our fixed
cost base in order to return to sustainable profitability at existing
demand levels and current exchange rates. Following this review, we
intend to restructure our business fundamentally. The Cost
Restructuring Program announced on May 4, 2005, which is being financed
by the 7 for 11 Rights Issue completed on July 18, 2005 comprises two
main elements; a redundancy program to be implemented across the Group,
as further detailed below, which accounts for a majority of the
restructuring costs and which is intended to remove
42
excess capacity and reduce overheads, and
capital expenditure and other investment to facilitate changes in our
production and supply chains so as to accommodate and maximise
efficiencies on removal of excess capacity. Key features of the Cost
Restructuring Program are as
follows:
•
annualised savings:
€90 million restructuring investment will be targeted
across the Group with the objective of achieving annualised savings of
approximately €90 million once fully implemented. The
benefits of the savings are expected to flow through in the second half
of the current financial year with the full benefits forecast to be
achieved in the year to March 31,
2007;
•
reduction of personnel:
it is anticipated that the total number of personnel employed by the
Group will reduce by about 1,800 when the proposed restructuring is
completed. Of these the numbers employed at Waterford Crystal are
expected to be reduced by approximately 485 from approximately 1,370,
with reductions at Rosenthal of approximately 160 from approximately
1,930, with reductions at Wedgwood/Royal Doulton of approximately 950
(of which approximately 450 have already left the business) from
approximately 6,200 (including Indonesia) and a further 200 staff
departing across the wider Group. The targeted reduction in employee
numbers is proposed to be effected following engagement by the Company
with its workforce and with union representatives in order to reach
agreement on acceptable redundancy terms within the Company's
available
resources;
•
removal
of excess capacity:
about €30 million is planned to be
spent on restructuring at Waterford Crystal and Rosenthal in order to
remove excess capacity. At Waterford Crystal, the Dungarvan plant (in
which the more traditional labour-intensive cut-crystal product is
manufactured) will be closed and the Kilbarry plant (in which we have
invested heavily over recent years to achieve the current high degree
of automation and technological advancement) will be modified from its
existing dual stream traditional/technology structure to a single
integrated technology unit. It is intended that approximately half of
the production from the Dungarvan plant will be transferred to Kilbarry
(which is then expected to operate at, or close to, maximum capacity)
and that the production of lower margin traditional product from
Dungarvan will be outsourced. At Rosenthal, out-sourcing of decoration
to the Czech Republic and increased automation of certain other aspects
of the production process will be implemented;
•
overhead reduction:
investment of approximately €24 million is planned to
reduce overheads at Waterford Crystal, Rosenthal and at Group level and
to upgrade manufacturing facilities at Waterford Crystal and Rosenthal.
This includes a streamlining of internal production systems to reflect
the reduced workforce and capital expenditure investment at Waterford
Crystal to accommodate the production transferring from Dungarvan and
at Rosenthal to reflect the outsourcing of product. The overhead
reduction also includes personnel reduction (incorporated into the
numbers detailed above) to reflect the elimination of duplicate
functions with the closure of Dungarvan, the streamlining of Rosenthal
and the redesign of work processes.
•
Wedgwood-Royal Doulton
integration savings
: following completion of the acquisition of
Royal Doulton on January 17, 2005, we have identified opportunities for
more savings than originally envisaged. It is planned to invest a total
of €36 million (of which €6.5 million had
been spent as at June 16, 2005) to achieve savings in manufacturing
(with outsourcing of certain products planned in addition to the
closure of the Nile Street factory and transfer of production to
Wedgwood's Barlaston factory, which has been substantively
completed), retail operations (with the introduction of increased
cross-manning), administration (primarily by way of integration of back
office functions such as finance, human resources, IT and legal) and
warehousing and logistics efficiencies.
Capital
expenditures and modernization of our existing factories
While we have recently consolidated or closed certain of our
production facilities, we have also engaged in a modernization program
of our remaining ceramic and crystal manufacturing plants in the UK,
Germany and Ireland. Between April 1, 2003 and March 31, 2005, we
invested an aggregate of €69.6 million in capital
expenditures. In the years ended March 31, 2003, 2004 and 2005, we had
capital expenditures of €22.2 million, €35.3
million and €12.1 million, respectively. See
"
Capital Resources—Capital
expenditures
".
43
During the year ended
March 31, 2005, we decreased our capital expenditures, primarily due to
the completion of the refurbishment of the furnace at our crystal
manufacturing plant in Ireland in 2004. We intend to continue to pursue
a more limited capital expenditure program in the short-term, focusing
on the maintenance of our plant and equipment, the renewal of our
product lines, the opening of additional flagship stores and
refurbishment of other retail distribution space in key markets.
Seasonality
Our net sales tend to be
concentrated during the last six months of the calendar year,
particularly during the Thanksgiving and Christmas holiday periods in
November and December. In contrast, our fixed costs are spread
consistently across the year. Our operating income in the second half
of the calendar year tends to account for a significantly higher
proportion of our total operating income than the first half of the
calendar year, while net sales in the first calendar quarter are
usually lower than net sales in each of the other three quarters. We
changed our year end from December 31 to March 31 in an attempt to
provide a more even presentation of our semi-annual financial
performance each year.
Inflation
Our operating income
during the last three years has not been significantly influenced by
inflation, although our salary costs have been impacted by wage
inflation in some jurisdictions.
Tax loss carry-forwards
Many of our subsidiaries have accrued significant tax loss
carry-forwards which, at March 31, 2005, totaled €633
million. Under current UK and Irish tax law, unused trading losses
incurred by a company carrying on a trade may be carried forward
indefinitely and set off against that entity's future taxable
trading income earned in the same trade. Current German tax legislation
also allows for unused trading losses incurred by a company to be
carried forward indefinitely and set off against that entity's
future taxable trading income earned in the same trade, subject to a
restriction to 60% of taxable trading income in excess of
€1 million in any given year. Generally tax loss
carry-forwards have a time expiry of 5-15 years in other
jurisdictions.
Critical Accounting Policies and Estimation
Techniques
Our principal accounting policies are set out in
note 1 to the Consolidated Financial Statements. These policies conform
with Irish GAAP, which differs in certain significant respects from US
GAAP. A discussion of the principal differences between Irish GAAP and
US GAAP, as they apply to our Consolidated Financial Statements, is set
forth in note 31 to our Consolidated Financial Statements included
elsewhere in this annual report.
We, like
virtually all other companies, use estimates and judgments that affect
the reported amounts in our Consolidated Financial Statements and
accompanying notes. The most significant policies affecting our
financial statements involve: valuation of inventories, the
recoverability of goodwill and long-lived assets, provisions for
deferred taxes, pension benefits, restructuring charges and
investments.
Due to the estimates and judgments involved in the
application of these policies, future changes in such estimates and
judgments, as well as in market conditions, could have a material
impact on our Consolidated Financial Statements.
The following
critical accounting policies and estimation techniques were used in the
preparation of our Consolidated Financial Statements included elsewhere
in this annual report:
Inventory
We value our
manufactured finished goods and work-in-progress inventories at the
lower of cost or net realizable value. Cost includes all direct labor,
materials and the appropriate allocation of factory and other
overheads, together with transportation costs of inventory prior to
sale, and duty where appropriate. In addition, our inventories are
valued using a weighted average cost method. Fluctuations in our
inventory levels, factory capacity utilization, along with the cost of
raw materials and labor, could impact the carrying value of our
inventory.
44
In the case of outsourced inventories,
cost is the purchase price plus duty where appropriate. Net realizable
value is the actual or estimated selling price in the normal course of
business (net of trade discounts) less all other costs of completion,
marketing, sales and/or distribution. If necessary, we write down our
inventory for discontinued, slow-moving and unmarketable products,
based upon assumptions about future demand, market conditions and
disposal costs. Determining these assumptions requires estimation of
the outcome of future uncertain events, using historical trends and
known future events. It also requires assumptions about the stores,
outlets and other distribution channels used for disposals. If actual
market conditions or actual disposal costs are less favorable than
those projected by management, additional inventory write-downs may be
required.
During the year ended March 31, 2005 we substantially
completed our program to simplify working capital management and
manufacturing processes. As a result of rationalising SKUs, lower
production levels and inventory write-downs we incurred a charge of
€50.5 million during the year.
Goodwill and
intangible assets
Under Irish GAAP, goodwill arising on
acquisition of subsidiary undertakings prior to December
31, 1997 is set off against reserves. Goodwill arising on
acquisitions after December 31, 1997 is capitalized and amortized over
its estimated useful life as is the value of other acquired intangible
assets. Goodwill previously set off against reserves will be charged or
credited in the Consolidated Statement of Income on the subsequent
disposal of the business to which it relates. Goodwill comprises the
excess of the purchase price over the fair value of the net assets
acquired. If there is evidence of permanent impairment goodwill is
written down to its estimated realizable amount based on the discounted
present value of projected future cash flows.
Under US GAAP our
accounting policy related to the annual impairment test for goodwill
and other indefinite-lived intangibles requires numerous estimates. We
have a significant amount of goodwill related to acquisitions in prior
years which is no longer amortized in accordance with US GAAP. We use
the present value of projected future discounted cash flows to
determine fair value. We believe that the accounting estimates related
to the recoverability of the carrying value of goodwill and intangible
assets are critical accounting estimates because:
(1)
The valuation is inherently judgemental and
highly susceptible to change from period to period because it requires
us to make assumptions about future supply and demand related to our
individual business units, future sales prices, achievable cost savings
and applicable exchange rates;
(2)
The value
of the benefit that we expect to realize as a result of the recent
acquisitions is inherently subjective;
(3)
In
accordance with US GAAP, we determine the fair value of the reporting
units using a weighted average cost of capital, currently 11%,
as the rate to discount estimated future cash flows. This rate may not
be indicative of actual rates obtained in the market, if incremental
borrowings are necessary;
(4)
In calculating
estimated future cash flow we have to exercise subjective judgements;
and
(5)
The impact of an impairment charge
could be material to our financial statements.
If we fail to
meet our forecasted sales levels, fail to achieve our anticipated cost
reductions, or if weak economic conditions prevail in our primary
markets, the estimated fair values of our reporting units are likely to
be adversely affected, resulting in impairment charges.
In the
annual impairment tests, under US GAAP, the fair values of the
Wedgwood, Rosenthal and W-C Designs reporting units were reviewed and
goodwill determined to not be recoverable in full. This resulted in
impairment charges of €86.0 million, €29.9
million and €10.1 million, respectively. Projected future
cash flows were discounted at 11% being the estimated weighted
average cost of capital. If alternative management judgements were
adopted then different impairment outcomes could arise.
45
Long-lived and tangible assets
We amortize tangible assets, excluding land, on a straight-line
basis over their estimated useful lives. The estimate of useful life
applied to each asset in turn determines whether and by which amount
its annual amortization rate is to be charged.
At least annually
we review our long-lived and tangible assets for impairment by
comparing the carrying value of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment has
occurred, the loss is recognized during that period.
Deferred
taxes
We recognize deferred tax assets and liabilities by
applying currently enacted statutory tax rates in effect in the years
in which the differences between the book and tax bases of existing
assets and liabilities are expected to reverse. We believe that all net
deferred tax assets shown on our balance sheet are more likely than not
to be realized in the future. In determining the realizability of
assets arising from tax losses carried forward, we use estimates of
future taxable income which by their nature are uncertain. During the
year ended March 31, 2005 the valuation allowance against the deferred
tax asset recognized under Irish GAAP increased by €127.3
million to €184.4 million.
Pension benefits
We maintain contributory defined benefit pension plans covering our
employees, mainly in the UK, Germany and Ireland, to provide
post-retirement benefits for participating employees. We make certain
assumptions, on advice from our actuaries, that affect the underlying
estimates relating to pension costs. These include future rates of
return on assets, rates of increase in pensionable earnings and
discount rates. Significant changes in interest rates, securities
market values, inflation, earnings indices and average lifespan of the
population, could require us to revise key assumptions resulting in
increased or reduced charges to earnings in respect of pension cost.
See "
Forward-Looking Statements
".
Under Irish GAAP and in accordance with SSAP 24, Accounting for
Pension Costs, the cost of providing pensions to employees is
calculated, with advice from independent actuaries, at what is expected
to be a reasonably stable proportion of pensionable pay. Any surpluses
or deficits in pension schemes, identified by periodic actuarial
valuations, are taken to the Consolidated Statement of Income over the
remainder of the expected service lives of current employees.
Restructuring charges
In the past we have committed
ourselves to rationalize our business activities, close manufacturing
plants, retail or office locations and/or reduce the number of our
employees. Our policy is to recognize a restructuring charge only after
our management (a) has approved and committed us to a detailed
restructuring plan, (b) has raised a valid expectation that it will
carry out the restructuring by starting to implement the plan or
announcing its main features, and (c) intends that the implementation
of the plan will commence soon after the commitment date. The amount
recognized as a restructuring charge depends upon estimates based on
various assumptions, including future severance costs, sublease or
disposal costs, contractual termination costs and so forth. Such
estimates are inherently subjective and may change based upon actual
experience.
Investments
Our investments are
stated at cost, less provisions for permanent diminution. In
determining the value of permanent diminution we have to estimate,
among other things, future income/loss of the business, cash flow and
dividends as well as future market conditions and the marketability of
the securities. Since the acquisition of the whole of the outstanding
share capital of Royal Doulton in January 2005 we have no significant
investments.
US GAAP reconciliation
Our
financial statements are prepared in accordance with Irish GAAP which
differs in certain significant respects from US GAAP. These differences
and their approximate effects on consolidated net
46
income, shareholders' equity and the
balance sheet are set forth in note 31 to the Consolidated Financial
Statements. The most significant differences arise in accounting for
derivative instruments and hedging activities, goodwill and other
intangible assets, deferred taxes, inventory valuations, property
valuations and pension costs.
Results of
Operations
The following table sets forth our income and
expense figures for the years shown:
Year
ended March
31,
2003
2004
2005
(€
in millions)
Net
sales
951.3
831.9
732.6
Cost
of
sales
(509.8
)
(448.7
)
(480.1
)
Gross
profit
441.5
383.2
252.5
Distribution
and administrative
expenses
(416.8
)
(397.7
)
(450.2
)
Other
operating
(expense)/income
(3.1
)
(0.3
)
2.0
Operating
income/(loss)
21.6
(14.8
)
(195.7
)
Gains
arising on conversion of US$
loans
(1)
9.7
—
—
Gain
on sale of property, plant and
equipment
(1)
5.1
6.0
3.8
Gain
on sale of All-Clad
business
(3)
—
—
103.2
Deficit
arising on closed pension
scheme
(1)
(3.9
)
—
—
Makewhole
payment
(2)
—
(3.7
)
(5.6
)
Net
interest
expense
(25.3
)
(32.4
)
(54.9
)
Net
income/(loss) before taxes and minority
interests
7.2
(44.9
)
(149.2
)
Taxes
on
income
(4.9
)
(4.7
)
(12.3
)
Net
income/(loss) after taxes before minority
interest
2.3
(49.6
)
(161.5
)
Minority
interest
(0.5
)
0.3
2.1
Net
income/(loss)
1.8
(49.3
)
(159.4
)
(1)
See
note 6 to our Consolidated Financial Statements.
(2)
During the year ended March 31, 2005 we incurred a
makewhole payment of €5.6 million (2004: €3.7 million) arising from the repayment of the
8.75% Secured Senior Notes.
(3)
During the
year ended March 31, 2005 we sold our All-Clad business, realising a
gain on sale of €103.2 million.
Non-GAAP
Financial Measures
From time to time in this annual report on
Form 20-F, in addition to figures presented in accordance with Irish
GAAP, we disclose figures that are non-GAAP financial measures. As
described in more detail below, such figures are presented as
additional information for our investors and should not be considered
as substitutes for or confused with their comparable Irish GAAP
measures.
47
The following table sets out the
reconciliation of net sales by segment as reported to net sales by
segment at constant exchange
rates:
Waterford
Crystal
Ceramics
Group
W-C Designs
&
Spring
All-Clad
Total
(€
in millions except per cent
amounts)
Year ended March
31, 2004 net sales compared to year ended March 31,
2003:
Year ended March 31, 2003 as
reported
302.8
483.7
50.7
114.1
951.3
Exchange
adjustment to restate to year ended March 31, 2004 actual exchange
rates
(37.7
)
(28.1
)
(7.4
)
(17.4
)
(90.6
)
Year
ended March 31, 2003 net sales restated at year ended March 31, 2004
actual exchange
rates
265.1
455.6
43.3
96.7
860.7
Year
ended March 31, 2004 as
reported
253.8
438.2
51.3
88.6
831.9
Year
ended March 31, 2004 (decrease)/increase over year ended March 31, 2003
at prevailing exchange
rates
(16.2
%)
(9.4
%)
1.2
%
(22.3
%)
(12.6
%)
Year
ended March 31, 2004 (decrease)/increase over year ended March 31, 2003
at constant exchange
rates
(4.3
%)
(3.8
%)
18.5
%
(8.4
%)
(3.3
%)
Year
ended March 31, 2005 net sales compared to year ended March 31,
2004:
Year ended March 31, 2004 as
reported
253.8
438.2
51.3
88.6
831.9
Exchange
adjustments to restate to year ended March 31, 2005 actual exchange
rates
(13.0
)
(3.6
)
(3.0
)
(2.4
)
(22.0
)
Year
ended March 31, 2004 net sales restated at year ended March 31, 2005
actual exchange
rates
240.8
434.6
48.3
86.2
809.9
Year
ended March 31, 2005 as reported
221.7
441.5
45.2
24.2
732.6
Year
ended March 31, 2005 (decrease)/increase over year ended March 31, 2004
at prevailing exchange
rates
(12.6
%)
0.8
%
(11.9
%)
(72.7
%)
(11.9
%)
Year
ended March 31, 2005 (decrease)/increase over year ended March 31, 2004
at constant exchange
rates
(7.9
%)
1.6
%
(6.4
%)
(71.9
%)
(9.5
%)
Net
sales by segment at constant exchange rates calculates prior
year's net sales value using the current year's average
exchange rate to translate foreign currency denominated sales in euros.
Comparing the prior year's sales at current exchange rates with
the current year's sales at actual exchange rates provides
management with a measure of the volume of sales in each of the two
years, allowing investors to more easily understand the effect of
exchange rate fluctuations on our business. Net sales by segment is the
most directly comparable GAAP measure.
The following table sets
forth the reconciliation of consolidated cost of sales, distribution
and administrative expenses and other operating expenses to
consolidated Operating
Expenses:
Year ended March
31,
2003
2004
2005
(€
in millions)
Cost of
sales
509.8
448.7
480.1
Distribution
and administrative
expenses
416.8
397.7
450.2
Other
operating
expenses/(income)
3.1
0.3
(2.0
)
Operating
expenses
929.7
846.7
928.3
48
The following table sets forth the
reconciliation of net sales and operating income/(loss) as reported to
Operating Expenses by product
category:
Year
ended March
31,
2003
2004
2005
(€
in
millions)
Net
sales by segment:
Waterford
Crystal
302.8
253.8
221.7
Ceramics
Group
483.7
438.2
441.5
W-C
Designs &
Spring
50.7
51.3
45.2
All-Clad
114.1
88.6
24.2
Net
Sales
951.3
831.9
732.6
Operating
income/(loss) by segment:
Waterford
Crystal
34.7
8.6
(48.7
)
Ceramics
Group
(19.6
)
(22.4
)
(117.9
)
W-C
Designs &
Spring
(3.2
)
(2.4
)
(9.6
)
All-Clad
22.2
13.1
1.0
Common
Costs
(12.5
)
(11.7
)
(20.5
)
Operating
income/(loss)
21.6
(14.8
)
(195.7
)
Operating
Expenses by segment:
Waterford
Crystal
268.1
245.2
270.3
Ceramics
Group
503.3
460.6
559.5
W-C
Designs &
Spring
53.9
53.7
54.8
All-Clad
91.9
75.5
23.2
Common
Costs
12.5
11.7
20.5
Operating
expense
929.7
846.7
928.3
Operating
expenses by product category are calculated by deducting operating
income/(loss) from net sales by segment. Management believes this
measure is useful to investors to understand the year-on-year movements
in the cost base for each of the segments and can be easily derived
from Irish GAAP measures.
The following table sets forth the
operating income/(loss) (before exceptional charges) and exceptional
charges of each of our principal segments for the periods shown and the
margin for each respective period.
49
Year
ended
March 31,
2003
%
Margin
(1)
Year ended
March 31,
2004
%
Margin
(1)
Year ended
March 31,
2005
%
Margin
(1)
(€
in millions, except percentages)
Operating
income/(loss) by segment as
reported:
Waterford
Crystal
34.7
11.5
%
8.6
3.4
%
(48.7
)
(22.0
%)
Ceramics
Group
(19.6
)
(4.1
%)
(22.4
)
(5.1
%)
(117.9
)
(26.7
%)
W-C
Designs &
Spring
(3.2
)
(6.3
%)
(2.4
)
(4.7
%)
(9.6
)
(21.2
%)
All-Clad
22.2
19.5
%
13.1
14.8
%
1.0
4.1
%
Common
Costs
(12.5
)
n/a
(11.7
)
n/a
(20.5
)
n/a
Operating
income/(loss) as
reported
21.6
2.3
%
(14.8
)
(1.8
%)
(195.7
)
(26.7
%)
Exceptional
charges by
segment
(2)
Waterford
Crystal
(4.5
)
(1.5
%)
(7.7
)
(3.0
%)
(27.0
)
(12.2
%)
Ceramics
Group
(31.2
)
(6.5
%)
(28.8
)
(6.6
%)
(65.2
)
(14.8
%)
W-C
Designs &
Spring
—
—
—
—
(8.4
)
(18.6
%)
All-Clad
—
—
—
—
—
—
Common
Costs
—
—
—
—
(7.4
)
n/a
Exceptional
charges
(35.7
)
(3.8
%)
(36.5
)
(4.4
%)
(108.0
)
(14.7
%)
Operating
income/(loss) by segment before exceptional
charges
(3)
:
Waterford
Crystal
39.2
12.9
%
16.3
6.4
%
(21.7
)
(9.8
%)
Ceramics
Group
11.6
2.4
%
6.4
1.5
%
(52.7
)
(11.9
%)
W-C
Designs &
Spring
(3.2
)
(6.3
%)
(2.4
)
(4.7
%)
(1.2
)
(2.7
%)
All-Clad
22.2
19.5
%
13.1
14.8
%
1.0
4.1
%
Common
Costs
(12.5
)
n/a
(11.7
)
n/a
(13.1
)
n/a
Operating
income/(loss) before exceptional
charges
57.3
6.0
%
21.7
2.6
%
(87.7
)
(12.0
%)
(1)
Margin
is calculated for each of the periods presented by dividing operating
income/(loss) and exceptional charges for each segment by their
respective net sales figure.
(2)
See
"
—Principal Factors that Affect our Results of
Operations—Effect of recent restructuring
" and
note 6 to our Consolidated Financial Statements.
(3)
Operating income/(loss) by segment before
exceptional charges is calculated by adding back exceptional charges by
segment to operating income/(loss) by segment, as reported. Management
believes this measure more accurately reflects the underlying income
generating capacity of the segment, eliminating non-recurring or
exceptional charges. Management uses the measure to understand the
underlying trends in income/(loss) by segment.
The most directly
comparable Irish GAAP measure is operating income/(loss) by
segment.
50
Year ended March 31, 2003 compared to
the year ended March 31, 2004
The following table sets forth
our income statement data and the percentage relationship to net sales
of each line item, for the years
shown:
Year
ended March
31,
2003
2004
(€
in millions, except percentages)
Net
sales
951.3
100.0
%
831.9
100.0
%
Cost
of
sales
(509.8
)
(53.6
)%
(448.7
)
(53.9
)%
Gross
profit
441.5
46.4
%
383.2
46.1
%
Distribution
and administrative
expenses
(416.8
)
(43.8
)%
(397.7
)
(47.9
)%
Other
operating
expenses
(3.1
)
(0.3
)%
(0.3
)
—
Operating
income/(loss)
21.6
2.3
%
(14.8
)
(1.8
)%
Gains
arising on conversion of US$
loans
9.7
1.0
%
—
—
Gain
on sale of property, plant and
equipment
5.1
0.5
%
6.0
0.7
%
Deficit
arising on closed pension
scheme
(3.9
)
(0.4
)%
—
—
Makewhole
payment
—
—
(3.7
)
(0.4
)%
Net
interest
expense
(25.3
)
(2.6
)%
(32.4
)
(3.9
)%
Net
income/(loss) before
taxes
7.2
0.8
%
(44.9
)
(5.4
)%
Taxes
on
income
(4.9
)
(0.5
%)
(4.7
)
(0.6
)%
Net
income/(loss) after taxes before minority
interest
2.3
0.3
%
(49.6
)
(6.0
)%
Minority
interest
(0.5
)
—
0.3
—
Net
income/(loss)
1.8
0.3
%
(49.3
)
(6.0
)%
Net
Sales
Our net sales declined by €119.4 million, or
12.6%, in the year ended March 31, 2004, from
€951.3 million in the year ended March 31, 2003 to
€831.9 million in the year ended March 31, 2004. Waterford
Crystal accounted for 30.5% of our net sales in the year ended
March 31, 2004, a decrease from March 31, 2003 when it accounted for
31.8% of our net sales. The Ceramics Group continued to be the
largest component of our net sales: 52.7% of net sales in the
year ended March 31, 2004, as compared to 50.8% for the year
ended March 31, 2003. All-Clad accounted for 10.7% of our net
sales in the year ended March 31, 2004, a decrease from March 31, 2003,
when it accounted for 12.0% of our net sales. W-C Designs
& Spring accounted for 6.2% of our net sales in the year
ended March 31, 2004, an increase from March 31, 2003 when this
category accounted for 5.3% of our net sales.
The
12.6% decline in our net sales from the year ended March 31,
2003 to the year ended March 31, 2004 was primarily due
to continued weakness in the US dollar. At constant exchange rates our
sales fell by 3.3% due to reduced demand for crystal, ceramics
and premium cookware particularly in the US and Europe, as a result of
uncertainty engendered by the armed conflict in Iraq, the SARs
epidemic, and the continued terrorist threat as well as a reduction in
US department store sales.
There were, however, increases in net
sales in certain of our product offerings and business units. Core
sales of Rosenthal increased despite a difficult retail environment,
Cashs Mail Order experienced strong demand and sales of Vera Wang, our
bridal range at Wedgwood, more than doubled. Market share in most of
our key markets was maintained.
Waterford
Crystal net sales
Net sales of Waterford Crystal declined
by €49.0 million, or 16.2%, in the year ended March
31, 2004 from €302.8 million in the year ended March 31,
2003 to €253.8 million in the year ended March 31,
2004.
The 16.2% decrease in Waterford Crystal net sales
in the year ended March 31, 2004 principally reflected foreign exchange
rate fluctuations (largely related to our sales in the US which
decreased partly
51
as a result of an increase in the relative
value of the euro to the US dollar during the period) and a decrease in
sales volume. At constant exchange rates crystal net sales declined by
approximately 4.3% as a result of the ongoing weakness in US
domestic demand for our goods and, in particular the weakness in
department store sales generally, from which the bulk of our US sales
are derived. The weak US demand reflects the impact of the continued
uncertainty surrounding the armed conflict in Iraq, continued
instability in the Middle East and oil prices.
However we
believe our principal brands maintained their market share in the US,
Ireland and the UK and the 'Seahorse' and
'Georgian' new collections have been favorably
received.
The decrease has been offset partially by Cashs which
contributed a full year of sales following its acquisition in November
2002.
Ceramics Group net sales
Net sales of the Ceramics Group declined by €45.5
million, or 9.4%, in the year ended March 31, 2004 from
€483.7 million in the year ended March 31, 2003 to
€438.2 million in the year ended March 31, 2004.
The 9.4% decrease in Ceramics Group net sales in the year
ended March 31, 2004 principally reflected foreign exchange rate
fluctuations (largely related to our sales in the US, the UK and Japan
which decreased partly as a result of an increase in the relative value
of the euro to the US dollar, the UK pound sterling and the Japanese
yen during the period) and a decrease in sales volume. At constant
exchange rates ceramic sales declined by approximately 3.8% as a
result of weak UK and German retail demand, continuing pricing pressure
as well as the ongoing global economic uncertainty, the SARS outbreak
and the resulting decrease in tourism. However, net sales in Japan and
the US increased from last year, the US sales boosted by the success of
the Vera Wang bridal range.
All-Clad net
sales
All-Clad net sales declined by €25.5
million, or 22.3% in the year ended March 31, 2004 from
€114.1 million in the year ended March 31, 2003 to
€88.6 million in the year ended March 31, 2004.
The
22.3% decrease in All-Clad net sales in the year ended March 31,
2004 as compared to the year ended March 31, 2003, principally
reflected foreign exchange rate fluctuations (largely related to our
sales in the US, which decreased primarily as a result of an increase
in the relative value of the euro to the US dollar during the period).
At constant exchange rates, premium cookware sales decreased by
8.4%. This was primarily due to the fact that net sales in the
year ended March 31, 2003 included a significant volume of sales made
at lower promotional prices. Such promotions were not repeated in the
year ended March 31, 2004. The remaining sales of All-Clad increased,
in particular the Emeril Lagasse range.
W-C
Designs & Spring net sales
W-C Designs & Spring
net sales increased by €0.6 million, or 1.2% in the
year ended March 31, 2004 from €50.7 million in the year
ended March 31, 2003 to €51.3 million in the year ended
March 31, 2004.
The 1.2% increase in W-C Designs &
Spring net sales in the year ended March 31, 2004 as compared to the
year ended March 31, 2003 reflected a full year's contribution of
sales by Spring, following its acquisition in November 2002 and a
significant volume increase by W-C Designs, which was eroded by a
significant exchange rate effect of the weakening US dollar. At
constant exchange rates net sales of W-C Designs & Spring
increased by 18.5%. The US and Switzerland are the principal
sources of sales of W-C Designs & Spring.
Cost of
sales and distribution and administrative expenses
("Operating Expenses")
Our Operating
Expenses decreased 8.9% during the fiscal year ended March 31,
2004 to €846.7 million from €929.7
million in the year ended March 31, 2003. This decrease in our
Operating Expenses principally reflected the fall in cost of sales, due
to lower sales levels, the foreign exchange effect of a weaker US
dollar against the euro and the impact of the restructuring of our
crystal and ceramics businesses, where the anticipated ongoing cost
savings are now beginning to be achieved, in both cost of sales and
distribution and administrative expenses, see "
Item
4—Information on the Company—Our Restructuring
Program
."
52
However, these factors were to some
degree offset by deteriorating gross margins due to declining factory
through-put and increased pension costs.
Waterford Crystal
The Operating
Expenses of our Waterford Crystal operations decreased by
€23.6 million, or 8.8%, during the fiscal year
ended March 31, 2004. The 8.8% decrease in Operating Expenses
primarily reflects a fall in the cost of sales due to lower sales
levels and the positive impact of foreign exchange translation (largely
related to our US dollar denominated Operating Expenses, which
decreased as a result of an increase in the relative value of the euro
to the US dollar during the period).
Ceramics Group
The Operating
Expenses of our Ceramics Group operations decreased by
€41.5 million, or 8.3%, during the fiscal year
ended March 31, 2004. The 8.3% decrease in Operating Expenses
primarily reflects a decrease in our cost of sales resulting from a
reduction in our sales volume and a foreign exchange translation impact
(largely related to our UK pound sterling denominated Operating
Expenses, which decreased as a result of an increase in the relative
value of the euro to the UK pound sterling during the period).
All-Clad
The Operating Expenses of
our All-Clad operations decreased by €16.4 million, or
17.8%, during the fiscal year ended March 31, 2004.
The
17.8% decrease in Operating Expenses is primarily a result of a
positive foreign exchange translation impact (largely related to our US
dollar denominated Operating Expenses which decreased as a result of an
increase in the relative value of the euro to the US dollar during the
period), partially offset by an increase in sales related expenses.
W-C Designs & Spring
The
Operating Expenses associated with W-C Designs & Spring increased
by €0.8 million, or 1.5%, during the fiscal year
ended March 31, 2004. The 1.5% increase in the Operating
Expenses was primarily due to the increase in sales, particularly from
the W-C Designs business, and from a first full year's
contribution by Spring, which was acquired in May 2002. This was offset
to a significant degree by the positive foreign exchange impact of US
dollar denominated Operating Expenses which decreased as a result of an
increase in the relative value of the euro to the US dollar during the
period.
Operating income/(loss)
Our operating income decreased in the year ended March 31, 2004 by
€36.4 million, from an operating income of
€21.6 million in the year ended March 31, 2003 to an
operating loss of €14.8 million in the year ended March
31, 2004. The decrease in our operating income for the year ended
March 31, 2004 compared to the year ended March 31, 2003
primarily reflects an adverse effect of exchange rates of
€30 million, principally due to the weakness of the US
dollar against the euro. Declining sales volumes particularly in the
Ceramics Group also contributed to this decrease in operating income,
as did higher than expected pension costs at Rosenthal.
Exceptional gain on sale of property, plant and
equipment
During the year ended March 31, 2004, we sold various
surplus properties in the UK and Ireland following the relocation of
part of our ceramics production to Asia. As a result we realized a gain
on disposal of €6 million.
Makewhole
payment
During the year ended March 31, 2004 we incurred a
makewhole payment of €3.7 million arising from the partial
repayment of the 8.75% Secured Senior Notes, as part of the 2003
Refinancing.
53
See
"Item
5—Operating and Financial Review and Prospects—Principal
Factors that Affect Our Results of Operations and Financial
Condition—New Capital Structure."
Net interest expense
In the year ended March 31,
2004, our net interest expense was €32.4 million, compared
to €25.3 million for the year ended March 31, 2003.
The increase in our net interest expense reflected a higher average
volume of debt, increased average interest rates, higher margins
payable as a result of our covenant waivers under the predecessor to
the Amended Revolving Credit Facility and higher interest rates for the
long-term Mezzanine Notes under the new capital structure put in place
during the fiscal year ended March 31, 2004. See
"Item
5—Operating and Financial Review and Prospects—Principal
Factors that Affect Our Results of Operations and Financial
Condition—New Capital Structure."
Taxes on income
In the year ended March 31, 2004, we
incurred taxation charges of €4.7 million compared to
charges of €4.9 million in the year ended March 31, 2003.
The decrease in taxation charge in the year ended March 31, 2004 was
due to lower taxable income in our US businesses as a result of reduced
net income from US operations.
In 2004, taxes were
payable on the taxable income of our All-Clad business as losses
incurred in our other businesses cannot be offset against this income
for US tax purposes.
The tax charge in the year ended March 31,
2003 was reduced by credits of €3.8 million for prior
years. There was no such adjustment in the year ended March 31,
2004.
See note 8 to the Consolidated Financial Statements for a
reconciliation of the actual tax charge to the notional tax charge on
our net income/(loss) before taxes.
Net income/(loss)
after taxes before minority interests
Our net income after
taxes before minority interest decreased in the year ended March 31,
2004 by €51.9 million, from an income of €2.3
million in the year ended March 31, 2003 to a loss of
€49.6 million in the year ended March 31, 2004. The
decrease in our net income after taxes before minority interests for
the year ended March 31, 2004 compared to the year ended March 31, 2003
primarily reflects an adverse effect of exchange rates of
€30 million, principally due to the weakness of the US
dollar against the euro, lower sales volumes, increased net interest
expense due to a higher average volume of debt and higher margins and
interest rates, makewhole payments on the retiring of 8.75%
Secured Senior Notes and competitive pressures on margins.
Year
ended March 31, 2004 compared to the year ended March 31, 2005
The following table sets forth our income statement data and
the percentage relationship to net sales of each line item, for the
years shown:
54
Year
ended March
31,
2004
2005
(€
in millions, except percentages)
Net
sales
831.9
100.0
%
732.6
100.0
%
Cost of
sales
(448.7
)
(53.9
)%
(480.1
)
(65.5
)%
Gross
profit
383.2
46.1
%
252.5
34.5
%
Distribution and administrative
expenses
(397.7
)
(47.9
)%
(450.2
)
(61.5
)%
Other operating
(expenses)/income
(0.3
)
(0.0
)%
2.0
0.3
%
Operating
loss
(14.8
)
(1.8
)%
(195.7
)
(26.7
)%
Gain on sale of property, plant and
equipment
6.0
0.7
%
3.8
0.5
%
Gain on sale of All-Clad
business
—
—
103.2
14.1
%
Makewhole
payment
(3.7
)
(0.4
)%
(5.6
)
(0.8
)%
Net interest
expense
(32.4
)
(3.9
)%
(54.9
)
(7.5
)%
Net loss before
taxes
(44.9
)
(5.4
)%
(149.2
)
(20.4
)%
Taxes on
income
(4.7
)
(0.6
)%
(12.3
)
(1.7
)%
Net loss after taxes before minority
interests
(49.6
)
(6.0
)%
(161.5
)
(22.1
)%
Minority
interests
0.3
0.0
%
2.1
0.3
%
Net
loss
(49.3
)
(6.0
)%
(159.4
)
(21.8
)%
Net
Sales
Our net sales declined by €99.3 million, or
11.9%, in the year ended March 31, 2005, from
€831.9 million in the year ended March 31, 2004 to
€732.6 million in the year ended March 31, 2005. Waterford
Crystal accounted for 30.2% of our net sales in the year ended
March 31, 2005, a decrease from March 31, 2004 when it accounted for
30.5% of our net sales. Ceramics Group continued to be the
largest component of our net sales: 60.3% of net sales in the
year ended March 31, 2005, as compared to 52.7% for the year
ended March 31, 2004. W-C Designs & Spring accounted for
6.2% of our net sales in the year ended March 31, 2005, as in
the year ended March 31, 2004, when it also accounted for 6.2%
of our net sales. All-Clad, which was sold on July 26, 2004, accounted
for 3.3% of our net sales in the year ended March 31, 2005, a
decrease from March 31, 2004 when this category accounted for
10.7% of our net sales.
The 11.9% decline in our
net sales from the year ended March 31, 2004 to the year ended March
31, 2005 was primarily due to the disposal of our All-Clad business in
July 2004, reduced demand, particularly for our Waterford Crystal
products, and further weakness in the US dollar. At constant exchange
rates our net sales fell by 9.5%.
There were, however,
continued improvements in certain of our product offerings and business
units. Core sales of Rosenthal increased despite a difficult retail
environment, Cashs Mail Order experienced strong demand and sales of
Vera Wang, our bridal range at Wedgwood continued to be the cornerstone
of our Ceramics Group business in the important US market. Market share
in all our key markets has been maintained or increased.
Waterford Crystal net sales
Net
sales of Waterford Crystal declined by €32.1 million, or
12.6%, in the year ended March 31, 2005 from €253.8
million in the year ended March 31, 2004 to €221.7 million
in the year ended March 31, 2005.
The 12.6% decrease in
Waterford Crystal net sales in the year ended March 31, 2005
principally reflected further weakness in the US dollar during the
period and a decrease in sales volume. At constant exchange rates
crystal net sales declined by approximately 7.9% as a result of
the ongoing weakness in US domestic demand for our goods and in
particular, the weakness in department store sales generally, from
where the bulk of our US sales are derived. The weak US demand appears
to reflect changes in consumers' apparent buying patterns.
However, we believe our principal brands maintained their market
share in the US, the Republic of Ireland, Germany and the UK.
55
Ceramics Group net
sales
Net sales of the Ceramics Group increased by
€3.3 million, or 0.8%, in the year ended March 31,
2005 from €438.2 million in the year ended March 31, 2004
to €441.5 million in the year ended March 31, 2005.
The 0.8% increase in Ceramics Group net sales in the year
ended March 31, 2005 principally reflected the acquisition of Royal
Doulton. At constant exchange rates Ceramics Group sales increased by
approximately 1.6%. Excluding the acquisition of Royal Doulton
net sales decreased by 5.3% at constant exchange rates.
All-Clad net sales
All-Clad net
sales declined by €64.4 million, or 72.7% in the
year ended March 31, 2005 from €88.6 million in the
year ended March 31, 2004 to €24.2 million in the year
ended March 31, 2004 as a result of the sale of All-Clad in July
2004.
W-C Designs & Spring net
sales
W-C Designs & Spring net sales decreased by
€6.1 million, or 11.9% in the year ended March 31,
2005 from €51.3 million in the year ended March 31, 2004
to €45.2 million in the year ended March 31, 2005.
The 11.9% decrease in net sales in the year ended March 31,
2005 as compared to the year ended March 31, 2004 reflected a decrease
in sales volume during the period in the W-C Designs linens business.
At constant exchange rates net sales of W-C Designs & Spring
decreased by 6.4%.
Cost of sales and distribution
and administrative expenses ("Operating
Expenses")
Our Operating Expenses increased
9.6% during the fiscal year ended March 31, 2005 to
€928.3 million from €846.7 million in
the year ended March 31, 2004. This increase in our Operating Expenses
principally reflected exceptional charges in relation to our working
capital reduction program and impairment of intangible assets,
deteriorating gross margins due to declining factory throughput
particularly in the Ceramics Group, offset to some extent by a fall in
cost of sales, due to the sale of All-Clad, in July 2004. See
"
Item 4 — Information on the Company — Our
Restructuring Program.
"
Waterford Crystal
The Operating
Expenses of our Waterford Crystal operations increased by
€25.1 million, or 10.2%, during the fiscal year
ended March 31, 2005. The 10.2% increase in Operating Expenses
primarily reflects an increase in exceptional charges in relation to
our working capital reduction program and charges for the impairment of
intangible assets.
Ceramics Group
The Operating Expenses of our Ceramics Group operations increased by
€98.9 million, or 21.5%, during the fiscal year
ended March 31, 2005. The 21.5% increase in Operating Expenses
primarily reflects an increase in exceptional charges in relation to
our working capital reduction program, impairment of intangible assets
and a deterioration in the gross margin due to declining factory
throughput.
All-Clad
The
Operating Expenses of our All-Clad operations decreased by
€52.3 million, or 69.3%, during the fiscal year
ended March 31, 2005 which was primarily a result of the sale of
All-Clad in July 2004.
W-C Designs &
Spring
The Operating Expenses associated with W-C Designs
& Spring increased by €1.1 million, or 2.0%,
during the fiscal year ended March 31, 2005. The 2.0% increase
in the Operating Expenses was primarily due to an increase in
exceptional charges for the impairment of intangible assets, offset to
a substantial degree by a reduction in cost of sales, reflecting a
reduction of net sales volume at W-C Designs.
56
Operating loss
Our
operating loss increased in the year ended March 31, 2005 by
€180.9 million, from an operating loss of
€14.8 million in the year ended March 31, 2004 to an
operating loss of €195.7 million in the year ended March
31, 2005. The increase in our operating loss for the year ended March
31, 2005 compared to the year ended March 31, 2004 primarily reflects
an increase in exceptional charges in relation to our working capital
reduction program and impairment of intangible assets, declining sales
volumes and gross margin, and the sale of the income generating
All-Clad business in July 2004.
Gain on sale of
property, plant and equipment
During the year ended March 31,
2005, we sold various surplus properties in the UK and Ireland
following the relocation of part of our ceramics production to Asia. As
a result we realized a gain of €3.8 million.
Gain on sale of All-Clad business
During the year ended March 31, 2005, we sold our
All-Clad business, realising a gain of €103.2 million.
Goodwill impairments
During the year ended March 31,
2005 we suffered impairment charges on the carrying value of our
intangible assets of €40.1 million.
Makewhole payment
During the year ended March 31,
2005 we incurred a makewhole payment of €5.6 million
(March 31, 2004: €3.7 million) arising from
the repayment of the 8.75% Secured Senior Notes, as part of the
new capital structure implementation. See "
Item
5—Operating and Financial Review and
Prospects— Principal Factors that Affect Our Results of
Operations and Financial Condition—Capital
Structure.
"
Net interest expense
In the year ended March 31, 2005, our net interest expense was
€54.9 million, compared to €32.4
million for the year ended March 31, 2004. The increase in our net
interest expense reflected a write-off of previously deferred costs
relating to our old revolving credit facility of €13.5
million, an increase in the amortization of finance fees by
€3.1 million, increased average interest rates and a full
year of interest on the Mezzanine Notes partially offset by a lower
average volume of debt. See "
Item
5—Operating and Financial Review and Prospects—Principal
Factors that Affect Our Results of Operations and Financial
Condition—New Capital Structure
."
Taxes on income
In the year ended March 31, 2005, we
incurred taxation charges of €12.3 million compared to
charges of €4.7 million in the year ended March 31, 2004.
The increase in taxation charge in the year ended March 31, 2005
was due to deferred tax charges for the de-recognition of deferred tax
assets representing tax losses no longer recognised as recoverable,
offset partially by reduced current tax charges reflecting lower
taxable income in our US businesses as a result of the disposal of the
All-Clad business.
Net loss after taxes before minority
interests
Our net loss after taxes before minority interest
increased in the year ended March 31, 2005 by
€111.9 million, from a loss of €49.6
million in the year ended March 31, 2004 to a loss of
€161.5 million in the year ended March 31, 2005. The
increase in our net loss after taxes before minority interests for the
year ended March 31, 2005 compared to the year ended March 31, 2004
primarily reflects exceptional charge in relation to our working
capital reduction program, intangible asset impairment charges, reduced
sales volumes and operating margins, increase finance fee amortization
and deferred tax charges for the de-recognition of deferred tax
assets.
57
Liquidity
Our primary sources of
liquidity are our cash flow from operations and borrowings, principally
from our Facility Agreement and certain other borrowings. The following
table sets forth our net cash inflow/(outflow) from operating
activities and our cash flows under Irish GAAP for the periods
indicated.
Year
ended March
31,
2003
2004
2005
(€
in millions)
Operating income/(loss) after
exceptional
charges
21.6
(14.8
)
(195.7
)
Exceptional
charges
35.7
36.5
108.0
Operating
income/(loss) before exceptional
charges
57.3
21.7
(87.7
)
Spend
on
restructuring.
(20.6
)
(29.0
)
(17.5
)
Working
capital reduction
program
—
—
(22.0
)
Depreciation
and
amortization..
46.7
40.4
39.0
(Surplus)/deficit
on sale of fixed
assets
(0.5
)
1.5
—
(Increase)/decrease
in
inventories
(30.9
)
(37.7
)
46.2
Decrease/(increase)
in accounts
receivable
9.8
(1.6
)
21.1
Increase/(decrease)
in accounts
payable
19.7
(10.3
)
(17.4
)
Exchange
rate
adjustments.
(9.9
)
6.7
(4.3
)
Net
cash inflow/(outflow) from operating
activities
71.6
(8.3
)
(42.6
)
Returns
on investments and servicing of
finance
(24.9
)
(54.7
)
(51.8
)
Taxes
paid.
(4.4
)
(6.0
)
(2.2
)
Capital
expenditure and financial
investment
(12.1
)
(26.2
)
(5.8
)
Acquisitions
and
disposals.
(26.9
)
—
115.1
Equity
dividends
paid.
(21.6
)
(7.6
)
—
Net
cash (outflow)/inflow before
financing
(18.3
)
(102.8
)
12.7
Financing
27.0
80.5
(31.7
)
Increase/(decrease)
in
cash
8.7
(22.3
)
(19.0
)
Net
cash inflow/(outflow) from operating activities
Our net cash
outflow from operating activities increased by €34.3
million in the year ended March 31, 2005 to
€42.6 million. This deterioration was due to a reduction
in operating income of €109.4 million and outflows
of €22.0 million due to the working capital reduction
program, €7.1 million reduction in accounts payable and
€11.0 million in adverse exchange rate fluctuations,
partially offset by increased cash flows from inventories by
€83.9 million, from receivables by €22.7
million and from restructuring payments by €11.5
million.
Our net cash outflow from operating activities was
€8.3 million in the year ended March 31, 2004, a dramatic
reversal from the net cash inflow of €71.6 million in the
year ended March 31, 2003, primarily as a result of lower operating
income, a year-on-year reduction in cash generated from accounts
payable of €30 million and an €8.4 million
increase in restructuring spend.
Net cash
(outflow)/inflow before financing
Our net cash inflow before
financing was €12.7 million in the year ended March 31,
2005, a dramatic improvement of €115.5 million compared to
the €102.8 million outflow in the year ended March 31,
2004. This improvement was in a very substantial part due to the net
surplus realised on the acquisition and disposal of subsidiary
undertakings which improved by €115.1 million between
these two years. Other movements in the year were a deterioration of
cash outflow from operating activities of €34.3m offset by
reductions in outflows for capital expenditures, dividends, taxes paid
and payments for the servicing of finance.
Our net cash outflow
before financing was €102.8 million in the year ended
March 31, 2004, a substantial increase from the net outflow of
€18.3 million in the year ended March 31, 2003. This
increase
58
was primarily due to the net cash outflow
from operating activities, a year-on-year reduction in accounts payable
combined with the increased costs of servicing finance as a result of
€25 million of debt issue costs and €3.7
million of makewhole payments partially offset by the absence of
acquisitions and lower dividends in 2004.
Financing
Our net cash outflow from financing was €31.7 million
in the year ended March 31, 2005 reflecting a net retirement of debt.
The net cash outflow of €31.7 million from financing
reflected a repayment of long term revolving loans of
€276.9 million, financed by €150.7 million in
new long term loans under our Asset Back Lending Facility,
€94.5 million new net equity and €19 million
of cash.
Our net cash inflow from financing was
€80.5 million in the year ended March 31, 2004, following
our debt restructuring including €166 million of
9 7/8% Mezzanine Notes, revised banking
facilities and Secured Senior Notes.
All of the net cash
proceeds of the All-Clad sale amounting to approximately
€179.4 million were used to repay senior debt under the
Amended Revolving Credit Facility and Secured Senior
Notes.
Following the successful completion of the rights
offering, the issue of the Mezzanine Notes, the subordinated loans and
the receipt of proceeds from the sale of All-Clad and various
properties, we believe that our working capital, together with the
amounts available under the Facility Agreement and our other
facilities, is sufficient to fund our present operations. See
"
Principal Factors that Affect Our Results of
Operations and Financial Condition—Capital
Structure
" and "
Item
11—Quantitative and Qualitative Disclosure about Market
Risk
".
Capital Resources
Our policy is
to finance our operations through a combination of cash flow generated
from operations, short-term bank borrowings, long-term debt, equity
funding and leasing and to achieve a balance between certainty of
funding and a flexible, cost-effective borrowing structure. We seek to
ensure continuity of funding by maintaining a broad portfolio of debt,
diversified by source and maturity, and by maintaining facilities
sufficient to cover peak anticipated borrowing requirements, with a
minimum of 20% having a maturity in excess of five years at any
point in time and the remainder having a maturity of no less than six
months. At March 31, 2005, 55.2% (March 31, 2004: 38%) of
total financial liabilities had a maturity of greater than five
years.
The following table sets forth our total borrowings and
cash and cash equivalents (on an Irish GAAP basis) as at the dates
specified:
March
31,
2003
2004
2005
(€
in millions)
Total
borrowings
(1)(2)
440.7
434.5
299.4
Cash
and cash
equivalents
(84.0
)
(51.6
)
(20.0
)
Net
debt
(3)
356.7
382.9
279.4
(1)
Includes
at March 31, 2003 and March 31, 2004 drawdowns under our secured
multicurrency Revolving Credit Facility, Mezzanine Notes, Secured
Senior Notes and the €5.1 million of euro loans maturing
between December 2005 and December 2007 for which certain properties
owned by Rosenthal AG are pledged as collateral.
(2)
On a US GAAP basis total borrowings at March 31,
2005 would be €15.8 million (March 31, 2004:
€25.0 million) higher, to reflect the elimination of debt
issue costs which are set-off against total debt under Irish
GAAP.
(3)
Net debt as at September 16, 2005
amounted to €279.6 million.
The following
table sets forth the currencies in which we held our cash and cash
equivalents as at March 31, 2005:
59
March
31, 2005
Local
currency
amount
euro
equivalent
(in
millions)
Euro
€5.6
€5.6
US
Dollars
$3.3
€2.6
UK
pound
sterling
£2.1
€3.1
Japanese
yen.
¥466.9
€3.4
Other
n/a
€5.3
Total
€20.0
As
at September 16, 2005 total cash and cash equivalents were
€58.6 million.
The 2003 Refinancing
In December 2003, we implemented a refinancing which
reduced senior debt, improved our liquidity and extended the maturity
of our indebtedness through the issue of the Mezzanine Notes, as
defined below. The 2003 Refinancing comprised a rights issue raising
gross proceeds of €38.5 million and an issue of Mezzanine
Notes raising gross proceeds of €166 million, the combined
proceeds of which, after expenses, were used to pre-pay a portion of
each of our senior debt components. Following the refinancing, the term
to maturity of our debt ranged from 4 years and 4 months to 7 years.
Notwithstanding these developments, we acknowledged at the time that
net debt remained excessive and the related covenants restrictive.
Developments in 2004
Disappointing results recorded
in the fiscal year ended March 31, 2004, which were significantly worse
than previously forecasted and which reflected both the challenging
market conditions and the deterioration in the dollar during that
period, impacted our working capital requirements. In order to
reinforce our financial position and allow us to continue our
operational restructuring, we supplemented our credit facilities, with
additional subordinated loans totalling €40 million
(the "
Subordinated Facilities
").
Subordinated debt of €32,500,000 was provided by Anglo
Irish Bank Corporation plc ("Anglo Irish") to
the Company and subordinated debt of €7,500,000 was
provided by Anglo Irish to Rosenthal A.G. (a German company in which
the Company has a majority interest) by term loan agreements dated May
28, 2004 and June 25, 2004 respectively. By agreements dated May 28,
2004 and June 25, 2004 between Anglo Irish and Lionheart Ventures
(Overseas) Limited, a Cyprus incorporated company controlled by Sir
Anthony O'Reilly ("Lionheart"), Anglo
Irish has options to put these loans at par plus accrued interest to
Lionheart. Sir Anthony O'Reilly and Mr Peter John Goulandris have
entered into undertakings dated May 28, 2004 and June 25, 2004 in
favour of Anglo Irish pursuant to which they severally undertake as to
one half of any amount required (i) to pay to Lionheart sufficient
funds to ensure that Lionheart is in a position to discharge its
obligations under the put options or (ii) to pay to Anglo Irish, in
discharge of Lionheart's obligations, the amount of the
obligations of Lionheart under the put options.
In July 2004, we
completed the sale of All-Clad to Groupe SEB. Net cash proceeds (after
expenses and applicable taxation) from the sale of All-Clad amounted to
approximately €179.4 million. All of the net proceeds of
the sale have been used to reduce our borrowings. This was consistent
with our stated strategy and with our obligations under our various
facilities to use cash realised from any sale of assets to reduce
senior debt. The application of all of the net proceeds of such sale to
repay senior debt effected a 63.8% reduction in senior debt
outstanding as of March 31, 2004. In anticipation of the All-Clad sale,
the Amended Revolving Credit Facility and the Amended Note Purchase
Agreement were amended as of May 28, 2004 and again as of July 26,
2004. Pursuant to these amendments, the lenders consented to the
disposal of All-Clad and certain of its subsidiaries. We were obliged
to pay the lenders an amendment fee of €2.3 million at the
time of the completion of the All-Clad sale in July 2004, to pay the
costs and expenses of the coordinating lenders and the facility agent
in connection with the amendment of the facility. We were also obliged
to pay the holders of the Senior Secured Notes an amendment fee of
1.00%
60
of the principal amount outstanding in
respect of the Secured Senior Notes and Makewhole Notes at the time of
the completion of the All-Clad sale in July 2004, and further to pay
all out-of-pocket costs and expenses of the Secured Senior Note holders
incurred in connection with the amendment of the Amended Note Purchase
Agreement.
On September 30, 2004, the Company and certain of its
affiliates and subsidiaries entered into a Facility Agreement (the
"
Facility Agreement
") with certain
financial institutions and Burdale Financial Limited, as agent for such
financial institutions (the "
Agent
").
On September 30, 2004, we used the Facility Agreement to raise
€134.0 million with which to repay our entire indebtedness
under the Amended Revolving Credit Facility Agreement, the Secured
Senior Notes and the Rosenthal Facilities, amounting to
€85.7 million, €25.5 million and
€22.8 million, respectively, at the time of such
repayment. As a consequence, the Amended Revolving Credit Agreement,
the Amended Note Purchase Agreement and the Rosenthal Facilities were
terminated.
On October 21, 2004 we announced that we were in
advanced discussions about a possible cash offer for Royal Doulton plc,
one of the world's leading chinaware manufacturers and owner of
the Royal Doulton, Minton and Royal Albert brands. We also announced a
proposed, fully underwritten rights issue of approximately
€100 million, on the basis of 5 new stock units for every
3 stock units held by qualifying stockholders. On December 15, 2004 we
announced the terms of a recommended offer for the entire issue and to
be issued ordinary share capital of Royal Doulton plc under which Royal
Doulton shareholders were to be offered 12p per share. On that date we
also announced the despatch of listing particulars and provisional
letters of allotment in relation to the 5 for 3 rights issue.
Use of proceeds of 5 for 3 Rights Issue
The gross
proceeds of the Rights Issue were €99.7 million and the
expenses of the Rights Issue amounted to €5.2 million (of
which €2.6 million comprised commission payable under the
Underwriting Agreement). The net proceeds of the Rights Issue were
used: €45.3 million to Royal Doulton Shareholders to
acquire their shares, €29.3 million to retire the existing
indebtedness of Royal Doulton and €4.9 million to
discharge the expenses of the acquisition (primarily professional
fees). The balance of €15.0 million was used to fund the
working capital of the enlarged group.
Cost Restructuring
Program and 7 for 11 Rights Issue
On May 4, 2005 we announced a
major restructuring program at an expected cost of €90
million to be financed by a further fully underwritten Rights Issue, on
the basis of 7 new stock units for every 11 stock units held by
qualifying shareholders, which was completed on July 18, 2005. See
"
Item 4—Information on the Company—Our
Restructuring program—Cost Restructuring
Program
".
The gross proceeds of the Rights
Issue were approximately €101.5 million, and the expenses
of the Rights Issue amounted to approximately €5 million
(of which approximately €2 million comprised commission
payable under the Underwriting Agreement).
Of the net proceeds,
up to approximately €90 million will be allocated to the
Cost Restructuring Program comprising the achievement of capacity
reduction (approximately €30 million), overhead reduction
(approximately €24 million) and the further integration of
Wedgwood and Royal Doulton (approximately €36 million).
The balance of approximately €6.5 million is expected to
be used for general working capital purposes.
At Waterford,
staff redundancy costs associated with both the consolidation of
manufacturing at the Kilbarry plant and the associated reduction of
overheads are estimated at approximately €27.1 million,
with capital expenditure and other associated restructuring costs
totalling, in aggregate, approximately €8.8 million.
At Wedgwood/Royal Doulton, a total of approximately
€23.9 million is dedicated to achieving targeted staff
redundancies intended to reduce both capacity and overheads and in
addition approximately €12.3 million is expected to be
spent on implementation of systems revisions and capital expenditure in
administration, warehousing and retail to reflect the reduced
workforce. Of this approximately €6.5 million has
already been spent.
61
At Rosenthal, redundancies to deliver the
targeted capacity reduction associated with the outsourcing of
decoration and small hollow ware and the targeted overhead reduction to
eliminate processing complexities have an estimated cost of
approximately €4 million with other restructuring and
capital expenditure amounting to approximately €4
million.
An additional approximate €10 million is
intended to achieve 200 redundancies across the wider Group which also
form part of the Cost Restructuring Program.
The cash resources
available to the Group have also been increased by the receipt of the
proceeds of the recently announced disposal of land at the Waterford
Crystal Social Centre. This transaction realised net consideration of
approximately €25 million (after expenses of approximately
€1.7 million and taxes of approximately €6.2
million). In accordance with the terms of the Group's Facility
Agreement, 30% of this (being approximately €7.5
million) has been used to effect a reduction in the amount outstanding
on the Senior Tranche B Facility Loan. The balance is available for
general working capital purposes.
The Facility
Agreement
Term and Structure
The
principal credit facility available to us is the Facility Agreement, a
multi-currency credit facility which permits a maximum drawdown
(subject to the availability of sufficient collateral) of (a) €205 million plus (b) US$30 million. The Company,
WW UK and substantially all of our operating companies are borrowers
under the Facility Agreement, and act as guarantors.
As at
September 16, 2005 an aggregate amount of €132.1 million
was outstanding under the Facility Agreement.
There are six
facilities available under the Facility Agreement, some of which were
used for the repayment of existing indebtedness at the time the
Facility Agreement was entered into and to be used for general
corporate and working capital
purposes:
•
the Working Capital
Facilities (the "
Working Capital
Facilities
") consisting of: (a) a €30
million Extended Term Loan Facility for which a term loan was made,
calculated with respect to and secured by eligible receivables (those
arising in the ordinary course and for which there is no impairment on
recoverability) and eligible inventory (inventory to which the borrower
has good title) (the "
Extended Term Loan
Facility
"); (b) a Receivables Finance Facility for
which loans are made calculated with respect to and secured by eligible
receivables (the "
Receivables Finance
Facility
"); and (c) a Revolving Credit Facility for
which loans are made or letters of credit are issued and secured by the
relevant goods (the "
Revolving Credit
Facility
").
•
the Term Loan Facilities (the
"
Term Loan Facilities
") consisting of:
(a) a euro-denominated Equipment Loan Facility secured by industrial
equipment (the "
Equipment Loan
Facility
") and (b) a euro-denominated Property
Loan Facility secured by real property (the "
Property
Loan Facility
").
•
the Senior Tranche B Facility (the
"
Senior Tranche B Facility
"), which is
a U.S.-dollar denominated term loan facility of US$30 million, to be
secured by a fixed and floating charge.
The following conditions
relate to the term and order in which the amounts may be drawn under
each of the above facilities:
•
The Extended Term Loan Facility,
Property Loan Facility, Equipment Loan Facility and Senior Tranche B
Facility were required to be drawn down within five days of the signing
of the Facility Agreement, and were drawn down on September 30, 2004;
the Receivables Finance Facility, the Revolving Credit Facility and the
Working Capital Refinancing Facility must be drawn within three years
of the date of the Facility Agreement and may be redrawn from time to
time.
•
The Extended Term Loan
Facility may be drawn by one or more borrowers, and it constitutes a
sub-limit within the Receivables Finance Facility and the Revolving
Credit Facility;
•
The terms of
the loans vary depending on the loan. The term of each of the loan
facilities except the Extended Term Loan and the Senior Tranche B Loan
facilities is three years; the Extended Term Loan and the Senior
Tranche B Loan facilities must be repaid in full on November 19,
2008.
62
The amounts that we may draw under each
facility are subject to certain conditions, including the
following:
•
The aggregate
amounts outstanding under the Extended Term Loan Facility, Receivables
Finance Facility, Revolving Credit Facility, Equipment Loan Facility
and Property Loan Facility may not exceed €205 million,
and the aggregate amount outstanding under the Senior Tranche B
Facility Loan may not exceed US$30 million at any
time.
•
The aggregate amounts
outstanding under the Working Capital Facilities may not exceed the
amount of the Group's total receivables calculated based on their
face amount minus any discount, multiplied by the relevant percentage
(85% for UK, Irish and U.S. borrowers and 80% for German
borrowers) (the "
Total Receivables
Availability
") plus the Group's available total
stock calculated as the stock percentage of the net value of the
eligible stock (the "
Total Stock
Availability
") minus the reserves established by the
Agent in its discretion, including a Subordinated Facilities reserve of
€25 million, a general reserve of €20
million, until the Group achieves EBITDA (as defined below) in excess
of €80 million in respect of any financial year and a
€5 million ancillary facilities
reserve.
•
The aggregate amounts
outstanding under the Receivables Finance Facility may not exceed the
lesser of the Total Receivables Availability and €100
million. The aggregate amounts outstanding under the Revolving Credit
Facility may not exceed €145 million. The aggregate amount
of outstanding loans under the Receivables Finance Facility in respect
of eligible stock may not exceed the lesser of the Total Stock
Availability and €130 million. The aggregate total of
letter of credit exposures may not exceed €15 million.
•
The Equipment Loan may not exceed
the lesser of 75% of the most recent valuation of the applicable
equipment, such valuation to take place annually, and €7.5
million; the Property Loan may not exceed the lesser of 80% of
the most recent valuation of mortgaged property, such valuation to take
place annually, and €20
million.
•
The €20
million general reserve will be allocated primarily to the Total Stock
Availability and the Total Receivables Availability of the UK and Irish
borrowers, and the Agent may do any of the following with respect to
the reserve: (a) reduce the receivables advance amount for a particular
borrower if that borrower's dilution rate (defined as the monthly
value of credit notes and non-cash credits issued by a borrower as a
percentage of the monthly value of sales) exceeds 5%; (b) reduce
the Total Stock Availability for any reduction in the stock limit or
other reduction; (c) allocate the reserves among the borrowers; and (d)
establish sub-limits as the Agent deems
appropriate.
•
Under the
Receivables Finance Facility and the Revolving Credit Facility,
individual borrowers may only request utilizations with respect to the
availability derived from eligible receivables or eligible stock
allocated to that borrower, and no utilisation may be requested by any
other borrower if the amounts available for utilisation by the US
borrowers are greater than €5 million or by the German
borrowers are greater than €3 million.
Costs and Fees
If any facility is cancelled by the
lenders or the Company or due to an event of default, a cancellation
fee must be paid. In the first year, the fee would be 2% of the
cancelled facilities; in the second year, the fee would be 1.5%
of the cancelled facilities, and in the final year or with respect to
any extension, the fee would be 1% of the cancelled facilities.
A commitment fee of 0.375% per annum must be paid for any
undrawn amount of the euro-denominated facilities limit. For each
letter of credit or similar arrangement, a fee of 2.5% per annum
is payable until the expiry of the letter of credit. A number of other
fees, including arrangement, amendment, underwriting, facility,
monitoring and security trustee fees, as well as fees and expenses
relating to the Senior Tranche B Facility, are also payable.
The interest rate on each of the loans except the
Senior Tranche B Loan is equal to the sum of: (i) LIBOR; (ii) a
margin of 2.5% with certain adjustment provisions and (iii) any
mandatory costs of funding imposed by the Financial Services Authority,
the Bank of England or similar monetary costs. Interest is payable on
the Senior Tranche B Loan at a rate of LIBOR plus 6.5% or the
Wachovia Bank NA prime rate plus 3.5%, at the election of the
Company each month. If the Company has consolidated profit before tax
of greater than zero,
63
the margin of 2.5% will be reduced to
2.25% per annum, if the profit is greater than €5
million, the margin will be reduced to 2% per annum and if the
profit is greater than €10 million, the margin will be
reduced to 1.75% per annum. In order for the margin to be
reduced, no default must be outstanding, Trading Cash Flow (as defined
below) must have been greater than zero for the preceding 12 months,
and the Total Availability must exceed the outstanding utilisations for
the Receivables Finance Facility, the Revolving Credit Facility and the
Extended Term Loan by at least €10 million.
For the
Equipment Loan Facility and Property Loan Facility, loans must be
repaid in instalments of 1.67% of the principal amount of the
loan per month and 0.834% of the principal amount of the loan
per month respectively, with the balance to be repaid three years from
the date of the Facility Agreement.
Covenants
The Facility Agreement requires that no security interest be created
over the assets of any obligor under the Facility Agreement without the
consent of the Agent other than certain permitted security interests,
including security interests (other than those on stock or receivables)
not exceeding €1 million in the aggregate, security
interests existing at the time of the Facility Agreement, security
interests arising by operation of law in the ordinary course of
business or provided for in suppliers' standard terms and certain
security interests created over bank accounts as cash collateral to
letters of credit. The Company and any other obligor may also not pay
any dividends except certain intercompany dividends unless the
consolidated profit before tax for that financial year is in excess of
€20 million. Obligors may not make any other payments to
affiliates or subsidiaries other than in the ordinary course, and may
not redeem any of their ordinary or preference share capital.
The Facility Agreement requires that neither the Company nor any
other obligor incur or have owing any financial indebtedness over
€1 million in the aggregate subject to exceptions for,
among others, certain intercompany indebtedness, certain indebtedness
relating to financial hedging transactions, certain indebtedness
incurred in connection with the Facility Agreement, normal trade credit
indebtedness, equipment leases and hire purchase transaction not
exceeding €50,000 in the aggregate, operating leases not
exceeding €1 million in the aggregate and any financial
indebtedness existing at the date of the Facility Agreement. The
Company must also ensure that no member of the Group grant any
guarantee without the prior consent of the majority lenders, subject to
certain exceptions. In addition, the terms of the Facility Agreement
restrict the obligors' abilities to incur debt senior in right of
payment to the amounts due under the Facility Agreement or be a
creditor with respect to any financial indebtedness.
No obligor
may enter into an amalgamation, merger, demerger, acquisition or
similar transaction other than certain intra-Group transactions of such
nature. In addition, no obligor may lease or dispose of individual
assets in excess of €150,000 or total assets in excess of
€1 million, each subject to certain exceptions, including
the disposal of obsolete inventories, the sale of trading stock, the
licensing of intellectual property in the ordinary course of business
subject to certain conditions and certain planned disposals. The
Company may not prepay the facilities provided by Anglo Irish Bank
Corporation plc on May 28, 2004 unless majority lenders' consent
is given or the auditors provide a certificate that the Company will
have sufficient working capital for 18 months following any such
prepayments.
Unless Total Availability exceeds €15
million we are required to procure that our Net Worth (as defined
below) shall at no time be less than an amount ranging from
€119 million in October 2004 to €75
million in March 2007 and our preceding year's annual Trading
Cash Flow (as defined below) shall not be less than an amount ranging
from a deficit of €111 million in October 2004 to
€20 million in March 2007.
The Company must provide
full individual and consolidated monthly accounts to the Agent within
30 days of the end of each month.
Events of
Default
The Facility Agreement contains standard events of
default, including for non-payment of principal, interest or fees,
misrepresentation and certain insolvency events. It also provides for
an event of default upon a change of control (as defined) and in case
of a Material Adverse Effect (as defined below) based on the reasonable
opinion of the lenders.
64
An event of default will also occur if
the Company fails to maintain the prescribed ratios of Net Worth or
Trading Cash Flow, when tested, or if any obligor breaches its
undertakings regarding limitations on incurring additional
indebtedness, creating additional security interests, asset disposals,
making loans or maintaining adequate insurance and, if not remedied
within 15 days of such breach, if it breaches any other provisions of
the Facility Agreement and/or the ancillary documents. The Facility
Agreement includes a cross-acceleration clause if borrowers or
guarantors under the Facility Agreement fail to timely make payment or
otherwise default on any financial indebtedness that exceeds
€150,000 individually other than with respect to the Anglo
Irish Bank Corporation facilities, or an aggregate of €20
million owed to trade creditors. Upon the occurrence of an event of
default, by a two thirds majority, the lenders under the Facility
Agreement may cancel their commitments under the facilities and declare
the loaned amounts immediately due and payable.
Certain
Definitions
For purposes of the Facility Agreement:
"
EBITDA
" means, in relation to any
member of the Group, for any period its losses/profits for that period
but (i) adding back any amounts in respect of interest, taxation,
depreciation and amortization, (ii) excluding any exceptional or
extraordinary profits and (iii) adjusting for the non-cash costs of any
rationalization or reorganization program.
"
Material Adverse Effect
" means an
effect which (in the reasonable opinion of a two thirds majority of all
the lenders under the Facility Agreement) results in or is likely to
result in a material adverse change in (i) the business, performance,
operations or assets of the obligors (whether individually or
collectively); or (ii) the ability of any obligor to perform any
of its respective obligations under the Facility Agreement and its
ancillary documents; or (iii) the legality, validity, priority or
enforceability of any obligations or security created by or arising
under the Facility Agreement and its ancillary documents. An event will
be deemed to not have a Material Adverse Effect if, in the opinion of a
majority of lenders, their ability to make full recovery from the Group
as a whole is not materially prejudiced as a result of the occurrence
of such event.
"
Net Worth
"
means at any time the aggregate paid up amount of the issued share
capital of the Company and the aggregate amount of the Company's
consolidated reserves (i) deducting goodwill and intangible assets,
(ii) deducting deferred tax, (iii) adding back or deducting any
adjustment made under FRS 17, and (iv) making such other reasonable
adjustments as the Agent may from time to time require or approve in
writing to ensure consistency year on year and which are notified to
the Company prior to the commencement of the relevant accounting
period.
"
Trading Cash Flow
"
means the consolidated profit before tax on ordinary activities of the
Group for the period under review (a) adding back any depreciation or
amortization, (b) excluding any extraordinary or exceptional profits,
(c) deducting any capital expenditures, and (d) making any other
reasonable adjustments to ensure consistency year-on-year.
The Mezzanine Notes and the Mezzanine Note
Indenture
On November 25, 2003, we issued
€166.0 million in principal amount of
9 7/8% Mezzanine Notes due 2010, (or the
"
Mezzanine Notes
"), which are
guaranteed by substantially all operating subsidiares (excluding
Rosenthal AG) and are secured by second ranking fixed and floating
charges over substantially all of our assets and those of our operating
subsidiaries. The Mezzanine Notes are subordinated in right of payment
to our current and future senior indebtedness as defined, which
includes the Facility Agreement.
In connection with the issuance
of the Mezzanine Notes, the Company, together with the Guarantors named
therein, The Bank of New York, London and Kredietbank S.A.
Luxembourgeoise entered into a Mezzanine Note Indenture, dated December
1, 2003 (the "
Mezzanine Note
Indenture
"). The Mezzanine Note Indenture establishes
the rights and duties of the Trustee, establishes certain Events of
Default with respect to the Mezzanine Notes and subordinates the
Mezzanine Notes in right of payment to all Senior Debt as defined.
Events of Default under the Mezzanine Note Indenture include failure to
timely pay any
65
interest or principal owed on the Mezzanine
Notes, default of any covenant under the Mezzanine Note Indenture,
failure to pay at maturity or the acceleration of any other
Indebtedness (which includes all principal and interest owed with
respect to borrowed money, evidenced by debt security instruments,
capitalized lease obligations, guarantees and certain hedging
arrangements) in an aggregate amount of €10 million or
more, certain insolvency events and any guarantee with respect to the
Mezzanine Notes being declared null and void.
Pursuant to the
terms of the Mezzanine Note Indenture, neither we nor our restricted
subsidiaries (which currently constitutes all of our subsidiaries) may
incur any Indebtedness, unless no Event of Default has occurred and is
continuing and on the date of the incurrence of such Indebtedness,
after giving effect to the incurrence of such Indebtedness, the
Consolidated Fixed Charge Coverage Ratio of the Company is greater than
2.0 to 1.0. For the purposes of the Mezzanine Note Indenture, the
"Consolidated Fixed Charge Coverage Ratio"
generally means the ratio of Consolidated EBITDA (generally
consolidated net income together with any taxes paid or accrued,
interest expense and certain consolidated non-cash charges) to
Consolidated Fixed Charges (generally consolidated interest expense
together with any dividend payments made to holders of preferred stock
as adjusted by applicable income tax rates) during the relevant period.
Such provision does not prohibit the incurrence of the following
Indebtedness, among other things: the Mezzanine Notes; the Facility
Agreement and other working capital facilities to a maximum of
€265 million; the Secured Senior Notes (which have been
repaid in full); Refinancing Indebtedness (generally, any refinancing
by the Company or its restricted subsidiaries of certain additional
indebtedness permitted to be incurred under the Mezzanine Note
Indenture and that does not increase either the aggregate principal
amount or the average life to maturity of such indebtedness);
indebtedness in connection with certain hedging activities; certain
intercompany indebtedness; and additional indebtedness of the Company
and its subsidiaries in an aggregate principal amount not exceeding
€25.0 million.
The Company and its restricted
subsidiaries may not declare or pay dividends, redeem the
Company's capital stock, make payments on any indebtedness junior
in right of payment to the Mezzanine Notes or make certain investments
(collectively, "Restricted Payments") if,
among other things, (1) an Event of Default shall have occurred, (2)
the Company may not incur at least €1 of additional
indebtedness in compliance with the Consolidated Fixed Charge Coverage
Ratio test described above, or (3) the aggregate amount of such
Restricted Payments would exceed (X) 50% of Consolidated Net
Income (generally consolidated net income excluding, among other
things, gains from asset sales, extraordinary gains and gains resulting
from certain corporate mergers) plus (Y) 100% of the aggregate
net cash proceeds received from the issuance of certain equity
securities plus (Z) the amounts by which certain Company indebtedness
is reduced together with certain amounts received from Company
investments. Notwithstanding the foregoing, the Company is permitted to
make certain Restricted Payments, subject to conditions, including
investments in entities that will become Restricted Subsidiaries,
additional investments of up to €25 million at any one
time outstanding and dividends of up to €10 million in the
aggregate. The Mezzanine Note Indenture furthermore places restrictions
on the Company's and its restricted subsidiaries' abilities
to incur indebtedness senior in right of payment to the Mezzanine
Notes, effect asset sales, issue preferred stock, create liens or other
security interests, enter into sale and leaseback transactions,
transact with affiliates and issue guarantees, among other things.
The Intercreditor Agreement
On September
30, 2004, the Company, the other parties to the Facilities Agreement
and the trustee under the Mezzanine Note Indenture, among others,
entered into an Intercreditor and Security Trustee Agreement (the
"Intercreditor Agreement"). Among other
things, the Intercreditor Agreement restricts our ability to make
payments on the Mezzanine Notes in certain circumstances (including
default under the Facility Agreement), restricts the ability of the
trustee under the Mezzanine Notes Indenture to accelerate or demand
payment under the Mezzanine Notes and subordinates the claims of
Mezzanine Note holders to those under the Facility Agreement in the
event of our insolvency.
The Inventory Security
Agreement
W/C Imports Inc., a wholly-owned subsidiary of
the Company, is also party to a Non-notification Factoring Agreement
and an Inventory Security Agreement (the "
Inventory
Security Agreement
") with
66
The CIT Group/Commercial Services, Inc.,
dated May 3, 1999, pursuant to which W/C Imports Inc. sells and assigns
all accounts receivable in exchange for the CIT Group/Commercial
Services, Inc. agreeing to advance it certain funds. The Inventory
Security Agreement restricts the ability of W/C Imports Inc. to create
security interests over its inventory or proceeds in favor of any
third-party.
Capital expenditures
Our
capital expenditures were €22.2 million in the year ended
March 31, 2003, €35.3 million in the year ended March 31,
2004 and €12.1 million in the year ended March 31, 2005.
The higher level of capital expenditure in 2004 was due primarily to
the refurbishment of the furnace at our Waterford Crystal manufacturing
plant in Ireland.
We intend to fund our current capital
expenditure requirements from internally generated funds and through
existing or future financing arrangements. We also may make selective
investments or acquisitions, should suitable opportunities arise, which
may be financed through additional borrowings to, the extent permitted
under the Facility Agreement, the Mezzanine Notes and equity
issuances.
Contractual Cash Obligations and Commercial
Commitments
The following table summarizes our contractual cash
obligations at March 31,
2005:
Total
Due
within
one year
Due between
one and three
years
Due between
three and five
years
Due
after
more than
five
years
(€ in
millions)
Short-term
debt
—
—
—
—
—
Long-term
debt
315.2
—
84.6
65.4
165.2
Operating
leases.
222.8
29.2
46.5
30.9
116.2
Capital
commitments.
1.1
1.1
—
—
—
Purchase
commitments
58.5
41.1
6.3
3.4
7.7
Total
597.6
71.4
137.4
99.7
289.1
Capital
commitments relate to the purchase of plant and
equipment.
Interest accruals are not included within this
table.
For information regarding our pension commitments, see
notes 23 and 33 to our Consolidated Financial Statements. Funding for
the year ending March 31, 2006 is anticipated to be similar to that for
the year ended March 31, 2005 with the addition of €3.0
million funding for the Royal Doulton UK closed defined benefit
plan.
We do not have a specified plan to provide for the funding
of our pension commitments.
Contingent
liabilities
In accordance with Section 17 of the Companies
(Amendment) Act, 1986, of the Republic of Ireland, we have guaranteed
the liabilities of certain of our subsidiaries. As a result, such
subsidiaries have been exempted from the provisions of Section 7 of the
Companies (Amendment) Act, 1986, of the Republic of Ireland. We have
also guaranteed certain of the borrowings of various subsidiaries.
Waterford had received capital grants amounting to €5.9
million at March 31, 2005, (March 31, 2004: €5.0 million),
which could become repayable to the Irish Government if the business
were to cease within 10 years of the date of the grants.
67
Quantitative
and Qualitative Disclosures about Market Risk
Interest rate and market risk
We are
exposed to changes in financial market conditions in the normal course
of our business operations due to our operations in different foreign
currencies and our ongoing investing and funding activities, including
changes in interest rates and foreign currency exchange rates. Market
risk is the uncertainty to which future earnings or asset/liability
values are exposed as a result of operating cash flows denominated in
foreign currencies and various financial instruments used in the normal
course of operations. We have established policies and procedures and
internal processes, including review by a sub-committee of our Board,
governing our management of market risks and the use of financial
instruments. For further discussion about market risk see
"
Item 11—Quantitative and Qualitative Disclosure
about Market Risk
".
New Accounting
Standards
International financial reporting
standards
By regulation, the European Union
("EU") has required that listed companies
must use International Financial Reporting Standards
("IFRS") adopted for use in the EU in the
preparation of consolidated accounts. The objective is to improve
financial reporting and enhance its transparency within the EU.
The application of International Financial Reporting Standards
("IFRS") became mandatory for financial
statements of listed companies with effect from January 1, 2005. This
will require us to present IFRS compliant financial statements for the
financial year ending March 31, 2006, together with comparative figures
for the prior year. It will also require the presentation of IFRS
compliant interim financial statements for the six months ending
September 30, 2005, together with prior period comparative figures.
April 1, 2004 is our transition date to IFRS. Though we are advanced in
our preparations for the move to report under IFRS in line with this
timetable, we continue to evaluate the consolidated balance sheet and
consolidated statement of income effects of adopting IFRS and,
therefore, the audit of the impact of transition has not been completed
at the date of this annual report. Until this work has been finalised,
it is possible that further effects not disclosed herein will be
identified.
Implementation of IFRS: Accounting policy choices
In accordance with IFRS 1,which establishes the framework for
transition to IFRS by a first-time adopter such as Waterford Wedgwood
plc, the Group proposes to elect, in common with the majority of listed
companies, to avail of a number of specific exemptions from
retrospective restatement as
follows:
•
Not to apply IFRS 3
"Business Combinations " to businesses
combinations undertaken prior to 1 April 2004.
•
To deem cumulative exchange
differences on the net investments in foreign subsidiaries as zero at
1 April 2004 as permitted by IFRS
1.
•
To recognize in full,
cumulative actuarial gains and losses for defined benefit pension
schemes as at 1 April 2004.
•
To
use the existing carrying value of fixed assets (including those
previously revalued) at 1 April 2004 as deemed cost.
•
To implement the requirements of
IFRS 2 "Share Based Payments " to all share
based payments granted after 7 November 2002 that have not vested by 1
January 2005.
•
Not to present
comparative information in accordance with IAS 32
"Financial Instruments: Disclosure and Presentation
" and IAS 39 "Financial Instruments:
Recognition and Measurement ". Accordingly, comparative
information for the year to 31 March 2005 in respect of financial
instruments will be prepared on the basis of the Group 's current
accounting policies under Irish GAAP.
68
The most significant changes impacting on
the results and the financial position of the Group following the
implementation of IFRS will
be:
•
Recognition in the
consolidated statement of income of fair value gains and losses on
derivative financial instruments, subject to hedge accounting.
•
Recognition of derivative
financial instruments and related hedge accounting entries at fair
value in the balance
sheet.
•
Recognition
in the balance sheet of proposed dividends only when approved.
•
Recognition of a charge for
share-based payments in the income statement for outstanding options
issued after 7 November 2002.
•
Recognition of assets and
liabilities of defined benefit pension schemes on the face of the Group
balance sheet and recognizing pension expense in the Group income
statement using principles similar to FRS 17 as disclosed in note 23 to
the 2005 consolidated financial statements.
•
The cessation of goodwill
amortization and the introduction of annual impairment
testing.
•
Changes to format of
the primary financial statements.
Impact of recently
issued US accounting pronouncements
In December 2004, the
FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). which
replaces SFAS No. 123. "Accounting for Stock-Based
Compensation," ("SFAS 123") and
supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees", SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to
be recognized in the financial statements based on their fair values
beginning with the first annual period after June 15, 2005. We are
currently evaluating the impact that adoption of SFAS 123(R) will have
but do not expect it to have a material impact.
In December
2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets-An Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" ("SFAS
153"). SFAS 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No.29, "Accounting for
Nonmonetary Transactions," and replaces it with an
exception for exchanges that do not have commercial substance if the
future cash flows of the entity are expected to change significantly as
a result of exchange. SFAS 153 is effective for the fiscal periods
beginning after June 15, 2005. We are currently evaluating the effect
that the adoption of SFAS 153 will have but do not expect it to have a
material impact.
In November 2004, the FASB issued Statement
No.151, Inventory Costs, an amendment of ARB No. 43, Chapter 4,
clarifying the existing requirements in ARB No. 43 regarding normal
capacity, spoilage costs and idle capacity costs. The guidance is
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We are currently evaluating the effect that the
adoption of SFAS 151 will have but do not expect SFAS 151 to have a
material impact.
In March 2004, the EITF reached consensus on
Issue No. 03-01, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments"
("EITF 03-01"). EITF 03-01 provides guidance
on Other-Than-Temporary impairment models for marketable debt and
equity securities and non-marketable securities accounted for under the
cost method. On September 30, 2004, the FASB issued FSP 03-01-1,
Effective Date of Paragraphs 10-20 of EITF Issue 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments, delaying the effective date for the recognition and
measurement guidance in EITF 03-01, until certain implementation issues
are addressed and a final FSP is issued. The disclosure requirements in
EITF 03-01 remain effective.
In May 2005, the FASB issued SFAS
No. 154, "Accounting Changes and Error
Corrections" ("SFAS154"), which
replaced APB No. 20, "Accounting Changes" and
SFAS No. 3, "Reporting Accounting Changes in Interim
Finanical Statements". SFAS154 changes the requirements
for the accounting for and reporting of a change in accounting
principle by requiring voluntary changes in accounting principles to be
reported using retrospective application, unless impraticable to do so.
SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15,
2005.
69
Other recently issued accounting
pronouncements will not have a material impact on our financial
position or results of operations.
Research and
Development
We maintain research and development departments in
our main manufacturing facilities. Expenditure on research and
development in the year ended March 31, 2005 amounted to
€7.7 million (2004: €6.1 million, 2003:
€9.3 million) and related mainly to the development of new
products, processes and manufacturing technologies.
Trend
Information
Trading in the first weeks of the current year
remains challenging with sales in the April-June 2005 quarter 8%
below the prior year on a like-for-like basis. However, the Group is
encouraged by the rally in the US dollar (in which currency,
approximately 40% of sales are represented), by the
strengthening of the Group's order books and by winning certain
substantial contracts which are due for delivery in the second half.
For the remainder of the current financial year, it is intended that
Waterford Wedgwood's focus will be on implementation of the Cost
Restructuring Program with some savings benefits expected to flow
through in the second half of the current financial year although the
full benefits are forecast to be achieved in the year to March 31,
2007. In parallel with this, all of the divisions are pursuing new
business initiatives with the objective of renewing sales growth. These
include an extension of distribution into premium stores such as Bed,
Bath & Beyond and tapping the potential of new markets such as
Eastern Europe and China. The financial impact of these initiatives is
not expected to be recorded before early in the year ending March 31,
2007. Accordingly, with a continued very difficult trading environment,
the challenge in achieving the Group's financial targets for the
remainder of the current financial year remains formidable.
Off-Balance Sheet Arrangements
There are no off-balance
sheet arrangements, as defined in respect of this Item 5.E, that have,
or are reasonably likely to have, an effect on the Company that is
material.
Item 6—Directors, Senior Management and
Employees
Directors and Senior Management
Board of Directors
The Board of
Directors of Waterford Wedgwood plc ("the
Board
") currently consists of 13 directors. Our
articles of association establish the terms governing the composition
of our Board of Directors. See "
—Board
Practices
" for more information.
70
The table below sets out the name, age and
position of each of the members of our Board of Directors as at
September 16,
2005.
Name
Age
Position
Sir
Anthony
O'Reilly
69
Chairman
of the Board and a member of the remuneration and nomination
committee.
Peter John
Goulandris
(1)
57
Deputy Chairman of the
Board and a member of the remuneration and nomination
committee.
Peter B.
Cameron
58
Director and Chief Executive
Officer.
Gerald P.
Dempsey
76
Director and a member of the audit
committee, the remuneration and nomination committee, and senior
independent director.
John
Foley
53
Director and Chief Executive Officer of
Waterford Crystal Limited.
Ottmar C.
Küsel
54
Director and Chief Executive Officer of
Rosenthal AG.
Kevin C.
McGoran
70
Director, Chairman of the audit committee, a
member of the remuneration and nomination committee and Chairman of the
Board of Waterford Crystal Limited.
Patrick J.A.
Molloy
67
Director and member of the audit
committee.
P. Redmond
O'Donoghue
(1)
62
Director.
Lady
O'Reilly
(1)
55
Director.
David
W. Sculley
59
Director.
Dr. F. Alan
Wedgwood
(1)
68
Director.
Lord
Wedgwood of
Barlaston
(1)
51
Director.
(1)
Also
a director of Waterford Wedgwood UK plc.
Sir Anthony
O'Reilly
has been a non-executive director since April 25,
1990. He was appointed deputy chairman on June 19, 1991, and was
appointed Chairman of the Board on January 1, 1994. His current term as
non-executive director expires in 2005 and he will stand for
re-election at the Annual General Meeting to be held on October 20,
2005. He is chief executive of Independent News & Media plc and is
chairman of Eircom Group plc. His other directorships include
Fitzwilton Limited. Sir Anthony O'Reilly is the husband of Lady
O'Reilly.
Peter John Goulandris
was appointed
deputy chairman on March 24, 1999, having been a director since May 17,
1996. He has also been a director of WW UK since December 17, 1998. He
was appointed chairman of WW UK in January 2001. His current term of
office as non-executive director expires in 2007. His other
directorships include Fitzwilton Limited. Peter John Goulandris is the
brother of Lady O'Reilly.
Peter B. Cameron
joined
us as a director in 2001. Previously, he was All-Clad's chief
operating officer from 1998 to 2000. He became chief executive of
All-Clad in August 2000 until its disposal in July 2004, when he became
our chief operating officer. On September 1, 2005 he was appointed
chief executive officer. His current term of office as an executive
director expires in 2007.
Gerald P. Dempsey
was appointed
a director on March 1, 1986. He is also a director of Waterford Crystal
Limited. His current term as non-executive director expires in 2007.
His other directorships include United Business Media Financial
Services Ireland and associated companies.
John Foley
joined us in 1991 and was appointed a director in October 2000. He is
currently also chief executive officer of Waterford Crystal. His
current term as executive director expires in 2005 and he will stand
for re-election at the Annual General Meeting to be held on October 20,
2005. He is non-executive chairman of Waterford Marketing and
Tourism.
Ottmar C. Küsel
joined us as a director in
April 1997. He is currently also chief executive officer of Rosenthal
AG. His current term of office as an executive director expires in
2006. He is chairman of the Ceramics Industry Association in Germany
and a member of the advisory board of the Düsseldorfer Hypotheken
Bank AG.
71
Kevin C. McGoran
was appointed a
non-executive director on April 25, 1990, and is currently chairman of
Waterford Crystal Limited and our audit committee financial expert. His
current term of office as a non-executive director expires in 2005 and
he will stand for re-election at the Annual General Meeting to be held
on October 20, 2005. He is chairman of Fitzwilton Limited.
Patrick J.A. Molloy
joined us as a non-executive director on
July 25, 2002. His current term as non-executive director expires in
2006. He is chairman of CRH plc, The Blackrock Clinic and Enterprise
Ireland. He retired as group chief executive of Bank of Ireland in
January 1998.
P. Redmond O'Donoghue
joined us as a
director in 1985. He was formerly chief executive officer. His current
term of office as a non-executive director expires in 2007. Prior to
joining us, he held senior sales and marketing positions with the Ford
Motor Company in the Republic of Ireland, England and Spain. He is a
non-executive director of Greencore plc and chairman of the Governing
Body of the Waterford Institute of Technology.
Lady
O'Reilly
was appointed a non-executive director on December
15, 1995, and has been a non-executive director of WW UK and a director
of Wedgwood Museum Trust Limited since June 15, 1994. Her
current term of office as a non-executive director expires in 2007. She
is chairperson of the Irish National Stud Company Limited and of the
O'Reilly Foundation. Lady O'Reilly is the wife of Sir
Anthony O'Reilly and the sister of Peter John Goulandris.
David W. Sculley
was appointed a non-executive director on
December 12, 1997. His current term of office as a non-executive
director expires in 2007. He is a partner in the New York based
investment firm Sculley Brothers and serves on the board of a number of
private companies.
Dr. F. Alan Wedgwood
was appointed a non-executive director of
Wedgwood in 1966. On November 28, 1986, he was appointed a
non-executive director and on June 19, 1991, a director of WW UK. His
current term of office as a non-executive director expires in 2006. Dr.
Wedgwood is the cousin of Lord Wedgwood.
Lord Wedgwood
of Barlaston
was appointed a non-executive director of WW UK on
December 19, 1997. He joined us as an executive director
on April 27, 2000. His current term of office as a director expires in
2005 and he will stand for re-election at the Annual General Meeting to
be held on October 20, 2005. He was a member of the House of
Lords from 1975 to 1999. Lord Wedgwood is the cousin of Dr. F. Alan
Wedgwood.
Senior management
The table
below sets out the name, age and position of each of our executive
directors and senior
managers.
Name
Age
Position
Peter
B.
Cameron
58
Director
and Chief Executive Officer
John
Foley
53
Director and Chief Executive Officer of
Waterford Crystal
Ottmar C.
Küsel
54
Director and Chief Executive Officer of
Rosenthal AG
Lord Wedgwood of
Barlaston
(1)
51
Director
Other
Officers
Patrick J.
Dowling.
59
Secretary and Chief Financial
Officer
Andrew E.
Elsby-Smith
(1)
.
41
Finance director of
Wedgwood
Moira Gavin.
48
Chief
Executive of
Wedgwood
(1)
Also a
director of Waterford Wedgwood UK plc.
Patrick J. Dowling
joined us on June 1, 1999. He had previously been finance director of
Fitzwilton Limited worked at Citibank and Bank of Chicago. He is a
director of Waterford Crystal Limited. He has been secretary to both WW
UK and the Company since September 1999 and has been Chief Financial
Officer since March 11, 2005. His current term as secretary will extend
indefinitely until he is replaced by the Board.
72
Andrew E. Elsby-Smith
joined us in
1991. He is currently finance director of Wedgwood and was appointed a
director of WW UK on June 25, 1999. His current term of office as a
director expires in 2005.
Moira Gavin
joined us in 1987
having started her career as a buyer at Macy's the US department
store. She worked in a number of positions before leaving to take up a
senior position at Lenox, the US company. She rejoined the Group in
November 2001 and was appointed President of Wedgwood USA in 2002 and
Chief Executive of Wedgwood on September 1, 2005.
Board/Management Changes
With effect from September 1, 2005
P. Redmond O'Donoghue retired as Chief Executive Officer and
Peter B. Cameron was appointed Chief Executive Officer. Mr.
O'Donoghue will remain on the Board as a non-executive director.
Tony O'Reilly jnr. resigned as a director and as Wedgwood Chief
Executive with effect from September 1, 2005. Paul M. D'Alton,
resigned as Chief Financial Officer on March 11, 2005, and Patrick
Dowling was appointed Chief Financial Officer. Sam Michaels, a
non-executive director since July 1999, resigned from the Board on
February 1, 2005. Lewis Glucksman, a non-executive director since
December 1998, resigned on October 21, 2004. Richard A. Barnes and
Christopher J. McGillivary resigned as directors on June 17, 2004 and
June 25, 2004, respectively.
Board Practices
The
Articles of Association of both the Company and WW UK provide that a
director may serve a maximum of three years and must then retire. A
retiring director is, however, eligible for re-election. All directors
not initially appointed at an Annual General Meeting hold office only
until the next Annual General Meeting and shall then be eligible for
election. The Board may from time to time appoint one or more directors
to any office for such period and on such terms as it decides. A
director so appointed will cease to hold such office when he no longer
serves as an executive of the Company or WW UK, as the case may be, or
the Board terminates his appointment. No director is required to retire
on account of age.
Our senior managers are appointed by the
Board of Directors and the majority of our senior managers have service
contracts. In the event that a director/senior manager's
employment is terminated without cause, such director or senior manager
could be entitled to any compensation due under the unexpired term of
his contract or pursuant to Irish law.
Board Committees
We have within our structure both an audit and a remuneration and
nominations committee. Membership of these committees is comprised of
non-executive directors only.
Audit
committee
The audit committee is chaired by Kevin C.
McGoran, as non-executive director, and consists of the following
additional non-executive directors: Gerald P. Dempsey and Patrick J.
Molloy. The terms of reference for the audit committee are set out in a
formal audit committee charter, which is approved by the Board. Its
purpose is to assist the Board to oversee and review our accounting and
financial reporting policies and internal control procedures. It also
assists the Board in selecting, evaluating the independence of and
replacing the external auditors. Both the chief financial officer and
head of internal audit of the Company normally attend meetings, with
representatives of the external auditors attending as appropriate. The
Company secretary is the secretary of the audit committee.
Remuneration and nominations committee
The
remuneration and nominations committee is responsible for advising on
the appointment of executive and non-executive directors and determines
terms and conditions of employment and remuneration for executive
directors. It meets when required to do so throughout the year. The
remuneration and nominations committee is chaired by Sir Anthony
O'Reilly and consists of the following additional non-executive
directors: Gerald P. Dempsey, Peter John Goulandris and Kevin C.
McGoran.
73
Internal control
Our directors supervise our system of internal controls. Our
internal controls include not just financial risk management but also
operational and compliance risk management. This internal control
system addresses the nature and extent of the risks facing us. The
chief financial officer of each of our businesses reports regularly to
our Board of Directors and/or to its committees on the management of
key risk areas and on the effectiveness of our internal controls in
relation to these risks. A review of the risks identified by each of
our businesses is included as part of our annual budget process. Our
internal control system, however, provides only reasonable and not
absolute assurance against material financial misstatements or
losses.
Compensation of directors and
officers
For the year ended March 31, 2005, the aggregate
compensation, paid or accrued, of the Company's and WW UK's
(together, the "Registrants") directors and
officers was €8,052,000. See note 5 to the Consolidated
Financial Statements which is incorporated by reference in this Item 6,
setting forth details on an individual basis of the remuneration paid
to executive and non-executive directors. In addition, the aggregate
amount set aside or accrued by the Registrants for the year ended March
31, 2005 to provide pension, retirement or similar benefits to the
directors and officers of the Registrants, was
€2,739,000.
Exemptions from
Corporate Governance Listing Requirements Under the NASDAQ Marketplace
Rules
In connection with the listing of the Company's
American Depositary Shares in the United States, we received an
exemption with respect to the quorum requirement reflected in NASDAQ
Marketplace Rule 4350(f), which requires each issuer to provide for a
quorum as specified in its by-laws for any meeting of the holders of
common stock, which shall in no case be less than
33 1/3% of the outstanding shares of a
company's voting stock. Our articles of association provide that
a quorum for a general meeting of the Company is constituted by three
or more persons present in person and entitled to vote. This quorum
requirement is in accordance with Irish law and generally accepted
business practice in the Republic of Ireland.
Employees
At March 31, 2005, we had 10,405 employees worldwide. We believe
that, other than our senior management, a majority of our employees are
members of trade unions.
Relations between the Company, its
employees and the trade unions representing those employees continue to
be good.
The table below provides a breakdown by activity and by
geographical location of our employees, including the employees of our
subsidiaries, at March 31, 2003, 2004 and 2005
respectively.
March
31,
2003
2004
2005
Number
of employees
Geographical
analysis:
United
Kingdom.
3,204
2,540
3,656
Germany
2,200
2,160
1,846
Republic
of
Ireland
1,748
1,534
1,435
North
America
1,275
1,278
1,056
Rest
of
World
508
547
2,412
Total
8,935
8,059
10,405
74
March
31,
2003
2004
2005
Number
of
employees
Analysis
by
activity:
Production
4,795
3,985
5,127
Distribution
637
586
1,085
Sales
and
marketing
2,738
2,782
3,446
Administration
765
706
747
Total
8,935
8,059
10,405
The
increase in employee numbers in 2005 reflects the acquisition of Royal
Doulton, partially off-set by the disposal of All-Clad and various
restructuring initiatives. See
"Principal Factors that
Affect Our Results of Operations and Financial Conclusion—Affect
of Recent Restructuring"
.
Royal
Doulton principally employ sales and marketing staff in the United
Kingdom, manufacturing staff in Indonesia and sales and marketing staff
in North America and Australia.
Employee share
schemes
We have had employee share schemes in
place since 1979. In May 1987, our shareholders approved an executive
share option scheme, replacing the earlier scheme approved in 1985. The
rules of the 1985 scheme were altered to enable the inclusion of
full-time executives of Wedgwood. Members of management (including
employees of our subsidiaries) designated by the Board, who had at
least two years' service to complete before retirement and who
worked at least 20 hours per week for us (including our subsidiaries),
were eligible to participate in the share option scheme. The Board
could at any time grant options for such number of stock units (a stock
unit comprises one €0.06 nominal value ordinary share in
Waterford Wedgwood plc and one £0.01 nominal value income share
in WW UK), exercisable at such option price, to such executives as the
Board might specify.
On December 12, 1995, our
shareholders replaced and updated the earlier scheme approved in 1987
and created several new employee share schemes, so as to bring our
employee share schemes into line with current best practice and enable
employees resident outside the Republic of Ireland and the UK to
participate. Under the new employee share schemes, the total number of
stock units that may be issued to employees under all of the schemes
was limited to not more than 10% of our ordinary share capital
outstanding at the end of any ten year period, and not more that
5% of our ordinary share capital outstanding at the end of any
five year period. The total number of stock units that may be issued to
any employee participating in an employee share scheme was limited to
no more than 5% of our ordinary share capital outstanding at the
end of any ten year period and not more than 3% of our ordinary
share capital outstanding at the end of any three year period.
Options to Purchase Securities from Registrants or
Subsidiaries
The 1995 Group Share Option
Scheme
Full-time executive directors and
employees who work at least 20 hours per week for us are eligible to
participate in the 1995 Group Share Option Scheme. Options under the
1995 Group Share Option Scheme are granted by the remuneration and
nominations committee and are subject to a performance condition, such
that for an option to be exercisable, there must have been an increase
in earnings per share over any three consecutive financial years prior
to the date of exercise, of at least seven percentage points more than
the increase in the Irish Consumer Price Index over the same period.
Options under the 1995 Group Share Option Scheme are granted at an
option price, which may not be less than the market value of the
underlying stock units on the date of grant. Options granted under this
scheme are limited so that the aggregate price payable on the exercise
of all options granted to the employee under this or any similar
scheme, in any ten year period, may not exceed four times the
employee's annual earnings. Options under this scheme are
normally exercisable, subject to the achievement of the performance
criteria, between the third and tenth anniversary of the grant. This
scheme does not meet the criteria for tax relief on the grant of share
options to employees set by the UK Revenue & Customs.
The 1996 Approved Group Share Option
Scheme
The 1996 Approved Group Share
Option Scheme is available to our employees who reside in the UK
and has been approved by the UK Revenue & Customs. Full-time
executive directors and employees
75
who work at least 20 hours per week for us
are eligible to participate. Options under the 1996 Approved Group
Share Option Scheme are granted by the remuneration and nominations
committee and are subject to a performance condition, such that for an
option to be exercisable, there must have been an increase in earnings
per share over any three consecutive financial years prior to the date
of exercise of at least seven percentage points more than the increase
in the Irish Consumer Price Index over the same period. Options granted
under this scheme are granted at an option price, which may not be less
than the market value of the underlying stock units on the date of
grant. An employee's participation under this scheme is limited
so that the aggregate price payable on the exercise of all options
granted to the employee under this or any similar scheme, in any ten
year period will not exceed four times the employee's annual
earnings, nor at any time will the aggregate price payable on the
exercise of any outstanding options under this or any other approved
option scheme exceed £30,000. Options are normally exercisable,
subject to the achievement of the performance criteria, between the
third and tenth anniversary of the grant.
The following table
sets forth information relating to the options granted under the 1995
Group Share Option Scheme and the 1996 Approved Group Share Option
Scheme, held by our employees as of September 16,
2005.
Date
Granted
Number of
shares under option at
September 16,
2005
Option price
per
share
(1)(2)
Expiration
Date
May 24,
1996
814,288
£0.50
May
24, 2006
May 24,
1996
322,540
€0.60
May 24,
2006
June 13,
1996
164,424
£0.53
June 13,
2006
November 7,
1996
64,508
€0.59
November 7,
2006
December 13,
1996
2,035,728
£0.49
December 13,
2006
December 13,
1996
1,983,625
€0.59
December 13,
2006
April 2,
1997
156,594
£0.54
April 2,
2007
March 26,
1998
391,486
£0.64
March 26,
2008
March 26,
1998
395,394
£0.63
March 26,
2008
March 26,
1998
97,870
£0.63
March 26,
2008
August 1,
1998
234,891
£0.48
August 1,
2008
October 7,
1998
78,296
£0.33
October 7,
2008
September 2,
1999
3,144,771
€0.59
September 2,
2009
September 2,
1999
159,725
£0.39
September 2,
2009
September 2,
1999
75,165
£0.39
September 2,
2009
March 27,
2000
6,692,700
€0.59
March 27,
2010
March 27,
2000
546,509
£0.36
March 27,
2010
March 27,
2000
646,728
£0.36
March 27,
2010
September 4,
2000
403,175
€0.79
September 4,
2010
September 4,
2000
195,740
£0.51
September 4,
2010
April 12,
2001
5,168,713
€0.71
April 12,
2011
April 12,
2001
861,269
£0.44
April 12,
2011
November 8,
2001
2,814,162
€0.40
November 8,
2011
November 8,
2001
813,502
£0.26
November 8,
2011
November 8,
2001
114,314
£0.26
November 8,
2011
June 5,
2002
1,209,527
€0.40
June 5,
2012
December 19,
2003
45,926
£0.11
December 19,
2013
December 19,
2003
657,784
£0.11
December 19,
2013
Total
30,289,354
(1)
Rounded
to the nearest whole pence (£0.01) or cent (€0.01)
as appropriate.
(2)
Option prices have been
adjusted to reflect the Rights Issues completed in January 2004,
January 2005 and July 2005.
76
The 1995 Irish Profit Sharing
Scheme
The Irish Profit Sharing Scheme was constituted by
a trust deed made between us and the scheme's trustees. We and
any participating subsidiaries have agreed to contribute a certain
amount of our profits from the previous financial year to trustees who
will use the funds either to acquire stock units or subscribe for new
stock units for the benefit of eligible employees. The remuneration and
nominations committee will determine, for any year in which the Irish
Profit Sharing Scheme is operated, the amount of profits of the
preceding financial year to be allocated and the basis of allocation to
employees. Any stock units subscribed for and issued under the Irish
Profit Sharing Scheme are to be subscribed at the closing quotation
price of our stock units as published in the Daily Official List of the
Irish Stock Exchange for the dealing day immediately preceding that
day, or, if greater, the nominal value of the shares comprised in the
stock unit.
Subject to the relevant legislation, all of our
employees (full- or part-time) and all of our executive directors
(including certain of our participating subsidiaries) who work such
minimum number of hours as the remuneration and nominations committee
may determine, are eligible to join the Irish Profit Sharing Scheme
provided they have the necessary qualifying period of continuous
service.
The maximum value of shares that can be appropriated to
each employee under the Irish Profit Sharing Scheme in any tax year may
not exceed the maximum from time to time permitted by the Irish Finance
Acts. The current limit is €12,697 per tax year.
Stock units allocated under the Irish Profit Sharing Scheme are to
be held by the trustees of the scheme for a minimum period of two years
after allocation.
Not more than 5% of our aggregate
profits in the preceding financial year before taxation (before any
provision for payments under the Irish Profit Sharing Scheme and any
other employee share schemes) which in the opinion of the remuneration
and nominations committee is attributable to our operations and those
of our subsidiaries, may be made available for the issue or purchase of
stock units under the Irish Profit Sharing Scheme or any other
employee's profit sharing scheme.
The number of ordinary
shares held under the Irish Profit Sharing Scheme as of September 16,
2005 is 9,452,899.
Savings-Related Share Option
Scheme 1995 (the "Savings-Related
Scheme")
All full-time executive directors
and all employees (full- or part-time) who have worked for us or a
participating subsidiary for a qualifying period as determined by the
remuneration and nominations committee (but not to exceed five years)
and any other employees nominated by the remuneration and nominations
committee are eligible to participate in the Savings-Related
Scheme.
Employees granted an option under the Savings-Related
Scheme are generally required to enter into a savings contract with a
designated savings carrier under which they make a monthly contribution
for a period of three years or, if we determine, any other period
permitted under the relevant legislation. The monthly contribution must
not exceed such limit as is fixed by the remuneration and nominations
committee within the ceiling imposed by the relevant legislation
(currently Stg£250 per month). A bonus representing an equivalent
interest return is payable at the end of the savings contract. An
option is granted to the employee, exercisable within six months of the
end of the savings contract, over the number of shares, at the option
price, equivalent to the maturity value of the savings contract.
Options are to be granted at an option price, which is not less than
80% of the market value of the underlying stock units on the day
before the date of invitation (or some other date agreed with the UK
Revenue & Customs) and, where ordinary shares are to be subscribed,
their nominal value (if greater). On April 27, 2000, shareholders
approved an allocation of up to 5% of our issued ordinary share
capital to the employee Savings-Related Scheme.
The number of
shares held under option through the Savings-Related Scheme as of
September 16, 2005 is 30,995,677.
Employee Share Ownership Plan (the
"ESOP")
The ESOP is constituted
by a discretionary trust established with the object of facilitating
the holding of stock units by or for the benefit of the plan
beneficiaries. The beneficiaries of the trust are the
77
participating employees (and in certain
circumstances former employees) including executive directors. The
trustee of the trust (which is a wholly owned subsidiary of the
Company) has been given power to apply the income and capital of the
trust fund for the benefit of the beneficiaries and may at its
discretion accumulate the income.
The Trustee has the power to
acquire our stock units and to hold them for the benefit of the plan
beneficiaries. In particular, the Trustee will be able to satisfy the
exercise of options under our share option schemes and provide stock
units under other share based incentives operated by us.
The
ESOP will hold, unallocated, no more than 5% of our issued share
capital at any one time.
The number of stock units purchased
under the ESOP, and held for the benefit of our employees as of
September 16, 2005 is 356,491.
Share Incentive Plan
2002
The Share Incentive Plan 2002 is constituted by a
trust deed made between us and the plan trustees. Under the plan,
participating employees make payments to the trustees each month, up to
a maximum of 10% of their gross pay, which the trustees use to
acquire stock units at the prevailing share price.
All of our UK
employees (full- or part-time) and all of our executive directors
(including those of certain of our participating subsidiaries) who are
based in the UK and work such minimum number of hours, as the
remuneration and nominations committee may determine, are eligible to
join the Share Incentive Plan.
The trustees of the plan are to
hold the ordinary shares for the benefit of the participating employees
until instructed otherwise. Tax benefits accrue when the stock units
are held in the trust for over five years.
The number of stock
units held under the 2002 Share Incentive Plan, and held for the
benefit of our employees, as of September 16, 2005 is 1,074,150.
Directors' and Secretary's Interests
The
following table sets forth the number and percentage of stock units of
Waterford Wedgwood plc beneficially owned by the directors and the
secretary of the Registrants as of September 16,
2005:
Director/Secretary
Stock
units of
Waterford
Wedgwood plc
Beneficially
Owned
Percentage of
Stock Units
Outstanding
P.B.
Cameron.
13,000,000
0.3
G.P.
Dempsey
63,635
—
P.J.
Dowling
1,371,103
—
A. E.
Elsby-Smith
66,154
—
J.
Foley
630,294
—
K.C.
McGoran
388,736
—
P.J.
Molloy
555,358
—
P.R.
O'Donoghue
7,444,634
0.2
D.
Sculley
3,017,883
0.1
F.A.
Wedgwood
1,743,190
—
Lord
Wedgwood of
Barlaston
183,963
—
Sub-total
of other
directors/secretary
28,464,950
0.7
%
78
O'Reilly and Goulandris families'
Holdings (which are held through the following direct and indirect
holdings)
(i)
Birchfield Holdings
Limited
1,163,316,437
26.7
%
Stoneworth
Investments
Limited
716,421,564
16.5
%
Araquipa
International
Limited
150,567,984
3.4
%
Albany
Hill
Limited
148,719,490
3.4
%
Cressborough
Holdings
Limited
51,094,206
1.2
%
Indexia
Holdings
Limited
3,726,021
0.1
%
Subtotal
of O'Reilly and Goulandris
families
2,233,845,702
51.3
%
Total
of Directors' and Secretary's
interests
2,262,310,652
52.0
%
(i)
For
additional information, see "
Item 7—Major
Shareholders and Related Party
Transactions"
.
Executive share option
scheme
Details of executive share options, granted in
accordance with the rules of the 1996 Approved Group Share Option
Scheme and the 1995 Group Share Option Scheme, held at any time during
the year ended March 31, 2005, by the directors and the secretary of
the Company and of WW UK are as
follows:
Director/Secretary
Options
held at
April 1, 2004
or date of
appointment
Adjusted
for rights
issue
Granted
during
year
Lapsed
during
year
Options held at
March 31, 2005
or
date of
retirement
Options
price
Exercisable
between
R.A.
Barnes
845,600
—
—
—
845,600
£0.72
12/13/99
-
12/13/06
211,400
—
—
—
211,400
£0.54
3/27/03
-
3/27/10
528,500
—
—
—
528,500
£0.65
4/12/04
-
4/12/11
211,400
—
—
—
211,400
£0.39
11/8/04
- 11/8/11
P.B.
Cameron
802,500
1,209,528
—
—
1,209,528
€0.59
3/27/03
-
3/27/10
535,000
806,352
—
—
806,352
€0.71
4/12/04
-
4/12/11
214,000
322,540
—
—
322,540
€0.40
11/8/04
-
11/8/11
267,500
403,176
—
—
403,176
€0.40
6/5/05
- 6/5/12
J.
Foley
246,100
370,921
—
—
370,921
€0.59
12/13/99
-
12/13/06
133,750
201,588
—
—
201,588
€0.59
9/2/02
-
9/2/09
107,000
161,270
—
—
161,270
€0.59
3/27/03
-
3/27/10
535,000
806,352
—
—
806,352
€0.71
4/12/04
-
4/12/11
214,000
322,540
—
—
322,540
€0.40
11/8/04
- 11/8/11
O.C.
Küsel
264,250
391,486
—
—
391,486
£0.64
3/26/01
-
3/26/08
107,000
161,270
—
—
161,270
€0.59
9/2/02
-
9/2/09
267,500
403,176
—
—
403,176
€0.59
3/27/03
-
3/27/10
535,000
806,352
—
—
806,352
€0.71
4/12/04
-
4/12/11
214,000
322,540
—
—
322,540
€0.40
11/8/04
- 11/8/11
C.J.
McGillivary
845,600
—
—
—
845,600
£0.72
12/13/99
-
12/13//06
1,057,000
—
—
—
1,057,000
£0.58
9/2/02
-
9/2/09
535,000
—
—
—
535,000
€0.90
3/27/03
-
3/27/10
535,000
—
—
—
535,000
€1.07
4/12/04
- 4/12/11
S.
Michaels
535,000
806,352
—
—
806,352
€0.60
3/27/03
- 3/27/10
P.R.
O'Donoghue
1,070,000
1,612,704
—
—
1,612,704
€0.59
12/13/99
-
12/13/06
1,070,000
1,612,704
—
—
1,612,704
€0.59
9/2/02
-
9/2/09
535,000
806,352
—
—
806,352
€0.59
3/27/03
-
3/27/10
749,000
1,128,892
—
—
1,128,892
€0.71
4/12/04
- 4/12/11
Lord
Wedgwood
107,000
161,270
—
—
161,270
€0.79
9/4/03
- 9/4/10
A.
Elsby-Smith
15,855
23,489
—
—
23,489
£0.49
5/24/99
- 5/24/06
79
Director/Secretary
Options
held at
April 1, 2004
or date of
appointment
Adjusted
for rights
issue
Granted
during
year
Lapsed
during
year
Options held at
March 31, 2005
or
date of
retirement
Options
price
Exercisable
between
36,995
54,808
—
—
54,808
£0.53
6/13/99
-
6/13/06
52,849
76,808
—
—
76,808
£0.63
3/26/01
-
3/26/08
1,004
1,487
—
—
1,487
£0.63
3/26/01
-
3/26/08
105,700
156,594
—
—
156,594
£0.39
9/2/02
-
9/2/09
105,700
156,594
—
—
156,594
£0.36
3/27/03
-
3/27/10
39,637
58,722
—
—
58,722
£0.26
11/8/04
- 11/8/11
P.J.
Dowling
160,500
241,905
—
—
241,905
€0.59
9/2/02
-
9/2/09
107,000
161,270
—
—
161,270
€0.79
9/4/03
-
9/4/10
160,500
241,905
—
—
241,905
€0.71
4/12/04
-
4/12/11
53,500
80,635
—
—
80,635
€0.40
11/8/04
- 11/8/11
S.A.Y.E. Share Option Scheme
Details of options granted under the Savings-Related Scheme held at
any time during the year ended March 31, 2005, by the directors and the
secretary of the Company and the directors of WW UK are as follows:
Director/Secretary
Options
held at
April 1, 2004
or date of
appointment
Adjusted
for rights
issue
Granted
during
year
Lapsed
during
year
Options held at
March 31, 2005
or
date of
retirement
Options
price
Exercisable
between
R.A.
Barnes
3,357
—
—
3,357
—
£0.577
12/1/03
-
6/1/04
6,085
—
—
—
6,085
£0.312
2/1/05
-
8/1/05
3,400
—
—
—
3,400
£0.222
2/1/06
-
8/1/06
13,464
—
—
—
13,464
£0.14
5/1/07
- 11/1/07
P.B.
Cameron
6,085
9,014
—
—
9,014
£0.211
2/1/05
-
8/1/05
3,400
5,037
—
—
5,037
£0.15
2/1/06
- 8/1/06
J.
Foley
6,241
9,406
—
—
9,406
€0.33
2/1/05
-
8/1/05
3,424
5,160
—
—
5,160
€0.23
2/1/06
- 8/1/06
C.J.
McGillivary
3,213
—
—
3,213
—
£0.577
12/1/03
-
6/1/04
6,085
—
—
—
6,085
£0.312
2/1/05
-
8/1/05
3,400
—
—
—
3,400
£0.222
2/1/06
-
8/1/06
13,464
—
—
—
13,464
£0.14
5/1/07
- 11/1/07
P.R.
O'Donoghue
2,509
—
—
2,509
—
€0.96
12/1/03
-
6/1/04
6,241
9,406
—
—
9,406
€0.33
2/1/05
-
8/1/05
3,424
5,160
—
—
5,160
€0.23
2/1/06
- 8/1/06
A.E.
Elsby-Smith
3,357
—
—
3,357
—
£0.577
12/1/03
-
6/1/04
6,085
9,014
—
—
9,014
£0.211
2/1/05
-
8/1/05
3,400
5,037
—
—
5,037
£0.15
2/1/06
-
8/1/06
13,464
19,946
—
—
19,946
£0.095
5/1/07
- 11/1/07
Lord
Wedgwood
13,464
19,946
—
—
19,946
£0.095
5/1/07
- 11/1/07
P.J.
Dowling
6,241
9,406
—
—
9,406
€0.33
2/1/05
-
8/1/05
3,424
5,160
—
—
5,160
€0.23
2/1/06
-
8/1/06
14,600
22,005
—
—
22,005
€0.133
5/1/07
- 11/1/07
Item 7—Major Shareholders and
Related Party Transactions
Major Shareholders
(a)
As far as is known to us, and other
than is disclosed under this item, the Company is not directly or
indirectly owned or controlled by one or more corporations or by any
foreign government. All of the issued voting share capital of WW UK is
owned by the Company.
80
(b)
At
September 16, 2005, Birchfield Holdings Limited
("
Birchfield
"), a company in which an
entity owned and controlled by Sir Anthony O'Reilly holds
50% and an entity owned and controlled by Peter John Goulandris
holds 50%, has notified us that it owns 1,163,316,437 stock
units, representing 26.7% of the Company's issued share
capital. Birchfield acquired these stock units pursuant to an
underwriting agreement for the rights issue of 7 new stock units for
each 11 stock units held on June 23, 2005.
(c)
At September 16, 2005, Stoneworth
Investment Limited ("
Stoneworth
"), a
company in which an entity owned and controlled by Sir Anthony
O'Reilly holds approximately 49%, and an entity owned and
controlled by Peter John Goulandris holds approximately 49% and
in which a former director of ours, Lewis Glucksman, holds 2%,
has notified us that it owns 716,421,564 stock units representing
16.5% of the Company's issued share capital. Stoneworth
acquired 119,666,795 of these stock units by purchasing, from July 17,
1998, to October 5, 1998, approximately 99% of the ordinary
shares and all the preference shares of Fitzwilton Limited
("
Fitzwilton
"). Fitzwilton had a
majority control over Shuttleway, a holding company, that held (as at
July 18, 1998) 144,342,328 of our stock units. In 2000, following a
restructuring of Shuttleway and Fitzwilton, Stoneworth became a direct
holder of the ordinary shares that were previously held through
Shuttleway and Fitzwilton. A further 9,331,733 ordinary shares were
received by Fitzwilton from us during 2001 as compensation for our
purchase of 86.5% of the issued share capital of Ashling
Corporation. A further 35,181,414 shares were acquired as a result of
the November 2003 Rights Issue, 273,633,236 as a result of the December
2004 Rights Issue and 278,608,386 as a result of the July 2005 Rights
Issue.
(d)
At September 16, 2005,
the following further interests subsisted in the issued share capital
of the Company:
The directors and
officers of the Registrants as a group held beneficially, an aggregate
of 28,464,950 stock units, representing approximately 0.7%
(excluding the holdings of the O'Reilly and Goulandris families)
of the issued share capital of the Company.
Araquipa International Limited, a
corporation 100% controlled by Peter John Goulandris, held
150,567,984 stock units. These holdings are approximately 3.4%
of the issued share capital of the Company.
Albany Hill Limited, a corporation in
which the following directors of the Company, Sir Anthony
O'Reilly, Lady O'Reilly and Peter John Goulandris,
collectively hold 100% of the issued share capital, held
148,719,490 stock units (approximately 3.4% of the issued share
capital of the Company).
Cressborough Holdings Limited
("
Cressborough
"), a company owned and
controlled by Peter John Goulandris, holds 51,094,206 stock units,
26,905 of which were acquired during 2001. These holdings are
approximately 1.2% of our issued share capital. Cressborough
acquired most of these stock units when it exchanged its approximately
6% interest in Shuttleway for 8,390,058 of our stock units. A
further 2,509,089 shares were acquired as a result of the November 2003
rights issue, 19,515,148 as a result of the December 2004 Rights Issue
and 19,869,969 as a result of the July 2005 rights issue.
Indexia Holdings Limited, a company
100% owned by Sir Anthony O'Reilly, has disclosed an
interest in 3,726,021 stock units representing approximately
0.1% of our issued share capital. Indexia Holdings Limited
acquired 68,181 shares as a result of the November 2003 Rights Issue,
as well as 114,792 shares due to the rights of Mystic Investments
(Cayman) Limited being renounced in favour of Indexia Holdings Limited.
Further it acquired 420,907 stock units from Mystic Investments
(Cayman) Limited, 1,423,133 stock units as a result of the December
2004 rights issue and 1,449,008 stock units as a result of the July
2005 rights issue.
Having regard to
the interests of Birchfield, Stoneworth and the other holdings
mentioned above, the combined holdings of the O'Reilly and
Goulandris families are approximately 51.3% of the issued share
capital of the Company.
(e)
We know
of no arrangements, the operation of which may at a subsequent date
result in a change in control of either of the Registrants.
(f)
None of the shareholders has special
voting rights.
81
(g)
The
Company has been notified of the following interests in its issued
share capital in excess of 3% at September 16, 2005.
Name
Holding
of
Stock Units
Percentage
of Stock
Units
Outstanding
(%)
Birchfield
Holdings
Limited
(1)
1,163,316,437
26.7
Stoneworth
Investment
Limited
(2)
716,421,564
16.5
Bank
of Ireland Asset
Management
(3)
304,197,024
7.0
Araquipa
International
Limited
(4)
150,567,984
3.4
Albany
Hill
Limited
(5)
148,719,490
3.4
(1)
Sir
Anthony O'Reilly, chairman of the Board of Directors indirectly
controls 50% and Peter John Goulandris, deputy chairman of the
Board of Directors, indirectly controls 50% of this company.
(2)
Sir Anthony O'Reilly, controls 49%,
Peter John Goulandris controls 49% and Lewis Glucksman a former
director owns 2% of this company.
(3)
We
have been advised that the shareholding of Bank of Ireland Asset
Management is not beneficially owned but is held on behalf of its
clients, none of whom, so far as we are aware, holds more than
3% of our issued share capital.
(4)
Peter
John Goulandris controls 100% of this company.
(5)
Sir Anthony O'Reilly indirectly controls
50%, Peter Goulandris indirectly controls 40% and Lady
O'Reilly indirectly controls 10% of this company.
For information regarding the portion of each class of the
Company's and WW UK's securities held in the US and the
number of record holders in the US, see "
Item
9—The Offer and Listing.
"
Interest of
Management in Certain Transactions
The following is a summary
of transactions entered into by the Company since April 1, 2004, in
which mangagement had an
interest.
(i)
The 2005 Underwriting
Agreement entered into by the Company, Birchfield and Davy on
June 20, 2005 (the "2005 Underwriting
Agreement"). Pursuant to the 2005 Underwriting Agreement,
subject to the fulfilment of certain conditions and on the terms set
out in the 2005 Underwriting Agreement, Birchfield acted as sole
underwriter of the 2005 Rights Issue and Davy acted as sponsor under
the Listing Rules ("Sponsor") to the 2005
Rights Issue. Where 2005 Rights Issue Units were not subscribed for
under the 2005 Rights Issue the Company and its broker, Davy, sought to
place the relevant 2005 Rights Issue Units with investors at a price
not less than the Issue Price plus expenses of sale (including
applicable commissions). If Davy, in its capacity as broker to
Waterford Wedgwood, was unable to procure subscribers in this regard
or, having concluded that it is unlikely that such subscribers could be
procured, decided not to endeavour to procure subscribers, the relevant
2005 Rights Issue Units would be subscribed for by the
Underwriter.
In consideration of its
agreement to underwrite the 2005 Rights Issue, the Underwriter was paid
a commission, for the first 30 days of its commitment under the
Underwriting Agreement, beginning on and including June 20, 2005 (the
"30 day Commission Period"), of 2.5%
of an amount equal to the value of the 2005 Rights Issue less the value
of that proportion of the 2005 Rights Issue Units in which the
O'Reilly/Goulandris Interests were interested in respect of which
no underwriting commission was payable (the resultant amount being the
"Underwriters Relevant
Amount").
An additional
commission of 0.125% of the value of the Underwriters Relevant
Amount less an amount equal to 0.125% of the value of 2005
Rights Issue Units then taken up other than by the
O'Reilly/Goulandris Interests was payable to the Underwriter for
each seven days or part of seven days (if any) after the 30 Day
Commission Period up to and including the earlier of the date of
termination of the 2005 Underwriting Agreement and the Cut Off Date (as
defined below). If the 2005 Underwriting Agreement had been terminated
in accordance with its terms, the Company, would have paid commissions
to the Underwriter on the same basis as detailed above, save that the
relevant percentage of commission applicable for the 30 Day Commission
period would be 1%.
82
For this
purpose "Cut Off Date" means the second
Business Day following the last date for acceptance and payment in full
under the Rights Issue (the "Closing
Date").
The 2005
Underwriting Agreement contained certain standard representations,
warranties, undertakings and indemnities by the Company in favour of
the Sponsor and the Underwriter in relation,
inter alia
, to the
2005 Rights Issue document, the business of the Group and the
Group's ability to implement the 2005 Rights
Issue.
The Company paid all costs and
expenses of the Underwriter and the Sponsor in connection with the 2005
Rights Issue, the issue of the 2005 Rights Issue Units and the
arrangements referred to and contemplated by the 2005 Underwriting
Agreement.
(ii)
The relationship
Agreement, which is dated June 20, 2005 was entered into by the Company
and Sir Anthony O'Reilly and Mr Peter John Goulandris. Under the
Relationship Agreement each of Sir Anthony O'Reilly and Mr Peter
John Goulandris has severally undertaken, from the time when either or
both of them becomes a controlling shareholder (defined as any person
(or persons acting jointly by agreement whether formal or otherwise)
who is (i) entitled to exercise, or to control the exercise of,
30% or more of the rights to vote at general meetings of
Waterford Wedgwood (but the rights to vote attaching to any treasury
shares held by Waterford Wedgwood are not to be taken into account when
calculating a person's percentage or rights to vote for this
purpose); or (ii) able to control the appointment of directors who are
able to exercise a majority of votes at board meetings of Waterford
Wedgwood) pursuant to the 2005 Rights Issue that (a) he shall exercise,
or procure the exercise of the voting rights attributable to his
holding so as to ensure that the Company and/or the Group is capable at
all times of carrying on its business independently of him and/or his
associates, (b) all transactions and relationships between him and/or
his associates and/or any entity interested in his holding of Stock
Units and the Group are conducted at arm's length and on a basis
no less favourable to the Company than on a normal commercial basis,
(c) he will abstain, or procure the abstention, from voting the Stock
Units attributable to his holding in general meetings of the Company in
respect of any contract or arrangement in which, in the reasonable
opinion of the Independent Board (being the Directors other than those
who may not vote as determined in accordance with the provisions
detailed in the following paragraph), he has a material interest;
(d) he will not exercise, or procure the exercise of, the voting
rights in the Company attributable to his shareholding in favour of any
amendment to the Articles which would be inconsistent with, or in
violation of, the terms of the Relationship Agreement; and (e) he will
procure that, within seven days of becoming aware of a significant
acquisition opportunity of a non-publicly quoted company in the luxury
crystal and ceramics businesses, the Company will be provided with
notice of that investment opportunity and he and his associates will
not pursue such acquisition opportunity if within a period of five
Business Days the Company notifies him of its intention to take up such
acquisition opportunity.
Each of the
parties to the Relationship Agreement has also severally undertaken to
use all reasonable endeavours to procure that during the term of the
Relationship Agreement (a) in respect of any Board resolution relating
to any transaction between any member of the Group and either or both
of Sir Anthony O'Reilly or Mr Peter John Goulandris, no member of
the Board may exercise a vote if he/she (i) is Sir Anthony
O'Reilly, Mr Peter John Goulandris, Lady O'Reilly or Mr
Tony O'Reilly Jnr (the "Current Relationship
Directors"), (ii) is connected within the meaning of
Section 26 of the 1990 Act (as amended by Section 76 of the Company Law
Enforcement Act 2001) to that principal shareholder, or (iii) has a
significant and direct business relationship with that principal
shareholder which, in the reasonable opinion of the Independent Board
(also excluding in this case the Director whose relationship is being
considered) would materially interfere with the exercise by him/her of
independent judgement on such matter; and (b) the requirements of the
Listing Rules (if any) in respect of controlling shareholders, insofar
as they relate to him as a principal shareholder, will be complied
with.
The Relationship Agreement came
into effect on the date that Sir Anthony O'Reilly and Mr Peter
John Goulandris became controlling shareholders (as described above)
pursuant to the 2005 Rights Issue.
83
(iii)
The
Deed of Undertaking entered into by the Company, with each of Sir
Anthony O'Reilly and Mr Peter John Goulandris on June 20, 2005.
Pursuant to the Deed of Undertaking, each of Sir Anthony O'Reilly
and Mr Peter John Goulandris (together the
"Obligors" for the purposes of this
description) as owners of the entire issued share capital of
Birchfield, severally undertook as to 50% each to the Company to
procure the due and punctual performance by Birchfield of its
obligations under the Underwriting Agreement. The Obligors severally
agreed to pay to the Company on demand any sum that Birchfield is due
to pay under the Underwriting Agreement and has not paid at the time
due for payment. Pursuant to the Deed of Undertaking, the Obligors also
irrevocably and unconditionally agreed severally to indemnify (and keep
indemnified) the Company on demand for any loss, liability or cost
incurred by the Company as a result of any obligations under the
Underwriting Agreement becoming void, voidable or unenforceable as
against Birchfield.
(iv)
A
relationship agreement dated December 14, 2004 entered into by the
Company and Sir Anthony O'Reilly and Mr Peter John Goulandris, in
order to address the requirements of the Listing Rules with respect to
controlling shareholders. This agreement terminated on February 28,
2005 as neither Sir Anthony O'Reilly nor Mr Peter John Goulandris
became a controlling shareholder for the purposes of the Listing Rules.
The material terms of this agreement were similar to the June 20, 2005
Relationship Agreement described at (ii)
above.
(v)
The Company entered into
the 2004 Underwriting Agreement on October 21, 2004 with Birchfield and
Davy. Pursuant to the 2004 Underwriting Agreement and subject to the
fulfilment of the conditions and on the terms set out in the 2004
Underwriting Agreement, Birchfield acted as Underwriter of the 2004
Rights Issue and Davy acted both as Sponsor to, and as an Underwriter
of, the 2004 Rights Issue. Where 2004 Rights Issue Units were not
subscribed for under the 2004 Rights Issue, the Company's broker,
Davy, sought to place the relevant 2004 Rights Issue Units with
investors at a price not less than the Issue Price plus expenses of
sale (including applicable commissions and VAT thereon). If Davy was
unable to procure subscribers in this regard or, having concluded that
it was unlikely that such subscribers could be procured, decided not to
endeavour to procure subscribers, the relevant 2004 Rights Issue Units
would be subscribed for by the Underwriters in their respective
proportions. Under the terms of the 2004 Underwriting Agreement,
Birchfield and Davy underwrote severally the 2004 Rights Issue as to
70% and 30% respectively.
In
consideration of their agreement to underwrite the 2004 Rights Issue,
each Underwriter was paid a commission for the first twenty eight days
of its commitment under the Underwriting Agreement, beginning from and
including October 21, 2004 (the "28 Day Commission
Period"), equal to 2.5% of the value of each
Underwriter's Relevant Amount (as defined in the 2004
Underwriting Agreement, being the amount obtained by multiplying the
Issue Price by the aggregate number of 2004 Rights Issue Units by the
proportion being underwritten by the relevant Underwriter). In the case
of Birchfield only, the amount of commission payable, as detailed
above, is reduced by an amount equal to 2.5% of the Birchfield
Deductible Amount (as defined in the 2004 Underwriting Agreement), so
as to ensure that the proportion of the 2004 Rights Issue Units in
which the O'Reilly/Goulandris Interests were interested was not
included in calculating the commission payable to Birchfield in respect
of these interests.
An additional
commission equal to 0.125% of the value of each of the
Underwriter's Relevant Amount (which, in the case of Birchfield
only, is reduced by an amount equal to 0.125% of the Birchfield
Deductible Amount on the same basis as detailed above) was payable to
each of the Underwriters for each seven days or part of seven days (if
any) after the 28 Day Commission Period up to and including the earlier
of the date of termination of the 2004 Underwriting Agreement and the
Cut Off Date (as defined below). If the 2004 Underwriting Agreement was
terminated in accordance with its terms, the Company was to pay
commissions to the Underwriters on the same basis as detailed above,
save that the relevant percentage of commission applicable for the 28
Day Commission Period shall be 1%. For this purpose
"Cut Off Date" means (i) if the Closing Date
falls on any date between (and including) December 22, 2004 and
December 29, 2004, the earlier of (A) the sixth business day following
the Closing Date and (B) the date (if any) by
84
which Davy, as Sponsor, has procured
subscribers for all of the 2004 Rights Issue Units not taken up or
determined that it will no longer procure subscribers for such 2004
Rights Issue Units in accordance with the 2004 Underwriting Agreement;
or (ii) in any other circumstance the second Business Day following the
Closing Date.
Each Underwriter paid to any
sub-underwriters, out of any commissions payable under the 2004
Underwriting Agreement, a sub-underwriting commission (to the extent
that sub-underwriters were or were to have been procured by such
Underwriter).
The Company paid all costs
and expenses of each Underwriter and the Sponsor in connection with the
2004 Rights Issue, the issue of the 2004 Rights Issue Units and the
arrangements referred to and contemplated by the 2004 Underwriting
Agreement.
The 2004 Underwriting Agreement
contained certain standard representations, warranties, undertakings
and indemnities by the Company in favor of the Sponsor and
Underwriters.
(vi)
The Company
entered into the 2004 Deed of Undertaking with each of Sir Anthony
O'Reilly and Mr Peter John Goulandris on 21 October, 2004.
Pursuant to the 2004 Deed of Undertaking, each of Sir Anthony
O'Reilly and Mr Peter John Goulandris (together the
"Obligors") as owners of the entire issued
share capital of Birchfield, severally undertook to the Company to
procure the due and punctual performance by Birchfield of its
obligations under the 2004 Underwriting
Agreement.
(vii)
For details of the
Subordinated Facilities and associated undertakings see
"
Item 5 − Operating and Financial Review and
Prospects − Liquidity − Developments in
2004
".
(viii)
During
the year ended March 31, 2005 Sam Michaels, one of our former
non-executive directors, was paid a fee of $100,000 (2004: $311,000)
from us for the provision of consulting services to All-Clad Holdings
Inc. for the period up to its disposal on July 27, 2004. David Sculley,
one of our non-executive directors, has a contract through Wellspring
Holdings, Inc. to provide consulting services for an annual fee of
$400,000 (2004: $400,000).
(ix)
Peter Cameron, chief executive
officer and former chief executive officer of All-Clad, was paid a
success bonus of $3.25 million during the year ended March 31, 2005
arising out of the sale of All-Clad.
(x)
Redmond O'Donoghue, our former
chief executive officer, has a service contract which can be terminated
by three years' notice, and Ottmar Küsel, chief executive
officer of Rosenthal AG, has a service contract which expires on
December 31, 2007.
Item 8—Financial Information
Consolidated Statements and Other Financial Information
See
"
Item 17—Financial
Statements
".
Legal Proceedings
From
time to time we are parties to legal proceedings arising in the normal
course of our business. In 2002, the Attorneys General of the States of
New York, Texas, Illinois and Florida requested that management provide
documentation and information with respect to our retail pricing
practices, as well as the sale and distribution of our products in
certain department and specialty stores in those states.
In
August 2004, we agreed a without prejudice settlement of $500,000 with
the New York Attorney General in settlement of specific aspects of a
case taken by the New York Attorney General against Federated Stores,
May Company, Lenox Inc. and Waterford Wedgwood for restraint of
trade.
Waterford Wedgwood USA Inc. is a defendant, with
Federated Department Stores Inc., the May Department Stores Co., and
Lenox, Inc., in a putative class-action antitrust case brought by W.
Scott Young and Tami Galindo, on behalf of themselves and all others
similarly situated, which the District Court for the Northern District
of California (the "Court") has described as
claiming vertical minimum resale price maintenance, horizontal price
fixing and an exclusionary group boycott. The case commenced with the
filing of the complaint on August 26, 2004. The Company denies these
allegations and is contesting the litigation
vigorously.
85
In March, 2005 a motion to dismiss filed
by Waterford Wedgwood and by Federated Stores and May Company was
denied and in April, 2005 the Court issued an order on discovery which
is now ongoing in respect of this action. It is too early to determine
the likely outcome of this matter and any potential loss is incapable
of estimation.
Dividends
The payment of dividends was
suspended after the payment of a dividend in respect of the year ended
March 31, 2003. Our Facility Agreement does not allow the payment of a
dividend in respect of any year unless the consolidated income before
tax for that financial year is in excess of €20
million.
At present there are no plans to resume the payment of
dividends.
If declared, holders of stock units are entitled to
elect to receive either UK source dividends paid on the income shares
of WW UK or Irish source dividends paid on the ordinary shares of the
Company. A holder of stock units is also entitled to elect to receive
dividends paid in either euro or UK pound sterling. If such elections
are not made, a holder of stock units will receive dividends paid in
euros on the ordinary shares. If a holder elects to receive dividends
on the income share comprised in the stock unit, such holder will be
entitled to a UK tax credit in respect of the cash amount of the
dividend received. At the 1996 Annual General Meeting of the Company,
shareholders approved the introduction of a scrip dividend plan. Under
the plan most shareholders are offered the option to elect to receive
their dividend in the form of additional stock units in the Group in
place of their cash entitlement. This offer was not made to
shareholders resident in the US or Canada.
Item
9—The Offer and Listing
The London Stock Exchange and
the Irish Stock Exchange Markets
On November 3, 1986, WW UK
distributed subscription rights to all of the Company's ordinary
shareholders enabling them to purchase one income share of WW UK for
every ordinary share of the Company held, at a purchase price of
£0.01 per income share, the ordinary share and income share
together constituting a "stock unit". Since
that time, stock units have been traded on the stock exchanges in
Ireland and London. From April 30, 1990 prices quoted on the London
Stock Exchange and the Irish Stock Exchange have been solely in respect
of stock units.
Price History
The London Stock Exchange
classifies equity securities based on 12 levels of normal market size
ranging from 500 to 200,000 shares. These levels of normal market size
reflect the turnover by value in each company's shares over the
past 12 months. Our stock units are quoted and traded on SEAQ at a
normal market size of 15,000 shares.
86
The reported high and low market
quotations for the stock units on The London Stock Exchange and The
Irish Stock Exchange based on their Daily Official Lists, as adjusted
for the bonus element of the Rights Issues, have been as follows:
The
London Stock Exchange
The Irish Stock
Exchange
High
Low
High
Low
(Per
stock
unit)
£
€
Year
ended December
31
2000
0.69
0.44
1.18
0.73
2001
0.71
0.28
1.13
0.44
Year
ended March
31
2003
0.39
0.14
0.65
0.19
2004
0.17
0.11
0.25
0.16
2005
0.13
0.03
0.20
0.04
Quarter
ended
June 30,
2003
0.14
0.12
0.20
0.16
September
30,
2003
0.17
0.13
0.25
0.18
December
31,
2003
0.16
0.11
0.23
0.16
March
31,
2004
0.15
0.13
0.23
0.18
June
30,
2004
0.13
0.08
0.20
0.12
September
30,
2004
0.10
0.07
0.12
0.08
December
31,
2004
0.07
0.03
0.09
0.04
March
31,
2005
0.05
0.03
0.08
0.04
June
30,
2005
0.04
0.02
0.06
0.04
Month
ended
March 31,
2005
0.04
0.03
0.06
0.04
April
30,
2005
0.03
0.02
0.04
0.04
May
31,
2005
0.04
0.03
0.05
0.04
June
30,
2005
0.04
0.03
0.06
0.04
July
31, 2005
0.04
0.04
0.06
0.05
August
31,
2005
0.04
0.04
0.06
0.06
September
30, 2005 (as at September 16, 2005)
0.05
0.04
0.07
0.06
American
Depository Shares ("ADSs")
Effective
July 8, 1986, ADSs representing 10 ordinary shares each, and, since
December 30, 1986, ADSs representing 10 stock units each, for which The
Bank of New York is currently the Depositary, were quoted on the NASDAQ
National Market System. In December 1988, we de-registered our ADSs
representing ordinary shares under the Securities Exchange Act of 1934
and terminated their quotation so that since that time the stock units
represented by ADSs are the only quoted securities on the NASDAQ
National Market System. The quotations set forth below for ADSs
representing stock units reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent
actual transactions.
87
The reported high and low market
quotations for the ADSs on the NASDAQ National Market System, as
adjusted for the bonus element of the Rights Issues, have been as
follows:
High
Low
(Per
ADS)
$
Year
ended December
31
2000
9.89
6.97
2001
10.50
4.11
Year
ended March
31
2003
6.20
2.18
2004
3.15
2.12
2005
2.54
0.41
Quarter
ended
June 30,
2003
2.54
2.12
September 30,
2003
2.99
2.29
December 31,
2003
3.15
2.25
March 31,
2004
2.94
2.49
June 30,
2004
2.66
1.68
September 30,
2004
2.03
1.38
December 30,
2004
1.54
0.78
March 31,
2005
1.15
0.51
June 30,
2005
0.79
0.50
Month
ended
March 31,
2005
0.79
0.51
April 30,
2005
0.61
0.50
May 31,
2005
0.64
0.51
June 30,
2005
0.79
0.57
July 31, 2005
0.90
0.69
August 31,
2005
0.89
0.74
September 30, 2005
(as at September 16, 2005)
0.90
0.69
As of March 31, 2005,
there were approximately 274 holders of an aggregate of 4,753,851 ADSs,
representing 47,538,510 stock units, equivalent to approximately
1.8% of the outstanding issued share capital of the
Company. In addition there were 191 US registered holders of an
aggregate of 1,501,649 stock units, equivalent to approximately
0.056% of the outstanding issued share capital of the
Company.
On March 10, 2005 the Company was advised by NASDAQ
that for the previous 32 consecutive business days, the bid price of
the Company's ADSs had closed below the minimum $1.00 per share
requirement for inclusion under NASDAQ Marketplace Rule 4450(a)(5)
("the Rule"). Therefore, in accordance with
Marketplace Rule 4450 (e)(2) the Company was provided with 180 calendar
days, or until September 6, 2005, to regain compliance. If at any time
before September 6, 2005 the bid price of the Company's ADSs
closed at $1.00 or more per share for a
minimum
of 10
consecutive business days, Staff would provide written notification
that it had achieved compliance with the Rule.
The minimum bid
price of $1.00 was not achieved within the specified time period and
consequently the Company's ADSs were delisted from NASDAQ with
effect from September 20, 2005. The Company currently does not intend
to seek reinstatement of its NASDAQ listing.
Item
10—Additional Information
Memorandum & Articles of
Association—Waterford Wedgwood plc and Waterford Wedgwood UK
plc
The information contained in the annual report on Form 20-F
for the fiscal year ended March 31, 2003 at item 10, in
relation to the Memoranda and Articles of Association of Waterford
Wedgwood plc and Waterford Wedgwood UK plc, remains unchanged.
88
Material Contracts
For a description of the Facility Agreement, the
Intercreditor Agreement, the Subordinated Loans and the Mezzanine Note
Indenture, see "
Item 5—Operating Financial Review
and Prospects—Capital Resources
". For a
description of the directors' service contracts, the 1995 Group
Share Option Scheme and the 1996 Approved Group Share Option Scheme see
"
Item 6—Directors, Senior Management and
Employees
".
For a description of the
Underwriting Agreements, the Relationship Agreements and the Deeds of
Undertaking see "
Item 7 − Major Shareholdings
and Related Party Transactions
".
Waterford
Crystal Limited ("WCL") entered into a
contract on May 24, 2005 (the "Contract") for
the sale of 22 acres of underutilized land surrounding its Sports and
Leisure Centre in Waterford (the "Property").
The purchaser was Parker Green (Carlow) Limited and the total purchase
price was €32,900,000. A deposit amounting to
€22,000,000 was released to WCL upon the delivery of a
security instrument and the balance of €10,900,000 was
discharged upon the satisfaction of conditions normal in property
transactions of this nature (i.e. release of security interests, vacant
possession etc). The Contract is subject to the satisfaction of a
condition subsequent that the Property will retain its recently
acquired zoning designation as mixed use, including retail warehousing.
The failure to satisfy this condition could result in the rescission of
the Contract and the return of the purchase price.
Exchange Controls and Other Limitations Affecting Security
Holders
Republic of Ireland
In the Republic of Ireland, there are currently no
foreign exchange controls or other statutes or regulations that
restrict the export or import of capital or that affect the remittance
of dividends, other than dividend withholding tax on the ordinary
shares or stock units, the payment of interest or the conduct of the
Company's operations.
There are no
restrictions under the Memorandum and Articles of Association of the
Company or under Irish law that limit the right of non-resident or
foreign owners to freely hold or vote the ordinary shares.
United Kingdom
There are currently
no UK foreign exchange controls or other statutes or regulations that
restrict the export or import of capital or that affect the remittance
of dividends on the income shares or stock units, the payment of
interest or the conduct of WW UK's operations.
There are no limitations, either under the laws of
the UK or under the Memorandum and Articles of Association of WW UK,
restricting the right of non-resident or foreign owners to freely hold
or vote (to the limited extent permitted by such Memorandum and
Articles of Association) the income shares.
Taxation
The following discussion
summarizes the material US federal income tax consequences and, to a
limited extent, the US estate and gift tax consequences and the UK and
Republic of Ireland tax consequences, of the purchase, ownership and
disposition of the Company's stock units or ADSs by a
"US Holder," as defined below.
A "US Holder" is a beneficial
owner of the Company's stock units or ADSs that holds such stock
units or ADSs as capital assets and is, for US federal tax purposes,
one of the following:
•
A
citizen or resident of the United
States;
•
A corporation
created or organized in the United States or under the laws of the
United States, any state thereof or the District of
Columbia;
•
An estate,
the income of which is subject to US federal income taxation regardless
of the source of such
income;
•
A trust, if (i)
a US federal or state court may properly exercise primary supervision
of the administration of the trust and one or more US persons have the
authority to control all substantial decisions of the trust or (ii) the
trust has made a valid election under US Treasury regulations to be
treated as a US person.
89
The following summary is
based upon the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations
and administrative and judicial rulings thereunder, the tax laws of the
Republic of Ireland and the UK, the income tax conventions between the
US and the Republic of Ireland (the "Irish
Treaty"), between the US and the UK entered into force on
April 25, 1980 (the "Old UK Treaty") and
between the US and the UK entered into force on March 31, 2003 (the
"New UK Treaty") and the gift and estate
conventions between the US and the Republic of Ireland and between the
US and the UK, all as currently in effect and all subject to change,
possibly with retroactive effect.
The New UK
Treaty is effective with respect to taxes withheld at the source on
amounts paid or credited on or after May 1, 2003. However, certain
provisions of the New UK Treaty took effect only on January 1, 2004.
Until these effective dates, the Old UK Treaty remained applicable; and
a US Holder that is eligible for the benefits of the Old UK Treaty may
in certain circumstances elect to have the Old UK Treaty apply in its
entirety for a period of 12 months after the applicable effective dates
of the New UK Treaty. Holders of Company stock units or ADSs are
advised to consult their own tax advisers concerning the overall tax
implications for them of the New UK Treaty, including the implications
of making the foregoing election.
This summary is general
information only. It does not exhaust all possible consequences to US
Holders and, specifically, does not address particular consequences to
US Holders subject to special tax treatment, such
as:
•
Dealers in
securities, or traders in securities that have elected mark-to-market
accounting;
•
Insurance
companies, financial institutions or "financial services
entities;"
•
Tax-exempt
organizations;
•
Corporations
that may be subject to section 269A or section 7874 of the
Code;
•
Persons that hold
the Company's stock units or ADSs together with other instruments
as a "straddle," hedge,"
"conversion transaction" or other integrated
transaction;
•
Persons
that hold the Company's stock units or ADSs through a partnership
or other pass-through
entity;
•
Persons that
acquired the Company's stock units or ADSs as
compensation;
•
Holders
subject to the alternative minimum
tax;
•
Holders that own,
directly or by attribution, 10% or more of the voting stock of
the Company or WW
UK;
•
Holders whose
functional currency is not the US dollar;
or
•
Certain former
citizens or long term residents of the United States.
This summary does not address any aspect of state
or local US tax law or, with the limited exception of the UK and the
Republic of Ireland, any aspect of foreign tax law. Further, this
summary is based on representations by the Depositary of the ADSs and
on the assumption that each obligation in the Depositary Agreement and
any related agreement will be performed in accordance with its terms.
If such is the case, (i) a holder of an ADR evidencing an ADS generally
will be treated as the owner of the underlying Company stock unit for
purposes of US federal income tax, the Irish Treaty and the UK Treaty
and (ii) an exchange of a Company stock unit for an ADR or an ADR for a
Company stock unit generally will not be subject to US, UK or Republic
of Ireland income or corporation tax.
Each
holder of the Company's stock units or ADSs is urged to consult
that holder's own tax adviser concerning the specific
consequences to that holder of purchasing, owning and disposing of the
Company's stock units or ADSs.
US Federal
Income Taxation
Taxation of Dividends
No
distributions in respect of the stock units or ADSs were made for the
fiscal year ending March 31, 2005.
90
Taxation of Capital Gains
A US Holder that sells, exchanges or otherwise
makes a taxable disposition of the holder's Company stock units
or ADSs generally will recognize capital gain or loss equal to the
difference between the US dollar value of the holder's basis in
the Company's stock units or ADSs and the US dollar value of the
amount realized upon the disposition. For non-corporate US Holders,
such gain or loss generally will be US source capital gain or loss for
foreign tax credit limitation purposes and will be taxed at the long
term capital gains rate, currently 15%, if the holder has held
the Company's stock units or ADSs for more than one year.
Any Republic of Ireland or UK tax imposed on such gains will be
allowable as a credit against a US Holder's US federal
income tax liability if the holder has income from sources outside the
United States in the appropriate category for purposes of the foreign
tax credit rules. The foreign tax credit rules are complex. US Holders
are urged to consult their own tax adviser concerning the application
of the US foreign tax credit rules.
The deductibility of
capital losses for US tax purposes is subject to significant
limitations.
Passive Foreign Investment Company
Generally, for US federal income tax purposes, a company is a
"passive foreign investment company," or
PFIC, for any taxable year if either (i) at least 75% of its
gross income is "passive" income or (ii) at
least 50% of its assets by value, determined on a quarterly
average basis, is attributable to assets that produce or are held for
the production of passive income. If the Company were a PFIC in any
taxable year in which a US Holder owned Company stock units or ADSs,
the holder could be subject to tax at ordinary income rates and liable
for the payment of interest on (a) a portion of any gain recognized by
the holder on a sale or other taxable disposition of the Company stock
units or ADSs and (b) any "excess
distribution" paid on the Company stock units or ADSs,
defined generally as a distribution in excess of 125% of the
average annual distributions paid by the Company or WW UK in the
preceding three taxable years.
Based on its current activities
and assets, the Company does not believe that it is a PFIC and does not
expect to become a PFIC in the foreseeable future. However, the
foregoing belief and expectation are based on the Company's
current activities and plans, either of which may change in the future.
The determination of whether or not the Company is a PFIC is made
annually, and it is possible that the Company will become a PFIC
because of changes in the composition of its assets or income.
Estate and Gift Taxation
Any inheritance tax payable
in the Republic of Ireland or the UK will be allowable as a credit
against the US federal estate tax payable upon the same property. There
is no credit against US federal gift tax for Irish gift tax
paid.
Backup Withholding and Information Reporting
A US paying agent or other US intermediary that receives payments of
dividends and other proceeds in respect of Company stock or ADSs may be
required by applicable Treasury regulations to report such payments to
the IRS. Backup withholding (currently at a rate of 28%) may
apply to these payments if a US Holder fails to provide the agent or
intermediary with an accurate taxpayer identification number or
certification of exempt status or fails to report all interest and
dividends required to be shown on its US income tax return, or if the
IRS otherwise notifies the agent or intermediary that such amount must
be withheld. Backup withholding is not an additional tax. The amount of
any backup withholding collected from a payment to a US Holder will be
allowed as a credit against the US Holder's US federal income tax
liability and may entitle the US Holder to a refund if certain required
information is furnished to the IRS in a timely manner. US Holders
should consult their tax advisers as to their qualification for
exemption from backup withholding and as to the procedure for obtaining
this exemption.
UK and Ireland Taxation
Taxation of Dividends
No distributions in respect of
the stock units or ADSs were made for the fiscal year ending
March 31, 2005.
91
Taxation of Capital Gains
A
US Holder of ADSs or stock units who is resident in the US and is not
resident or ordinarily resident (for UK tax purposes) in the UK will
not be liable for UK tax on gains realized on the sale or other
disposal of these ADSs or stock units unless the ADSs or stock units
are held in connection with a trade carried on by him in the UK through
a branch or agency. A US Holder of ADSs or stock units who is resident
in the US and not resident or ordinarily resident (for Republic of
Ireland tax purposes) in the Republic of Ireland will not be liable for
Republic of Ireland tax on gains realized on the sale or other disposal
of the ADSs or stock units unless the ADSs or stock units are held in
connection with a trade or business carried on by him in the Republic
of Ireland through a branch or agency.
A US citizen who is
resident or ordinarily resident in the UK, or a US corporation that is
resident in the UK or which holds ADSs or stock units in connection
with a trade or business carried on by it in the UK through a branch or
agency, may be liable for both UK and US tax on a gain resulting from
the disposal of ADSs or stock units. A US citizen who is resident or
ordinarily resident in the Republic of Ireland, or a US corporation
that is resident in the Republic or Ireland, of which ADSs or stock
units are an asset or for whose purpose the ADSs or stock units are
held, may be liable for both Republic of Ireland and US tax on a gain
on the disposal of the ADSs or stock units.
A company is deemed
to be resident in the Republic of Ireland for Irish tax purposes if its
management and control is exercised in Ireland. A company is also
deemed to be resident in Ireland if it is incorporated in Ireland (save
in the circumstances below).
Companies which are incorporated in
the Republic of Ireland are not regarded as resident if they or a
related company are trading in Ireland and they are controlled by
persons resident in an EU Member State or tax treaty country, or if
they or a related company are quoted on a recognized stock exchange in
an EU Member State or tax treaty country.
Alternatively, a
company incorporated in the Republic of Ireland will not be regarded as
Irish resident if the company is regarded as non-resident by virtue of
a tax treaty between the Republic of Ireland and another country.
Estate and Gift Taxation
Stock units, or ADSs
representing stock units, in companies registered in the Republic of
Ireland are deemed to be situated where the company maintains its share
register, namely the Republic of Ireland. Republic of Ireland capital
acquisitions tax applies to gifts and inheritances of Irish property.
Gifts and inheritances of ADSs and stock units are, therefore, subject
to capital acquisitions tax. Certain exemptions apply to gifts and
inheritances depending upon the relationship between the donor and
donee. For example, bequests to a spouse under a will or gifts between
spouses are wholly exempt from Irish capital acquisitions tax.
UK inheritance tax may apply to gifts and bequests of ADSs or stock
units to the extent that the value of such stock units is attributable
to income shares, whether or not the donor is domiciled or treated as
domiciled for UK inheritance tax purposes in the UK and to gifts and
bequests of ADSs or stock units to the extent of their value if the
donor is domiciled or treated as domiciled in the UK. UK Inheritance
Tax is not chargeable on gifts of stock units or ADSs to individuals or
trusts (other than discretionary trusts) if the transfer of those stock
units or ADSs is made more than seven complete years prior to the death
of the person making that gift.
Stamp Duty and Stamp Duty
Reserve Tax
No Irish stamp duty is payable on the transfer of an
ADS. No stamp duty reserve tax
("
SDRT
") will be payable on the
transfer of an ADS.
UK ad valerom stamp duty may be payable at
the rate of 0.5% (rounded up to the nearest £5) on the
amount or value of the consideration in respect of a document effecting
a transfer of one or more ADS subject to any available exemption or
relief. In practice it should not be necessary to pay any UK ad valorem
stamp duty on such document unless that document is required for
certain purposes in the UK. If it becomes necessary to pay UK ad
valerom stamp duty in respect such document, it may also be necessary
to pay interest and penalties.
92
The Irish stamp duty treatment of the
conversion of stock units into ADSs and the conversion of ADSs back
into stock units has recently been agreed between the Irish Revenue
Commissioners and the Irish Stock Exchange. Where the conversion into
or out of ADSs is on a sale or in contemplation of a sale Irish Stamp
Duty of 1% will apply.
Stock units deposited with the
Depositary by the beneficial owner will not attract Irish stamp duty
provided they are not deposited on a sale or in contemplation of a
sale. When stock units are transferred to the Depositary, or a nominee
for the Depositary, UK stamp duty or SDRT may be payable at a rate of
1.5% (rounded up if necessary, in the case of UK stamp duty, to
the nearest multiple of £5) of or up to the amount or value of
the consideration payable or, in certain circumstances, the value of
the stock units. The liability for such UK stamp duty or SDRT will be
for the account of the Depositary or its nominee, as the case may be,
but the cost will in practice generally be required to be reimbursed by
participants in the depository receipt scheme to the Depositary or its
nominee.
A transfer of stock units by the Depositary at the
direction of the ADS holder directly to a purchaser will give rise to
Irish stamp duty at 1% of the value. A transfer to the holder of
the ADS upon cancellation of the ADS will not attract a charge to Irish
stamp duty provided the transfer is not on a sale or in contemplation
of a sale and appropriate certification is given. The transfer of the
stock units by the Depositary or its nominee to the holder of the ADSs
is not liable to UK ad valorem stamp duty or to SDRT. A fixed UK stamp
duty of £5 may be payable on the instrument used for this
purpose.
A transfer on sale or voluntary disposition of stock
units will give rise to Irish stamp duty at a rate of 1% on the
consideration or value. Where a transaction is effected under Crest,
under current practice no additional charge to SDRT is collected in
respect of the consideration attributable to the income share.
If the transfer is effected outside Crest, payments of Irish stamp
duty will normally frank any liability to UK stamp duty. Under double
taxation arrangements between the Republic of Ireland and the UK where
an instrument has been stamped in one country, the instrument is deemed
to have been stamped in the other country, but only to the extent of
the duty it bears in the first country.
A transfer of stock
units other than on sale or by voluntary disposition will not attract a
charge to Irish stamp duty if effected by an instrument of transfer or
under the Crest system, provided appropriate certification is given.
Any UK stamp duty on a transferred document should be limited to
£5.00. No SDRT should arise under the Crest system under current
practice.
In relation to sales of stock units which do not
involve the transfer of legal title and which are not effected by an
instrument of transfer, Irish stamp duty charges may not arise but a
charge to SDRT at the rate of 0.5% could arise on the amount or
value of the consideration attributable to the income
share.
Documents on Display
It is possible to read and
copy documents referred to in this annual report on Form 20-F that have
been filed with the SEC at the SEC's public reference room
located at 450 Fifth Street NW, Washington, DC 20049. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference
rooms and their charges. SEC filings are also available to the public
from commercial document retrieval services and, for our most recent
filings only, at the web site maintained by the SEC at
http://www.sec.gov.
93
Item
11—Quantitative and Qualitative Disclosures about Market
Risk
All of the figures in this Item 11 have been prepared
under Irish GAAP.
We are exposed to changes in financial market
conditions in the normal course of our business operations due to
operations in different foreign currencies and ongoing investing and
funding activities, including changes in interest rates and foreign
currency exchange rates. Market risk is the uncertainty to which future
earnings or asset/liability values are exposed due to operating cash
flows denominated in foreign currencies and various financial
instruments used in the normal course of operations. We have
established policies and procedures and internal processes, including
review by a sub-committee of the Board, governing our management of
market risks and the use of financial instruments.
We are
exposed to changes in interest rates primarily as a result of
short-term and long-term debt used to maintain liquidity and to fund
our business operations. We borrow in different currencies and from
different sources to meet the borrowing needs of the Group. The nature
and amount of our long-term and short-term debt can be expected to vary
as a result of future business requirements, market conditions and
other factors.
Our operating cash flows denominated in
currencies other than the euro and certain of our borrowings are
exposed to changes in foreign exchange rates. We continually evaluate
our foreign currency exposure (primarily US dollar, yen and UK pound
sterling), based on current market conditions and the business
environment. In order to mitigate the effect of foreign exchange risk,
we engage in hedging activities.
Treasury management and
financial instruments
Our treasury operations are managed by
the Group Treasury function within parameters formally defined and
regularly reviewed by the Treasury Risk Management Committee of the
Board supplemented by procedures and bank mandates. Our Treasury
function operates as a centralized service managing interest rate,
foreign currency and financing risk and its activities are routinely
reported to members of the Board.
Consistent with our policy,
Group Treasury does not engage in speculative activity. Financial
instruments, including derivatives, are used to raise finance and to
manage interest rate and foreign currency risk arising from our
operations. The directors set out their views on the key financial
risks below.
Foreign currency risk management
The majority of our business operations and our assets and
liabilities are transacted and held in four principal currencies; euro,
UK pound sterling, US dollar and yen.
It is our policy to
protect income and expenditure, where appropriate, by means of forward
currency contracts. Projected business trading flows are netted by
currency and, where considered appropriate, hedged up to 3 years ahead.
We elected during the year ended March 31, 2004 to cancel a portion of
our outstanding future year's forward cover, resulting in a gain
during the year ended March 31, 2004, as part of our management of the
yield on our hedging activities in respect of overseas trading cash
flows. Taking into account our view on the four principal currencies,
current hedging in place at September 16, 2005 for the coming 12 months
was as follows: 91.3% of our $/€ exposure and
57.3% of our ¥/£ exposure.
We monitor our
exposure to changes in exchange rates by estimating the impact of
possible changes on reported operating income before tax. If we did not
hedge our currency exposures we estimate, based on our year ended March
31, 2005, that a 1 cent decline in the value of the US dollar against
the euro would reduce operating income by approximately
€0.6 million in a full year and a 10 yen decline in the
yen against the UK pound sterling would reduce operating income by
€1.7 million in a full year.
Our policy has
been to use foreign currency borrowings and forward foreign currency
contracts to hedge part of the impact on our balance sheet of exchange
rate movements on foreign currency denominated assets and
liabilities.
94
Analysis of Forward
Contracts by currency
Principal (notional) amount by expected
maturity date:
Year
ending March 31,
Fair
value
as at
March 31,
2004
March 31,
2004
2006
2007
2009
Total
(in
millions except average exchange rates)
€
million
Forward contracts to hedge
anticipatory transactions:
Sale of US
dollars for euro:
Notional contract
amount
$0.2
$9.3
—
$9.5
0.4
Weighted average contractual exchange
rate
1.16
1.17
—
1.17
Forward
contract to hedge US dollar
borrowings:
Sale of UK pound sterling for
US dollar:
Notional contract
amount
—
—
$22.6
$22.6
1.6
Weighted
average contractual exchange
rate
—
—
1.59
1.59
Interest
rate risk:
Interest rate
swaps
—
—
—
—
(0.9)
March
31, 2005
Year ending
March 31,
2006
Total
Fair value
as at
March
31,
2005
(in
millions except average exchange rates)
€
million
Forward contracts to hedge
anticipatory transactions:
Sale of US
dollar for euros:
Notional contract
amount
$105.0
$105.0
0.0
Weighted
average contractual exchange
rate
1.31
1.31
Sale of
Japanese yen for UK pound sterling:
Notional
contract
amount
¥2,625.0
¥2,625.0
1.0
Weighted
average contractual exchange
rate
186.17
186.17
Sale of
US dollars for UK pound sterling:
Notional
contract
amount
$4.0
$4.0
0.2
Weighted
average contractual exchange
rate
1.77
1.77
Sale of
Australian dollars for UK pound
sterling:
Notional contract
amount
AUS$0.1
AUS$0.1
0.0
Weighted
average contractual exchange
rate
2.58
2.58
Sale of
euro for UK pound sterling:
Notional contract
amount
€0.1
€0.1
0.0
Weighted
average contractual exchange
rate
1.45
1.45
Purchase
of US dollars for UK pound sterling:
Notional
contract
amount
$0.2
$0.2
0.0
Weighted
average contractual exchange
rate
1.80
1.80
Purchase of
US dollars for euro:
Notional contract
amount
$0.2
$0.2
0.0
Weighted
average contractual exchange
rate
1.23
1.23
Purchase of
euro for UK pound sterling:
Notional contract
amount
€0.2
€0.2
Weighted
average contractual exchange
rate
1.36
1.36
As at March 31,
2005 the Group has no foreign exchange derivatives other than those
presented above.
95
Interest rate risk management
Our interest rate exposure arising from our borrowings and deposits
is managed by the use of fixed rate debt, interest rate swaps and
interest rate collars. The objectives for the mix between fixed and
floating rate borrowings are set to reduce the impact of an upward
change in interest rates while enabling some benefits to be enjoyed if
interest rates fall. Thus our interest rate risk management policy is
to fix between 20% and 60% of the interest cost on
outstanding debt. At March 31, 2005, 53.2% (2004: 48.7%)
of debt was fixed at an average rate of 9.86% (2004:
9.52%) for a weighted average maturity of 5.6 years (2004: 6.1
years). The average rate of interest paid during the year ended March
31, 2005 was 7.15% (year ended March 31, 2004: 5.6%).
We monitor our exposure to changes in interest rates by estimating
the impact of possible changes on reported operating income before tax.
Based on the level and composition of year end debt, a rise in market
rates by one percentage point, for a period of one year, would increase
losses before tax by €1.9 million for the year ended
March 31, 2005 (year ended March 31, 2004: increase net loss
before tax by €3.2 million).
Fixed
rate
debt
Floating
rate
debt
Weighted
average
interest
rate
%
Weighted
average
time for
which
rate
is
fixed
Years
Amount
Weighted
average
interest
rate %
Amount
Total
(€ in
millions)
(€ in
millions)
At March 31,
2005
Euro
loans
9.9
5.6
159.3
8.1
(1.7
)
157.6
US dollar
loans
—
—
—
5.4
71.5
71.5
UK pound sterling
loans
—
—
—
7.4
48.8
48.8
Yen
loans
—
—
—
2.8
21.5
21.5
Total
9.9
5.6
159.3
5.7
140.1
299.4
Fixed
rate
debt
Floating
rate
debt
Weighted
average
interest
rate
%
Weighted
average
time for
which
rate
is
fixed
Years
Amount
Weighted
average
interest
rate %
Amount
Total
(€ in
millions)
(€ in
millions)
At March 31,
2004
Euro
loans
9.8
6.5
162.9
6.0
85.3
248.2
US dollar
loans
8.8
4.6
48.8
6.4
99.7
148.5
UK pound sterling
loans
—
—
—
5.8
15.8
15.8
Yen
loans
—
—
—
2.3
22.0
22.0
Total
9.5
6.1
211.7
5.8
222.8
434.5
Item
12—Description of Securities other than Equity Securities
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