PROSPECTUS
$165,000,000
SYRATECH(TM)
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CORPORATION
11% Senior Notes due 2007
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The 11% Senior Notes due 2007 (the "Senior Notes") are being offered (the
"Offering") by Syratech Corporation, a Delaware corporation ("Syratech" or the
"Company"). The net proceeds of the Offering, together with the net proceeds of
the other financing described herein, will be used to support a recapitalization
(the "Recapitalization") of Syratech, pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") providing for the merger of the Company and THL
Transaction I Corp ("THL I"), a Delaware corporation organized by Thomas H. Lee
Company, (the "Merger") with Syratech surviving such Merger and to pay related
transaction costs. The consummation of this Offering, the Recapitalization and
the financing thereof are conditioned upon each other.
The Senior Notes mature on April 15, 2007, unless previously redeemed.
Interest on the Senior Notes is payable semiannually on April 15 and October 15,
commencing October 15, 1997. The Senior Notes will be redeemable at the option
of the Company, in whole or in part, on or after April 15, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the redemption date. Notwithstanding the foregoing, at any time on or before,
April 15, 2000 the Company may redeem up to 35% of the original aggregate
principal amount of the Notes with the net proceeds of a public offering of
common stock of the Company at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the redemption date; provided
that at least $100.0 million in aggregate principal amount of Senior Notes
remain outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 45 days of the date
of the closing of such public offering. Upon a Change of Control (as defined
herein), the Company will be required to make an offer to repurchase all
outstanding Senior Notes at 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase. See "Description
of Senior Notes."
The Senior Notes will be general unsecured obligations of the Company
ranking senior to all existing and future subordinated indebtedness of the
Company and pari passu in right of payment to all unsubordinated indebtedness of
the Company, including indebtedness under the New Credit Facility (as defined
herein). However, the obligations of the Company under the New Credit Facility
will be secured by the accounts receivable and inventory of the Company and its
domestic subsidiaries and, accordingly, such indebtedness will effectively rank
senior to the Senior Notes to the extent of such assets. The Senior Notes will
be fully and unconditionally guaranteed (the "Subsidiary Guarantees") on a joint
and several basis by each of the Company's domestic subsidiaries (the
"Guarantors"). The Subsidiary Guarantees will rank senior to all existing and
future subordinated indebtedness of the Guarantors and pari passu with all other
unsubordinated indebtedness of the Guarantors, including the guarantees of
indebtedness under the New Credit Facility. As of December 31, 1996, on a pro
forma basis after giving effect to the Recapitalization, including the Offering
and the application of the proceeds therefrom, as described under "Use of
Proceeds," the Company and its subsidiaries would have had $10.3 million of
secured indebtedness (consisting of outstanding letters of credit) which would
have effectively ranked senior to the Senior Notes.
The Company does not intend to list the Senior Notes on any national
securities exchange. See "Risk Factors -- Absence of Public Market."
See "Risk Factors" beginning on Page 13 for a discussion of factors that
should be considered in evaluating an investment in the Senior Notes.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(2)(3)
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Per Senior Note........ 100% 3% 97%
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Total.................. $165,000,000 $4,950,000 $160,050,000
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(1) Plus accrued interest, if any, from April 16, 1997.
(2) The Company and the Guarantors have, jointly and severally, agreed to
indemnify the Underwriters (as defined herein) against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses payable by the Company and the Guarantors,
estimated at $550,000.
The Senior Notes are being offered, subject to prior sale, by the
Underwriters when, as and if issued to and accepted by the Underwriters, and
subject to various prior conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the Senior Notes will be made in New York, New
York on or about April 16, 1997.
NationsBanc Capital Markets, Inc. Chase Securities Inc.
The date of this Prospectus is April 10, 1997.
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[INSIDE FRONT COVER:]
1. Seven photographs of Syratech silver products, including flatware, serving
pieces and picture frames.
2. Stylized tradenames: Towle Silversmiths, Wallace Silversmiths, International
Silver Company, Rochard, Inc., Faberware, C.J. Vander Limited, Elements,
Tuttle La Preference, and Melannco.
[INSIDE BACK COVER:]
1. Six photographs of Syratech seasonal products, including Christmas
ornaments and Christmas decorations.
2. Stylized tradenames: Rauch Industries, Holiday Workshop, Potpourri Designs
and Silvestri.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SENIOR NOTES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates by reference documents which are not presented
herein or delivered herewith. Copies of any such documents relating to the
Company, other than exhibits to such documents (unless such exhibits
specifically are incorporated by reference in such documents), are available
without charge, upon written or oral request, from Syratech Corporation, 175
McClellan Highway East Boston, Massachusetts 02128-9114, Attention: Faye A.
Florence, Esq., Vice President, Secretary and General Counsel, telephone: (617)
561-2200. In order to ensure timely delivery of the documents requested, any
such request should be made by April 1, 1997.
The following documents previously filed by the Company (File No. 1-12624)
with the Commission are incorporated in this Prospectus by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
(2) The Company's Proxy Statement, dated April 8, 1996 which was mailed to
the Company's stockholders in connection with the Annual Meeting of
Stockholders held on May 9, 1996.
(3) The Company's Current Report on Form 8-K dated February 29, 1996, as
amended by the Current Report on Form 8-K/A dated February 27, 1997 (which
supersedes a Current Report on Form 8-K/A dated April 29, 1996); Current
Report on Form 8-K dated April 17, 1996, as amended by the Current Report on
Form 8-K/A dated August 26, 1996; Current Report on Form 8-K dated May 1,
1996; Current Report on Form 8-K dated July 11, 1996; Current Report on Form
8-K dated September 17, 1996; Current Report on Form 8-K dated October 25,
1996; and Current Report on Form 8-K dated November 12, 1996.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the date of
the Merger shall be deemed to be incorporated by reference herein and to be part
hereof from the date of the filing of such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute part of this Prospectus.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained or incorporated by
reference in this Prospectus, the matters discussed or incorporated by reference
herein are forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the risk factors set forth under "Risk Factors" as well as the
following: general economic and business conditions; industry capacity; industry
trends; overseas expansion; the loss of major customers; changes in demand for
the Company's products; the timing of orders received from customers; cost and
availability of raw materials; dependence on foreign sources of supply; changes
in business strategy or development plans; availability and quality of
management; availability, terms and deployment of capital; and the seasonal
nature of the business. Special attention should be paid to such forward-looking
statements including, but not limited to, statements relating to (i) the
Company's ability to execute its growth strategies and to realize its growth
objectives, (ii) the Company's planned expansion of its product offerings, (iii)
the Company's ability to obtain sufficient resources to finance its working
capital and capital expenditure needs and provide for its known obligations, and
(iv) the continuation of, and the Company's ability to benefit from, the vendor
consolidation trend in the retail industry described elsewhere in this
Prospectus.
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with the more detailed information and financial
data, including the notes thereto, appearing elsewhere in this Prospectus or
incorporated herein by reference. Unless the context indicates otherwise, all
references herein to "Syratech" or the "Company" shall refer to Syratech
Corporation and its subsidiaries.
The Company
Overview
Syratech designs, manufactures, imports and markets a diverse portfolio of
tabletop, giftware and seasonal products. The Company is a leading domestic
manufacturer and marketer of sterling silver flatware, sterling silver and
silver-plated hollowware. The Company also offers a number of other
complementary tabletop and giftware items, including stainless steel flatware,
brass hollowware, picture frames and photo albums, glassware, woodenware and
ceramics. Tabletop and giftware products generated approximately 63.4% of net
sales for the year ended December 31, 1996. The Company also is a leading
domestic manufacturer and marketer of seasonal products including Christmas
ornaments as well as a distributor of Christmas trim, lighting and tree skirts.
Seasonal products generated approximately 36.6% of net sales for the year ended
December 31, 1996.
Syratech has positioned itself as a single-source supplier to retailers by
offering a wide assortment of products across multiple price points through its
"good-better-best" strategy. This strategy enables the Company to sell its
products through a broad array of distribution channels, including retail
specialty stores, department stores, mass market merchandisers, catalogue
showrooms and warehouse clubs. Syratech markets its products under numerous
Company-owned tradenames including the Towle Silversmiths[RegTM], Wallace
International Silversmiths[RegTM]and International Silver Company[RegTM]
tradenames which are used in connection with the sale of tabletop and giftware
items and the Rauch[RegTM], Silvestri[RegTM] and Potpourri[RegTM] tradenames
which are used in connection with the sale of Christmas and other seasonal
merchandise.
Syratech has made a number of recent acquisitions to broaden and complement
its existing product lines. The Company has significantly enhanced the value of
acquired product lines by integrating them into the Company's existing
infrastructure. During 1996, the Company acquired Rauch, a leading domestic
manufacturer and marketer of Christmas ornaments, and C.J. Vander, a U.K.
manufacturer and marketer of prestigious sterling silver flatware and
hollowware. Also in 1996, the Company acquired certain assets, including the
tradenames, of Silvestri, a high-end manufacturer and marketer of Christmas
ornaments, collectibles, lighting and trim as well as other giftware and
decorative accessories, and Potpourri, a manufacturer and marketer of Christmas
products. The Company continually introduces new products and expands the
distribution of its existing products. As a result, the Company has generated
significant growth in net sales and Adjusted EBITDA from $103.7 million and
$11.8 million, respectively, in 1992 to $271.5 million and $29.8 million,
respectively, on a pro forma basis, in 1996. Furthermore, the Company believes
that the continued integration of the acquisitions into its existing business
will position it to increase sales and profitability.
Competitive Strengths
The Company's goal is to become the leading domestic, single-source
supplier of tabletop, giftware and seasonal products to retailers. To achieve
this goal, the Company will rely on its core competitive strengths, which are as
follows:
Leading Market Positions. The Company is one of the leading domestic
manufacturers and marketers of sterling silver flatware and sterling silver and
silverplated hollowware. These products are sold under the Wallace, Towle and
International Silver tradenames, which are well-recognized and date back to the
American Colonial period. In addition, the Company is one of the leading
domestic manufacturers of Christmas ornaments. These products are sold under the
Rauch, Silvestri and Potpourri tradenames, which are well-established brands for
Christmas and other seasonal merchandise. Historically, the Company has been
able to increase sales by leveraging its leading market positions, strong
presence with retailers and strong brand identity with consumers to introduce
new products and product categories.
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Broad Portfolio of Products with Well-Recognized Tradenames. The Company
provides a broad offering of quality products at multiple price points. These
items range from exclusive prestige products, such as sterling silver flatware
and hollowware, to moderately priced products, including silverplated and
stainless steel flatware, silverplated and brass hollowware and other giftware
and seasonal merchandise.
Syratech uses Company-owned and licensed tradenames as merchandising tools
to assist retailers in coordinating their product offerings and differentiating
their products from those of their competitors. In addition to the Wallace,
Towle, International, Rauch, Silvestri and Potpourri tradenames, the Company
markets giftware products under numerous other tradenames, including
Rochard[RegTM], Holiday Workshop[RegTM], Melannco[RegTM] and Elements[RegTM].
The Company believes that its strongest brands draw customers into retail stores
specifically to purchase products bearing those tradenames. In addition to its
own tradenames, the Company produces a variety of products under license from
certain entities including The Walt Disney Company[RegTM], Cuisinart[RegTM],
Victoria & Albert Museum[RegTM] and Faberge, Inc.[RegTM].
The Company recently acquired certain assets, including the intellectual
property, of Farberware, Inc. Following this acquisition, the Company licensed
the Farberware tradename to third parties for use on cookware and bakeware,
small electric and certain other commercial electric items. The Company is
currently marketing certain products under the Farberware tradename and believes
there are significant opportunities to develop the tradename in other product
categories which have not been otherwise licensed to third parties.
The Company's diverse product lines allow it to target a wide range of
customers and to respond more effectively to changes in retail distribution and
consumer preferences. Furthermore, the vendor consolidation trend in the retail
industry increases demand for vendors, like the Company, who can make timely
deliveries of a broad range of quality products and provide advertising and
other sales support.
Diversified Distribution Channels. The Company sells its products to
approximately 30,000 customers in most major distribution channels, including
retail specialty stores, such as jewelry, seasonal and nonseasonal giftware and
collectible stores, department stores, mass market merchandisers, catalogue
showrooms, warehouse clubs, premium and incentive marketers, drug store chains
and home centers. The Company believes that the recent Rauch and Silvestri
acquisitions will strengthen the Company's presence with mass market
merchandisers and department and specialty stores, respectively. In addition,
the Company has a policy of not owning or operating Company outlet stores and
believes that this policy further strengthens relationships with customers. The
Company's broad customer base, both in terms of number of customers and
distribution channels, reduces exposure to any single customer or distribution
channel. In 1996, no single customer accounted for more than 8% of the Company's
net sales.
Innovative Product Development. The vast majority of the Company's
products, including products that are sourced from outside vendors, are designed
by the Company's design team and independent designers in conjunction with the
Company's product development and marketing teams. The Company's design and
product development and marketing teams collaborate (i) to introduce innovative
new products and product categories, such as the Holiday Workshop line of
seasonal products, the Hostess Helpers[RegTM] sterling accessory line and a
dinnerware category that coordinates with sterling silver flatware and (ii) to
develop acquired brands into successful product lines for the Company, such as
the Melannco lines of picture frames and photo albums and the Elements glassware
lines.
Integrated Manufacturing and Sourcing. The Company relies both on its own
domestic manufacturing capabilities and on a variety of suppliers located
primarily in the Asia Pacific Rim to deliver quality products at competitive
prices to its customers. The Company's decision to manufacture or to import is
based largely upon expertise, quality, availability and cost. In order to ensure
quality, imported products are generally manufactured using Company-owned tools
and dies. In 1996, through its import organization comprised of approximately
150 employees, both in the U.S. and overseas, the Company sourced products from
approximately 480 manufacturers, with whom in many cases it has had
long-standing relationships.
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Business Strategy
The Company has developed and is implementing a business strategy to build
upon its core operating strengths and enhance profitability.
Leverage Recent Acquisitions. The Company believes that opportunities for
growth in sales and profitability exist through successfully integrating its
recent acquisitions into the Company's sales and marketing organization and
consolidating and rationalizing certain operations. Historically, the Company
has expanded and augmented acquired product lines through leveraging internal
marketing expertise and existing distribution relationships.
The Company plans to expand the distribution of Rauch, Silvestri and
Potpourri products by marketing them through the Company's established
distribution channels and also plans to add new products to their existing
lines. By integrating Rauch, Silvestri and Potpourri with the Company's
internally developed Holiday Workshop lines of seasonal products, the Company
has significantly expanded its product offerings in this product category, both
in terms of types of product and retail price points, and strengthened its
presence in major retail channels. In addition, the Company believes that such
strengthened presence will provide opportunities to cross-sell the Company's
tabletop and giftware product lines through Rauch and Silvestri distribution
channels.
Through the acquisition of C.J. Vander, the Company believes that it will
be able to expand the distribution of Wallace and Towle sterling silver and
silverplated product lines into the European market, primarily through C.J.
Vander's existing distribution channels. In addition, the Company intends to
expand the distribution of C.J. Vander products in the United States through the
Company's independent representatives who sell to high-end specialty and
department stores.
In addition, the Company believes that the recent acquisitions will enable
it to achieve cost savings through (i) the consolidation of warehouses,
showrooms and manufacturing facilities, (ii) efficiencies resulting from
increasing sales volume through its existing distribution network and (iii)
reductions in certain general and administrative expenses, such as MIS, human
resources and credit analysis. For example, the Company is consolidating its
distribution facilities in the Western United States by building its own
warehouse to reduce costs, increase capacity and serve its customers more
efficiently.
Expand Distribution of Existing Product Lines. The Company believes that it
has significant opportunities to expand the distribution of its existing product
lines by increasing the penetration of existing retailer customers and the
number of retail outlets to which it sells. Beginning in 1994, the Company
implemented a program with a specialty retailer and franchisee, whereby the
Company sources, markets and distributes giftware products for the customer's
retail system comprised of several thousand stores. As a result, the Company has
identified several growth opportunities, both in terms of expanded product
offerings and additional store coverage. In addition, the Company intends to
expand the distribution of several product lines introduced in the past several
years, such as Melannco and Elements, which the Company believes are growth
opportunities that have not yet been fully exploited.
Broaden Product Offerings. The Company expects to make a number of new
product introductions each year. As a result of the planned investments in
tools, dies and machinery, the Company believes that it will be able to broaden
significantly its offering of Christmas and other seasonal merchandise beginning
in 1997. The Company intends to capitalize on the Farberware tradename by
introducing new products in categories as to which exclusive rights to the
tradename have not been granted to third parties. In addition, the Company
continues to expand and upgrade its line of sterling silver, silverplated and
other tabletop and giftware products.
Invest Further in Technology and Productivity to Maintain a Low-Cost
Structure. In order to support the growth of its business, during 1997 the
Company plans to invest $15 million to expand its manufacturing, warehousing and
distribution capabilities. In addition, the Company intends to invest in
application solutions to enhance its Electronic Data Interchange (EDI) and
warehousing capabilities. The Company plans to add a Warehousing Management
System (WMS) to each of its warehouses. These systems will enhance the Company's
ability to service its customers by improving its order processing and logistics
and storage utilization, minimizing order cycle times, enhancing inventory
management, and ensuring that customer orders are processed efficiently.
Additionally, the Company is planning to expand its manufacturing capabilities
by acquiring new tools, dies and
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machinery. The Company also has purchased a 828,000 square foot manufacturing
and distribution facility in Chester, South Carolina which will increase
production capacity and reduce costs.
Make Selected Acquisitions. The Company believes that the giftware and
seasonal markets and, to a lesser extent, the tabletop market are highly
fragmented with a number of small manufacturers and marketers of limited
products lines. The Company believes that these industry dynamics and the
continuing trend among retailers to consolidate their vendor base should
generate attractive opportunities to acquire complementary brands, products,
product categories and businesses that will provide operating synergies.
The Recapitalization
Pursuant to a Restated Agreement and Plan of Merger dated November 27,
1996, effective as of October 23, 1996, as amended effective as of February 14,
1997 (the "Merger Agreement"), between Syratech and THL I, THL I will be merged
with and into Syratech (the "Merger"), with Syratech surviving the Merger. The
Merger, together with financings discussed below, are collectively referred to
as the "Recapitalization." Pursuant to the terms of the Merger:
(i) All shares of Syratech Common Stock, other than those retained by
stockholders as discussed below, will be converted into the right to
receive $32 per share in cash (except that Mr. Leonard Florence, the
Company's President, Chief Executive Officer and Chairman of the Board,
will receive $28 in cash per share) following the Merger.
(ii) Stockholders of the Company, other than management, may elect to retain
up to 34.75% of their shares of Syratech Common Stock, up to a maximum of
868,250 shares.
(iii) Mr. Leonard Florence has agreed to retain 528,472 shares of Syratech
Common Stock, and management, other than Mr. Florence, intends to retain
123,766 shares of Syratech Common Stock. In addition, Mr. Florence will
contribute 35,232 shares of Syratech Common Stock to the Company upon
consummation of the Merger, which shares shall be cancelled for no
additional consideration. The total number of shares retained by Mr.
Florence and management is expected to be 652,238, which represents
approximately $20.9 million, or approximately 17.2% of the equity of the
Company.
Upon consummation of the Merger:
(i) The common stock of THL I will be converted into an aggregate of
3,131,780 shares of Syratech Common Stock (less the number of shares
(not to exceed 781,250) retained by stockholders other than management
stockholders). In addition, affiliates of Thomas H. Lee Company (the
"Lee Affiliates") will purchase an aggregate of 18,000 shares of
cumulative redeemable preferred stock, $.01 par value per share (the
"Cumulative Redeemable Preferred Stock") from Syratech. As a result,
the Lee Affiliates, including Thomas H. Lee Equity Fund III, L.P. (the
"Fund"), will own approximately $100.2 million (less the value of
shares (not to exceed $25.0 million) retained by stockholders other
than management stockholders) of the common equity of the Company and
$18.0 million of the preferred equity of the Company (collectively,
the "Equity Investment"). This will represent up to 82.8% of the
common equity and 100% of the preferred equity of the Company.
(ii) Syratech will enter into the New Credit Facility, which will provide for
revolving credit borrowings of up to $130 million. The proceeds from
the Senior Notes and the Equity Investment will be used (a) to pay
stockholders of Syratech $32 per share for their shares of Syratech
Common Stock which are not being retained (other than shares held by
Mr. Florence who will receive $28 per share), (b) to pay transaction
fees and expenses and (c) to refinance existing indebtedness of
Syratech.
See "The Recapitalization," "Use of Proceeds" and "Description of Other
Indebtedness."
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The Offering
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<S> <C>
Securities Offered............. $165.0 million aggregate principal amount of 11% Senior Notes due
2007 of the Company (the "Senior Notes").
Maturity Date.................. April 15, 2007
Interest Payment Dates......... April 15 and October 15, commencing October 15, 1997.
Optional Redemption............ On or after April 15, 2002, the Company may redeem the Senior
Notes, in whole or in part, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of redemption.
Notwithstanding the foregoing, at any time on or before April 15,
2000, the Company may redeem up to 35% of the original aggregate
principal amount of Senior Notes, with the net cash proceeds of a
public offering of common stock of the Company, at the redemption
prices set forth herein, plus accrued and unpaid interest thereon, if
any, to the redemption date; provided that at least $100.0 million in
aggregate principal amount of Senior Notes remain outstanding immediately
after the occurrence of such redemption; and provided, further, that
such redemption shall occur within 45 days of the date of the closing of
such public offering. See "Description of Senior Notes -- Optional Redemption."
Ranking........................ The Senior Notes will be general unsecured obligations of the
Company, ranking senior to all existing and future subordinated
indebtedness of the Company and pari passu in right of payment with
all other existing and future unsubordinated indebtedness of the
Company, including indebtedness under the New Credit Facility (as
defined herein). However, the obligations of the Company under the
New Credit Facility will be secured by the accounts receivable and
inventory of the Company and its domestic subsidiaries and,
accordingly, such indebtedness will effectively rank senior to the
Senior Notes to the extent of such assets. As of December 31, 1996,
on a pro forma basis after giving effect to the Recapitalization,
including the Offering and the application of the proceeds therefrom,
as described under "Use of Proceeds," the Company and its
subsidiaries would have had $10.3 million of secured indebtedness
(consisting of outstanding letters of credit) which would have
effectively ranked senior to the Senior Notes.
Subsidiary Guarantees.......... The payment of principal, premium, if any, and interest on the Senior
Notes will be fully and unconditionally guaranteed on a joint and
several basis (the "Subsidiary Guarantees") by each of the Company's
domestic subsidiaries (collectively, the "Guarantors"). The Subsidiary
Guarantees will rank senior to all existing and future subordinated
indebtedness of the Guarantors and pari passu with all other
unsubordinated indebtedness of the Guarantors, including the
guarantees of indebtedness under the New Credit Facility. The
Guarantors' obligations under the New Credit Facility, however, will
be secured by a lien on certain assets of the Guarantors and,
accordingly, such indebtedness will rank prior to the Subsidiary
</TABLE>
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<S> <C>
Guarantees with respect to such assets. However, the Company's direct
and indirect foreign subsidiaries will not provide any guarantees of,
or other credit support for, the Senior Notes, and, accordingly, the
indebtedness and other liabilities of such subsidiaries will
effectively rank senior in right of payment to the Senior Notes to the
extent of the assets of such subsidiaries. As of December 31, 1996,
such subsidiaries had indebtedness and other liabilities (including
trade payables) of $3.7 million.
Change of Control......... Upon a Change of Control (as defined herein), the Company will be
required to make an offer to repurchase all outstanding Senior Notes at
101% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of repurchase. See "Description of Senior
Notes -- Repurchase at the Option of Holders -- Change of Control."
Covenants................. The Indenture pursuant to which the Senior Notes will be issued (the
"Indenture") will restrict, among other things, the ability of the
Company and its subsidiaries to incur additional indebtedness, pay
dividends or make certain other restricted payments, incur liens,
engage in any sale and leaseback transaction, sell stock of
subsidiaries, apply net proceeds from certain asset sales, merge or
consolidate with any other person, sell, assign, transfer, lease, envy
or otherwise dispose of substantially all of the assets of the Company,
enter into certain transactions with affiliates, or incur indebtedness
that is subordinate in right of payment to any Indebtedness and senior
in right of payment to the Senior Notes or a Subsidiary Guarantee.
Use of Proceeds........... The Company intends to use the net proceeds of the Offering, together
with the net proceeds of the Equity Investment and borrowings under the
New Credit Facility (i) to support the Recapitalization (ii) to pay
transaction costs associated with the Recapitalization and (iii) to
refinance existing indebtedness. See "Use of Proceeds."
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Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
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Summary Consolidated Historical and Unaudited Pro Forma Financial Data
The following table presents summary consolidated historical financial
information as of December 31, 1992 through 1996 and for each of the years in
the five-year period ended December 31, 1996 and has been derived from the
consolidated financial statements of the Company. In addition, the table
presents unaudited summary pro forma consolidated financial data of the Company,
as adjusted to give effect to the Recapitalization and the Rauch Acquisition
which have been derived from, and should be read in conjunction with, the
unaudited Pro Forma Condensed Consolidated Financial Statements, including the
notes thereto, appearing elsewhere in this Prospectus. See "Pro Forma Condensed
Consolidated Financial Statements." The summary unaudited pro forma consolidated
financial data are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial position that would
have occurred if the Recapitalization or other transactions had been consummated
on the dates indicated, nor are they necessarily indicative of future operating
results or financial position. The consolidated balance sheets of the Company as
of December 31, 1995 and 1996 and the consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996, together with the notes thereto and the related report
of Deloitte & Touche LLP, independent auditors, are included elsewhere herein.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
Pro Forma
1992 1993 1994 1995 1996 1996
----------- ----------- ----------- ----------- --------------- ------------------
(dollars in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data(1):
Net sales..................................... $103,735 $122,682 $147,291 $169,520 $ 270,931 $ 271,540
Cost of sales................................. 70,361 84,643 104,600 119,836 194,113 194,544
-------- -------- -------- -------- ---------- -----------
Gross profit.................................. 33,374 38,039 42,691 49,684 76,818 76,996
Selling, general and administrative
expenses..................................... 24,364 27,727 31,613 34,239 57,664 58,870
Other operating income(2)..................... -- -- -- -- 3,948 3,948
-------- -------- -------- -------- ---------- -----------
Income from operations........................ 9,010 10,312 11,078 15,445 23,102 22,074
Interest expense.............................. (2,757) (948) (559) (287) (3,150) (24,334)(3)
Interest income............................... 23 82 98 4,881 771 792
Other income(4)............................... -- -- -- -- 11,900 11,900
-------- -------- -------- -------- ---------- -----------
Income before income taxes.................... 6,276 9,446 10,617 20,039 32,623 10,432
Provision for income taxes.................... 1,657 2,390 2,758 6,863 12,234 3,912
-------- -------- -------- -------- ---------- -----------
Income from continuing operations............. 4,619 7,056 7,859 13,176 20,389 6,520
Discontinued operations:
Income from discontinued operations,
net of income taxes.......................... 10,284 10,838 12,068 2,572 -- --
Gain on sale of Syroco, Inc., net of
income taxes................................. -- -- -- 30,451 -- --
-------- -------- -------- -------- ---------- -----------
Net income.................................... $ 14,903 $ 17,894 $ 19,927 $ 46,199 $ 20,389 $ 6,520
======== ======== ======== ======== ========== ===========
Earnings per common share from continuing
operations.................................. $ 0.55 $ 0.60 $ 0.67 $ 1.12 $ 2.32
======== ======== ======== ======== ==========
Other Financial Data:
EBITDA(5)..................................... $ 11,824 $ 13,363 $ 14,348 $ 18,698 $ 24,357 $ 23,460
Adjusted EBITDA............................... -- -- -- -- 30,528(6) 29,785(7)
Capital expenditures.......................... 5,557 2,781 2,603 2,679 15,125 15,218
Depreciation and amortization................. 2,814 3,051 3,270 3,253 4,767 4,898
Ratio of earnings to fixed charges(8)......... 2.9x 7.4x 10.2x 23.4x 7.7x 1.2x
Adjusted cash interest expense................ -- -- -- -- -- 21,464(9)
Ratio of Adjusted EBITDA to Adjusted
cash interest expense........................ -- -- -- -- -- 1.4x
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
Pro Forma
1992 1993 1994 1995 1996 1996
---------- ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......................... $87,458 $105,115 $125,136 $ 122,050 $119,918 $126,630
Total assets............................ 141,294 152,060 190,684 220,566 227,254 237,618
Total debt(10).......................... 6,446 5,060 15,379 51,735(11) 6,636 165,200
Cumulative Redeemable Preferred Stock -- -- -- -- -- 18,000
Common stockholders' equity............. 112,381 131,005 152,100 146,596 170,248 4,048
</TABLE>
- ------------
(1) The income statement has been restated to reflect Syroco, Inc. as a
discontinued operation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Transactions."
(2) Consists of income from the sale of Farberware inventory, and other
operating income, net of certain selling, general and administrative
expenses, relating to the sale of Farberware inventory. The Company has
licensed the right to manufacture, market and distribute these products to
third parties. See "Business--Recent Transactions."
(3) The pro forma statements give effect to the Recapitalization and the
corresponding increase in debt levels and interest expense. See "Pro
Forma Condensed Consolidated Financial Statements."
(4) Consists of nonrecurring pre-tax income related to licensing the Farberware
name on cookware and bakeware.
(5) "EBITDA" is defined herein as income before income taxes, plus depreciation
and amortization expense and interest expense, net, less other income of
$3,512 related to the sale of Farberware inventory less the non- recurring
pre-tax income of $11,900 related to the one-time licensing of the
Farberware name on cookware and bakeware. EBITDA is presented because the
Company believes it is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness. However, EBITDA should not be
considered as an alternative to net income as a measure of operating
results or to cash flows as a measure of liquidity in accordance with
generally accepted accounting principles. EBITDA (subject to certain
adjustments) is a factor in certain of the covenants in the New Credit
Facility and the Indenture governing the Senior Notes.
(6) "Adjusted EBITDA" is defined herein as EBITDA adjusted for certain items of
expense which are not expected to be continuing costs to the Company. For
the year ended December 31, 1996, such items consist of Rauch salaries and
related benefits of $623, Silvestri expenses of $712, including showroom,
warehouse and freight expenses, compensation expense of $3,953 related to
the transfer of shares to three executive officers and pension expense of
$883.
(7) "Adjusted EBITDA" is defined herein as EBITDA adjusted for certain items
of expense which are not expected to be continuing costs to the Company.
For the pro forma 1996 presentation, such items consist of Rauch
non-recurring expenses of $154 incurred as a result of a 1994 fire at its
principal manufacturing, warehouse and distribution facility, Rauch
salaries and related benefits of $623, Silvestri expenses of $712,
including showroom, warehouse and freight expenses, compensation expense
of $3,953 related to the transfer of shares to three executive officers
and pension expense of $883.
(8) For purposes of computing this ratio, earnings consist of income from
continuing operations before income taxes plus fixed charges. Fixed charges
consist of interest expense, Cumulative Redeemable Preferred Stock
dividends, amortization of debt issuance costs and one-third of the rent
expense from operating leases, which management believes is a reasonable
approximation of an interest factor.
(9) For the purpose of calculating adjusted cash interest expense, cash
interest expense (i) is net of amortization of deferred financing costs of
$1,407 and (ii) has been adjusted to exclude (x) $519 of interest expense
associated with incremental borrowings assumed to have been made by the
Company (for purposes of the pro forma presentation) to finance the
acquisition of Rauch (which was actually purchased with cash) and
11
<PAGE>
(y) to exclude $944 of interest expense associated with the incremental
borrowing made by the Company (and repaid during 1996) to finance the
acquisition of Farberware to be consistent with the exclusion from EBITDA
of the income from the sale of certain assets (including inventory)
acquired from Farberware.
(10) Consists of long-term debt, notes payable and current maturities of
long-term debt.
(11) Reflects temporary borrowings of $51,735 made on December 29, 1995 in
connection with the purchase by the Company, for retirement of 3,065 shares
of Common Stock owned by affiliates of Katy Industries, Inc. (the "Katy
Stock Repurchase"). These borrowings were paid on January 2, 1996.
12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the specific factors set
forth below as well as the other information included in the Prospectus before
deciding to purchase the Senior Notes offered hereby.
Significant Leverage and Debt Service; Effective Subordination
On a pro forma basis, after giving effect to the Recapitalization,
including this Offering and the application of the net proceeds therefrom, the
Company's total debt, preferred stockholders' equity and common stockholders'
equity as of December 31, 1996 would have been $165.2 million (excluding
approximately $10.3 million of letters of credit outstanding), $18.0 million and
$4.0 million, respectively. See "Capitalization," "Pro Forma Condensed
Consolidated Financial Statements," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the New Credit Facility and the Indenture governing the Senior
Notes will require the Company to meet certain financial tests, and other
restrictions may limit its ability to borrow additional funds or to dispose of
assets and may affect the Company's flexibility in planning for, and reacting
to, changes in its business, including possible acquisition activities, and
(iii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's ability to meet its debt service obligations and to reduce
its total indebtedness will be dependent upon the Company's future performance,
which will be subject to general economic conditions and to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control. Based upon the current and anticipated level of operations,
the Company believes, however, that its cash flow from operations, together with
amounts available under the New Credit Facility, will be adequate to meet its
anticipated requirements through December 31, 1998 for working capital, capital
expenditures, interest payments and scheduled principal payments. There can be
no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. If the Company is unable to generate
sufficient cash flow from operations in the future to service its debt, it may
be required to refinance all or a portion of its existing debt, including the
Senior Notes, or to obtain additional financing. There can be no assurance that
any such refinancing would be possible or that any additional financing could be
obtained. The inability to obtain additional financing could have a material
adverse effect on the Company. For example, a default by the Company under the
terms of the Indenture would result in a default under the terms of the New
Credit Facility.
Additionally, a substantial portion of the Company's other indebtedness,
particularly under the New Credit Facility, will mature prior to the Senior
Notes and the New Credit Facility will be secured by a lien on accounts
receivable and inventory, while the Senior Notes represent unsecured obligations
of the Company. Accordingly, the lender(s) under the New Credit Facility (and
any other indebtedness secured by assets of the Company) will have a claim
ranking effectively prior to that of the holders of the Senior Notes with
respect to the proceeds of assets securing such indebtedness.
The Company also conducts substantial operations through its direct and
indirect subsidiaries which are not incorporated in the United States (the
"Foreign Subsidiaries"). The Foreign Subsidiaries will not provide guarantees
of, or other credit support for, the Senior Notes. Consequently, the Company's
obligations under the Senior Notes will be effectively subordinated to the
indebtedness and other liabilities (including trade payables) of the Foreign
Subsidiaries. As of December 31, 1996, the Foreign Subsidiaries had identifiable
assets of $14.9 million and for the year then ended the Foreign Subsidiaries had
income from operations of $7.7 million. See Note 13 to Consolidated Financial
Statements of Syratech. As of December 31, 1996, the Foreign Subsidiaries had
indebtedness and other liabilities (including trade payables) of $3.7 million.
Competition
The tabletop, giftware and seasonal products markets are highly
competitive. Competition is affected not only by the large number of domestic
manufacturers, but also by the large volume of foreign imports. Several of the
Company's competitors are larger and may have greater financial resources than
the Company. The Company's
13
<PAGE>
products may compete indirectly with a broad range of products not offered by
the Company. A number of factors affect competition in the sale of tabletop,
giftware, seasonal and other products of the types manufactured, imported and
sold by the Company. Among these are brand identification, style, design,
packaging, price, quality, promotion and the level of service provided to
customers. The importance of these competitive factors varies from customer to
customer and from product to product. See "Business--Competition."
Dependence Upon Key Personnel
The Company is currently dependent upon the ability and experience of its
senior management team, including Leonard Florence, Chairman of the Board,
President and Chief Executive Officer, E. Merle Randolph, Vice President,
Treasurer and Chief Financial Officer, Melvin L. Levine, Vice President of
Purchasing, and Alan R. Kanter, Vice President of Sales. The loss of any of
these executives could adversely affect the Company. In connection with the
Merger, these executives will continue to be employed by the Company pursuant to
their current employment agreements with certain modifications. See
"Management--Employment Agreements." The terms of the employment agreements for
these four executives will be five years in the case of Messrs. Florence and
Levine and three years in the case of Messrs. Randolph and Kanter. The Company
does not maintain policies of "key person" life insurance on the life of any of
its executives.
Retail Industry
The Company sells its products to retailers, including department and
specialty stores, mass market merchandisers, catalogue showrooms, discount
wholesalers, warehouse clubs, premium and incentive marketers, drug and
supermarket chains, jewelers and home centers and through other channels of
distribution. Certain of such retailers have engaged in leveraged buyouts or
transactions in which they incurred a significant amount of debt, and some are
currently operating under the protection of the federal bankruptcy laws. As a
result of these financial difficulties and bankruptcy and insolvency
proceedings, the Company may be unable to collect some or all amounts owed by
these retailers. Additionally, all or part of the operations of a retailer that
seeks bankruptcy or other debtor protection may be discontinued or sales of the
Company's products to such a retailer may be curtailed or terminated as a result
of such bankruptcy or insolvency proceedings.
As is customary in the retail industry, the Company generally does not
enter into written agreements with customers but relies on orders that are
cancelable until shipment.
The Company's business is sensitive to consumer spending patterns, which in
turn are subject to prevailing economic conditions. Future economic recessions
could have a material adverse effect on the Company's financial condition and
results of operations.
Future Acquisitions
The Company expects to continue a strategy of identifying and acquiring
companies with complementary products or services that may be expected to
enhance the Company's operations and profitability. There can be no assurance
that the Company will be able to identify appropriate acquisition candidates,
negotiate appropriate acquisition terms, obtain financing which may be needed to
effect such acquisitions or integrate acquisitions successfully into the
Company's operations or that any of such acquisitions will prove profitable.
Seasonality
Historically, the Company has realized its highest sales and profit levels
in its third and fourth quarters as a result of the buying patterns associated
with the Christmas selling season. The Company expects that the recent Rauch and
Silvestri acquisitions and the acquisition of certain assets of Potpourri Press
will intensify the degree of seasonality that the Company historically has
experienced as the vast majority of Rauch, Silvestri and Potpourri products are
Christmas items. The Company's needs for working capital accelerate in the
second half of the year and, accordingly, total debt levels tend to peak in the
third and fourth quarters, falling off again in the first quarter of the
following year. The amount of the Company's sales generated during the second
half of the year generally depends upon a number of factors, including general
economic conditions, and other factors beyond the Company's control. The
Company's results of operations would be adversely and disproportionately
affected if the Company's sales were substantially lower than those normally
expected during the second half of the year.
14
<PAGE>
Foreign Sources of Supply
Many of the Company's products are manufactured to its specifications by
foreign manufacturers located principally in Hong Kong, India, Korea, Taiwan,
the People's Republic of China and Japan. In 1996, the Company purchased an
aggregate of approximately $104 million of products from approximately 480
foreign manufacturers. No vendor accounted for 10% or more of such purchases in
1995. The Company does not have information on the financial condition of its
major foreign vendors, all of which are privately held. Of the Company's foreign
purchases in 1996, approximately 92% were from vendors located in the Far East,
approximately 4% were from vendors located in India and approximately 4% in the
aggregate from vendors in other locations. The Company's arrangements with its
manufacturers are subject to the risks of doing business abroad, including risks
associated with economic or political instability in countries in which such
manufacturers are located, labor strikes and risks associated with foreign
currency and potential import restrictions. The Company also is subject to risks
associated with the availability of, and time required for, the transportation
of products from foreign countries, including shipping losses or lost sales that
may result from delays or interruptions in shipping.
Price and Availability of Raw Materials
Collectively, the Company and its four major competitors in the sterling
silver flatware market account for substantially all sterling silver flatware
sales in the United States. Prices of silver are subject to fluctuation. The
price of silver has ranged, according to the closing prices of Handy & Harman
Inc. (the "Handy & Harman Price"), from $3.54 per troy ounce to $6.01 per troy
ounce during the five-year period ended December 31, 1996. A prolonged
significant increase in silver prices could have a material adverse effect on
the Company's results of operations. The Handy & Harman Price for a troy ounce
of silver on February 21, 1997 was $5.23. Silver used by the Company in the
manufacture of its tabletop and giftware products represents less than 5% of its
Cost of Goods Sold. See "Business--Manufacturing and Raw Materials."
Environmental Regulation
The Company's manufacturing operations, including silverplating, chrome
plating, tool making and painting, routinely involve the handling of waste
materials that are classified as hazardous. The Company is subject to certain
domestic federal, state, local and foreign laws and regulations concerning the
handling, containment and disposal of hazardous substances, and therefore, in
the ordinary course of its business, the Company incurs compliance costs and may
be required to incur clean-up costs. In addition, the Company's C.J. Vander
facility is subject to many environmental regulations related to its
manufacturing operations in the United Kingdom. Actions by federal, state, local
and foreign governments concerning environmental matters could result in laws or
regulations that could increase the cost of producing the products manufactured
by the Company or otherwise adversely affect the demand for its products. In
addition, the future costs of compliance with environmental laws and regulations
and liabilities resulting from currently unknown circumstances or developments
could be substantial and could have a material adverse effect on the Company.
For example, certain laws and regulations could impose liability upon the
Company for any historic releases of hazardous substances from facilities that
it has owned or operated, or, from facilities to which its waste materials have
been transported for treatment or disposal.
Trademarks, Copyrights and Patents
The Company markets its products under many well-recognized tradenames,
including Wallace Silversmiths[RegTM], International Silver Company[RegTM],
Towle Silversmiths[RegTM], Farberware[RegTM], Tuttle Sterling[RegTM], C.J.
Vander Ltd.[TM], Rauch Industries, Inc.[RegTM], Silvestri[RegTM],
Rochard[RegTM], Elements[RegTM] and 1847 Rogers Bros.[RegTM] The success of the
Company's various businesses depends in part on the Company's ability to use
these tradenames as well as certain proprietary designs and trademarks on an
exclusive basis in reliance upon the protections afforded by applicable
copyright, patent and trademark laws and regulations. The loss of certain of the
Company's rights to such designs, trademarks and tradenames or the inability of
the Company effectively to protect or enforce such rights could adversely affect
the Company.
Labor Relations
The Company believes that its relationship with its employees is good. The
Company's employees are not represented by labor unions; however, Rauch, which
merged with the Company on February 15, 1996, was a subject of efforts by UNITE
(the "Union") in the fall of 1995 to organize Rauch's employees. A scheduled
Union election was postponed because the Union filed unfair labor practice
charges against Rauch with the National Labor
15
<PAGE>
Relations Board (the "NLRB"). These charges, which related to allegations of
threats and promises by Rauch officials and the termination of certain
employees, were settled pursuant to an agreement between Rauch and the Union. On
May 2, 1996, the NLRB approved the agreement and the Union's request that the
petition for an election be withdrawn with prejudice.
On March 31, 1994 an Administrative Law Judge ("ALJ") designated by the
National Labor Relations Board ("NLRB") determined that the Company's
subsidiaries Wallace International de P.R., Inc. and International Silver de
P.R., Inc. (the "P.R. Subsidiaries") had engaged in unfair labor practices
incident to a union election (won by the P.R. Subsidiaries) held in February,
1993 and ordered the P.R. Subsidiaries to refrain from certain conduct and to
take certain affirmative action. The ALJ's decision was affirmed by the NLRB on
September 22, 1994. Incident to a second union election (also won by the P.R.
Subsidiaries) held on June 22, 1994 pursuant to stipulation, the P.R.
Subsidiaries were again charged with unfair labor practices. The ALJ again found
that the P.R. Subsidiaries had engaged in unfair labor practices. The Company
has appealed to the NLRB, and the appeal is pending.
Potential Inability to Fund a Change of Control Offer
Upon a Change of Control Offer (as defined in the Indenture), the Company
will be required to offer to repurchase all outstanding Senior Notes at 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. However, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required repurchases
of Senior Notes tendered. Moreover, restrictions in the New Credit Facility
prohibit the Company from making such required repurchases; consequently, any
such repurchases would constitute an event of default under the New Credit
Facility. There can be no assurance that the Company will be able to obtain
appropriate consents under the New Credit Facility to enable it to fulfill such
repurchase obligations. Notwithstanding these provisions, the Company could
enter into certain transactions, including certain recapitalizations, that would
not constitute a Change of Control but would increase the amount of debt
outstanding at such time. See "Description of Senior Notes--Repurchase at the
Option of Holders."
Fraudulent Conveyance Considerations
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Guarantors, at the time it incurred the indebtedness
evidenced by the Senior Notes or its Subsidiary Guarantee, as the case may be,
(i)(a) was or is insolvent or rendered insolvent by reason of such occurrence or
(b) was or is engaged in a business or transaction for which the assets
remaining with the Company or such Guarantor constituted unreasonably small
capital or (c) intended or intends to incur, or believed or believes that it
would incur, debts beyond its ability to pay such debts as they mature, and (ii)
the Company or such Guarantor received or receives less than the reasonably
equivalent value of fair consideration for the incurrence of such indebtedness,
the Senior Notes and the Subsidiary Guarantees could be voided, or claims in
respect of the Senior Notes or such Subsidiary Guarantees could be subordinated
to all other debts of the Company or such Guarantors, as the case may be. The
voiding or subordination of any such pledges or other security interests or of
any of such indebtedness could result in an Event of Default (as defined in the
Indenture) with respect to such indebtedness, which could result in acceleration
thereof. In addition, the payment of interest and principal by the Company
pursuant to the Senior Notes or the payment of amounts by a Guarantor pursuant
to a Subsidiary Guarantee could be voided and required to be returned to the
person making such payment, or to fund for the benefit of the creditors of the
Company or such Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the saleable value of all of its assets at a fair valuation or if
the present saleable value of its assets were less than the amount of its
probable liability on its existing debts, including contingent liabilities, as
they become absolute and mature or (ii) it could not pay its debts as they
become due.
To the extent any Subsidiary Guarantees were voided as a fraudulent
conveyance or held unenforceable for any other reason, holders of Senior Notes
would cease to have any claim in respect of such Guarantor and would be
creditors solely of the Company and any Guarantor whose Subsidiary Guarantee was
not avoided or held unenforceable. In such event, the claims of the holders of
Senior Notes against the issuer of an invalid Subsidiary Guarantee would be
subject to the prior payment of all liabilities and preferred stock claims of
such Guarantor. There can be no assurance that, after providing for all prior
claims and preferred stock interests, if any, there would
16
<PAGE>
be sufficient assets to satisfy the claims of the holders of Senior Notes
relating to any voided portions of any Subsidiary Guarantees. The Company is a
holding company whose material assets consist primarily of the capital stock of
the Guarantors. Consequently, the Company is dependent upon dividends paid by
the Guarantors to pay its operating expenses, service its debt obligations,
including the Senior Notes, and satisfy any mandatory repurchase obligations
relating to the Senior Notes, as a result of a Change of Control or a sale or
other disposition of certain assets. See "Description of Senior Notes" and
"Description of Other Indebtedness."
On the basis of their historical financial information, recent operating
history as discussed in "Pro Forma Condensed Consolidated Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other factors, each of the Company and each Guarantor believes
that, after giving effect to the indebtedness incurred in connection with the
Offering, it (i) will not be insolvent, will not have unreasonably small capital
for the businesses in which it is engaged and will not incur debts beyond its
ability to pay such debts as they mature and (ii) will have sufficient assets to
satisfy any probable money judgment against it in any pending action. There can
be no assurance, however, as to what standard a court would apply in making such
determinations.
Absence of Public Market
There is no existing public market for the Senior Notes and the Company
does not intend to list the Senior Notes on any national securities exchange.
Although the Underwriters have advised the Company that they currently intend to
make a market in the Senior Notes, the Underwriters are not obligated to do so
and may discontinue such market-making at any time. Accordingly, there can be no
assurance that an active market will develop upon completion of this Offering
or, if developed, that such market will be sustained. The initial offering price
of the Senior Notes will be determined through negotiations between the Company
and the Underwriters, and may bear no relationship to the market price of the
Senior Notes after the Offering. Factors such as quarterly or cyclical
variations in the Company's financial condition and results of operations,
variations in interest rates, future announcements concerning the Company or its
competitors, government regulation, general economic and other conditions could
cause the market price of the Senior Notes to fluctuate substantially.
Control by the Thomas H. Lee Company
Upon completion of the Recapitalization, at least 60% and up to 82.8% of
the outstanding shares of Syratech Common Stock will be held by Lee Affiliates,
including the Fund, which will own at least 50%. In addition, the Lee Affiliates
will hold $18.0 million of Cumulative Redeemable Preferred Stock. Accordingly,
the Fund will control the Company and have the power to elect all of its
directors, appoint new management and to approve any action requiring the
approval of the holders of Syratech Common Stock, including adopting amendments
to the Company's Amended and Restated Certificate of Incorporation and approving
mergers or sales of substantially all of the Company's assets. The directors
elected by the Fund will have the authority to effect decisions affecting the
capital structure of the Company, including the issuance of additional capital
stock, the implementation of stock repurchase programs and the declaration of
dividends.
17
<PAGE>
THE RECAPITALIZATION
Pursuant to the Merger Agreement, THL I will be merged with and into
Syratech (the "Merger"), with Syratech surviving the Merger. Pursuant to the
terms of the Merger Agreement, all shares of Syratech Common Stock, other than
those retained by stockholders as discussed below, will be converted into the
right to receive $32 per share in cash (except that Mr. Florence will receive
$28 per share in cash) following the Merger. In addition, pursuant to the terms
of the Merger Agreement, stockholders of the Company, other than members of
Management (defined as those executive officers listed in Syratech's 1996 Proxy
Statement) may elect to retain up to 34.75% of their shares of Syratech Common
Stock. The total number of shares of Syratech Common Stock which may be retained
by stockholders, other than Management, is 868,250. To the extent that
stockholders (other than Management) elect to retain more than an aggregate of
868,250 shares of Syratech Common Stock, the number of shares they will be
entitled to retain will be subject to proration. Mr. Leonard Florence, the
Company's President, Chief Executive Officer and Chairman of the Board, is
required by the Merger Agreement to retain 528,472 shares of Syratech Common
Stock and to contribute 35,232 shares of Syratech Common Stock to the Company.
Management, other than Mr. Florence, intend to retain 123,766 shares of Syratech
Common Stock, and such amount will not be subject to proration. See "Certain
Transactions." The consummation of the Merger is subject to certain significant
conditions, including obtaining the consent of the holders of a majority of the
issued and outstanding shares of Syratech Common Stock at the meeting of such
holders scheduled for April 14, 1997, as well as obtaining other required
consents and the completion of financing.
Simultaneously with the consummation of the Merger, Lee Affiliates
including the Fund, will invest approximately $100.2 million (less the value of
shares (not to exceed $25.0 million) retained by stockholders other than
Management) in the common equity of THL I and $18.0 million in the Company's
Cumulative Redeemable Preferred Stock (collectively, the "Equity Investment").
In connection with the consummation of the Recapitalization, the Company will
pay Thomas H. Lee Company a closing fee of $3 million. See "Certain
Transactions." Upon consummation of the Merger, the common stock of THL I will
be converted into an aggregate of 3,131,780 shares of Syratech Common Stock
(less the number of shares (not to exceed 781,250) retained by stockholders
other than Management). See "Risk Factors--Control by Thomas H. Lee Company."
In addition, in connection with the consummation of the Merger, Syratech
will enter into the New Credit Facility. See "Description of Other
Indebtedness." The proceeds from the Senior Notes and the Equity Investment will
be used (i) to pay stockholders of Syratech $32 per share for their shares of
Syratech Common Stock which are not being retained (other than shares held by
Mr. Florence who will receive $28 per share), (ii) to pay transaction fees and
expenses and (iii) to refinance existing indebtedness of Syratech. See "Use of
Proceeds." The closing of these financings, including the Offering, will occur
concurrently with, and will be conditioned upon, the consummation of the Merger.
The financings, together with the Merger, are collectively referred to as the
"Recapitalization".
18
<PAGE>
The sources and uses of funds in connection with the Recapitalization are
as follows (derived from the Pro Forma Condensed Consolidated Financial
Statements set forth elsewhere in this Prospectus):
(dollars in thousands)
Sources of Funds:
New Credit Facility proceeds (1)..................... $ --
Senior Notes proceeds................................ 165,000
Cash from exercise of employee stock options......... 2,874
Equity contribution:
THL I
Cumulative Redeemable Preferred Stock.............. 18,000
Common Stock (2)................................... 100,217
Retained by Management (3).......................... 20,872
--------
Total Sources...................................... $306,963
========
Uses of Funds:
Merger consideration (3)............................. $275,251
Repayment of existing debt........................... 6,436
Excess cash.......................................... 276
Fees and expenses.................................... 25,000
--------
Total Uses......................................... $306,963
========
- ------------
(1) The Company expects that a $130,000 New Credit Facility, including a letter
of credit sub-limit of $30,000, will be available for working capital and
general corporate purposes. The amount shown excludes $10,348 of letters of
credit which will be issued to replace existing letters of credit. See
"Description of Other Indebtedness."
(2) Assumes non-management stockholders do not elect to retain shares.
(3) Includes 528,472 shares retained by Mr. Florence and 123,766 shares to be
retained by other members of Management.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the issuance of the
Senior Notes are estimated to be approximately $160.1 million, after deduction
of underwriting discounts and commissions, but prior to payment of other related
fees and expenses. The net proceeds of the issuance of the Senior Notes will be
used, together with the proceeds of the Equity Investment, (i) to support the
Recapitalization, including the refinancing of the Company's existing
indebtedness, and (ii) to pay transaction costs associated with the
Recapitalization. The Company's current credit facilities have maturity dates of
April 30, 1997 and May 31, 1997. On March 12, 1997, the weighted average
interest rate on borrowings under such facilities was 7.5%.
20
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996, and on a pro forma basis to give effect to the
Offering, and the application of the net proceeds therefrom in connection with
the Recapitalization. This table should be read in conjunction with "Pro Forma
Condensed Consolidated Financial Statements" and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Actual Pro Forma
---------- -----------
(in thousands except sh
<S> <C> <C>
Cash and cash equivalents...................................................... $ 3,605 $ 3,881
======= ========
Total debt:
Revolving loan and notes payable.............................................. $ 6,636 $ 200
New Credit Facility (1)....................................................... -- --
Senior Notes offered hereby................................................... -- 165,000
------- --------
Total debt................................................................... 6,636 165,200
------- --------
Stockholders' equity:
Preferred Stock, $.10 par value; 500,000 shares authorized, no shares
issued or outstanding (135,000 shares designated Series A Preferred
Stock), actual basis; $.01 par value; 25,000 shares authorized,18,000
shares issued and outstanding, pro forma basis (2)............................ -- 18,000
Common Stock, $.01 par value; 20,000,000 shares authorized, 8,695,449
shares issued, actual basis; 20,000,000 shares authorized, 3,784,018
shares issued and outstanding, pro forma basis (3)............................ 87 38
Additional paid in capital.................................................... 12,480 --
Retained earnings............................................................. 157,117 3,443
Cumulative translation adjustment............................................. 567 567
Less: Treasury stock; 218 shares at cost, actual basis; no shares, pro forma
basis........................................................................ (3) --
------- --------
Total stockholders' equity (4)............................................... 170,248 22,048
------- --------
Total capitalization........................................................... $176,884 $187,248
======= ========
</TABLE>
- ------------
(1) The Company expects that a $130,000 New Credit Facility, including a letter
of credit sub-limit of $30,000, will be available for working capital and
general corporate purposes. The amount shown excludes $10,348 of letters of
credit which will be issued to replace existing letters of credit. See
"Description of Other Indebtedness."
(2) Reflects 18,000 shares of Cumulative Redeemable Preferred Stock to be held
by Lee Affiliates. Dividends are cumulative and accrue daily at the rate of
12% per annum. The liquidation preference of the Cumulative Redeemable
Preferred Stock is $1,000 per share plus all accrued and unpaid dividends.
Holders of the Cumulative Redeemable Preferred Stock are entitled, subject
to the rights of creditors, in the event of any voluntary or involuntary
liquidation of the Company, to an amount in cash equal to $1,000 for each
share outstanding plus all accrued and unpaid dividends compounded annually.
The rights of holders of the Cumulative Redeemable Preferred Stock upon
liquidation of the Company rank prior to those of the holders of Syratech
Common Stock. See "Description of Cumulative Redeemable Preferred Stock."
(3) The pro forma number of shares of Syratech Common Stock outstanding assumes
that no stockholder (other than Management) elects to retain shares of
Syratech Common Stock following the Merger.
21
<PAGE>
(4) The pro forma stockholders' equity is attributed to the following
adjustments:
(in thousands)
Historical stockholders' equity............................. $ 170,248
Common Stock converted by existing stockholders (a)......... (254,379)
Common equity contribution (b).............................. 100,217
Cumulative Redeemable Preferred Stock....................... 18,000
Cash proceeds from exercise of employee stock options....... 2,874
Costs and expenses incurred, net of deferred financing
cost capitalized............................................ (14,912)
---------
Pro forma stockholders' equity.............................. $ 22,048
=========
------------
(a) Assumes non-cash election is not exercised.
(b) Assumes non-management stockholders do not elect to retain Syratech
Common Stock.
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Condensed Consolidated Financial Statements") have
been derived by the application of pro forma adjustments to the Company's
historical financial statements included in this Prospectus. The pro forma
condensed consolidated statement of operations for the year ended December 31,
1996 give effect to the Recapitalization and related transactions and the
acquisition of Rauch as if such transactions were consummated as of the
beginning of the earliest period presented. The acquisition of C. J. Vander and
the Silvestri product line were not material to the condensed consolidated
financial statements and as such are not included in the Pro Forma Condensed
Consolidated Financial Statements. The pro forma balance sheet gives effect to
the Recapitalization and related transactions as if such transactions had
occurred as of December 31, 1996. The adjustments are described in the
accompanying notes. The Pro Forma Financial Statements should not be considered
indicative of actual results that would have been achieved had the
Recapitalization and related transactions been consummated on the date or for
the periods indicated and do not purport to indicate balance sheet data or
results of operations as of any future date or for any future period. The Pro
Forma Condensed Consolidated Financial Statements should be read in conjunction
with the Company's historical financial statements and the notes thereto
included in this Prospectus. See "Available Information" and "Incorporation of
Certain Documents by Reference."
The pro forma adjustments were applied to the respective historical
financial statements to reflect and account for the Merger as a
recapitalization. Accordingly, the historical basis of the Company's assets and
liabilities has not been impacted by the transaction.
23
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------
Historical Pro Forma
Syratech Recapitalization Syratech
Corporation Adjustments Corporation
-------------- ------------------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................... $ 3,605 $ 276 (1) $ 3,881
Accounts receivable, net............................... 60,020 -- 60,020
Inventories............................................ 79,355 -- 79,355
Deferred income taxes.................................. 8,940 -- 8,940
Prepaid expenses and other............................. 3,803 -- 3,803
-------- ---------- --------
Total current assets................................ 155,723 276 155,999
Property, plant and equipment, net...................... 63,955 -- 63,955
Purchase price in excess of net assets acquired......... 7,032 -- 7,032
Other assets............................................ 544 10,088 (2) 10,632
-------- ---------- --------
Total............................................... $227,254 $ 10,364 $237,618
======== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan and notes payable....................... $ 6,636 $ (6,436)(3) $ 200
Accounts payable....................................... 9,689 -- 9,689
Accrued expenses....................................... 11,049 -- 11,049
Accrued compensation................................... 4,228 -- 4,228
Accrued advertising.................................... 3,273 -- 3,273
Income taxes payable................................... 930 -- 930
-------- ---------- --------
Total current liabilities........................... 35,805 (6,436) 29,369
Long-term debt.......................................... 165,000 (4) 165,000
Deferred income taxes................................... 17,706 -- 17,706
Pension liability....................................... 3,495 -- 3,495
Commitments and contingencies:
Stockholders' equity:
Cumulative Redeemable Preferred Stock.................. -- 18,000 (5) 18,000
Common stock........................................... 87 (49)(6)(7) 38
Additional paid-in capital............................. 12,480 (12,480)(7) --
Retained earnings...................................... 157,117 (153,674)(2)(7) 3,443
Cumulative translation adjustment...................... 567 -- 567
Less: Treasury stock................................... (3) 3 (7)(8) --
-------- ---------- --------
Total stockholders' equity.......................... 170,248 (148,200) 22,048
-------- ---------- --------
Total............................................... $227,254 $ 10,364 $237,618
======== ========== ========
</TABLE>
See notes to pro forma condensed consolidated balance sheet.
24
<PAGE>
NOTES TO PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands except share data)
The pro forma financial data have been derived by the application of pro
forma adjustments to the Company's historical financial statements for the
period noted. The Merger has been accounted for as a recapitalization which will
have no impact on the historical basis of assets and liabilities. The pro forma
financial data assumes that there are no dissenting stockholders to the Merger.
(1) The net effect of the Merger, as if it occurred on December 31, 1996,
reflects the following:
Sources of Funds:
New Credit Facility proceeds (a)..................... $ --
Senior Notes proceeds................................ 165,000
Cash from exercise of employee stock options......... 2,874
Equity contribution:
THL I
Cumulative Redeemable Preferred Stock.............. 18,000
Common Stock (b)................................... 100,217
Retained by Management (c).......................... 20,872
--------
Total Sources...................................... $306,963
========
Uses of Funds:
Merger consideration (c)............................. $275,251
Repayment of existing debt........................... 6,436
Excess cash......................................... 276
Fees and expenses.................................... 25,000
--------
Total Uses......................................... $306,963
========
------------
(a) The Company expects that a $130,000 New Credit Facility, including a
letter of credit sub-limit of $30,000, will be available for working
capital and general corporate purposes. The amount shown excludes
$10,348 of letters of credit which will be issued to replace existing
letters of credit. See "Description of Other Indebtedness."
(b) Assumes non-management stockholders do not elect to retain shares.
(c) Includes 528,472 shares to be retained by Mr. Florence and 123,766
shares to be retained by other members of Management.
(2) The adjustment to retained earnings reflects the total fees and expenses
of $25,000 anticipated to be paid to effect the Merger, net of the
adjustment to other assets of $10,088 of capitalized debt issuance fees.
The estimated fees and expenses are anticipated to consist of (i) fees
and expenses related to the Merger Financings, including bank commitment
fees and underwriting discounts and commissions, (ii) fees and expenses
in connection with the prepayment of historical debt and (iii)
professional, advisory and investment banking fees and expenses and (iv)
miscellaneous fees and expenses such as printing and filing fees.
(3) The pro forma adjustment to short-term borrowings reflects the repayment
of historical revolving debt outstanding of $6,436, excluding $10,348
of letters of credit which will be issued to replace existing letters
of credit.
(4) The pro forma adjustment to long-term debt reflects issuance of $165,000
of Senior Notes.
(5) Reflects 18,000 shares of Cumulative Redeemable Preferred Stock to be
held by Lee Affiliates. Dividends are cumulative and accrue daily at the
rate of 12% per annum. The liquidation preference of the Cumulative
Redeemable Preferred Stock is $1,000 per share plus all accrued and
unpaid dividends. Holders of the Cumulative Redeemable Preferred Stock
are entitled, subject to the rights of creditors, in the event of any
voluntary or involuntary liquidation of the Company, to an amount in cash
equal to $1,000 for each share outstanding plus all accrued and unpaid
dividends compounded annually.
25
<PAGE>
The rights of holders of the Cumulative Redeemable Preferred Stock upon
liquidation of the Company rank prior to those of the holders of Syratech
Common Stock. The Cumulative Redeemable Preferred Stock will be
redeemable at any time at the option of the Company, in whole or in part,
at $1,000 per share plus all accumulated and unpaid dividends, if any, to
the date of redemption. The Company must, subject to the Company's
existing debt agreements (including the Indenture), redeem all
outstanding Cumulative Redeemable Preferred Stock in the event of a
public offering of equity, a change of control, or certain sales of
assets. As used in the designation of the Cumulative Redeemable Preferred
Stock, the terms "Change of Control" has the same meaning as is ascribed
to that term in the Indenture governing the issuance of the Senior Notes.
See "Description of Cumulative Redeemable Preferred Stock."
(6) The adjustment reflects the effect of the Merger on the 8,659,999 shares
outstanding (excluding the 35,232 shares held by Mr. Florence) to be
cancelled and retired at $.01 par value per share. There will be
3,784,018 shares outstanding subsequent to the Merger.
(7) The adjustment reflects amounts distributed to convert up to 8,217,261
shares of Syratech Common Stock to cash, including those converted under
the Employee Stock Option Plan, for total consideration of $275,251 less
the retention of shares by existing stockholders. Combining the value of
the retained shares with the receipt of proceeds by Syratech in
connection with the Merger for up to 3,131,780 shares issued to THL I
results in common stockholders' equity contribution of $121,089.
(8) The adjustment reflects the cancellation of the 218 shares of treasury
stock.
26
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------------------------------------------
Recapitalization
Historical Pro Forma Pro Forma Pro Forma
Syratech Rauch(1) Adjustments Combined Adjustments Combined
----------------- ----------- ----------------- ----------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... $ 270,931 $ 609 $271,540 $271,540
Cost of sales..................... 194,113 330 $ 101(2) 194,544 $(20,572) 194,544
---------- ------- --------- -------- --------- --------
Gross profit.................. 76,818 279 (101) 76,996 76,996
Selling, general and
administrative expenses.......... 57,664 1,806 30(3) 58,420 450(4) 58,870
(94)(5)
(986)(6)
Other operating income(a)......... 3,948(7) 3,948 3,948
---------- ------- --------- -------- --------- --------
Income (loss) from
operations................... 23,102 (1,527) 949 22,524 (450) 22,074
Interest expense.................. (3,150) (93) (519)(8) (3,762) (20,572)(9) (24,334)
Interest income................... 771 21 792 792
Other income(b)................... 11,900(10) 11,900 11,900
---------- ------- --------- -------- --------- --------
Income (loss) before
provision (benefit)
for income taxes............. 32,623 (1,599) 430 31,454 (21,022) 10,432
Provision (benefit) for income
taxes............................ 12,234 (439)(11) 11,795 (7,883)(11) 3,912
---------- ------- --------- -------- --------- --------
Net income (loss)............. 20,389 (1,599) 869 19,659 (13,139) 6,520
---------- ------- --------- -------- --------- --------
Preferred stock dividends
accrued.......................... 2,160(12) 2,160
---------- ------- --------- -------- --------- --------
Net income (loss) for
common
stockholders................. $ 20,389 $(1,599) $ 869 $ 19,659 $(15,299) $ 4,360
========== ======= ========= ======== ========= ========
</TABLE>
- ------------
(a) Income from the sale of Farberware inventory and other operating income, net
of certain selling, general and administrative expenses.
(b) Non-recurring pre-tax income related to the one-time licensing of the
Farberware name on cookware and bakeware.
See notes to pro forma condensed consolidated statement of operations.
27
<PAGE>
NOTES TO PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands)
The pro forma condensed consolidated financial data have been derived by
the application of pro forma adjustments to the Company's historical financial
statements for the period noted. The Merger has been accounted for as a
recapitalization which will have no impact on the historical basis of assets and
liabilities. The pro forma financial data assumes that there are no dissenting
shareholders to the Merger.
(1) Includes the results of operations for the 45 day period, beginning
January 1, 1996 prior to the Company's acquisition of Rauch.
(2) Reflects additional depreciation expense as a result of an allocation of a
portion of the Rauch purchase price to property, plant and equipment.
(3) Reflects additional amortization expense as a result of amortizing, over
30 years, the $7,224 allocation of Rauch purchase price in excess of net
assets acquired.
(4) The pro forma adjustment to selling, general and administrative expenses
reflect the annual management fee the Company will pay to the Thomas H.
Lee Company.
(5) Reflects an adjustment for certain acquisition related costs incurred by
Rauch.
(6) Reflects an adjustment for a stock option buy out by Rauch.
(7) Consists of income from the sale of Farberware inventory and other
operating income, net of certain selling, general and administrative
expenses, relating to the sale of Farberware inventory. The Company
licensed the right to manufacture, market and distribute these products to
a third party. See "Business--Recent Transactions."
(8) Reflects an increase in interest expense had the acquisition of Rauch
taken place on January 1, 1996, using an interest rate of 8.3% per annum,
which represents the Company's weighted average interest costs for the
period.
(9) The pro forma adjustment to interest expense reflects the following:
Interest expense on the New Credit Facility (assumed 9.0% rate) $ 1,015
Interest expense on the Senior Notes (11.0% rate).................. 18,150
Amortization of debt issuance costs over 6-10 years................ 1,407
-------
Total adjustment............................................... $20,572
=======
(10) Consists of non-recurring pre-tax income of $11,900 related to the
one-time licensing of the Farberware name for use on cookware and
bakeware.
(11) The adjustment reflects the tax effect of the pro forma adjustments at a
37.5% effective tax rate.
(12) Dividends on shares of Cumulative Redeemable Preferred Stock are
cumulative from the date of issue and are payable when and as may be
declared from time to time by the Board of Directors of the Company. Such
dividends shall accrue on a daily basis (whether or not declared) from the
original date of issue at an annual rate per share equal to 12% of the
original purchase price per share, with such amount to be compounded
annually on each December 31 so that if the dividend is not paid from any
year the unpaid amount shall be added to the original purchase price of
the Cumulative Redeemable Preferred Stock for the purpose of calculating
succeeding year's dividends.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See "Forward Looking Statements"
The following analysis of the financial condition and results of operations
of the Company is qualified in its entirety by the more detailed information and
financial data, including the Condensed Consolidated Financial Statements and
related notes thereto, appearing elsewhere herein.
General
The Company has historically expanded its product lines through
acquisitions. The Company has integrated these acquisitions into its existing
operations, resulting in increased sales and a broader product line. All
acquisitions of businesses were accounted for under the purchase method of
accounting, and, accordingly, the results of operations of each acquired company
have been included in the Consolidated Statements of Earnings since its
respective acquisition date.
Due to the number, magnitude and timing of the Company's acquisitions, the
Company's operating results, as reflected in the Consolidated Financial
Statements, are not directly comparable on a year-to-year basis. See
"Business--Recent Transactions."
Results of Operations
The following table sets forth certain financial data as a percentage of
net sales of the Company for each of the periods presented.
<TABLE>
<CAPTION>
Percentage of Net Sales
----------------------------------------
Year Ended December 31,
----------------------------------------
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Net Sales............................................ 100.0% 100.0% 100.0%
Cost of sales........................................ 71.0 70.7 71.6
------- ------- --------
Gross profit........................................ 29.0 29.3 28.4
Selling, general and administrative expenses......... 21.5 20.2 21.3
Other operating income............................... 1.4(1)
--------
Income from operations.............................. 7.5 9.1 8.5
Interest income (expense), net....................... (0.3) 2.7 (0.9)
Other income......................................... 4.4(2)
---- --- ----
Income before income taxes.......................... 7.2 11.8 12.0
Provision for income taxes........................... 1.9 4.0 4.5
------- ------- --------
Income from continuing operations................... 5.3% 7.8% 7.5%
======= ======= ========
</TABLE>
- ------------
(1) Includes income from the sale of Farberware inventory and other operating
income, net of certain selling, general and administrative expenses
relating to the sale of Farberware inventory. The Company licensed the
right to manufacture, market and distribute these products to a third
party. See "Business--Recent Transactions."
(2) Consists of non-recurring pre-tax income related to the one-time licensing
of the Farberware name for cookware and bakeware.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased 59.8% to $270.9 million for the year ended December 31,
1996 from $169.5 million for the year ended December 31, 1995. Excluding the
impact of acquisitions of businesses and product lines completed in 1996, net
sales increased 8.1%. This increase reflects primarily increased sales volume of
giftware items (including seasonal items, picture frames and silver plated
items) and of sterling silver flatware. The changes in product prices did not
materially impact net sales.
Gross profit increased 54.6% to $76.8 million for the year ended December
31, 1996 from $49.7 million for the year ended December 31, 1995. Gross profit
as a percentage of sales was 28.4% for the year ended December 31,
29
<PAGE>
1996 compared to 29.3% for the year ended December 31, 1995. The decrease in
gross profit percentage was primarily a result of the acquisition of Rauch,
which gross profit margin is lower than that of certain of the Company's other
product lines and a $1.3 million nonrecurring compensation expense charge
related to the transfer of shares to one of the executive officers. See note 11
to the Company's consolidated financial statements. Partially offsetting this
decrease was the gross profit on the recently acquired high end Silvestri
seasonal productline. Excluding the impact of acquisitions, the gross profit
percentage was 30.3% for the year ended December 31, 1996. This increase in
gross profit percentage, exclusive of acquisitions, was due to increased
sterling flatware sales which have a higher profit margin than other tabletop
and giftware items and also to a change in product mix in the giftware lines to
higher margin items including frames and certain seasonal products. The increase
in gross profit margin was not materially impacted by change in product prices.
Selling, general and administrative expenses ("S,G & A expenses") increased
to 21.3% as a percentage of net sales of $57.7 million for the year ended
December 31, 1996 from 20.2% or $34.2 million for the year ended December 31,
1995. S,G & A expenses were $39.5 million or 21.5% as a percentage of net sales
excluding S,G & A expenses incurred at Rauch, Silvestri, C.J. Vander and
Potpourri. These acquired companies had $18.2 million of S,G & A expenses
including the allocation of existing and continuing corporate expenses.
Substantial resources were dedicated and additional expenses were incurred as a
result of acquiring productlines, integrating functions (including selling and
marketing, customer service and general and administrative functions) and in the
case of Farberware, general and administrative costs of disposing of the
productline during 1996. Allocated corporate costs incurred to sell the
Farberware product line of $2.6 million are not included in the other operating
income line and are included in the Company's S,G & A expenses. Also included in
S,G & A expenses in 1996 was $2.6 million of nonrecurring compensation expense
related to the transfer of shares to two other executive officers. See note 11
to the Company's consolidated financial statements.
Income from operations increased 49.6% to $23.1 million in the year ended
December 31, 1996. Included in income from operations for the year ended
December 31, 1996, was $3.5 million, net of certain S,G & A expenses, from the
disposal of Farberware inventory. The Company does not expect to incur any loss
on the disposal of the remaining Farberware inventory at December 31, 1996 of
$3.3 million.
Interest expense, net was $2.4 million for the year ended December 31, 1996
compared to interest income, net of $4.6 million for the year ended December 31,
1995. This change results from a reduction in invested cash used to purchase and
retire 3,064,751 shares of the Company's Common Stock, for recent acquisitions
and for seasonal working capital needs.
The provision for income taxes was $12.2 million for the year ended
December 31, 1996 compared to $6.9 million for the year ended December 31, 1995.
The effective income tax rate was 37.5% for the year ended December 31, 1996
compared to 34.3% for the year ended December 31, 1995. This increase in the
effective income tax rate in 1996 is due to a higher proportion of income earned
in tax jurisdictions with higher income tax rates, including but not limited to
the Farberware income.
Net income for the year ended December 31, 1996, all of which was income
from continuing operations, was $20.4 million or $2.32 per share, on shares of
8,799,000, compared to income from continuing operations of $13.2 million, or
$1.12 per share, on shares of 11,803,000, for the year ended December 31, 1995.
The year ended December 31, 1996 included non-recurring pre-tax income of $11.9
million, net of costs, resulting from a license agreement. Net income for the
year ended December 31, 1995 was $46.2 million or $3.91 per share. The year
ended December 31, 1995 included income from discontinued operations, net of
income taxes, of $2.6 million and the gain on sale of Syroco, Inc. of $30.5
million totaling $2.79 per share.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased by 15.1% to $169.5 million in 1995 from $147.3 million
in 1994 primarily due to expanded product offerings within the giftware line, as
well as increased demand for the Company's giftware products and an increase in
its seasonal product category. The Company's sales increased despite a difficult
retail environment in 1995.
The Company's gross profit increased 16.4% to $49.7 million in 1995 from
$42.7 million in 1994. The gross profit as a percentage of net sales increased
to 29.3% in 1995 from 29.0% in 1994. This increase was due primarily to improved
product mix in the giftware lines.
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Selling, general and administrative expenses increased to $34.2 million in
1995 from $31.6 million in 1994 but decreased as a percentage of net sales to
20.2% in 1995 from 21.5% in 1994. The decrease of 1.3 percentage points was due
to the Company's cost reduction program following the sale of Syroco.
Income from operations increased 39.4% to $15.4 million in 1995 from $11.1
million in 1994 as a result of the factors discussed above.
Interest income, net, was $4.6 million in 1995 compared to net interest
expense of $0.5 million in 1994. Interest income was earned primarily as a
result of investing the net proceeds from the sale of Syroco in short-term,
investment grade securities.
The provision for income taxes in 1995 was $6.9 million compared with $2.8
million in 1994. The effective income tax rate increased to 34.3% in 1995 from
26.0% in 1994. The 1995 effective income tax rate increased primarily due to an
increase in the proportion of the Company's earnings in tax jurisdictions with
higher tax rates, primarily interest income earned in the United States.
Liquidity and Capital Resources
On March 28, 1995, the Company sold its casual furniture and accessories
business of Syroco, Inc. to Marley Plc for net proceeds of $133.9 million after
transaction costs and income taxes. The Company has used the net proceeds from
the sale of Syroco for working capital requirements to grow its existing
business, to effect the Katy Stock Repurchase and to make several acquisitions
in 1996.
Net cash provided by operating activities for the year ended December 31,
1996 was approximately $23.8 million. The primary sources of cash were the
decrease in marketable securities as a result of the repayment of temporary
borrowings used to effect the Katy Stock Repurchase and income generated which
includes the non-
recurring pre-tax Farberware gain of $11.9 million. Partially offsetting these
sources was acquisition related increases in accounts receivable and
inventories.
At December 31, 1996, accounts receivable increased to $60.0 million from
$31.9 million at December 31, 1995. This increase is primarily the result of
sales of Farberware inventory, seasonality, the recent acquisitions and
increased sales volume in the tabletop and giftware product lines. The increase
in inventory from $41.2 million at December 31, 1995 to $79.4 million at
December 31, 1996 is due to recent acquisitions, including purchased Farberware
inventory. During 1996, $23.8 million was collected from the final settlement
agreement for the Rauch fire loss which occurred prior to the Company's
acquisition of Rauch.
The Company's working capital requirements are seasonal and tend to be
highest in the period from September through December due to the Christmas
selling season. Accounts receivable tend to decline during the first quarter as
receivables generated during the third and fourth quarters are collected and
remain lower until the next peak season beginning in September. Accordingly, the
Company's debt level under its revolving credit facilities generally peaks in
the third quarter and reduces during the first quarter. This seasonality has
increased as a result of the acquisition of Rauch and the Silvestri product
line. See "Risk Factors--Seasonality".
Capital expenditures were approximately $15.1 million for the year ended
December 31, 1996. These expenditures were primarily for a warehouse in South
Carolina, computer software and hardware, improvements at the Company's East
Boston facility, machinery, tools and dies for the Company's manufacturing
facilities and for a building and equipment for C.J. Vander.
The Company expects capital expenditures for the year ended December 31,
1997 to be approximately $17 million, including land and construction costs for
a warehouse facility on the West Coast, the cost of certain machinery and
equipment for Rauch.
On December 29, 1995, the Company effected the Katy Stock Repurchase. The
aggregate purchase price of $52.1 million represented approximately $17 per
share. The purchase was substantially financed by the issuance of two promissory
notes due January 2, 1996 to subsidiaries of Katy and the assumption of short
term bank debt, all aggregating $51.7 million. The two promissory notes and the
short-term bank debt were repaid on January 2, 1996.
Effective October 31, 1996, the Company's Loan Agreement was amended to add
Rauch, Farberware and Silvestri as borrowers and limited total borrowings,
including amounts reserved for drawings on letters of credit, to $100.0 million
through December 31, 1996 and thereafter to $60.0 million under the earlier of
April 30, 1997
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or the completion of refinancing contemplated with respect to the
Recapitalization. As of December 31, 1996, the amount of outstanding borrowings
under the Loan Agreement was $5.9 million.
The revolving credit facility of one of the Company's Puerto Rican
subsidiaries expired on May 30, 1996; however, the Company received a letter of
commitment increasing the line from $4.0 million to $10.0 million and extending
it to May 31, 1997. On October 15, 1996, the Puerto Rican subsidiary and the
lender entered into an Amended and Restated Line of Credit Agreement increasing
the facility to $10.0 million and renewing it to May 31, 1997. As of December
31, 1996, the amount of outstanding borrowings under the line was $0.6 million.
On December 31, 1996, credit availability, net of $10.3 million of
outstanding letters of credit, under the Loan Agreement and the Puerto Rican
subsidiary's line totaled $83.8 million and $9.4 million, respectively. On
January 1, 1997, the availability under the Loan Agreement was reduced by $40.0
million.
The Company anticipates, assuming that the Recapitalization was consummated
on December 31, 1996, that up to approximately $304.1 million of financing will
be required in connection with the Recapitalization and related transactions for
(i) the consummation of the Merger, (ii) the repayment of the existing bank debt
of the Company and (iii) the payment of fees and expenses associated with the
Recapitalization. The Company expects to obtain the necessary funds from (i) the
Equity Investment and (ii) the issuance and sale of the Senior Notes in the
Offering. See "The Recapitalization" and "Use of Proceeds".
At the time of the execution of the amendment to the Merger Agreement, a
commitment letter to provide senior credit financing was presented to the
Company. The New Credit Facility will provide for $130.0 million of revolving
credit borrowings. The New Credit Facility will mature on the fifth anniversary
of the Recapitalization. Interest on loans under the New Credit Facility will
bear interest at rates based upon federal or Eurodollar Rates plus an applicable
margin. Loans under the New Credit Facility will be guaranteed by any and all
current or future domestic subsidiaries of the Company and will be secured by
security interests in the accounts receivable and inventory of the Company and
its domestic subsidiaries. For a more complete description of the New Credit
Facility, see "Risk Factors--Significant Leverage and Debt Service; Effective
Subordination" and "Description of Other Indebtedness."
Upon consummation of the Recapitalization, the Company would have on a pro
forma basis (as of December 31, 1996) outstanding debt of approximately $165.2
million. The transaction is expected to close in the second quarter of 1997. It
is intended that the transaction will be accounted for as a recapitalization.
The Company anticipates that its principal use of cash following the
Recapitalization will be working capital requirements, debt service requirements
and capital expenditures as well as expenditures relating to acquisitions and
integrating acquired businesses. Based upon current and anticipated levels of
operations, the Company believes that its cash flow from operations, together
with amounts available under the New Credit Facility, will be adequate to meet
its anticipated requirements through December 31, 1998 for working capital,
capital expenditures and interest payments. There can be no assurance, however,
that the Company's business will continue to generate sufficient cash flow from
operations in the future to service its debt, and the Company may be required to
refinance all or a portion of its existing debt or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company.
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Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation"
("Statement 123"). The Company has continued to account for its stock-based
transactions to employees in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and will include the pro
forma disclosures required by Statement 123, if material, in its annual
financial statements. For stock option grants to non-employees, the Company
follows the provisions of Statement 123, calculates compensation expense using a
fair value based method and amortizes compensation expense over the vesting
period. During the year ended December 31, 1996, the Company did not grant any
options to purchase shares of common stock to non-employees.
Also, effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("Statement 121"). Statement
121 requires that long-lived assets held and used by an entity be reviewed for
impairment whenever circumstances indicate that the carrying amount of an asset
may not be recoverable. It also requires that long-lived assets to be disposed
of be reported at the lower of the carrying amount or fair value less the cost
to sell. The adoption of Statement 121 did not have a material effect on the
Company's financial position or results of operations for the year ended
December 31, 1996.
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BUSINESS
Overview
Syratech designs, manufactures, imports and markets a diverse portfolio of
tabletop, giftware and seasonal products. The Company is a leading domestic
manufacturer and marketer of sterling silver flatware, sterling silver and
silver-plated hollowware. The Company also offers a number of other
complementary tabletop and giftware items, including stainless steel flatware,
brass hollowware, picture frames and photo albums, glassware, woodenware and
ceramics. Tabletop and giftware products generated approximately 63.4% of net
sales for the year ended December 31, 1996. The Company also is a leading
domestic manufacturer and marketer of seasonal products including Christmas
ornaments as well as a distributor of Christmas trim, lighting and tree skirts.
Seasonal products generated approximately 36.6% of net sales for the year ended
December 31, 1996.
Syratech has positioned itself as a single-source supplier to retailers by
offering a wide assortment of products across multiple price points through its
"good-better-best" strategy. This strategy enables the Company to sell its
products through a broad array of distribution channels, including retail
specialty stores, department stores, mass market merchandisers, catalogue
showrooms and warehouse clubs. Syratech markets its products under numerous
Company-owned tradenames including the Towle Silversmiths[RegTM], Wallace
International Silversmiths[RegTM]and International Silver Company[RegTM]
tradenames which are used in connection with the sale of tabletop and giftware
items and the Rauch[RegTM], Silvestri[RegTM] and Potpourri[RegTM] tradenames
which are used in connection with the sale of Christmas and other seasonal
merchandise.
Syratech has made a number of recent acquisitions to broaden and complement
its existing product lines. The Company has significantly enhanced the value of
acquired product lines by integrating them into the Company's existing
infrastructure. During 1996, the Company acquired Rauch, a leading domestic
manufacturer and marketer of Christmas ornaments, and C.J. Vander, a U.K.
manufacturer and marketer of prestigious sterling silver flatware and
hollowware. Also in 1996, the Company acquired certain assets, including the
tradenames, of Silvestri, a high-end manufacturer and marketer of Christmas
ornaments, collectibles, lighting and trim as well as other giftware and
decorative accessories, and Potpourri, a manufacturer and marketer of Christmas
products. The Company continually introduces new products and expands the
distribution of its existing products. As a result, the Company has generated
significant growth in net sales and Adjusted EBITDA from $103.7 million and
$11.8 million, respectively, in 1992 to $271.5 million and $29.8 million,
respectively, on a pro forma basis, in 1996. For the year ended December
31, 1996, the Company had net sales of $270.9 million, an increase of 59.8%
from the same period in 1995. Furthermore, the Company believes that the
continued integration of the acquisitions into its existing business will
position it to increase sales and profitability.
Competitive Strengths
The Company's goal is to become the leading domestic, single-source
supplier of tabletop, giftware and seasonal products to retailers. To achieve
this goal, the Company will rely on its core competitive strengths, which are as
follows:
Leading Market Positions. The Company is one of the leading domestic
manufacturers and marketers of sterling silver flatware and sterling silver and
silverplated hollowware. These products are sold under the Wallace, Towle and
International Silver tradenames, which are well-recognized and date back to the
American Colonial period. In addition, the Company is one of the leading
domestic manufacturers of Christmas ornaments. These products are sold under the
Rauch, Silvestri and Potpourri tradenames, which are well-established brands for
Christmas and other seasonal merchandise. Historically, the Company has been
able to increase sales by leveraging its leading market positions, strong
presence with retailers and strong brand identity with consumers to introduce
new products and product categories.
Broad Portfolio of Products with Well-Recognized Tradenames. The Company
provides a broad offering of quality products at multiple price points. These
items range from exclusive prestige products, such as sterling silver flatware
and hollowware, to moderately priced products, including silverplated and
stainless steel flatware, silverplated and brass hollowware and other giftware
and seasonal merchandise.
Syratech uses Company-owned and licensed tradenames as merchandising tools
to assist retailers in coordinating their product offerings and differentiating
their products from those of their competitors. In addition to the Wallace,
Towle, International, Rauch, Silvestri and Potpourri tradenames, the Company
markets giftware
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products under numerous other tradenames, including Rochard[RegTM], Holiday
Workshop[RegTM], Melannco[RegTM] and Elements[RegTM]. The Company believes that
its strongest brands draw customers into retail stores specifically to purchase
products bearing those tradenames. In addition to its own tradenames, the
Company produces a variety of products under license from certain entities
including The Walt Disney Company[RegTM], Cuisinart[RegTM], Victoria & Albert
Museum[RegTM] and Faberge, Inc.[RegTM].
The Company recently acquired certain assets, including the intellectual
property, of Farberware Inc. Following this acquisition, the Company licensed
the Farberware tradename to third parties for use on cookware and bakeware,
small electric and certain other commercial electric items. The Company is
currently marketing certain products under the Farberware tradename and believes
there are significant opportunities to develop the tradename in other product
categories which have not been otherwise licensed to third parties.
The Company's diverse product lines allow it to target a wide range of
customers and to respond more effectively to changes in retail distribution and
consumer preferences. Furthermore, the vendor consolidation trend in the retail
industry increases demand for vendors, like the Company, who can make timely
deliveries of a broad range of quality products and provide advertising and
other sales support.
Diversified Distribution Channels. The Company sells its products to
approximately 30,000 customers in most major distribution channels, including
retail specialty stores, such as jewelry, seasonal and nonseasonal giftware and
collectible stores, department stores, mass market merchandisers, catalogue
showrooms, warehouse clubs, premium and incentive marketers, drug store chains
and home centers. The Company believes that the recent Rauch and Silvestri
acquisitions will strengthen the Company's presence with mass market
merchandisers and department and specialty stores, respectively. In addition,
the Company has a policy of not owning or operating Company outlet stores and
believes that this policy further strengthens relationships with customers. The
Company's broad customer base, both in terms of number of customers and
distribution channels, reduces exposure to any single customer or distribution
channel. In 1996, no single customer accounted for more than 8% of the Company's
net sales.
Innovative Product Development. The vast majority of the Company's
products, including products that are sourced from outside vendors, are designed
by the Company's design team and independent designers in conjunction with the
Company's product development and marketing teams. The Company's design and
product development and marketing teams collaborate (i) to introduce innovative
new products and product categories, such as the Holiday Workshop line of
seasonal products, the Hostess Helpers[RegTM] sterling accessory line and a
dinnerware category that coordinates with sterling silver flatware and (ii) to
develop acquired brands into successful product lines for the Company, such as
the Melannco lines of picture frames and photo albums and the Elements glassware
lines.
Integrated Manufacturing and Sourcing. The Company relies both on its own
domestic manufacturing capabilities and on a variety of suppliers located
primarily in the Asia Pacific Rim to deliver quality products at competitive
prices to its customers. The Company's decision to manufacture or to import is
based largely upon expertise, quality, availability and cost. In order to ensure
quality, imported products are generally manufactured using Company-owned tools
and dies. In 1996, through its import organization comprised of approximately
150 employees, both in the U.S. and overseas, the Company sourced products from
approximately 480 manufacturers, with whom in many cases it has had
long-standing relationships.
Business Strategy
The Company has developed and is implementing a business strategy to build
upon its core operating strengths and enhance profitability.
Leverage Recent Acquisitions. The Company believes that opportunities for
growth in sales and profitability exist through successfully integrating its
recent acquisitions into the Company's sales and marketing organization and
consolidating and rationalizing certain operations. Historically, the Company
has expanded and augmented acquired product lines through leveraging internal
marketing expertise and existing distribution relationships.
The Company plans to expand the distribution of Rauch, Silvestri and
Potpourri products by marketing them through the Company's established
distribution channels and also plans to add new products to their existing
lines. By integrating Rauch, Silvestri and Potpourri with the Company's
internally developed Holiday Workshop lines of seasonal products, the Company
has significantly expanded its product offerings in this product category, both
in terms of types of product and retail price points, and strengthened its
presence in major retail channels. In addition,
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the Company believes that such strengthened presence will provide opportunities
to cross-sell the Company's tabletop and giftware product lines through Rauch
and Silvestri distribution channels.
Through the acquisition of C.J. Vander, the Company believes that it will
be able to expand the distribution of Wallace and Towle sterling silver and
silverplated product lines into the European market, primarily through C.J.
Vander's existing distribution channels. In addition, the Company intends to
expand the distribution of C.J. Vander products in the United States through the
Company's independent representatives who sell to high-end specialty and
department stores.
In addition, the Company believes that the recent acquisitions will enable
it to achieve cost savings through (i) the consolidation of warehouses,
showrooms and manufacturing facilities, (ii) efficiencies resulting from
increasing sales volume through its existing distribution network and (iii)
reductions in certain general and administrative expenses, such as MIS, human
resources and credit analysis. For example, the Company is consolidating its
distribution facilities in the Western United States by building its own
warehouse to reduce costs, increase capacity and serve its customers more
efficiently.
Expand Distribution of Existing Product Lines. The Company believes that it
has significant opportunities to expand the distribution of its existing product
lines by increasing the penetration of existing retailer customers and the
number of retail outlets to which it sells. Beginning in 1994, the Company
implemented a program with a specialty retailer and franchisee, whereby the
Company sources, markets and distributes giftware products for the customer's
retail system comprised of several thousand stores. As a result, the Company has
identified several growth opportunities, both in terms of expanded product
offerings and additional store coverage. In addition, the Company intends to
expand the distribution of several product lines introduced in the past several
years, such as Melannco and Elements, which the Company believes are growth
opportunities that have not yet been fully exploited.
Broaden Product Offerings. The Company expects to make a number of new
product introductions each year. As a result of the planned investments in
tools, dies and machinery, the Company believes that it will be able to broaden
significantly its offering of Christmas and other seasonal merchandise beginning
in 1997. The Company intends to capitalize on the Farberware tradename by
introducing new products in categories as to which exclusive rights to the
tradename have not been granted to third parties. In addition, the Company
continues to expand and upgrade its line of sterling silver, silverplated and
other tabletop and giftware products.
Invest Further in Technology and Productivity to Maintain a Low-Cost
Structure. In order to support the growth of its business, during 1997 the
Company plans to invest $15 million to expand its manufacturing, warehousing and
distribution capabilities. In addition, the Company intends to invest in
application solutions to enhance its Electronic Data Interchange (EDI) and
warehousing capabilities. The Company plans to add a Warehousing Management
System (WMS) to each of its warehouses. These systems will enhance the Company's
ability to service its customers by improving its order processing and logistics
and storage utilization, minimizing order cycle times, enhancing inventory
management, and ensuring that customer orders are processed efficiently.
Additionally, the Company is planning to expand its manufacturing capabilities
by acquiring new tools, dies and machinery. The Company also has purchased a
828,000 square foot manufacturing and distribution facility in Chester, South
Carolina which will increase production capacity and reduce costs.
Make Selected Acquisitions. The Company believes that the giftware and
seasonal markets and, to a lesser extent, the tabletop market are highly
fragmented with a number of small manufacturers and marketers of limited
products lines. The Company believes that these industry dynamics and the
continuing trend among retailers to consolidate their vendor base should
generate attractive opportunities to acquire complementary brands, products,
product categories and businesses that will provide operating synergies.
Recent Transactions
Rauch
On February 15, 1996, the Company, through an indirect wholly owned
subsidiary, acquired the outstanding shares of Rauch for approximately $49.6
million, including costs of the transaction. The acquisition was accounted for
under the purchase method of accounting, and the results of operations of Rauch
have been included with the results of the Company from February 15, 1996. The
purchase price in excess of net assets acquired of $7.2 million is being
amortized on the straight line basis over 30 years. During the year ended
December 31, 1996, the Company
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received $23.8 million in connection with an insurance claim relating to a 1994
fire at Rauch. During the fiscal year ended December 31, 1995, net sales of
Rauch were $58.9 million.
Farberware Inc.
On April 2, 1996, the Company, through its indirect wholly owned
subsidiary, Far-B Acquisition Corp. ("Far-B"), together with Lifetime Hoan
Corporation ("Lifetime"), acquired certain assets from Farberware Inc., a
subsidiary of U.S. Industries, Inc. ("USI") Lifetime and the Company are not
affiliates.
Farberware Inc. was a manufacturer of aluminum clad, stainless steel
cookware and bakeware and small electric kitchen appliances. The aggregate
consideration paid by Far-B and Lifetime was approximately $45.8 million,
subject to adjustment, of which Far-B paid approximately $32.6 million. The
amount of the adjustment was the subject of a dispute, as noted below. The
assets acquired by the Company included certain of the inventory, the tradename
"Farberware" and the intellectual property (including the intellectual property
that relates to cookware and bakeware and electric products other than major
kitchen appliances) and certain tools and dies and machinery and equipment.
Effective April 2, 1996, the Company, through Far-B, entered into a
manufacturing services agreement with Farberware Inc. for transitional
manufacturing services for certain finished goods previously produced by
Farberware Inc. The Company entered into the manufacturing services agreement in
part to provide continuity of product during a transition period in order to
protect the strength of the Farberware name in the marketplace. The
manufacturing services agreement has terminated.
Upon disposal of acquired inventory, the Company will not manufacture or
sell Farberware cookware and bakeware products or noncommercial electric
products. Accordingly, net sales for the year ended December 31, 1996 exclude
sales of Farberware inventory, and $3.5 million, net of certain selling, general
and administrative expenses, from these sales has been recorded as other
operating income.
Pursuant to an agreement made with Lifetime contemporaneously with the
agreement for acquisition of assets of Farberware Inc., the Company and Lifetime
agreed to share the rights to receive, and the obligation to pay certain
commissions in respect of, royalties under specified license agreements assigned
to the Company by the prior owner of the Farberware trade name. Through a joint
venture to be, but which has not yet been, formally established pursuant to the
agreement with Lifetime and subject to certain intellectual property rights that
the Company has reserved exclusively for itself, the Company and Lifetime expect
to continue to grant licenses to third parties for use of the Farberware trade
name, The Company itself also intends to market specified products from time to
time under the Farberware trade name. The agreement with Lifetime provides that
for a period of sixty days following a change of control of either Syratech or
Lifetime, the other co-owner of the joint venture will have the right to require
the co-owner that has experienced the change in control to set a price for a
one-half interest in the venture, and thereupon the other co-owner (i.e., the
one that has not experienced a change of control) can elect either to buy its
co-owner's interest at the price so set or to sell its own interest at such
price to the co-owner that set it.
On June 27, 1996, the Company's Farberware Inc. subsidiary (formerly Far-B)
("Farberware") entered into a license agreement with Meyer Marketing Co. Ltd.
("Meyer") pursuant to which Meyer was granted for a term of 200 years (i) an
exclusive worldwide license to use the Farberware name and certain related
intellectual property rights in connection with the sourcing, manufacture and
distribution of cookware and bakeware products for home use and commercial,
industrial and institutional size pots, pans and roasters, and (ii)
non-exclusive (shared) rights to use certain Farberware technology and other
intellectual property. For such grant, Meyer made a one-time payment to the
Company of $25.5 million, which resulted in recognition by the Company of $11.9
million of non-recurring income. On July 12, 1996, Farberware granted to a major
retail chain the exclusive license to use the Farberware name and related
intellectual property in connection with the sourcing, manufacture, marketing
and sale of certain electric products for annual royalty payments. On October
25, 1996 Farberware Inc. granted to FCI Corp. a license to use the Farberware
name in connection with the sourcing, manufacturing, marketing and sale of
certain Commercial Products (defined as six specified commercial urns and one
specified commercial convection oven plus cookware, bakeware and electric
products developed by the Licensee solely and exclusively for commercial,
industrial or institutional use with the prior written approval of Farberware)
for the payment of annual royalties.
On February 3, 1997 the Company, Farberware, and Lifetime reached an
agreement (the "Settlement Agreement"), with USI and Bruckner Manufacturing
Corp. (formerly Farberware Inc., the USI subsidiary)("BMC") to settle all
previous outstanding legal disputes arising out of the Farberware asset purchase
agreement and the
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manufacturing services agreement. The Settlement Agreement provides for no
change to the aggregate consideration paid for the acquired assets, and
eliminates certain restrictions on the disposition of acquired tools, machinery
and equipment. The Company expects to recognize a gain of approximately $2.5
million before taxes in 1997 on the disposition and sale of certain of the tools
and equipment. Under the terms of the Settlement Agreement, Farberware will
receive certain finished goods inventory at no cost which the Company estimates
has a net realizable value of approximately $1.2 million, and agreed to pay for
certain finished goods inventories purchased under the manufacturing services
agreement. The Settlement Agreement also resolved outstanding claims and
disputes related to purchase price adjustments, trade accounts receivable,
advertising commitments, and the administration of consumer warranties.
Silvestri
On April 16, 1996, the Company purchased finished goods inventory and
intangible assets of the Silvestri division of FFSC, Inc. for approximately $8.6
million. Prior to the Company's purchase of such assets, FFSC, Inc., its
subsidiaries and affiliated companies had filed for protection under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Texas (the "Bankruptcy Court"). The Bankruptcy Court approved this
acquisition by the Company. Silvestri products include Christmas ornaments,
collectibles, lighting and trim as well as other seasonal and nonseasonal
giftware and decorative accessories.
The Company has given a guaranty (limited to $4 million), dated as of May
21, 1996, of the obligations of FF Holding Company, FFSC, Inc. and certain
related entities to The CIT Group/Business Credit, Inc. under a certain debtor
in possession financing agreement dated May 21, 1996 and, at the request of the
Company, NationsBank N.A. (South) has issued its letter of credit, dated May 21,
1996 in the amount of $4 million to CIT Group/Business Credit, Inc. to secure
the Company's aforesaid guaranty. Certain funds which are affiliates of the
Thomas H. Lee Company are creditors of FFSC, Inc.
C.J. Vander
On May 8, 1996, the Company, through one of its subsidiaries, acquired all
of the outstanding common stock of C.J. Vander, a manufacturer of sterling
silver and silverplated flatware and hollowware in Sheffield and London,
England. The purchase price was immaterial to the Company's consolidated
financial statements. The acquisition was accounted for under the purchase
method of accounting.
Potpourri
On November 26, 1996, a wholly-owned subsidiary of the Company acquired
inventory, tangible property, intellectual property rights, certain key records
(including customer lists, customer files, supplier information, catalogs) and
certain contract rights (selected by the Company's subsidiary) of Potpourri
Press, a North Carolina-
based manufacturer and marketer of Christmas products for a purchase price of
approximately $2.3 million plus a $0.2 million promissory note.
Syroco, Inc.
On April 11, 1995, pursuant to an agreement entered into on March 28, 1995,
the Company, through its subsidiary, Syratech Holding Corporation, sold Syroco.
The net proceeds received after costs of the sale and income taxes were $133.9
million. On September 25, 1995, the Company reached a final settlement regarding
the sale of Syroco. Under the terms of the settlement, the Company reacquired
certain assets and reassumed certain liabilities of Syroco which have been
recorded at their estimated net fair value amounting to $1.8 million at December
31, 1995. The Company does not expect that the liquidation of the assets will
have a material effect on the previously recognized gain on disposal. The sale
resulted in the discontinuation of the Company's casual furniture and
accessories business and resulted in an after tax gain on disposal of $30.5
million which was recognized in the second quarter of 1995. The assets and
liabilities relating to the discontinued business are included in the caption,
net assets of discontinued operations, in the Consolidated Balance Sheets at
December 31, 1995. The results of operations for the discontinued segment are
included in discontinued operations in the Consolidated Income Statements for
the years ended December 31, 1994 and 1995 and Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996.
Products
The Company designs, manufactures, imports and markets a diverse offering
of quality tabletop, giftware and seasonal products. The Company defines
seasonal products as Christmas tree ornaments, other Christmas
38
<PAGE>
decorations and a variety of other products sold for Halloween, Easter,
Thanksgiving, Mothers Day and Valentines Day. Seasonal products are marketed
under a variety of the Company's tradenames. Seasonal products are included in
the Tabletop and Giftware product category and are marketed under the Wallace,
Towle, and International Silver tradenames. For example, the Company considers
picture frames a tabletop and giftware item and also considers it seasonal
simply by changing the packaging slightly (e.g., a red colored box at Christmas
time). Therefore, a number of the Company's products and/or product lines cannot
be categorized between Tabletop and Giftware and Seasonal.
The majority of the Company's products are sold through the same
distribution channels. Customers in each distribution channel purchase a wide
range of the Company's products. Distribution costs are not tracked by product
category and therefore are not distinguishable between Tabletop and Giftware and
Seasonal. In addition, selling and marketing costs, including product design,
trade shows and travel, are not tracked separately and are not reasonably
allocable by product category.
A significant portion of the Company's products are also sourced overseas.
This function is also not performed by product or product line and is therefore
not reasonably allocable by product category.
The Company also believes that a significant change in sales of specific
products will not materially impact operating results.
The following table presents a breakdown of the Company's net sales by
major product categories for the periods presented. For the purpose of this
table, seasonal products include the Rauch (including Rochard), Silvestri and
Holiday Workshop product lines. Certain seasonal products marketed under
Wallace, Towle and International Silver trademarks are included in the tabletop
and giftware product category.
Year Ended December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- ----------
(in thousands)
Tabletop and Giftware......... $139,510 $153,170 $171,824
Seasonal...................... 7,781 16,350 99,107
--------- --------- ---------
Total......................... $147,291 $169,520 $270,931
========= ========= =========
- ------------
The Company's products include those shown in the table below, all of which
are marketed under one of the Company's many well-recognized tradenames as shown
in the table:
<TABLE>
<CAPTION>
Product Category Representative Products Principal Tradenames
- ------------------- ----------------------------------------- ------------------------------------------------
<S> <C> <C>
TABLETOP Sterling Silver Flatware and Wallace Silversmiths[RegTM], Towle
AND Hollowware, Silverplated Flatware Silversmiths[RegTM], International Silver
GIFTWARE and Hollowware, Stainless Steel Company[RegTM], Farberware[RegTM], C.J.
Flatware, Picture Frames and Photo Vander, Ltd.[TM], Roberts and Belk,
Albums, Porcelain Boxes, Ltd.[TM], Tuttle Sterling[RegTM], Rochard[TM],
Candlesticks, Cosmetic Accessories, Melannco[RegTM], 1847 Rogers Bros.[RegTM],
Glassware, Woodenware, Ceramics, Elements[RegTM]
Brassware
SEASONAL Waterglobes, Figurines, Collectibles, Rauch Industries[RegTM], Silvestri[RegTM],
Christmas Ornaments, Christmas Holiday Workshop[RegTM], Potpourri[RegTM],
Stockings, Tree Skirts, Trim, Lighting International Christmas[TM], Holiday
Products[TM], Rochard[TM]
</TABLE>
Tabletop and Giftware
Sterling Silver and Silverplated Flatware and Hollowware. The Company
designs, markets and distributes a variety of products in these categories,
including flatware, serving pieces, cosmetic accessories and hollowware, such as
candlesticks, casseroles and coffee and tea services, that are marketed under
the tradenames Wallace Silversmiths[RegTM], Towle Silversmiths[RegTM],
International Silver Company[RegTM], C.J. Vander[TM] and Tuttle Sterling[RegTM].
A vast
39
<PAGE>
majority of the Company's products in this category are manufactured at the
Company's plants in Puerto Rico and Massachusetts. These products are sold
primarily to specialty stores, including jewelry stores and gift stores, and
department stores and are generally included in bridal registries.
Stainless Steel Flatware. The Company designs, markets and distributes
several lines of stainless steel flatware ranging from premium mass-produced
sets to high-end flatware place settings. The Company markets these products
under tradenames such as Wallace Silversmiths[RegTM], Towle Silversmiths[RegTM],
International Silver Company[RegTM], 1847 Rogers Bros.[RegTM] and, under a
license agreement, the tradename Cuisinart[RegTM]. The Company's products in
this category are imported from the Company's third-party vendors located
primarily in the Asia Pacific Rim. The primary channels of distribution include
department stores, mass market merchandisers, warehouse clubs and specialty
stores and are also included in bridal registries.
Picture Frames and Photo Albums. The Company designs, markets and
distributes several product lines of picture frames and photo albums. The
picture frames range from sterling silver on the high end to a variety of other
frames produced in wood, resin, ceramic, metal and other mediums. The photo
albums are produced in metal, fabric and resin. The Company markets these
products under tradenames such as Melannco International[RegTM], International
Silver Company[RegTM], Wallace Silversmiths[RegTM] and Towle Silversmiths[RegTM]
and under license from The Walt Disney Company[RegTM]. The Company's products in
this category are imported from the Company's third-party vendors located
primarily in the Asia Pacific Rim. The channels of distribution include
department stores, including stationery departments, specialty stores and mass
market merchandisers.
Glassware, Woodenware and Ceramics. The Company designs, markets and
distributes several lines of glassware products, including beverageware, glass
dinnerware and salad sets. The Company markets these products under the
tradenames International Silver Company[RegTM] and Elements[RegTM]. The Company
intends to market a woodenware and ceramics line in 1997 under the
Farberware[RegTM] tradename. The Company's products in this category are
imported from the Company's third-party vendors located primarily in the Asia
Pacific Rim. The channels of distribution of the Company's glassware line
include mass market merchandisers, warehouse clubs and specialty stores.
Porcelain Boxes. The Company designs, markets and distributes a diverse
range of high-end, hand-painted porcelain boxes under the Rochard [TM] tradename
which are primarily manufactured by third-party vendors located primarily in
France. The channels of distribution include specialty stores, including jewelry
stores and department stores.
Other Tabletop and Giftware. The Company designs, markets and distributes a
wide range of other tabletop and giftware products, including premium products
such as picture frames and cosmetic accessories as "gift with purchase" items,
brassware, napkin rings and decorative clocks. The primary channels of
distribution include department stores, mass market merchandisers, warehouse
clubs and specialty stores.
Seasonal Products
Christmas Ornaments. The Company designs, markets and distributes Christmas
tree ornaments made of glass, satin, ceramic and resin. The Company's products
are distributed through specialty stores, department stores, jewelry stores,
mass market merchandisers and warehouse clubs. These products are marketed under
the tradenames Rauch[RegTM], Silvestri[RegTM], Holiday Workshop[RegTM] and
International Christmas[TM]. The Company also manufactures limited edition,
sterling silver Christmas ornaments that are marketed under the tradenames
Wallace Silversmiths[RegTM] and Towle Silversmiths[RegTM].
Other Christmas Decorations. The Company designs, markets and distributes a
diverse product offering of other Christmas decorations including figurines,
waterglobes, collectibles, trim, lighting, tree skirts and other decorative
items produced in wood, resin, metal, paper, textiles, glass and ceramic. These
products are marketed under the tradenames Silvestri[RegTM], Rauch[RegTM],
Holiday Workshop[RegTM], International Christmas[TM] and Elements[RegTM]. These
products are distributed through specialty stores, department stores, mass
market merchandisers and warehouse clubs.
Other Seasonal Products. The Company designs, markets and distributes a
variety of other seasonal products for Halloween, Easter, Thanksgiving, Mothers
Day and Valentines Day. These products include figurines, vases, bowls, trays
and other items comprised of metal, resin, wood, ceramic and glass. These
products are distributed through specialty stores, department stores, mass
market merchandisers and warehouse clubs.
40
<PAGE>
Sales, Marketing and Distribution
On January 17, 1997, the Company, through one of its indirect wholly-owned
subsidiaries, acquired approximately 42 acres of land in Mira Loma, California.
The Company intends to construct a warehouse and distribution center on the
property to serve as its western region warehouse and distribution center.
The Company sells many different types of products, with a variety of price
points and target customers. Accordingly, the Company sells its products through
a variety of distribution channels including department and speciality stores,
mass market merchandisers, warehouse clubs, catalogue showrooms, premium and
incentive marketers, drug store chains, supermarkets, and jewelry stores. The
Company maintains separate sales forces for its product lines so as to provide
the specialized expertise and attention necessary to service its customer base.
The Company's sales and marketing staff coordinates with individual retailers to
devise marketing strategies and merchandising concepts and to furnish advice on
advertising and product promotion. The Company has developed several promotional
programs for use in the ordinary course of business to promote sales throughout
the year.
The Company's various sales and marketing efforts are supported from its
principal office and showroom in East Boston, Massachusetts and, for certain of
its products, from its offices and showrooms in Hong Kong and London. The
Company maintains additional showrooms in New York, Los Angeles, Atlanta, Dallas
and Chicago. The Company's sales and marketing staff at December 31, 1996,
consisted of approximately 150 employees who are salaried, paid commissions
based on sales or, in some instances, paid a base salary plus commissions. The
Company also distributes certain of its products through independent sales
representatives who work on a commission basis only.
Retailing Customers
During 1996, 20 customers accounted for approximately 43% of the Company's
net sales. No one customer represented more than 8% of the Company's net sales.
<TABLE>
<CAPTION>
Channels of Distribution % of 1996 Net Sales
- ------------------------------------------------------------------------ --------------------
<S> <C>
Mass Market Merchandisers, Catalogue Showrooms, Warehouse Clubs,
Drug Store Chains, Supermarkets........................................ 39%
Department Stores...................................................... 19%
Specialty Stores, Jewelry Stores, Premium and Incentive Marketers...... 42%
</TABLE>
In order better to service its customers, the Company has invested in
equipment and software to allow its customers to transmit their orders
electronically throughout the EDI system.
Manufacturing and Raw Materials
The Company produces its sterling silver flatware at its manufacturing
facility in San German, Puerto Rico, where it fabricates and manufactures
sterling silver into finished products for the Wallace, International, Towle and
Tuttle lines, and in Sheffield, England for C.J. Vander, Ltd. and Roberts and
Belk. The Company also designs, produces and maintains the tools required for
manufacturing sterling silver flatware.
The Company has maintained, in the aggregate, approximately six months of
inventory. The Company's silver fabrication operation in its Puerto Rico
manufacturing plant became fully operational during 1994. This process reduces
the need for purchasing fabricated silver from outside vendors. The Company uses
substantial quantities of fabricated silver in its manufacturing operations.
Fabricated sterling silver made from fine silver purchased by the Company may be
readily obtainable from outside resources as well. The Company purchases fine
silver in the spot market in quantities the Company believes are adequate to
meet reasonably foreseeable consumer demand for its silver products. The Company
does not engage in speculative purchases of fine silver. In the five-year period
ended December 31, 1996, the closing price of silver as quoted by Handy & Harman
Inc. has ranged from $3.54 per troy ounce to $6.01 per troy ounce ($5.23 at
February 21, 1997).
The Company manufactures silverplated giftware and tabletop products,
including hollowware, at its manufacturing and silverplating facilities in North
Dighton, Massachusetts and Sheffield, England. These facilities have all the
stamping, processing, soldering, finishing, polishing, silverplating and
packaging capabilities necessary to turn unfinished metal into finished
products.
41
<PAGE>
The Company's imported products originate as designs created by its
internal design staff or by independent designers, in each case in conjunction
with the Company's product development and marketing staffs. Products based on
these designs are manufactured to the Company's specifications in various
countries including Hong Kong, India, Korea, Taiwan, China, Japan, Indonesia,
Malaysia and certain European countries.
In 1996, the Company purchased an aggregate of approximately $104 million
of products from approximately 480 foreign manufacturers. No vendor accounted
for ten percent or more of such purchases in 1996. The Company does not have
information on the financial condition of its major foreign vendors, all of
which are privately held, but is not aware of any unfavorable information
related to their respective financial condition. Of the Company's foreign
purchases in 1996, approximately 92% were from vendors located in the Far East
and approximately 4% were from vendors located in India and approximately 4% in
the aggregate from vendors in other locations. The Company does not believe that
the loss of any single foreign supplier would have a material long-term adverse
impact on the Company's source of supply, because other manufacturers with whom
the Company does business would be able to increase production to fulfill the
Company's requirements. See "Risk Factors--Foreign Sources of Supply."
The Company intends to invest in increasing production capacity and
improving productivity related to its Rauch operations. For several of the prior
selling seasons, the Company believes that Rauch had operated under capacity
constraints. The Company has developed and is in the process of installing new
automatic machinery with a production capacity exceeding 150% of the capacity of
its current machines. The Company expects that the new machinery will start
operating during the first quarter of 1997. The Company also purchased an
828,000 (approximately) square foot building in Chester, South Carolina, which
is in close proximity to the existing Rauch manufacturing plant. This new
facility will provide adequate space for the new machinery and allow for
automated material handling which is expected to reduce costs substantially.
This large warehouse and distribution center will also provide the Company an
opportunity to consolidate its outside warehouse and manufacturing. The Company
continuously looks for new equipment intended to reduce production costs.
The recently acquired Rauch Christmas decoration manufacturing process uses
three basic raw materials: (i) expandable polystyrene ("EPS") for unbreakable
ornaments, (ii) glass ornament blanks and (iii) acetate or polyester yarn
materials including boxes and packaging. To produce Christmas stockings, tree
skirts and Santa Claus hats and suits, Rauch purchases non-woven and knitted
pile fabric. Rauch has not experienced difficulty in obtaining raw materials or
other supplies from its suppliers and does not anticipate any such difficulty in
the foreseeable future. Rauch imports ornament hangers, small glass and satin
balls and assorted tree and off-the-tree decorations from Taiwan, Hong Kong,
Mexico and Colombia. See "Risk Factors--Foreign Sources of Supply."
Competition
The tabletop, giftware and seasonal products industries in which the
Company is engaged are highly competitive. Competition is affected not only by
the large number of domestic manufacturers, but also by the large volume of
foreign imports. Several of the Company's competitors are larger and have
greater financial resources than the Company. The Company's products compete
indirectly with a broad range of household products not offered by the Company.
Within the overall tabletop products industry, the production of sterling silver
flatware in the United States is relatively concentrated, with five
manufacturers, including the Company, accounting for substantially all of the
sterling silver flatware manufactured and sold in the United States. The other
principal manufacturers and marketers of sterling silver flatware are Gorham,
Inc. and its affiliate The Kirk Steiff Company, Reed & Barton Corp. and Lunt
Silversmiths, all of which have been in business for many years. The giftware
and seasonal products industries, however, are very fragmented with numerous
small manufacturers and marketers of a limited number of products. The Company
is not aware of any competitor having the same product line breadth.
A number of factors affect competition in the sale of products of the type
manufactured, imported and sold by the Company. Among these are brand
identification, style, design, packaging, price, quality, promotion, sales staff
and the level of service provided to customers. The importance of these
competitive factors varies from customer to customer and from product to product
and no one of these factors is dominant in all cases. The Company believes that
its ability to compete effectively can be attributed to its performance in all
of these areas. Certain of the Company's foreign competitors have tried to gain
market share in the United States by producing low-cost items and by taking
advantage of the increased purchasing power of the dollar in times when the
dollar is relatively strong as compared to foreign countries. Rising labor costs
in many foreign countries and the relative weakness of the
42
<PAGE>
dollar, as compared to the exchange rates prevailing in the mid-1980's, have
reduced these advantages to some extent in recent years. See "Risk
Factors--Competition".
Trademarks, Copyrights and Patents
The success of the Company's various businesses depends in part on the
Company's ability to exploit certain proprietary designs, trademarks and brand
names on an exclusive basis in reliance upon the protections afforded by
applicable copyright, patent and trademark laws and regulations. The loss of
certain of the Company's rights to such designs, trademarks and brand names or
the inability of the Company effectively to protect or enforce such rights could
adversely affect the Company. See "Risk Factors--Trademarks, Copyrights and
Patents."
Seasonality
Sales are generally higher in the third and fourth quarters and are
strongly influenced by the buying patterns associated with the Christmas season.
The acquisitions of Rauch and Silvestri will intensify the seasonality of the
Company since the majority of Rauch and Silvestri products are Christmas items
and sales of these products are strongest in the third and fourth quarters. The
Company continues to introduce products appropriate to other holidays and
seasons in order to increase sales during the first and second quarters. See
"Risk Factors--Seasonality."
Backlog and Warranty
The Company's backlog consists of cancelable orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year, largely because of annual differences in consumer acceptance of
product lines, product availability, marketing strategies, inventory levels of
retailers and differences in overall economic and weather conditions. Orders for
the Company's products are generally subject to cancellation until shipment. As
a result, comparison of backlog as of any date in a given year with backlog at
the same date in a prior year are not necessarily indicative of sales trends.
The Company had (exclusive of Farberware) a backlog of approximately $24.3
million as of December 31, 1996, compared to approximately $24.0 million as of
December 31, 1995. See "Seasonality." The Company does not believe that backlog
is necessarily indicative of the Company's future results of operations or
prospects.
The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer goodwill. In accordance with normal retail
industry practice, the Company ordinarily accepts returns only from its
customers and does not ordinarily accept returns directly from consumers.
Certain of the products returned to the Company by its customers, however, may
have been returned to those customers by consumers. The Company will routinely
accept returns for imported products that are received late by the customer. The
majority of the returned products are resold into the same distribution channel.
During the three year period ended December 31, 1996, returns and allowances
amounted to approximately 2.1% of sales.
Incident to its acquisition of certain assets of Farberware Inc. (now known
as Bruckner Manufacturing Company), the Company agreed to assume all obligations
and liabilities with respect to warranties for replacement or repair of products
manufactured by Farberware under the latter's printed warranty forms and certain
other product warranties. The Company is entitled, subject to certain
conditions, to be indemnified by Bruckner Manufacturing Company and its parent
for the expenses incurred incident to such warranties.
Environmental Regulation
The Company's manufacturing operations including, silverplating, chrome
plating, tool making and painting, routinely involve the handling of waste
materials that are classified as hazardous. The Company is subject to certain
domestic federal, state and local laws and regulations concerning the handling,
containment and disposal of hazardous substances and, therefore, in the ordinary
course of its business, the Company incurs compliance costs and may be required
to incur clean-up costs. In addition, the Company's C.J. Vander facility is
subject to many environmental regulations related to its manufacturing
operations in the United Kingdom. Actions by federal, state and local
governments concerning environmental matters could result in laws or regulations
that could increase the cost of producing the products manufactured by the
Company or otherwise adversely affect the demand for its products. In addition,
the future costs of compliance with environmental laws and regulations and
liabilities resulting from currently unknown circumstances or developments could
be substantial and could have a material
43
<PAGE>
adverse effect on the Company. For example, certain laws and regulations could
impose liability upon the Company for any historic releases of hazardous
substances from facilities that it has owned or operated, or, from facilities to
which its waste materials have been transported for treatment or disposal.
Properties
The following table sets forth information with respect to the Company's
properties as of January 31, 1997:
<TABLE>
<CAPTION>
Approximate
Square
Footage or
Location Type of Facility Acreage Status
- ---------------------------- ----------------------------------- -------------- --------
<S> <C> <C> <C>
Chester, SC................ Warehouse/Manufacturing/Showroom 828,000 Owned
Revere, MA................. Warehouse/Distribution 580,000 Owned
Gastonia, NC............... Manufacturing/Distribution 425,000 Owned
East Boston, MA............ Office/Showroom 292,000 Owned
El Paso, TX................ Warehouse 125,000 Owned
Sheffield, England......... Manufacturing/Warehouse/Foundry 39,920 Owned
Mira Loma, CA.............. Land 42 Acres Owned
Cramerton, NC.............. Land 34.1 Acres Owned
Ontario, CA................ Warehouse/Distribution 285,000 Leased
Dallas, TX*................ Warehouse 189,100 Leased
North Dighton, MA.......... Manufacturing/Warehouse/Office 134,042 Leased
Crisfield, MD.............. Manufacturing/Warehouse 71,754 Leased
San German, PR............. Manufacturing/Office 70,296 Leased
China...................... Warehouse 56,512 Leased
New York, NY............... Showroom 45,361 Leased
Hong Kong.................. Office/Warehouse/Showroom 42,009 Leased
Atlanta, GA................ Showrooms 15,050 Leased
Los Angeles, CA............ Showroom 10,095 Leased
Dallas, TX................. Showrooms 9,716 Leased
Chicago, IL................ Showroom 7,452 Leased
Taiwan..................... Office 6,253 Leased
Philippines................ Office 4,380 Leased
London, England............ Office/Showrooms/Retail Store 4,000 Leased
New York, NY............... Warehouse 3,800 Leased
Wallingford, CT............ Office 2,800 Leased
Dallas, TX*................ Office Leased
</TABLE>
- ------------
* Includes Silvestri space, the leasing of which has not yet been approved by
the Bankruptcy Court.
Employees
As of December 31, 1996, the Company had approximately 1,925 employees. The
Company believes that its relationship with its employees is good.
The Company's employees are not represented by labor unions; however,
Rauch, which merged with the Company on February 15, 1996, was a subject of
efforts by UNITE (the "Union") in the fall of 1995 to organize Rauch's
employees. A scheduled Union election was postponed because the Union filed
unfair labor practice charges against Rauch with the National Labor Relations
Board (the "NLRB"). These charges, which related to allegations of threats and
promises by Rauch officials and the termination of certain employees, were
settled pursuant to an agreement between Rauch and the Union. On May 2, 1996,
the NLRB approved the agreement and the Union's request that the petition for an
election be withdrawn with prejudice.
On March 31, 1994 an ALJ designated by the NLRB determined that the P.R.
Subsidiaries had engaged in unfair labor practices incident to a union election
(won by the P.R. Subsidiaries) held in February, 1993 and ordered the P.R.
Subsidiaries to refrain from certain conduct and to take certain affirmative
action. The ALJ's decision was affirmed by the NLRB on September 22, 1994.
Incident to a second union election (also won by the P.R.
44
<PAGE>
Subsidiaries) held on June 22, 1994 pursuant to stipulation, the P.R.
Subsidiaries were again charged with unfair labor practices. The ALJ again found
that the P.R. Subsidiaries had engaged in unfair labor practices. The Company
has appealed to the NLRB, and the appeal is pending.
Legal Proceedings
The Company has been named as a defendant in several legal actions arising
from its normal business activities, including routine copyright and trademark
litigation, which actions are considered normal in the businesses in which the
Company is engaged.
The Company carries insurance against liability for certain types of risks.
Although the amount of liability that could result from any litigation cannot be
accurately predicted, in the opinion of management, the Company's potential
liability on all known claims would not have a material adverse effect on the
results of operations or financial condition of the Company.
45
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table provides information concerning the directors and
executive officers of the Company following the Recapitalization. All directors
will hold office until the next annual meeting of stockholders of the Company
and until their successors have been duly elected and qualified. All officers
will serve at the discretion of the Board of Directors.
Name Age Positions with the Company
- --------------------------- ------ --------------------------------------
Leonard Florence.......... 65 Chairman of the Board,
President, Chief Executive
Office and Director
E. Merle Randolph......... 64 Vice President, Treasurer, Chief
Financial Officer and Director
Melvin L. Levine.......... 65 Vice President of Purchasing and
Director
Alan R. Kanter............ 44 Vice President of Sales and Director
Faye A. Florence.......... 40 Vice President, General Counsel
and Secretary
David V. Harkins.......... 55 Director
Thomas M. Hagerty......... 33 Director
Scott A. Schoen........... 38 Director
Kent R. Weldon............ 29 Director
Seth W. Lawry............. 32 Director
Leonard Florence is the Chairman of the Board, Chief Executive Officer and
President of the Company. He has served in the capacity of Chairman of the Board
and Chief Executive Officer continuously since September 1986. He has also been
President and a director of certain of its subsidiaries since their respective
dates of organization. Mr. Florence previously served as President of the
Company from 1986 to 1994 and resumed the position in 1995. Mr. Florence has
been an executive in the tabletop and giftware products industry for more than
35 years.
E. Merle Randolph has been Vice President, Chief Financial Officer and
Treasurer of the Company since September 1986. He became a director of the
Company in May 1989. Mr. Randolph is also an officer of certain of the Company's
subsidiaries. For 17 years prior to joining the Company, Mr. Randolph was
employed in various financial positions by Rockwell International Corporation.
Melvin L. Levine has been Vice President of the Company and certain of its
subsidiaries since September 1986. Mr. Levine has been an executive in the
tabletop and giftware products industry for more than 35 years. He became a
director of the Company in May 1989. Mr. Levine is also an officer and director
of certain of the Company's subsidiaries.
Alan R. Kanter, who will become a director of the Company following the
Merger, has been a Vice President of the Company and a subsidiary of the Company
since September 1986. Mr. Kanter has been employed in the tabletop and giftware
products industry for more than 20 years.
Faye A. Florence, an attorney, has been Vice President and General Counsel
of the Company since June 1987 and Secretary since August 1987. Ms. Florence is
also an officer of certain of the Company's subsidiaries. Ms. Florence is the
daughter of Leonard Florence.
David V. Harkins will become a director of the Company following the
Merger. Mr. Harkins is Senior Managing Director of Thomas H. Lee Company and
joined Thomas H. Lee Company in 1986. Mr. Harkins is the President and a Trustee
of THL Equity Trust III, the General Partner of THL Equity Advisers III Limited
Partnership, which is the General Partner of Thomas H. Lee Equity Fund III, L.P.
and is the Chairman of National Dentex Corporation since 1983. Mr. Harkins is a
director of Stanley Furniture Company, Inc., National Dentex Corporation,
HomeSide, Inc., Freedom Securities, Inc. and First Alert, Inc.
46
<PAGE>
Thomas M. Hagerty will become a director of the Company following the
Merger. Mr. Hagerty is the Treasurer and a director of THL I. Mr. Hagerty is a
Managing Director of the Thomas H. Lee Company since 1993 and he joined Thomas
H. Lee Company in 1988. Mr. Hagerty is a Vice President and Trustee of THL
Equity Trust III, the General Partner of THL Equity Advisers III Limited
Partnership, which is the General Partner of Thomas H. Lee Equity Fund III, L.P.
Mr. Hagerty is a director of Select Beverages, Inc., Freedom Securities, Inc.
and HomeSide, Inc.
Scott A. Schoen will become a director of the Company following the Merger.
Mr. Schoen is the President and a director of THL I. Mr Schoen is a Managing
Director of the Thomas H. Lee Company since 1991 and he joined Thomas H. Lee
Company in 1986. Mr. Schoen is a Vice President and Trustee of THL Equity Trust
III, the General Partner of THL Equity Advisers III Limited Partnership, which
is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Schoen is a
director of First Alert, Inc., Rayovac Corporation, Anchor Advanced Products,
Inc., Alliance International Group, Inc., Health o meter Products, Inc. and
LaSalle Re Holdings Ltd.
Kent R. Weldon will become a director of the Company following the Merger.
Mr. Weldon is the Secretary and a director of THL I. Mr. Weldon is an Associate
of Thomas H. Lee Company since 1995; he worked at Thomas H. Lee Company from
1991 to 1993 and rejoined in 1995. Mr. Weldon is a Vice President of THL Equity
Trust III, the General Partner of THL Equity Advisers III Limited Partnership,
which is the General Partner of Thomas H. Lee Equity III, L.P. From 1989 to
1991, Mr. Weldon worked in the Mergers & Acquisitions Department of Morgan
Stanley & Co. Incorporated. From 1993 to 1995, Mr. Weldon attended the Harvard
Graduate School of Business Administration.
Seth W. Lawry will become a director of the Company following the Merger.
Mr. Lawry is a Vice President of Thomas H. Lee Company since 1995; he worked at
Thomas H. Lee Company from 1989 to 1990 and rejoined in 1994. Mr. Lawry is a
Vice President of THL Equity Trust III, the General Partner of THL Equity
Advisers III Limited Partnership, which is the General Partner of Thomas H. Lee
Equity III, L.P. From 1990 to 1992, Mr. Lawry attended Stanford Graduate School
of Business. From 1992 to 1994, Mr. Lawry worked in the Mergers & Acquisitions
Department of Morgan Stanley & Co. Incorporated. Mr. Lawry is a director of
Freedom Securities, Inc.
Committees of the Board of Directors
It is expected that the Board of Directors will establish an Audit
Committee and a Compensation Committee to replace those committees as now
constituted. The membership of the reconstituted committees has not yet been
determined. The Compensation Committee will make recommendations concerning the
salaries and incentive compensation of employees of and consultants to Syratech,
and will oversee and administer the Company's stock option plans. The Audit
Committee will be responsible for reviewing the results and scope of audits and
other services provided by Syratech's independent auditors.
Employment Agreements
Effective August 16, 1991, the Company entered into an employment agreement
with Leonard Florence (the "Florence Employment Agreement") providing for the
employment of Mr. Florence as Chief Executive Officer of the Company at an
annual base salary, payable in semi-monthly installments, of not less than $0.35
million as well as for certain other benefits and the reimbursement of expenses.
Unless otherwise terminated by the Company as provided in the Florence
Employment Agreement, Mr. Florence's term of full-time employment will continue
until the earlier of (i) the fifth anniversary of receipt of a notice of
termination given by either party to the other or (ii) the first anniversary of
receipt of a notice of termination given by Mr. Florence to the Company. The
Company may, at its discretion, but without any obligation, increase Mr.
Florence's base salary during the term of full-time employment. Once the base
salary shall have been increased, it shall not thereafter be decreased without
his written consent. Mr. Florence's current base salary is $0.7 million per
annum. The Florence Employment Agreement obligates Mr. Florence to provide
certain advisory services to the Company during the five-year period following
the term of Mr. Florence's full-time employment (the "Advisory Period") and
provides for Mr. Florence to receive annual compensation during the Advisory
Period in an amount equal to not less than 25% of his base salary during the
final year of his full-time employment. During the period of his full-time
employment and the Advisory Period, Mr. Florence is prohibited from engaging in
any business that is competitive with any line of business in which the Company
is engaged that contributes three percent or more of the gross revenues of the
Company. The Florence Employment Agreement also provides for payment to Mr.
Florence of a retirement benefit.
47
<PAGE>
The Company entered into a similar employment agreement, also effective as
of August 16, 1991, with Melvin L. Levine, Vice President of Purchasing of the
Company, except in Mr. Levine's case the base salary was $0.225 million for the
year ended December 31, 1992. Mr. Levine's current base salary is $0.350 million
per annum.
As of May 1995 and July 1995, the employment agreements with Messrs. Levine
and Florence were amended with respect to the computation and payment of
retirement benefits to each and, in the case of Mr. Florence, to provide for
payment of a survivor's benefit to his surviving spouse. Specifically, the
amendments provided for annual retirement benefit payments in amounts equal to
2% of their respective average total compensation (i.e., base salary and bonus
compensation) in the three years preceding attainment by the relevant executive
of age sixty-five or termination of such executive's full time employment,
whichever occurs later, multiplied by the number of years of such executive's
employment by the Company.
The Employment Agreements with Messrs. Florence and Levine, as amended,
provide for retirement benefit payments determined and payable in accordance
with the agreements. The following table shows the estimated annual benefits
payable to Messrs. Florence and Levine upon retirement based upon various
compensation levels and years of service.
Pension Plan Table
Years of Service
---------------------------------
Renumeration 5 10 15
- --------------- --------- --------- ---------
400,000 40,000 80,000 120,000
500,000 50,000 100,000 150,000
600,000 60,000 120,000 180,000
700,000 70,000 140,000 210,000
800,000 80,000 160,000 240,000
900,000 90,000 180,000 270,000
1,000,000 100,000 200,000 300,000
1,100,000 110,000 220,000 330,000
1,200,000 120,000 240,000 360,000
1,300,000 130,000 260,000 390,000
1,400,000 140,000 280,000 420,000
Messrs. Florence and Levine have each completed ten years of credited
service. Retirement benefits under the employment agreements are computed on the
basis of a straight-life annuity and are not reduced by the benefits received
under Social Security, but would be reduced by any benefits received under any
Company funded pension plan that hereafter may be adopted.
Upon the consummation of the Merger, the Employment Agreement with Leonard
Florence will be amended so as to (i) change his term of full-time employment
from a rolling five-year term to a fixed five-year term, (ii) provide for a
minimum base compensation of $1.15 million per annum, (iii) establish $1.15
million as the minimum amount upon which his retirement benefit (and the
survivor's benefit of his surviving spouse) will be computed and (iv) create
contractual rights with respect to certain perquisites that are accorded to him
informally under his present arrangements with the Company. Under Section 162(m)
of the Internal Revenue Code, so much of the compensation paid to Mr. Florence
as exceeds $1 million annually may not be deductible by the Company for federal
income tax purposes. The Employment Agreement with Melvin L. Levine will be
amended, as of the Effective Time, to change his term of full-time employment
from a rolling five-year term to a fixed five-year term.
The Company has also entered into employment agreements, effective as of
August 16, 1991, with E. Merle Randolph, Vice President, Chief Financial Officer
and Treasurer, and Alan R. Kanter, Vice President of Sales of the Company. The
agreements with Messrs. Randolph and Kanter are similar to those with Messrs.
Florence and Levine described above, except that (i) the term of full-time
employment of each of Messrs. Randolph and Kanter will continue until the third
anniversary of receipt of a notice of termination given by the Company to the
executive involved or by such executive to the Company, (ii) the period during
which each of Messrs. Randolph and Kanter has agreed to provide advisory
services to the Company (and to be bound by a non-competition agreement)
following the term of his full-time employment will be the lesser of three years
or six months for each year of his full-time employment beginning with the date
of the employment agreement, with such advisory period and the
48
<PAGE>
coextensive non-competition covenant being subject to termination at the
election of the Company on six months prior notice to the executive involved,
and (iii) no provision was originally made therein for a payment of a retirement
benefit.
The employment agreements of Messrs. Randolph and Kanter were amended in
July 1996, to provide, and during the same month Faye A. Florence and the
Company entered into a Retirement Benefit Agreement that provides, inter alia,
for the payment at age 65 or upon termination of such officer's employment,
whichever is later, of an annual retirement benefit to each such officer equal
to a percentage of his or her average annual compensation for the three fiscal
years ended immediately prior to the date on which such officer ceases to be a
full time employee of the Company multiplied by the number of years of such
officer's service to the Company. The minimum annual retirement benefit for each
such officer will be $75,000.
It is not contemplated that any changes will be made in the agreements with
Messrs. Randolph and Kanter and Ms. Florence.
On December 31, 1996, the Company, THL I and Leonard Florence entered into
three separate agreements, one with each of Alan R. Kanter, Melvin L. Levine and
E. Merle Randolph (each an "Executive Party"). Pursuant to each of the three
agreements (i) Mr. Florence agreed to contribute to the Company (a) on December
31, 1996, 10,604 shares of Syratech Common Stock, (b) on January 14, 1997,
10,628 shares of Syratech Common Stock and (c) on January 14, 1998, the largest
number (not exceeding 3,124) of shares of Syratech Common Stock as shall have an
aggregate value of approximately $99,991, (ii) on each of the dates of
contribution of such shares of Syratech Common Stock by Mr. Florence to the
Company, such shares were to be canceled and the Company was to issue to the
Executive Party, that number of shares of Syratech Common Stock that would be
equal to the number of shares of Syratech Common Stock contributed to the
Company on such date by Mr. Florence; (iii) on December 31, 1996 the Company
paid to each Executive Party the sum of $234,346; (iv) on January 14, 1997 the
Company paid to each Executive Party an amount equal to the lesser of (x) the
income tax benefit of the Company from the issuance of shares of Syratech Common
Stock and the cash payment required to be made to him on such date or (y) the
aggregate amount of federal, state and local income taxes to be owed by each
Executive Party as a result of the issuance of such shares and the making of
such cash payment; and (v) on January14, 1998 the Company is required to pay to
each Executive Party an amount equal to the lesser of (x) the income tax benefit
to the Company from the issuance of shares of Common Stock and the cash payments
to be made to each Executive Party on such date or (y) the aggregate amount of
federal, state and local income taxes that will be owed by each Executive Party
as a result of the issuance of shares of Common Stock and cash payment to be
made to him on such date. Each agreement provides that the manner in which the
payments to be made to each Executive Party for the purpose of transferring to
each Executive Party the tax benefits to the Company from such transactions are
to be calculated and subsequently adjusted is to be in the sole discretion of
the Company.
The Company and each Executive Party also entered into an agreement to the
respective Executive Party's Employment Agreement (each an "Amendment No. 2 to
Employment Agreement") dated January 31, 1997, to be effective as of December
31, 1996, to clarify and ensure that the transfer of shares referenced in the
above paragraph did not alter the compensation of the relevant Executive Party
for purposes of calculating the Executive Party's retirement benefit.
Stock Option Plan
1997 Stock Option Plan. The Company expects that the 1997 Stock Option Plan
(the "1997 Plan") will be adopted by the Board of Directors and approved by the
Company's stockholders promptly following the Closing. A maximum of 273,438
shares of Common stock will be issuable pursuant to the 1997 Plan upon exercise
of options. Under the 1997 Plan, incentive stock options may be granted to
employees and officers of the Company and non-qualified stock options may be
granted to consultants, directors, employees and officers of the Company.
The 1997 Plan will be administered by the Board of Directors of the Company
or a committee thereof consisting of two or more directors. Subject to the
provisions of the 1997 Plan, the Board of Directors will have the authority to
select optionees and determine the terms of the options granted, including (i)
the number of shares subject to each option, (ii) when the option becomes
exercisable, (iii) the exercise price of the options (which in the case of an
incentive stock option cannot be less than the fair market value of the Common
Stock on the date of grant, or less than 110% of fair market value in the case
of employees or officers holding 10% or more of the voting stock of the
Company), (iv) the duration of the option and (v) the time, manner and form of
payment upon exercise of an option.
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An option will not be transferable by the optionee except by will or by the
laws of descent and distribution. Options will be exercisable only while the
optionee remains in the employ of the company or for a period of time
thereafter. If an optionee remains in the employ of the Company or for a period
of time thereafter. If an optionee becomes disabled or dies while in the employ
of the Company, the option will be exercisable prior to the last day of the
third and sixth month, respectively following the date of termination of
employment. If the optionee leaves the employ of the Company for any other
reason, the option will be terminated immediately upon termination of
employment; provided that the Board of Directors may extend this period up to
the original expiration date of such option. Options which are exercisable
following termination of employment will be exercisable only to the extent that
the optionee was entitled to exercise such options on the date of such
termination.
50
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of Syratech Common Stock after giving effect to the
Recapitalization (i) by each stockholder who owns beneficially in excess of 5%
of the outstanding Syratech Common Stock, (ii) by each director, and (iii) by
all officers and directors as a group. Except as otherwise indicated, all
persons listed below have (i) sole voting power and investment power with
respect to their shares of Syratech Common Stock, except to the extent that
authority is shared by spouses under applicable law, and (ii) record and
beneficial ownership with respect to their shares of Syratech Common Stock. The
following table assumes that no stockholders other than Management retain shares
in the Recapitalization.
<TABLE>
<CAPTION>
Shares of
Common Stock
Beneficially
Name Owned Percentage
- ------------------------------------------------------- --------------- ------------
<S> <C> <C>
Leonard Florence (a)................................... 528,472 14.0%
E. Merle Randolph...................................... 30,875 *
Melvin L. Levine....................................... 41,132 1.1%
Alan R. Kanter......................................... 48,232 1.3%
Faye A. Florence....................................... 3,527 *
David V. Harkins (b)................................... 3,131,780 82.8%
Scott A. Schoen (b).................................... 3,131,780 82.8%
Thomas M. Hagerty (b).................................. 3,131,780 82.8%
Seth W. Lawry (b)...................................... 3,131,780 82.8%
Kent R. Weldon (b)..................................... 3,131,780 82.8%
Thomas H. Lee Equity Fund III, L.P. (c)................ 2,686,817 71.0%
THL-CCI Limited Partnership (d)........................ 278,710 7.4%
Officers and Directors as a group (10 persons)......... 3,784,018 100.0%
</TABLE>
- ------------
* Less than 1% of the issued and outstanding Syratech Common Stock.
(a) The business address for Leonard Florence is c/o Syratech Corporation, 175
McClellan Highway, East Boston, Massachusetts, 02128-9114.
(b) The business address of this stockholder is c/o Thomas H. Lee Company, 75
State Street, Boston, Massachusetts 02109. All such voting securities are
owned by Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee Foreign Fund
III, L.P. and THL-CCI Investors Limited Partnership and may be deemed to be
beneficially owned by Messrs. Harkins, Hagerty, Schoen, Lawry and Weldon,
officers of Thomas H. Lee Company. Each of such persons disclaims beneficial
ownership of such shares.
(c) THL Equity Advisors III Limited Partnership ("Advisors"), the general
partner of Thomas H. Lee Equity Fund III, L.P. and Thomas H. Lee Foreign
Fund III, L.P., THL Equity Trust III ("Equity Trust"), the general partner
of Advisors, Thomas H. Lee, Messrs. Harkins, Hagerty and Schoen and other
managing directors of Thomas H. Lee Company may be deemed to be beneficial
owners of the shares of Syratech Common Stock held by such funds. Each of
such persons maintains a principal business address at Suite 2600, 75 State
Street, Boston, Massachusetts 02109. Each of such persons disclaims
beneficial ownership of such shares.
(d) THL Investment Management Corp., the general partner of THL-CCI Limited
Partnership, and Thomas H. Lee, as director and sole shareholder of THL
Investment Management Corp., may also be deemed to be beneficial owners of
the shares of Syratech Common Stock held by THL-CCI Limited Partnership.
Each of such persons maintains a principal business address at Suite 2600,
75 State Street, Boston, Massachusetts 02109. Each of such persons disclaims
beneficial ownership of such shares.
51
<PAGE>
CERTAIN TRANSACTIONS
Following the Recapitalization, affiliates of Thomas H. Lee Company will
own between 60.7% and 82.8% of the Common Stock of the Company. See "The
Recapitalization."
At Closing, the Company will enter into a management agreement with Thomas
H. Lee Company pursuant to which the Company will pay Thomas H. Lee Company a
closing fee of $3.0 million in connection with the Recapitalization and an
annual fee of $450,000 for each of five successive years, for management
services to the Company. Such management services consist of on-going
operational, financial, accounting and strategic planning analysis and advice.
Following the initial five-year term of such agreement, such agreement
automatically continues for successive one year terms unless any party thereto,
at least ninety days prior to the end of any term, provides all other parties
thereto with notice of the intent to terminate the agreement.
The Company will enter into amended employment agreements with each of
Messrs. Florence and Levine in connection with the Recapitalization and is party
to existing employment agreements with Messrs. Kanter and Randolph as well as a
Retirement Benefits Agreement with Ms. Florence. See "Management--Employment
Agreements." Each of the Company's executive officers will be eligible to
participate in a stock option plan to be adopted by the Company. See
"Management--Stock Option Plan."
The Company will enter into a stockholders agreement (the "Stockholders'
Agreement") with affiliates of Thomas H. Lee Company and Management in
connection with the Recapitalization. Pursuant to the Stockholders' Agreement,
the stockholders party thereto will be required to vote their shares of Common
Stock to elect a Board of Directors of the Company consisting of certain
directors designated by affiliates of Thomas H. Lee Company and certain
management directors. The Stockholders' Agreement also grants those stockholders
who are affiliates of Thomas H. Lee Company the right to require the Company to
effect the registration of shares of Common Stock they hold for sale to the
public, subject to certain conditions and limitations. In addition, under the
terms of the Stockholders' Agreement, if the Company proposes to register any of
its securities under the Securities Act of 1933, as amended, whether for its own
account or otherwise, the stockholders party thereto are entitled to notice of
such registration and are entitled to include their shares therein, subject to
certain conditions and limitations. All fees, costs and expenses of any
registration effected on behalf of such stockholders under the Stockholders'
Agreement (other than underwriting discounts and commissions) will be paid by
the Company.
Shares of Syratech Common Stock held by executive officers and directors of
the Company will be entitled to receive the same consideration as shares of
Syratech Common Stock held by other stockholders, except that (i) Leonard
Florence will be required to retain 528,472 of his shares of Syratech Common
Stock, (ii) Leonard Florence will receive $28 per share and (iii) the other
Management Stockholders are required to retain 123,766 shares of Syratech Common
Stock, which amount will not be subject to proration. In addition, certain
executive officers and directors hold options to purchase Syratech Common Stock
which will vest and be converted into cash in connection with the Merger.
Ocean State Jobbers, Inc. ("Ocean State") purchased from the Company
merchandise in the amount of approximately $2.450 million for the year ended
December 31, 1996. Alan Perlman, a director of the Company, has been an officer
and director of Ocean State since 1977.
Service Merchandise Co. Inc., ("Service") purchased from the Company
merchandise in the amount of approximately $22.598 million for the year ended
December 31, 1996. Effective July 12, 1996, the Company, through an indirect
wholly-owned subsidiary, granted a license to Service to use certain trademarks,
patents and copyrights relating to certain electric and other products. An
indirect beneficial owner of less than 1% of the Company's Common Stock holds a
significant management position in Service. Harold Roitenberg, a director of the
Company, is also a director of Service.
Wacker Industrial Company ("Wacker"), a major supplier, is owned by a
holder of less than 1% of Syratech Common Stock. For the year ended December 31,
1996, the Company had purchases from Wacker of approximately $4.478 million.
The Company believes that the transactions described or referred to above
were effected on terms no less favorable to the Company than those that could
have been obtained from unaffiliated third parties.
52
<PAGE>
Pursuant to the Merger Agreement, the Company has agreed for six years
after the consummation of the Merger to indemnify all present and former
directors and officers of the Company and its subsidiaries and will, subject to
certain limitations, maintain for six years its current directors' and officers'
insurance and indemnification policy.
Additional information relating to executive compensation and various
benefit arrangements of the Company is set forth and incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders held on May 9, 1996. See "Available Information" and "Incorporation
of Certain Documents by Reference."
53
<PAGE>
DESCRIPTION OF SENIOR NOTES
General
The Senior Notes will be issued pursuant to an Indenture (the "Indenture")
between the Company and State Street Bank and Trust Company, as trustee (the
"Trustee"). The terms of the Senior Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act"). The Senior Notes are subject to all such
terms, and Holders of Senior Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. Copies of the proposed form of Indenture have been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part and are available as set forth below under "-- Available Information". The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions." For purposes of this summary, the term "Company"
refers only to Syratech, as survivor of the Merger, and not to any of its
Subsidiaries.
The Senior Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment with all current and future
unsubordinated Indebtedness of the Company, including borrowings under the New
Credit Facility. However, all borrowings under the New Credit Facility will be
secured by a first priority Lien on the accounts receivable and inventory of the
Company and its domestic subsidiaries. Consequently, the obligations of the
Company under the Senior Notes will be effectively subordinated to its
obligations under the New Credit Facility to the extent of such assets. As of
December 31, 1996, on a pro forma basis after giving effect to the
Recapitalization, approximately $10.3 million principal amount of indebtedness
would have been outstanding under the New Credit Facility (consisting of amounts
outstanding under letters of credit) and $119.7 million (subject to borrowing
base calculations) would have been available to be borrowed thereunder. See
"Risk Factors -- Substantial Leverage and Debt Service; Effective
Subordination."
The Company also conducts substantial operations through its direct and
indirect subsidiaries which are not incorporated in the United States (the
"Foreign Subsidiaries"). The Foreign Subsidiaries will not provide guarantees
of, or other credit support for, the Senior Notes. Consequently, the Company's
obligations under the Senior Notes will be effectively subordinated to the
indebtedness and other liabilities (including trade payables) of the Foreign
Subsidiaries. As of December 31, 1996, the Foreign Subsidiaries had identifiable
assets of $14.9 million and for the year then ended the Foreign Subsidiaries had
income from operations of $7.7 million. See Note 13 to Consolidated Financial
Statements of Syratech. As of December 31, 1996, the Foreign Subsidiaries had
indebtedness and other liabilities (including trade payables) of $3.7 million.
Principal, Maturity and Interest
The Senior Notes offered hereby will be limited in aggregate principal
amount to $165.0 million and will mature on April 15, 2007. The Indenture
provides for the issuance of up to $40.0 million aggregate principal amount of
additional Senior Notes having identical terms and conditions to the Senior
Notes offered hereby (the "Additional Senior Notes"), subject to compliance with
the covenants contained in the Indenture. Any Additional Senior Notes will be
part of the same issue as the Senior Notes offered hereby and will vote on all
matters with the Senior Notes offered hereby. For purposes of this "Description
of Senior Notes," references to the Senior Notes do not include Additional
Senior Notes. Interest on the Senior Notes will accrue at the rate of 11% per
annum and will be payable semi-annually in arrears on and October 15, commencing
on October 15, 1997, to Holders of record on the immediately preceding April 1
and October 1. Interest on the Senior Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of original issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and interest
on the Senior Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Senior Notes at their respective addresses set forth in the
register of Holders of Senior Notes; provided that all payments of principal,
premium and interest with respect to Senior Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Senior Notes will be issued in denominations of $1,000 and integral
multiples thereof.
54
<PAGE>
Optional Redemption
The Senior Notes will not be redeemable at the Company's option prior to
April 15, 2002. Thereafter, the Senior Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on April 15 of the years indicated below:
Year Percentage
- ----------------------------- ------------
2002........................ 105.500%
2003........................ 103.667
2004........................ 101.833
2005 and thereafter......... 100.000%
Notwithstanding the foregoing, during the first 36 months after the date of
the Indenture, the Company may redeem up to an aggregate of 35% of the aggregate
principal amount of the Senior Notes originally issued with the net cash
proceeds of a public offering of Common Stock of the Company at a redemption
price of (i) 111% of the principal amount thereof if redeemed prior to April 15,
1998, (ii) 110% of the principal amount thereof if redeemed on or after April
15, 1998 and prior to April 15, 1999 and (iii) 109% of the principal amount
thereof if redeemed on or after April 15, 1999, in each case, plus accrued and
unpaid interest thereon, if any, to the redemption date; provided that at least
$100.0 million in aggregate principal amount of Senior Notes remain outstanding
immediately after the occurrence of such redemption; and provided, further, that
such redemption shall occur within 45 days of the date of the closing of such
public offering.
Selection and Notice
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that Senior Notes redeemed with the proceeds of a
public offering of common stock shall be selected on a pro rata basis. No Senior
Notes of $1,000 or less in principal amount shall be redeemed in part. Notices
of redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Senior Notes to be redeemed
at its registered address. Notices of redemption may not be conditional. If any
Senior Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Note shall state the portion of the principal amount
thereof to be redeemed. A new Senior Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Note. Senior Notes called for redemption
become due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on Senior Notes or portions of them called for
redemption.
Mandatory Redemption
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Senior Notes.
Repurchase at the Option Of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Senior Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Senior Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior Notes
as a result of a Change of Control.
55
<PAGE>
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Senior
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the Senior Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Senior Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each Holder of Senior Notes so tendered the Change of Control Payment for such
Senior Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each Holder a new Senior Note equal in
principal amount to any unpurchased portion of the Senior Notes surrendered, if
any; provided that each such new Senior Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Senior Notes validly tendered and not withdrawn under such Change
of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Senior Notes to require the Company
to repurchase such Senior Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Senior Notes to require that the
Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization or similar transaction.
The Company's other senior indebtedness contains prohibitions of certain
events that would constitute a Change of Control. In addition, the Company's
ability to pay cash to the Holders of Senior Notes upon a repurchase may be
limited by the Company's then existing financial resources. See "Risk
Factors -- Change of Control."
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or
the Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 75% of the consideration received therefor by the Company
or such Subsidiary is in the form of cash.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option (a) to permanently reduce
indebtedness under the Credit Facilities (and correspondingly reduce commitments
thereunder) or (b) to acquire a controlling interest in another business, to
make a capital expenditure or to acquire other long-term assets, in each case,
in the same or a similar line of business as the Company is engaged in on the
date of the Indenture. Pending the final application of any such Net Proceeds,
the Company may temporarily reduce Indebtedness under its Credit Facilities or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company will be required to make an offer to all Holders of Senior
Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Senior
Notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Senior Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess
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Proceeds for general corporate purposes. If the aggregate principal amount of
Senior Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Senior Notes to be purchased on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
Subsidiary Guarantees
The Company's payment obligations under the Senior Notes will be jointly
and severally guaranteed (the "Subsidiary Guarantees") by the Guarantors. The
Company conducts all of its business through its subsidiaries, including the
Guarantors. In 1996, the Guarantors accounted for, in the aggregate, 78.4%,
66.5% and 93.5% of the Company's net sales, income from operations and
identifiable assets, respectively. The obligations of each Guarantor under its
Subsidiary Guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable law. See, however, "Risk Factors -- Fraudulent
Conveyance Matters." The obligations of each Guarantor are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Subsidiary Guarantee or pursuant
to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Senior Notes, the Indenture and Subsidiary Guarantee and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.
The Indenture will provide that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "Redemption or
Repurchase at Option of Holders -- Asset Sales."
Certain Covenants
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company) or
to the direct or indirect holders of the Company's or any of its Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company, any Subsidiary of
the Company or any Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Subsidiary of the Company);
(iii) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is pari passu with
or subordinated to the Senior Notes (other than Senior Notes and Indebtedness
outstanding under Credit Facilities incurred in accordance with the Indenture),
except a payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
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(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after the
date of the Indenture (excluding Restricted Payments permitted by clause (ii)
of the next succeeding paragraph), is less than the sum of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available at
the time of such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the date of the Indenture of Equity Interests of the Company (other
than Disqualified Stock) or of Disqualified Stock or debt securities of the
Company that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities) sold
to a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was made
after the date of the Indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (A) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c)(ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of pari passu or
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Subsidiary of the Company to the holders of its common stock on a pro rata
basis; (v) the redemption of up to $10 million in liquidation preference of
Cumulative Redeemable Preferred Stock in the aggregate subsequent to the Issue
Date at a redemption price not exceeding the liquidation preference thereof at a
redemption price equal to the liquidation preference thereof plus accrued and
unpaid dividends thereon if (x) no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof, (y) the
Company would, at the time of such Restricted Payment and after giving pro forma
effect thereto as if such Restricted Payment had been made at the beginning of
the applicable four-quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock" and (z) the
Company's Debt to Cash Flow Ratio at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four quarter period, would have been no
greater than 4.5 to 1.0. and (vi) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Subsidiary of the Company held by any member of the Company's (or any of its
Subsidiaries') management upon termination of employment; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $750,000 in any twelve-month period (with
unused amounts in any calendar year being available for such purposes in the
next two succeeding calendar years, with a maximum of $1,500,000 so available in
any one year) in any twelve-month period and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5.0 million. Not later than the date of making any Restricted
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Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or appraisal required by
the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock or sell or otherwise directly or indirectly transfer any
preferred stock of any of its Subsidiaries to any other person and will not
permit any of its Subsidiaries to issue any shares of preferred stock other than
to the Company; provided, however, that the Company may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock if the Fixed
Charge Coverage Ratio for the Company's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2 to 1, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The Indenture will also provide that the Company will not incur any
Indebtedness that is contractually subordinated to any other Indebtedness of the
Company unless such Indebtedness is also contractually subordinated to the
Senior Notes on substantially identical terms; provided, however, that no
Indebtedness of the Company shall be deemed to be contractually subordinated to
any other Indebtedness of the Company solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of revolving credit Indebtedness and
letters of credit (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company thereunder) under
the Credit Facilities; provided that the aggregate principal amount of all
revolving credit Indebtedness and letters of credit outstanding under all Credit
Facilities after giving effect to such incurrence, does not exceed an amount
equal to $130.0 million less the aggregate amount of all Net Proceeds of Assets
Sales applied to permanently repay any such Indebtedness pursuant to the
covenant described above under the caption "-- Asset Sales";
(ii) the incurrence by the Company and its Subsidiaries of Indebtedness
represented by the Senior Notes, other than any Additional Senior Notes, and the
Subsidiary Guarantees, respectively;
(iii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $10.0 million at any
time outstanding;
(iv) the incurrence by any corporation that becomes a Subsidiary after the
Issue Date of Acquired Debt, which Indebtedness is existing at the time such
corporation becomes a Subsidiary; provided, however, that (A) immediately after
giving effect to such corporation becoming a Subsidiary the Company could incur
at least $1.00 of additional Indebtedness (other than Permitted Debt) in
accordance with the Indenture, (B) such Indebtedness is without recourse to the
Company or to any Subsidiary or to any of their respective properties or assets
other than Person becoming a Subsidiary or its properties and assets and (C)
such Indebtedness was not incurred as a result of or in connection with or in
contemplation of such entity becoming a Subsidiary;
(v) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are used
to refund, refinance or replace, Indebtedness that is permitted by the Indenture
to be incurred;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries; provided, however, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all
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Obligations with respect to the Senior Notes and (ii)(A) any subsequent issuance
or transfer of Equity Interests that results in any such Indebtedness being held
by a Person other than the Company or a Wholly Owned Subsidiary and (B) any sale
or other transfer of any such Indebtedness to a Person that is neither the
Company nor a Wholly Owned Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such Subsidiary,
as the case may be;
(vii) the incurrence by the Company of Hedging Obligations that are
incurred for the purpose of fixing or hedging currency risk or interest rate
risk with respect to any Indebtedness that is permitted by the terms of this
Indenture to be outstanding;
(viii) the Guarantee by any of the Guarantors of Indebtedness of the
Company or another Guarantor that was permitted to be incurred by the Indenture;
(ix) Indebtedness for letters of credit relating to workers' compensation
claims and self-insurance or similar requirements in the ordinary course of
business;
(x) Indebtedness arising from Guarantees of Indebtedness of the Company or
any Subsidiary or other agreements of the Company or a Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or Subsidiary, other than Guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or Subsidiary for
the purpose of financing such acquisition, provided that the maximum aggregate
liability in respect of all such Indebtedness shall at no time exceed the gross
proceeds actually received by the Company and its Subsidiaries in connection
with such disposition;
(xi) obligations in respect of performance bonds and completion guarantees
provided by the Company or any Subsidiary in the ordinary course of business;
and
(xii) the incurrence by the Company or any of its Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding not to exceed $10.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or on any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any Indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) applicable law, (b) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (c) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices,
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(d) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, or (e) Permitted Refinancing Indebtedness, provided
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; (iv) each of the
Guarantors confirms its obligations under the Subsidiary Guarantees and the
Indenture pursuant to a supplement in a form reasonably satisfactory to the
Trustee; and (v) except in the case of a merger of the Company with or into a
Wholly Owned Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of their respective properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of the
Board of Directors and (b) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$7.5 million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; provided that (v) any employment
agreement entered into by the Company or any of its Subsidiaries or any employee
benefit plan available to employees of the Company generally, in each case, in
the ordinary course of business and consistent with the past practice of the
Company or such Subsidiary, (w) transactions between or among the Company and/or
its Subsidiaries, (x) Restricted Payments (other than Restricted Investments)
that are permitted by the provisions of the Indenture described above under the
caption "-- Restricted Payments," (y) investment banking and management fees in
an aggregate amount no greater than $450,000 in any calendar year (plus
reimbursement of expenses) to be paid by the Company to Thomas H. Lee Company
and (z) a cash fee of $3 million payable by the Company to Thomas H. Lee Company
on the date of the Indenture, in each case, shall not be deemed Affiliate
Transactions.
Sale and Leaseback Transactions
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company or one of its Subsidiaries may enter into a sale and
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leaseback transaction if (i) the Company or such subsidiary could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the covenant described above
under the caption "-- Incurrence of Additional Indebtedness and Issuance of
Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to
the covenant described above under the caption "-- Liens," (ii) the gross cash
proceeds of such sale and leaseback transaction are at least equal to the fair
market value (as determined in good faith by the Board of Directors and set
forth in an Officers' Certificate delivered to the Trustee) of the property that
is the subject of such sale and leaseback transaction and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and the Company
applies the proceeds of such transaction in compliance with, the covenant
described above under the caption "-- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Subsidiaries
The Indenture will provide that, except to the extent permitted under the
covenant entitled "Restricted Payments", the Company (i) will not, and will not
permit any Wholly Owned Subsidiary of the Company to, transfer, convey, sell,
lease or otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary
of the Company to any Person (other than the Company or a Wholly Owned
Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or
other disposition is of all the Capital Stock of such Wholly Owned Subsidiary
and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described above
under the caption "-- Asset Sales," and (ii) will not permit any Wholly Owned
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Subsidiary of
the Company.
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Senior Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Senior Notes unless such
consideration is offered to be paid or is paid to all Holders of the Senior
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Additional Subsidiary Guarantees
The Indenture will provide that (a) the Company will not permit any of its
Subsidiaries that is not a Guarantor to guarantee or secure through the granting
of Liens the payment of any Indebtedness of the Company or any Guarantor and (b)
the Company will not and will not permit any of its Subsidiaries to pledge any
intercompany notes representing obligations of any of its Subsidiaries, to
secure the payment of any Indebtedness of the Company or any Guarantor, in each
case unless such Subsidiary, the Company and the Trustee execute and deliver a
supplemental indenture evidencing such Subsidiary's Guarantee (providing for the
unconditional Guarantee by such Subsidiary, on a senior basis, of the Senior
Notes).
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Notes are outstanding, the Company will furnish to the
Trustee and the Holders of Senior Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
Events of Default and Remedies
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes; (ii) default in the payment when due of the principal of or
premium, if any, on the Senior Notes; (iii) failure by the Company to comply
with the provisions described under
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the captions "-- Change of Control," "-- Asset Sales," "-- Restricted Payments"
or "-- Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) failure
by the Company for 60 days after notice to comply with any of its other
agreements in the Indenture or the Senior Notes; (v) default by the Company
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Subsidiaries (or the payment of which is guaranteed
by the Company or any of its Subsidiaries), whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $10.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Senior Notes
may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Senior Notes will become
due and payable without further action or notice. Holders of the Senior Notes
may not enforce the Indenture or the Senior Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Senior Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Senior Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Senior Notes. If an Event of Default occurs prior
to April 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Senior Notes prior to April 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Senior Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Guarantor, as such, shall have any liability
for any obligations of the Company or the Guarantors under the Senior Notes, the
Indenture or the Subsidiary Guarantees, as applicable, or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Senior Notes by accepting a Senior Note waives and
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releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Senior Notes and the Subsidiary Guarantees ("Legal Defeasance")
except for (i) the rights of Holders of outstanding Senior Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Senior Notes when such payments are due from the trust referred to below, (ii)
the Company's and the Guarantors' obligations with respect to the Senior Notes
concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Senior Notes
are being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default resulting from
the borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under, any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
deliver to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Senior Notes over any of
the other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for or relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
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Transfer and Exchange
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Senior Note selected for redemption. Also, the Company is not required to
transfer or exchange any Senior Note for a period of 15 days before a selection
of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture,
the Subsidiary Guarantees or the Senior Notes may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Senior Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Senior Notes), and any existing default or compliance with any provision of
the Indenture, the Subsidiary Guarantees or the Senior Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Senior Notes (including consents obtained in connection with a
tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Senior Note or alter the provisions with respect to the redemption of the
Senior Notes (other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest on any Senior Note, (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Senior Notes (except a rescission of acceleration of
the Senior Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Senior Note payable in money other than
that stated in the Senior Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Senior Notes to receive payments of principal of or premium, if any, or interest
on the Senior Notes, (vii) waive a redemption payment with respect to any Senior
Note (other than a payment required by one of the covenants described above
under the caption "-- Repurchase at the Option of Holders"), (viii) release any
Guarantor from any of its obligations under its Subsidiary Guarantee or the
Indenture, except in accordance with the terms of the Indenture, or (ix) make
any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Subsidiary Guarantees or the Senior Notes to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Senior Notes in addition
to or in place of certificated Senior Notes, to provide for the assumption of
the Company's or a Guarantor's obligations to the Holders of Senior Notes in the
case of a merger or consolidation, to provide for the issuance of a Subsidiary
Guarantee by a Subsidiary of the Company, to provide for the issuance of
Additional Senior Notes in accordance with the limitations set forth in the
Indenture on the Issue Date, to make any change that would provide any
additional rights or benefits to the Holders of Senior Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject
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to certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Senior Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "-- Change of Control" and/or the
provisions described above under the caption "-- Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue or sale by the Company or any of its Subsidiaries of Equity Interests of
any of the Company's Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1,000,000 or (b) for Net Proceeds in
excess of $1,000,000. Notwithstanding the foregoing: (i) a transfer of assets by
the Company to a Subsidiary or by a Subsidiary to the Company or to a Wholly
Owned Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned
Subsidiary to the Company or to another Wholly Owned Subsidiary, and (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "-- Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, shares of corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months
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and overnight bank deposits, in each case with any lender party to the New
Credit Facility or with any domestic commercial bank having capital and surplus
in excess of $500 million and a Keefe Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above and (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties, (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals or their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares), (iv) the first
day on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors or (v) the Company consolidates with, or merges
with or into, any Person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any Person, or
any Person consolidates with, or merges with or into, the Company, in any such
event pursuant to a transaction in which any of the outstanding Voting Stock of
the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance). For purposes of this definition, any transfer of an equity interest
of an entity that was formed for the purpose of acquiring Voting Stock of the
Company will be deemed to be a transfer of such portion of such Voting Stock as
corresponds to the portion of the equity of such entity that has been so
transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP.
"Consolidated Indebtedness" of any Person as of any date of determination
means the sum (without duplication) of (i) the total amount of Indebtedness and
Attributable Debt of such Person and its Subsidiaries, plus (ii) the total
amount of other Indebtedness shown on the balance sheet of the primary obligor
on such Indebtedness, to the extent that such Indebtedness has been Guaranteed
by such Person or one of its Subsidiaries, plus (iii) the aggregate liquidation
value or redemption amount (if larger) of all Disqualified Stock of such Person
(other than
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any Cumulative Redeemable Preferred Stock outstanding on such date) and all
preferred stock of Subsidiaries of such Person, in each case, determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Subsidiary thereof, (ii) the Net Income of any Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that Net Income is not at the date
of determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Credit Facility) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time. Indebtedness under Credit Facilities
outstanding on the date on which Senior Notes are first issued and authenticated
under the Indenture shall be deemed to have been incurred on such date in
reliance on the exception provided by clause (i) of the definition of Permitted
Indebtedness.
"Debt to Cash Flow Ratio" means, as of any date of determination, the ratio
of (a) the Consolidated Indebtedness as of such date to (b) the Consolidated
Cash Flow of the Company and its Subsidiaries on a consolidated basis for the
four most recent full fiscal quarters ending immediately prior to such date for
which internal financial statements are available. For purposes of calculating
Consolidated Cash Flow for the computation referred to above, (i) acquisitions
that have been made by the Company or any of its Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the date on which such Ratio is being calculated (the
"Calculation Date") shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the proviso
set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Senior Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations (but excluding
amortization of debt issuance costs) and (ii) the consolidated interest expense
of such Person and its Subsidiaries that was capitalized during such period, and
(iii) any interest expense on Indebtedness of another Person that is guaranteed
by such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Subsidiaries, other than dividend payments on Equity Interests payable solely in
Equity Interests (other than Disqualified Stock) of the Company, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each of (i) each domestic subsidiary of the Company and
(ii) any other subsidiary that executes a Subsidiary Guarantee in accordance
with the provisions of the Indenture, and their respective successors and
assigns.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or of the values of foreign currencies purchased or received by the
Company of any of its Subsidiaries in the ordinary course of business.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with
GAAP. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the Credit Facilities) secured by a Lien on the
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"New Credit Facility" means that certain credit facility, dated as of
April 16, 1997, by and among the Company and NationsBank, N.A. (South), as
administrative agent and a lender, providing for up to $130 million of revolving
credit borrowings, including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Subsidiary of the Company in a Person,
if as a result of such Investment (i) such Person becomes a Wholly Owned
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Subsidiary of
the Company; (d) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "-- Repurchase at
the Option of Holders -- Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
the Company; and (f) other Investments in any Person having an aggregate fair
market value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (f) that are at the time
outstanding, not to exceed $5 million.
"Permitted Liens" means (i) Liens on accounts receivable and inventory
securing Indebtedness under the Credit Facilities that will be permitted by the
terms of the Indenture to be incurred; (ii) Liens in favor of the Company; (iii)
Liens on property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (iii) of the third
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness; (vii)
Liens existing on the date of the Indenture; (viii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; and
(ix) Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not exceed $2.5
million at any one time outstanding and that (a) are not incurred in connection
with the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund Existing
Indebtedness or other Indebtedness of the Company or any of its Subsidiaries
incurred in accordance with the Indenture (other than Indebtedness incurred in
accordance with clauses (i), (vi), (vii), (viii), (ix), (x), (xi) or (xii) of
the third paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock;" provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Senior Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Senior Notes on terms at least as favorable to the Holders of
Senior Notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (iv)
such Indebtedness is incurred either by the Company or by the Subsidiary who is
the obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
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"Principals" means Thomas H. Lee Equity Fund III, L.P. and its
co-investors, Thomas H. Lee Foreign Fund III, L.P., and any Affiliates of Thomas
H. Lee Company.
"Related Party" with respect to any Principal means (A) any controlling
stockholder or 80% (or more) owned Subsidiary of such Principal or (B) any
trust, corporation, partnership or other entity of which the beneficiaries,
stockholders, partners, owners or other Persons beneficially holding an 80% or
more controlling interest of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Voting Stock" means, with respect to any Person, the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
DESCRIPTION OF OTHER INDEBTEDNESS
In connection with the Recapitalization, the banks will provide senior
financing to the Company and its domestic subsidiaries as co-borrowers pursuant
to the $130.0 million New Credit Facility. The New Credit Facility will include
a $30.0 million sublimit for the issuance of standby and commercial letters of
credit.
Borrowings made under the New Credit Facility shall bear interest at a rate
equal to, at the Company's option, NationsBank's Eurodollar Rate plus 225 basis
points or the Prime Rate plus 50 basis points. The "Prime Rate" is a fluctuating
interest rate equal to the higher of (i) the rate of interest announced publicly
by NationsBank as its prime rate and (ii) a rate equal to 1/2 of 1% per annum
above the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers, as
determined for any day by NationsBank. The Eurodollar Rate and Prime Rate
margins will be subject to step-downs commencing twelve months from the closing,
based on the Company's performance. Interest based on the Base Rate shall be
payable monthly in arrears. Interest based on the Eurodollar Rate shall be
payable in arrears at the earlier of the end of (a) the applicable interest
period and (b) month-end. Eurodollar Rate borrowings are available in 1-, 2-, 3-
or 6-month interest periods.
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The New Credit Facility expires five (5) years from the consummation of the
Merger. Pursuant to the terms of the New Credit Facility, the Company is
required during February and March of each year to maintain excess availability
(i.e. borrowing capacity in excess of the borrowings outstanding under the New
Credit Facility) of at least $45.0 million. The obligations of the Company under
the New Credit Facility are secured by inventory, accounts receivable and the
proceeds of the foregoing of the Company and its domestic subsidiaries.
The New Credit Facility contains customary covenants of the Company and the
subsidiary borrowers, including, without limitation, restrictions on (i) the
incurrence of debt, (ii) the sale of assets, (iii) mergers, acquisitions and
other business combinations, (iv) voluntary prepayment of other debt of the
Company, (v) transactions with affiliates (as defined in the New Credit
Facility), (vi) investments, as well as prohibitions on the payment of dividends
to, or the repurchase or redemption of stock from, shareholders and various
financial covenants. Pursuant to the terms of the New Credit Facility, the
Company would be in default under the New Credit Facility upon the non-payment
of principal or interest when due under the notes issued in connection with the
New Credit Facility or, subject to applicable grace periods in certain
circumstances (ranging from zero to ten days), upon the non-fulfillment of the
covenants described above, certain changes in control of the ownership of the
Company or various other defaults described in the New Credit Facility. If such
a default occurs, the banks will be entitled to take all actions permitted to be
taken by a secured creditor under the uniform commercial code and to accelerate
the amounts due under the New Credit Facility and may require all such amounts
to be immediately paid in full.
DESCRIPTION OF CUMULATIVE REDEEMABLE PREFERRED STOCK
Following the consummation of the Merger, 25,000 shares will be designated
as Cumulative Redeemable Preferred Stock, par value $.01 per share. In
connection with the Recapitalization, Lee Affiliates will purchase an aggregate
of 18,000 shares of the Company's Cumulative Redeemable Preferred Stock.
The liquidation preference of the Cumulative Redeemable Preferred Stock
will be $1,000 per share plus accrued but unpaid dividends. Holders of the
Cumulative Redeemable Preferred Stock will be entitled, subject to the rights of
creditors, in the event of any voluntary or involuntary liquidation of the
Company, to an amount in cash equal to $1,000 for each share outstanding plus
all accrued and unpaid dividends. The rights of holders of the Cumulative
Redeemable Preferred Stock upon liquidation of the Company rank prior to those
of the holders of Syratech Common Stock.
Dividends on shares of Cumulative Redeemable Preferred Stock will be
cumulative from the date of issue and will be payable when and as may be
declared from time to time by the Board of Directors of the Company. Such
dividends will accrue on a daily basis (whether or not declared ) from the
original date of issue at an annual rate per share equal to 12% of the original
purchase price per share, with such amount to be compounded annually on each
December 31 so that if the dividend is not paid for any year the unpaid amount
will be added to the original purchase price of the Cumulative Redeemable
Preferred stock for the purpose of calculating succeeding years' dividends.
The Cumulative Redeemable Preferred Stock will be redeemable at any time at
the option of the Company, in whole or in part, at $1,000 per share plus all
accumulated and unpaid dividends, if any, to the date of redemption. Subject to
the Company's existing debt agreements, the Company must redeem all outstanding
Cumulative Redeemable Preferred Stock in the event of a public offering of
equity, a change of control or certain sales of assets.
The holders of Cumulative Redeemable Preferred Stock will have no voting
rights with respect to their Cumulative Redeemable Preferred Stock except as may
be required by applicable law.
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UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting Agreement
(the "Underwriting Agreement") among Syratech, the Guarantors, NationsBanc
Capital Markets, Inc. ("NCMI"), and Chase Securities Inc. ("CSI" and, together
with NCMI the "Underwriters"), the Underwriters have agreed to purchase from the
Company and the Company has agreed to sell to the Underwriters, the respective
principal amount of Senior Notes set forth opposite their names below.
Principal
Amount
--------------
NationsBanc Capital Markets, Inc......... $ 99,000,000
Chase Securities Inc..................... $ 66,000,000
------------
Total.................................... $165,000,000
============
In the Underwriting Agreement the Underwriters have agreed, subject to
certain conditions, to purchase all of the Senior Notes, if any are purchased.
The Company has been advised by the Underwriters that they propose to offer
the Senior Notes to the public initially at the price set forth on the cover
page of this Prospectus, to certain securities dealers (who may include the
Underwriters) at such price less a concession not in excess of 0.50% of the
amount per Senior Note and that the Underwriters and such dealers may reallow a
discount not in excess of 0.25% of the amount per Senior Note to other dealers,
including the Underwriters. After the closing of the public offering, the public
offering price, the concession and the discount to other dealers may be changed
by the Underwriters.
There is no currently existing trading market for the Senior Notes, and
although the Underwriters have advised the Company that it currently intends to
make a market in the Senior Notes, they are not obligated to do so and any such
market making may be discontinued at any time, without notice, in the sole
discretion of the Underwriters. Accordingly, there can be no assurance as to the
development or liquidity of any market that may develop for the Senior Notes.
The Company and the Guarantors have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"), or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Underwriters have informed the Company that they do not expect to
confirm sales of Senior Notes offered hereby to any accounts over which they
exercise discretionary authority.
In accordance with Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc., (the "NASD"), no member of the NASD
participating in the Offering will execute a transaction in the Senior Notes in
an account over which it exercises discretion without the prior specific written
approval of the customer.
NationsBridge L.L.C. and NationsBank, N.A., affiliates of NCMI, and CSI and
The Chase Manhattan Bank have delivered commitments to provide the Company
interim financing for the Recapitalization and will receive customary fees (and
reimbursement of expenses) in connection therewith. Such interim financing
commitments will terminate upon consummation of the Offering and a portion of
the proceeds of the Offering will be used to pay such fees and reimbursement.
NationsBank of Georgia, N.A. is the agent and a lender under the Company's
existing credit facility and NationsBank, N.A. (South) will be the agent and a
lender under the New Credit Facility. In addition, NCMI and its affiliates
provide or have provided banking, advisory and other financial services for the
Company and Thomas H. Lee Company in the ordinary course of business for which
they have received customary compensation. The Chase Manhattan Bank, or its
affiliates, participates on a regular basis in various banking and general
financing transactions for Thomas H. Lee Company and the Lee Affiliates.
Affiliates of CSI and NCMI are limited partners of Thomas H. Lee Equity Fund
III, L.P.
Under the Rules of Fair Practice of the NASD, if more than 10% of the net
proceeds of a public offering of debt securities, not including underwriting
compensation, are intended to be paid to members of the NASD or affiliated or
associated persons that are participating in the distribution of the offering,
the yield at which the debt securities are distributed to the public must be no
lower than that recommended by a "qualified independent underwriter", as defined
in Rule 2720 of the Conduct Rules of the NASD. NationsBank of Georgia, N.A., is
expected to receive in the aggregate more than 10% of the net proceeds of the
Offering as a result of the repayment by the Company of outstanding indebtedness
under the Company's existing credit facility provided by NationsBank of Georgia,
N.A. Accordingly, CSI has agreed to act as the qualified independent underwriter
in connection with this
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Offering. The yield on the Senior Notes, when sold to the public at the public
offering price set forth on the cover of this Prospectus, will be no lower than
that recommended by CSI. In exchange for its services for acting as a qualified
independent underwriter, CSI will receive $5,000 from the Company.
In order to facilitate the offering of the Senior Notes, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Senior Notes. Specifically the Underwriters may overallot in
connection with the offering, creating a short position in the Senior Notes for
their own account. In addition, to cover overallotments or to stabilize the
price of the Senior Notes, the Underwriters may bid for, and purchase, Senior
Notes in the open market. Any of these activities may stabilize or maintain the
market price of Senior Notes above independent market levels. The Underwriters
are not required to engage in these activities, and may end any of these
activities at any time.
LEGAL MATTERS
The validity of the Senior Notes offered hereby will be passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. As of
January 31, 1997, lawyers of Paul, Weiss, Rifkind, Wharton & Garrison
beneficially owned an aggregate of 36,681 shares of Syratech individually or in
various fiduciary capacities. Certain legal matters in connection with the
Offering will be passed upon for the Underwriter by Latham & Watkins, New York,
New York.
EXPERTS
The consolidated financial statements and schedule of Syratech and its
subsidiaries for each of the three years in the period ended December 31, 1996,
included in or incorporated by reference in this Prospectus, have been audited
by Deloitte & Touche LLP, independent accountants, as stated in their reports
appearing herein and elsewhere in the Prospectus and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing. The financial statements of Rauch Industries, Inc. for
the fiscal year ended December 31, 1995 included in the Company's Form 8-K/A
dated February 27, 1997 (which supersedes a Current Report on Form 8-K/A dated
April 29, 1996), amending the Company's Current Report on Form 8-K dated
February 29, 1996, have been incorporated by reference in this Prospectus and
have been audited by Coopers & Lybrand L.L.P., independent accountants, as
indicated in their report, also incorporated by reference in this Prospectus
from the Form 8-K/A, with respect thereto, and have been so incorporated in
reliance upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this Prospectus, and, if given or
made, such information or representations may not be relied upon as having been
authorized by Syratech. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy the securities to which it relates in any
jurisdiction in which, or to any person to whom, it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus nor any offer or
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the information set forth herein or in the affairs
of the Company since the date hereof.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or at
its regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. The Company's Common
Stock is listed on the New York Stock Exchange, Inc., and reports, proxy
statements and other information concerning the Company may be inspected and
copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
75
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SYRATECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Deloitte & Touche LLP........................................................... F-2
Consolidated Financial Statements:
Consolidated balance sheets as of December 31, 1995 and December 31, 1996................ F-3
Consolidated income statements for the years ended December 31, 1994, December 31, 1995
and December 31, 1996................................................................... F-4
Consolidated statements of stockholders' equity for the years ended December 31, 1994,
December 31, 1995 and December 31, 1996................................................. F-5
Consolidated statements of cash flows for the years ended December 31, 1994, December
31, 1995 and December 31, 1996.......................................................... F-6
Notes to consolidated financial statements............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Syratech Corporation:
We have audited the accompanying consolidated balance sheets of Syratech
Corporation and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Syratech Corporation and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997 (February 14, 1997 as to Note 15)
F-2
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------
Notes 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
ASSETS....................................................... 1, 7
Current assets:
Cash and equivalents........................................ $ 78,493 $ 3,605
Marketable securities....................................... 4 30,561 --
Accounts receivable, net.................................... 12 31,893 60,020
Inventories................................................. 5 41,151 79,355
Deferred income taxes....................................... 8 5,105 8,940
Prepaid expenses and other.................................. 10 1,602 3,803
Net assets of discontinued operations....................... 3 1,834 --
-------- --------
Total current assets..................................... 190,639 155,723
Property, plant and equipment, net.......................... 6 29,560 63,955
Purchase price in excess of net assets acquired............. -- 7,032
Other assets................................................ 367 544
------- --------
Total.................................................... $220,566 $227,254
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable................. 7 $ 51,735 $ 6,636
Accounts payable............................................ 12 6,438 9,689
Accrued expenses............................................ 4,436 11,049
Accrued compensation........................................ 11 2,478 4,228
Accrued advertising......................................... 1 1,991 3,273
Income taxes payable........................................ 1, 8 1,511 930
-------- --------
Total current liabilities................................ 68,589 35,805
Deferred income taxes........................................ 1, 2, 8 3,657 17,706
Pension liability............................................ 10 1,724 3,288
Other long-term liabilities.................................. 11 -- 207
Commitments and contingencies................................ 9, 10,14
Stockholders' equity:........................................ 1, 11,15
Preferred stock, $.10 par value, 500,000 shares authorized;
no shares issued or outstanding (135,000 shares are
designated Series A Preferred Stock)....................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
8,667,249 and 8,695,449 shares issued in 1995 and 1996,
respectively............................................... 87 87
Additional paid-in capital................................. 9,699 12,480
Retained earnings........................................... 7 136,728 157,117
Cumulative translation adjustment........................... 85 567
Less: Treasury stock; 218 shares, at cost................... (3) (3)
-------- --------
Total stockholders' equity................................ 146,596 170,248
-------- --------
Total..................................................... $220,566 $227,254
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
Notes 1994 1995 1996
-------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Net sales..................................................... 1 $147,291 $169,520 $ 270,931
Cost of sales................................................. 104,600 119,836 194,113
-------- -------- ----------
Gross profit.............................................. 42,691 49,684 76,818
Selling, general and administrative expenses.................. 31,613 34,239 57,664
Other operating income........................................ 2, 12 -- -- 3,948(1)
-------- -------- ---------------
Income from operations.................................... 11,078 15,445 23,102
Interest expense.............................................. 7 (559) (287) (3,150)
Interest income............................................... 4 98 4,881 771
Other income................................................. 2 -- -- 11,900(2)
-------- -------- ---------------
Income before provision for
income taxes.............................................. 10,617 20,039 32,623
Provision for income taxes.................................... 1, 8 2,758 6,863 12,234
-------- -------- ----------
Income from continuing
operations............................................... 7,859 13,176 20,389
Discontinued operations:
Income from discontinued operations net
of income taxes of $7,421 and $1,645, respectively.......... 3 12,068 2,572 --
Gain on sale of Syroco, Inc., net of income taxes of $16,599 3 -- 30,451 --
-------- -------- ----------
Net income................................................ $ 19,927 $ 46,199 $ 20,389
======== ======== ==========
Earnings per share: 1
Continuing operations........................................ $ .67 $ 1.12 $ 2.32
Discontinued operations...................................... 1.02 2.79 --
-------- -------- ----------
Net income................................................ $ 1.69 $ 3.91 $ 2.32
======== ======== ==========
Weighted average common and common equivalent shares
outstanding.................................................. 1 11,809 11,803 8,799
======== ======== ==========
</TABLE>
- ------------
(1) Consists of income from the sale of Farberware inventory and other operating
income, net of certain selling, general and administrative expenses.
(2) Consists of non-recurring pre-tax income related to licensing the Farberware
name on cookware and bakeware.
See notes to consolidated financial statements.
F-4
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Cumulative
Paid-in Retained Translation Treasury
Shares Amount Capital Earnings Adjustment Stock Total
------------- --------- ------------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994......... 11,649,432 $116 $ 60,214 $70,602 $76 $ (3) $131,005
Exercise of stock options....... 38,200 297 297
Compensation related to stock
options........................ 116 116
Tax effect of stock options..... 746 746
Net income...................... 19,927 19,927
Translation adjustment.......... 9 9
----------- ---- -------- -------- ---- ---- --------
Balance, December 31, 1994....... 11,687,632 116 61,373 90,529 85 (3) 152,100
Exercise of stock options....... 44,150 1 326 327
Compensation related to stock
options........................ 102 102
Tax effect of stock options..... (78) (78)
Purchase of common stock for
retirement (Note 11)........... (3,064,751) (30) (52,024) (52,054)
Net income...................... 46,199 46,199
----------- ---- -------- -------- ---- ---- --------
Balance, December 31, 1995....... 8,667,031 87 9,699 136,728 85 (3) 146,596
Exercise of stock options....... 28,200 202 202
Compensation related to stock
options......................... 78 78
Tax effect of stock options..... 250 250
Transfer of shares (Note 11) 2,338 2,338
Rights redemption (Note 11)..... (87) (87)
Net income...................... 20,389 20,389
Translation adjustment.......... 482 482
----------- ---- -------- -------- ---- ---- --------
Balance, December 31, 1996....... 8,695,231 $ 87 $ 12,480 $157,117 $567 $ (3) $170,248
=========== ==== ======== ======== ==== ==== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income...................................................... $ 19,927 $ 46,199 $ 20,389
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................. 3,270 3,253 4,767
Deferred income taxes.......................................... (452) (2,229) (2,756)
Acquisition of Farberware assets............................... -- -- (9,500)
Disposal of Farberware assets.................................. -- -- 13,600
Farberware electrics license................................... -- -- 500
Transfer of shares............................................. -- -- 3,655
Pension liability.............................................. 208 1,155 1,564
Compensation related to stock options.......................... 116 102 78
Gain (loss) on disposal of assets and other.................... 8 3 (17)
Increase (decrease) in cash, net of effect of businesses
acquired:
Marketable securities.......................................... -- (30,561) 30,561
Accounts receivable............................................ (7,984) (3,649) (18,356)
Inventories.................................................... (6,590) (817) (17,106)
Prepaid expenses and other..................................... 711 (1,446) (471)
Accounts payable and accrued expenses.......................... 4,155 595 (2,870)
Income taxes payable........................................... 3,699 (2,306) (2,095)
Discontinued operations....................................... (27,660) (49,915) 1,834
-------- -------- --------
Net cash provided by (used in) operating activities............. (10,592) (39,616) 23,777
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (2,603) (2,679) (15,125)
Net proceeds from sale of Syroco, Inc........................... -- 133,931 --
Proceeds from disposal of assets................................ 336 -- 66
Insurance claim proceeds........................................ -- -- 23,771
Acquisitions of businesses, net of cash acquired................ -- -- (48,540)
Other........................................................... (529) 61 (186)
-------- -------- --------
Net cash provided by (used in) investing activities............. (2,796) 131,313 (40,014)
-------- -------- --------
Cash flows from financing activities:
Change in revolving loan facilities and notes payable........... 11,944 (14,504) (59,075)
Repayment of borrowings......................................... (1,624) (875) (300)
Tax effect on stock options..................................... 746 (78) 250
Exercise of stock options....................................... 297 327 202
Deferred financing costs and other.............................. 62 60 (24)
-------- -------- --------
Net cash provided by (used in) financing activities............. 11,425 (15,070) (58,947)
Effect of exchange rate changes on cash and equivalents......... -- -- 296
-------- -------- --------
Net increase (decrease) in cash and equivalents................. (1,963) 76,627 (74,888)
Cash and equivalents, beginning of year......................... 3,829 1,866 78,493
-------- -------- --------
Cash and equivalents, end of year............................... $ 1,866 $ 78,493 $ 3,605
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
1. Business and Summary of Significant Accounting Policies
Business
Syratech Corporation designs, manufactures, imports and markets a diverse
portfolio of tabletop, giftware and seasonal products, including: sterling
silver, silverplated and stainless steel flatware; sterling silver, silverplated
and brass holloware; picture frames and photo albums; glassware, woodenware and
ceramics; fine porcelain boxes; figurines, waterglobes and Christmas ornaments,
trim, lighting and tree skirts.
Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Syratech
Corporation and its subsidiaries (the Company), Syratech Holding Corporation and
its subsidiaries, Syratech Security Corporation, Wallace International
Silversmiths, Inc. and its subsidiaries (Wallace), Leonard Florence Associates,
Inc. (LFA), Towle Manufacturing Company and its subsidiaries (Towle), Rauch
Industries, Inc. and its subsidiaries (Rauch), Silvestri Inc. and subsidiaries
(Silvestri), Syratech (H.K.) Ltd. and its subsidiaries (Syratech H.K.). All
significant intercompany balances and transactions have been eliminated.
Adoption of New Accounting Pronouncements
Effective January 1, 1996, the Company adopted, prospectively, Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
circumstances indicate that the carrying value of an asset may not be
recoverable. The adoption of SFAS No. 121 did not have a significant effect on
the Company's consolidated financial position or results of operations for the
year ended December 31, 1996.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
For Stock-Based Compensation." As permitted by SFAS No. 123, the Company has
continued to account for its stock-based transactions to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As required by SFAS No. 123, for stock option grants to
non-employees, the Company calculates compensation expense using a fair value
based method and amortizes compensation expense over the vesting period. During
the year ended December 31, 1996, the Company did not grant any options to
purchase shares of common stock to non-employees.
Marketable Securities
The Company's marketable securities have been classified as trading
securities and are carried at their fair value on the consolidated balance
sheet.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the reporting period. Actual results
could differ from these estimates.
F-7
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Revenue Recognition
Revenue is recognized when products are shipped. The Company provides
allowances for estimated doubtful accounts and sales returns based on historical
experience and evaluation of specific accounts. Such allowances, excluding
amounts related to Farberware Inc. (see Note 2), were comprised of the
following:
December 31,
--------------------
1995 1996
--------- --------
Sales returns and allowances......... $2,604 $3,501
Doubtful accounts.................... 1,603 1,861
------- -------
$4,207 $5,362
======= =======
Customers
Substantially all customers are retailers. No base of customers in one
geographic area constitutes a significant portion of sales. No single customer
represented 10% or greater of consolidated net sales in 1994, 1995 or 1996.
Inventories
Inventories are stated at the lower of cost or market. Two subsidiaries
determine cost on the last-in, first-out (LIFO) method for silver and certain
non-silver inventories. For all other inventories, cost is determined on the
first-in, first-out (FIFO) method.
Property, Plant and Equipment
Purchased property, plant and equipment is recorded at cost. Leased
equipment is recorded at the present value of the minimum lease payments
required during the lease term. Depreciation is provided using the straight-line
method over the estimated useful lives of the related assets and over the terms,
if shorter, of the related leases, as follows:
Years
---------
Buildings and improvements......... 4 to 39
Tools and dies..................... 3 to 10
Machinery and equipment............ 3 to 10
Other.............................. 3 to 10
Purchase Price in Excess of Net Assets Acquired
Purchase price in excess of net assets acquired is amortized using the
straight-line method over 30 years (Note 2). The Company evaluates the carrying
value of goodwill based upon current and anticipated net income and undiscounted
cash flows, and recognizes an impairment when it is probable that such estimated
future net income and/or cash flows will be less than the carrying value of
goodwill. Measurement of the amount of impairment, if any, is based upon the
difference between carrying value and estimated fair value.
Other Assets
Other assets consist principally of deposits, deferred fees, deferred
financing costs and deferred long-term rent. Deferred financing costs are being
amortized using the straight-line method over the terms of the related loans.
Accumulated amortization aggregated approximately $100 and $125 at December 31,
1995 and 1996 respectively.
Advertising Costs
Advertising costs are charged to operations when incurred. These costs
totaled $3,035, $3,064 and $3,690 in the years ended December 31, 1994, 1995 and
1996, respectively.
F-8
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Financial Instruments
The carrying values of cash and equivalents, accounts receivable, accounts
payable and borrowings under revolving credit facilities approximate fair value
due to the short-term nature of these instruments.
Income Taxes
The Company and its domestic subsidiaries (except for Wallace's Puerto
Rican subsidiaries) file a consolidated federal income tax return. The Puerto
Rican subsidiaries file separate returns in accordance with Section 936 of the
Internal Revenue Code. Deferred income taxes are provided for certain income and
expense items which are accounted for differently for financial reporting and
income tax purposes.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at year-end exchange rates and income and expense items are
translated at the average rates of exchange prevailing during each year. The
effects of foreign currency fluctuations on the foreign subsidiaries assets and
liabilities have been reflected as a separate component of stockholders' equity.
Transaction gains and losses have been insignificant.
Earnings Per Share
Earnings per share are computed based on the weighted average common and
common equivalent shares outstanding during each period presented. Common stock
equivalents include common stock options (treasury stock method). Primary and
fully diluted earnings per share are the same for each of the periods presented.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
Cash Flow Information
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................. $ 827 $ 268 $2,383
======= ======= =======
Income taxes............................................. $10,741 $30,593 $16,791
======= ======= =======
Supplemental schedule of non-cash investing and financing
activities:
Purchase of common stock for retirement, financed by
issuance of promissory notes and assumption of bank debt $51,735
=======
Rights redemption obligation............................. $ 87
=======
Share transfer by principal stockholder.................. $2,338
=======
</TABLE>
2. Acquisitions
Acquisitions of Businesses
On February 15, 1996, the Company, through an indirect wholly owned
subsidiary, acquired the outstanding shares of Rauch for approximately $49,626
including costs of the transaction. The acquisition was accounted for under the
purchase method of accounting, and the results of operations of Rauch have been
included with the results of the Company from February 15, 1996.
F-9
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The purchase price in excess of net assets acquired of $7,224 is being
amortized on the straight line basis over 30 years. Rauch is a leading domestic
manufacturer and marketer of Christmas and other seasonal products, in
particular glass and satin tree ornaments. During 1996, the Company received
$23,771 in connection with an insurance claim relating to a 1994 fire at Rauch.
The allocation of purchase price is as follows:
Cash paid to Rauch shareholders.......................... $ 48,042
Acquisition costs incurred............................... 1,584
--------
Total purchase price..................................... $ 49,626
========
Allocated to:
Cash.................................................... $ 2,084
Accounts receivable.................................... 8,461
Insurance receivable................................... 23,771
Inventories............................................ 19,206
Deferred income taxes.................................. 2,518
Prepaid expenses and other............................. 983
Property, plant and equipment, net..................... 23,081
Other assets........................................... 89
Purchase price in excess of net assets required........ 7,224
Current liabilities.................................... (22,303)
Deferred income taxes.................................. (15,488)
--------
$ 49,626
========
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1995.
Year Ended December 31,
---------------------------
1995 1996
----------- ----------
Net sales................................. $228,439 $271,540
========= =========
Income from continuing operations......... $ 15,316 $ 19,657
========= =========
Net income................................ $ 48,339 $ 19,657
========= =========
Earnings per share:
Continuing operations.................... $ 1.30 $ 2.23
========= =========
Net income............................... $ 4.10 $ 2.23
========= =========
On May 8, 1996, the Company, through one of its subsidiaries, acquired all
of the outstanding common stock of C.J. Vander Ltd., a manufacturer of sterling
silver and silverplated flatware and hollowware in Sheffield and London,
England. The purchase price was immaterial to the Company's consolidated
financial statements. The acquisition was accounted for under the purchase
method of accounting.
Acquisition of Assets
In February of 1996, the Company entered into an agreement to acquire
certain assets, including a major portion of the tangible assets, intellectual
property and the corporate name, of Farberware Inc. ("Farberware Inc.").
Effective April 2, 1996, the Company, through its indirect wholly-owned
subsidiary, Far-B Acquisition Corp. ("Far-B"), together with Lifetime Hoan
Corporation ("Lifetime") acquired certain assets from Farberware Inc., a
subsidiary of U.S. Industries, Inc. The Company and Lifetime are not affiliates.
Farberware Inc. was a manufacturer of aluminum clad, stainless steel
cookware and bakeware and small electric kitchen appliances. The aggregate
consideration paid by Far-B and Lifetime was $45,771, subject to adjustment, of
which Far-B paid approximately, $32,611. The amount of the adjustment was the
subject of a dispute
F-10
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
which was settled on February 3, 1997. The assets acquired by the Company
included certain of the inventory, the tradename "Farberware" and the
intellectual property (including the intellectual property that relates to
cookware and bakeware and electric products other than major kitchen appliances)
and certain tools and dies and machinery and equipment. Effective April 2, 1996,
the Company, through Far-B, entered into a manufacturing services agreement with
Farberware Inc. for transitional manufacturing services for certain finished
goods previously produced by Farberware Inc. The Company entered into the
manufacturing services agreement in part to provide continuity of product during
a transition period in order to protect the strength of the Farberware name in
the marketplace. The manufacturing services agreement has terminated.
Upon disposal of the acquired inventory, the Company will not manufacture
or sell Farberware cookware and bakeware products or noncommercial electric
products. Accordingly, net sales for the year ended December 31, 1996 exclude
revenue from sales of Farberware inventory, and $3,948, net of certain selling,
general and administrative expenses, from these sales has been recorded as other
operating income. At December 31, 1996, accounts receivable, net and inventories
of the Company included $4,972 and $3,289, respectively related to Faberware.
In a separate transaction, the Company and Far-B entered into an agreement
with Lifetime, which provided for the allocation between them of the assets
acquired from Farberware Inc., the granting of a long-term license to Lifetime
for use of the Farberware name in connection with an extensive list of products,
the granting to Lifetime of long-term exclusive rights to operate Farberware
outlet stores, the reservation of certain exclusive rights to Far-B (including
exclusive rights to use of the Farberware name for corporate purposes and for
the marketing of cookware and bakeware products as well as electric products)
and for the future formation of a joint venture to administer certain licensing
rights.
On June 27, 1996, the Company's Farberware Inc. subsidiary (formerly Far-B)
("Farberware") entered into a license agreement with Meyer Marketing Co. Ltd.
("Meyer") pursuant to which Meyer was granted for a term of 200 years (i) an
exclusive worldwide license to use and exploit the Farberware name and certain
related intellectual property rights in connection with the sourcing,
manufacture and distribution of cookware and bakeware products for home use and
commercial, industrial and institutional size pots, pans and roasters, and (ii)
non-exclusive (shared) rights to use certain Farberware technology and other
intellectual property. For such grant, Meyer made a one-time payment to the
Company of $25,500 which resulted in recognition by the Company of $11,900 of
non-recurring income. Under the terms of the licensing agreement, the Company
has no further obligation with respect to the amount paid by Meyer. As such, the
entire proceeds received were recognized as revenue in the second quarter of
1996. On July 12, 1996, Farberware granted to a major retail chain the exclusive
license to use and exploit the Farberware name and related intellectual property
in connection with the sourcing, manufacture, marketing and sale of certain
electric products for annual royalty payments. On October 25, 1996 Farberware
granted to FCI Corp. a license to use and exploit the Farberware name in
connection with the sourcing, manufacturing, marketing and sale of certain
commercial products (defined as six specified commercial urns and one specified
commercial convection oven plus cookware, bakeware and electric products
developed by the Licensee solely and exclusively for commercial, industrial or
institutional use with the prior written approval of Farberware) for the payment
of annual royalties. See Note 12.
On February 3, 1997 the Company, Farberware, and Lifetime reached an
agreement (the "Settlement Agreement"), with Bruckner Manufacturing Corp.
("BMC") and U.S. Industries Inc. ("USI") to settle all previous outstanding
legal disputes arising out of the Farberware Asset Purchase Agreement ("APA")
and the Manufacturing Services Agreement ("MSA"). Under the terms of the
Settlement Agreement, Farberware will receive certain finished goods inventory
at no cost, and pay for certain finished goods inventories purchased under the
MSA. Farberware will also receive a waiver of certain restrictions in the APA on
disposing of tools, machinery, and equipment formerly used by BMC in the
manufacture of Farberware products. The Company intends to sell the majority of
the tools, machinery and equipment and will retain the remainder for use in its
existing businesses. The settlement did not result in any adjustment to the
original purchase price and no loss is expected to be incurred as a result of
the settlement.
F-11
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On April 16, 1996, the Company purchased finished goods inventory and
intangible assets of the Silvestri division of FFSC, Inc. ("Silvestri") for
approximately $8,600. Prior to the Company's purchase of such assets, FFSC,
Inc., its subsidiaries and affiliated companies had filed for protection under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Texas (the "Bankruptcy Court"). The Bankruptcy Court
approved this acquisition by the Company. Silvestri products include Christmas
ornaments, collectibles, lighting and trim as well as other seasonal and
nonseasonal giftware and decorative accessories.
The Corporation has given a Guaranty (limited to $4,000), dated as of May
21, 1996, of the obligations of FF Holding Company, FFSC, Inc. and certain
related entities to The CIT Group/Business Credit, Inc. under a certain debtor
in possession financing agreement dated May 21, 1996 and, at the request of the
Company, NationsBank N.A. (South) has issued its letter of credit, dated May 31,
1996 in the amount of $4,000 to CIT Group/Business Credit, Inc. to secure the
Company's aforesaid guaranty.
On November 26, 1996, a wholly-owned subsidiary of the Company acquired
inventory, tangible property, intellectual property rights, certain records
(including customer lists, customer files, supplier information, catalogs) and
certain contract rights of Potpourri Press, Inc., a North Carolina- based
manufacturer and marketer of Christmas products, for a purchase price of
approximately $2,300 plus a $240 promissory note (Note 7).
3. Discontinued Operations
On April 11, 1995, pursuant to an agreement entered into on March 28, 1995,
the Company, through its subsidiary, Syratech Holding Corporation, sold Syroco,
Inc. ("Syroco"). The net proceeds received after costs of the sale and income
taxes were $133,931. On September 25, 1995, the Company reached a final
settlement regarding the sale of Syroco. Under the terms of the settlement, the
Company reacquired certain assets and reassumed certain liabilities of Syroco
which have been recorded at their estimated net fair value of $1,834 at December
31, 1995. The Company does not expect that the liquidation of the assets will
have a material effect on the previously recognized gain on disposal. An after
tax gain on disposal of Syroco of $30,451 was recognized in the second quarter
of 1995.
The sale resulted in the discontinuation of the Company's casual furniture
and accessories business. The assets and liabilities relating to the
discontinued business are included in net assets of discontinued operations in
the consolidated balance sheets at December 31, 1995. The results of operations
and cash flows for the discontinued segment are included in discontinued
operations in the consolidated income statements and the consolidated statements
of cash flows for years ended December 31, 1994, 1995 and 1996.
Net assets of discontinued operations at December 31, 1995 consisted of the
following:
Inventories, net........................... $ 1,778
Property, plant and equipment, net......... 227
Other assets............................... 875
Liabilities................................ (1,046)
-------
Total.................................... $ 1,834
=======
Operating results of the discontinued segment consisted of the following:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
1994 1995
--------------- -----------------
(unaudited)
<S> <C> <C>
Net sales........................................ $94,883 $33,626
======== ========
Income before provision for income taxes......... $19,489 $ 4,217
Provision for income taxes....................... 7,421 1,645
-------- --------
Income from discontinued operations.............. $12,068 $ 2,572
======== ========
</TABLE>
The operating results of the discontinued segment exclude previously allocated
corporate expenses.
F-12
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Marketable Securities
At December 31, 1995, marketable securities consisted of $30,000 of
short-term high grade notes having original maturities of six months. Marketable
securities are carried at fair value which approximates cost plus accrued
interest. Interest earned at December 31, 1995 but not paid, of $561, is
included in interest income for the year ended December 31, 1995. There were no
marketable securities at December 31, 1996.
5. Inventories
Inventories were comprised of the following:
December 31,
----------------------
1995 1996
---------- ---------
Raw Materials........... $3,908 $9,020
Work-in-process......... 1,744 5,980
Finished goods.......... 35,499 64,355
------- -------
Total................. $41,151 $79,355
======= =======
Inventories would have been approximately $2,752 and $3,430 higher at
December 31, 1995 and 1996, respectively, if the FIFO method had been used for
all inventories. Decreases in LIFO inventory quantities had the effect of
increasing consolidated net income by $4 in 1994, and decreasing consolidated
net income by $59 in 1996. There were no decreases in LIFO inventory quantities
in 1995.
6. Property, Plant and Equipment
Property, plant and equipment was comprised of the following:
December 31,
---------------------------
1995 1996
------------ ------------
Land and improvements.................. $ 7,813 $ 8,305
Buildings and improvements............. 18,780 41,838
Tools and dies......................... 13,808 14,635
Machinery and equipment................ 6,046 25,388
Other.................................. 1,169 1,619
Construction in progress............... 1,239 4,923
-------- --------
Total................................ 48,855 96,708
Less: accumulated depreciation......... (19,295) (32,753)
-------- --------
Net.................................. $ 29,560 $ 63,955
======== ========
Capitalized interest was not material to the Company's consolidated
financial statements.
On January 17, 1997, the Company purchased a parcel of land in Mira Loma,
California for $3,179. The Company plans to begin construction of a warehouse
and distribution facility on this land in 1997.
7. Revolving Loan Facilities and Notes Payable
Revolving Loan Facilities
Effective October 31, 1996, the Company's Amended and Restated Loan and
Security Agreement (the "Company Loan Agreement") provides for maximum permitted
borrowings of $100,000 through December 31, 1996 and to $60,000 until the
earlier of April 30, 1997 or the completion of refinancing contemplated with
respect to the Agreement and Plan of Merger with THL Transaction I Corp. (Note
15). Interest on borrowings is charged at the bank's prime rate less .75% (7.5%
at December 31, 1996) or at an option to borrow at 1.0% over the Eurodollar
F-13
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
rate (6.53% using the 30 day Eurodollar rate, at December 31, 1996). The
weighted average interest rate on borrowings outstanding under this facility for
the year ended December 31, 1996 was 7.29%. The Company Loan Agreement as
amended expires on April 30, 1997. At December 31, 1996, there was $5,878
outstanding under the Company Loan Agreement and credit availability (net of
letters of credit outstanding) was $83,770. On January 1, 1997 availability was
reduced by $40,000. Borrowings are collateralized by substantially all of the
assets of the Company and its subsidiaries with the exception of C.J. Vander.
The Company Loan Agreement restricts the payment of cash dividends to 331/3% of
net income for the prior year. In addition, it limits repurchases of the
Company's outstanding capital stock and capital expenditures, and contains
covenants which require, among other things, minimum levels of consolidated
tangible net worth and the maintenance of certain financial ratios. In December
1995, the restriction to repurchase outstanding capital stock was modified to
allow the Company to repurchase all of the 3,064,751 shares of the Company's
stock owned by affiliates of Katy Industries, Inc. (the "Katy Stock
Repurchase"). The agreement was modified in December 1995 to permit the
acquisition of Rauch referred to in Note 2. During 1996, further modifications
were made to permit the Farberware, Silvestri, C.J. Vander and Potpourri
acquisitions. At December 31, 1996, the Company had $6,783 unrestricted retained
earnings available for payment of cash dividends.
During 1996, one of Wallace's Puerto Rican subsidiaries and its lender
entered into an Amended and Restated Line of Credit Agreement (the "Facility")
which provides for borrowings up to a maximum of $10,000 and expires on May 31,
1997. Interest on borrowings is charged at the bank's prime rate minus .30%
(7.95% at December 31, 1996 or at an option to borrow at the Eurodollar rate
plus 1.70% (7.2313%, using the 30 day Eurodollar rate, at December 31, 1996).
The weighted average interest rate on borrowings outstanding under this Facility
for the year ended December 31, 1996 was 8.08%. At December 31, 1996 $558 was
outstanding under the Facility and the credit availability was $9,442.
Borrowings are uncollateralized; however, the pledge of assets owned by one of
the subsidiaries as collateral for other loans is prohibited. Borrowings under
the Facility are guaranteed by the Company and cross-guaranteed by certain other
subsidiaries.
Notes Payable
At December 31, 1996, the Company had a note payable of $200 related to the
purchase of Potpourri (Note 2). At December 31, 1995, the Company had notes
payable of $51,735 related to the purchase of 3,064,751 shares of the Company's
common stock on December 29, 1995 (Note 11). These notes were paid on January 2,
1996.
F-14
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Income Taxes
The provisions for income taxes were comprised of the following:
Year Ended December 31,
--------------------------------------
1994 1995 1996
--------- ---------- ----------
Current:
Federal......... $1,356 $ 6,518 $11,379
State........... 524 1,674 3,542
Foreign......... 625 937 1,307
------ ------- -------
2,505 9,129 16,228
------ ------- -------
Deferred:
Federal......... (561) (1,805) (3,344)
State........... 87 (383) (900)
Foreign......... (19) -- --
------ ------- -------
(493) (2,188) (4,244)
------ ------- -------
Tax effect of stock options:
Federal......... 574 (60) 193
State........... 172 (18) 57
------ ------- -------
746 (78) 250
------ ------- -------
Total.......... $2,758 $ 6,863 $12,234
====== ======= =======
The reconciliations between the Company's effective income tax rate and the
U.S. federal statutory rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Federal statutory rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit...... 3.1 2.5 4.9
Hong Kong........................................... (6.6) (4.8) (4.3)
Puerto Rico......................................... (6.0) (3.8) (2.4)
United Kingdom...................................... -- -- 0.6
Provision for undistributed foreign earnings........ 1.6 5.0 1.6
Valuation allowance................................. -- -- 1.6
Other............................................... (1.1) 0.4 0.5
------ ------ ------
Effective income tax rate.......................... 26.0% 34.3% 37.5%
====== ====== ======
</TABLE>
The components of income before provision for income taxes were comprised
of the following:
Year Ended December 31,
--------------------------------------
1994 1995 1996
---------- ---------- ---------
Domestic......... $7,081 $14,480 $25,457
Foreign.......... 3,536 5,559 7,166
------- -------- --------
Total.......... $10,617 $20,039 $32,623
======= ======== ========
Provisions have been made for taxes on the undistributed earnings of
Syratech H.K. and Wallace's Puerto Rican subsidiaries which are ultimately
expected to be remitted to the parent company. The Company has permanently
invested a portion of the undistributed earnings of its Puerto Rican and
Syratech H.K. subsidiaries. It is not practical to estimate the amount of
unrecognized deferred tax liability attributable to these undistributed foreign
earnings.
F-15
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Wallace's Puerto Rican subsidiaries operate under grants from the
Commonwealth of Puerto Rico exempting 90% of their income from taxation until
December 2003. Had the Company not been eligible for the tax exemption, net
income in 1994, 1995, and 1996 would have been reduced by approximately $1,330,
$1,198, and $1,211, and earnings per share would have been decreased by
approximately $.11, $.10, and $.14, respectively.
The tax effects of significant items comprising the Company's net deferred
tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996
------------------- ----------------
<S> <C> <C>
Deferred tax liability:
Property, plant and equipment................ $ (2,349) $ (17,263)
Foreign earnings............................. (1,994) (2,525)
-------- ---------
Deferred tax liability...................... (4,343) (19,788)
-------- ---------
Deferred tax assets:
Accounts receivable.......................... 2,171 4,475
Inventory.................................... 1,447 2,336
Reserves and accruals........................ 1,567 2,266
Pension...................................... 522 1,876
Other deductible amounts..................... 84 69
Contribution carryforwards................... -- 433
Foreign operating loss carryforwards......... -- 175
-------- ---------
Deferred tax asset.......................... 5,791 11,630
-------- ---------
Valuation allowance.......................... -- (608)
-------- ---------
Net deferred tax asset (liability)........... $ 1,448 $ (8,766)
======== =========
</TABLE>
The valuation allowance relates to the potential unusable portion of
foreign tax loss carryforwards of $530 and contribution carryforwards of $1,066.
9. Commitments and Contingencies
The Company and its subsidiaries have various operating lease commitments
for buildings and equipment. The lease agreements generally require the Company
to pay insurance, real estate taxes, and maintenance and contain various renewal
options. Future minimum rental payments for all noncancellable operating leases
for each of the next five years and thereafter are as follows:
1997....................... $ 3,552
1998....................... 1,887
1999....................... 1,632
2000....................... 1,123
2001....................... 628
Subsequent to 2001......... 480
Rent expense for all operating leases was approximately $1,789, $1,821, and
$5,209 in 1994, 1995 and 1996, respectively.
Certain subsidiaries were contingently obligated for outstanding letters of
credit, trade acceptances and similar instruments aggregating $10,348 at
December 31, 1996 (Note 7). The assets of Syratech H.K. are pledged as
collateral for certain of these contingent obligations.
10. Employee Benefit Plans
The Company has three 401(k) savings plans. The 401(k) savings plans cover
substantially all employees of its domestic and Puerto Rican subsidiaries. The
401(k) plans are subject to certain minimum age and length of employment
requirements. Under two of these plans, the Company matches 30% of participants'
contributions up to 6% of compensation. Under the other plan, the Company
matches 50% of the first five hundred twenty dollars
F-16
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
contributed and 25% thereafter, of the participants' contributions up to 15% of
compensation. The Company also has a savings plan, established in 1991, covering
substantially all employees of the Company's Hong Kong subsidiary. Under the
Hong Kong plan, the Company contributes up to 10% of the participants'
compensation. The Company contributed an aggregate of $197, $256 and $597 to all
of these Plans in 1994, 1995 and 1996.
The Company's C. J. Vander subsidiary also has an employee benefit plan.
The Company's obligation under the plan is not material to the Company's
consolidated financial position or results of operations.
The Company has employment agreements with certain officers and employees
for terms ranging from three to five years, which provide for minimum annual
salaries aggregating $2,451 and certain other benefits.
Agreements with the Company's five officers provide for retirement benefit
payments. With respect to two of these officers, for the year ended December 31,
1994, the agreements provided for benefit payments in amounts equal to two
percent of the officers' final year base salaries multiplied by the number of
years of service with the Company. In 1995, these two agreements were amended to
provide that the benefit payments be based upon two percent of the average total
annual compensation (salary and bonus) for the three year period preceding the
executives' retirement dates multiplied by the number of years of service. In
addition, one of the agreements was amended (the "1995 Plan Amendment") to
provide for a 100% survivor benefit for the executive's spouse. In 1996 existing
employment agreements with two officers were amended to also provide for a
retirement benefit. Additionally, a third officer who does not have an
employment agreement with the Company was granted a retirement benefit. Two of
these agreements were amended to provide for benefit payments based upon the
greater of (i) $75,000 or (ii) one half of one percent of the average total
annual compensation (salary and bonus) for the three year period preceding the
executives' retirement dates multiplied by the number of years of service. One
of these agreements was amended to provide for benefit payments based upon the
greater of (i) $75,000 or (ii) one percent of the average total annual
compensation (salary and bonus) for the three year period preceding the
executives' retirement dates multiplied by the number of years of service.
Upon consummation of the Merger (Note 15), an employment agreement with an
officer will be amended so as to (i) change the officer's term of full-time
employment from a rolling five-year term to a fixed five-year term, (ii) provide
for a minimum base salary of $1,150 per annum, (iii) establish $1,150 as the
minimum amount upon which the officer's retirement benefit (and the survivor's
benefit of his surviving spouse) will be computed and (iv) create contractual
rights with respect to certain perquisites that he is accorded informally under
present arrangements with the Company. Additionally, an employment agreement
with another officer will be amended to change the officer's term of full-time
employment from a rolling five-year term to a fixed five-year term.
Pension expense is determined using assumptions at the beginning of the
year. Assumptions used in determining the actuarial present value of the
projected benefit obligation include: a discount rate of 8.5% in 1994 and 1995
and 7.5% in 1996 and a rate of future increases in benefit compensation of 5%.
The effect of the change in discount rate was not material to the consolidated
financial statements.
Net pension cost included the following components:
1994 1995 1996
------- ------- --------
Service cost for benefits earned........... $137 $196 $ 317
Interest cost benefit obligation........... 71 123 199
Amortization of prior service cost......... -- 476 620
Amortization of (gain)/loss................ -- -- 191
----- ----- ------
Net periodic pension cost.................. $208 $795 $1,327
===== ===== ======
The following table summarizes the amounts recognized in the consolidated
balance sheets as of December 31, 1995 and 1996:
F-17
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Actuarial present value of obligations:
Vested benefit obligation.................................... $1,724 $3,287
Projected benefit obligation................................. 2,012 3,612
Fair value of plan assets..................................... -- --
Projected benefit obligation in excess of plan assets......... 2,012 3,612
Unrecognized prior service cost............................... (603) (610)
Unrecognized gain/(loss)...................................... (45) (311)
Additional minimum liability.................................. 360 597
------ ------
Net accrued pension liability................................. $1,724 $3,288
====== ======
</TABLE>
11. Stockholders' Equity
Key Employee Stock Option Plans
Under the Company's 1986 Key Employee Stock Option Plan ("1986 Plan"),
qualified and non-qualified options to purchase up to a maximum of 1,300,000
shares of common stock were granted to certain employees at exercise prices not
less than 85% of the fair market value at the date of grant. Options become
exercisable ratably over a five-year period and expire ten years from the date
of grant. There were no shares available for grant under the 1986 Plan at
December 31, 1996. Compensation cost has been recognized for the Company's 1986
Plan for the amount equal to 15% of the fair market value at the date of grant
ratably over the five year period that they became exercisable over.
In 1993, the Company established the 1993 Key Employee Stock Option Plan
("1993 Plan"), with provisions similar to the 1986 Plan. Under the 1993 Plan,
qualified and non-qualified options to purchase up to a maximum of 400,000
shares of common stock may be granted to certain employees at an exercise price
not less than fair market value at the date of grant. At December 31, 1996,
67,000 options were outstanding under the 1993 plan.
In 1995, the Company established the 1995 Key Employee Stock Option Plan
("1995 Plan"). The 1995 Plan contains certain provisions similar to the 1993
Plan and would allow the grant of 800,000 options at an exercise price not less
than fair market value at the date of grant. At December 31, 1996, 20,000
options were outstanding under the 1995 plan.
No compensation cost has been recognized for the Company's 1993 and 1995
Plans.
F-18
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A summary of stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Exercise Price
Shares Per Share Per Share
----------- ----------------- ------------------
<S> <C> <C> <C>
Outstanding at January 1, 1994........... 297,350 $.0038--$13.70 $9.66
Canceled................................. (8,400) $ 10.67 $10.67
Granted.................................. 50,000 $ 14.35 $14.35
Exercised................................ (38,200) $.0038--$10.67 $7.88
---------
Outstanding at December 31, 1994......... 300,750 $.0038--$14.35 $10.64
Canceled................................. (90,900) $10.67--$14.56 $12.91
Granted.................................. 54,500 $14.56--$18.75 $16.87
Exercised................................ (44,150) $.0038--$10.67 $7.29
---------
Outstanding at December 31, 1995......... 220,200 $.0038--$18.75 $11.92
Canceled................................. (102,000) $10.67--$24.75 $24.47
Granted.................................. 139,500 $23.00--$24.75 $24.68
Exercised................................ (28,200) $.0038--$10.67 $7.17
---------
Outstanding at December 31, 1996......... 229,500 $10.67--$24.75 $14.68
=========
Exercisable at December 31, 1996......... 107,080 $10.67--$18.75
=========
</TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Weighted Average Exercise
Range of Number Average Remaining Price for
Number of Exercise Currently Exercise Contractual Currently
Options Prices Exerciseable Price Years Exerciseable
- ------------ ------------------- --------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
142,500 $10.67 to $14.56 97,580 $11.11 5.97 $11.03
87,000 $17.13 to $24.75 9,500 $20.52 8.66 $ 17.22
-------- --------
229,500 107,080 $14.68 6.99 $ 11.58
======== ========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option and other employee stock
based compensation plans. Had compensation cost for the Company's stock option
plans been determined based on fair value at the grant dates for awards under
those plans which were granted on or after January 1, 1995 consistent with the
method of SFAS No. 123, the Company's net income and earnings per share for the
two years ended December 31, 1996 would have been reduced to the pro forma
amounts indicated below:
Year Ended December 31,
-------------------------
1995 1996
---------- ---------
Net income:
As reported......... $46,199 $20,389
======== ========
Pro forma........... $45,762 $20,036
======== ========
Net income per share
As reported......... $ 3.91 $ 2.32
======== ========
Pro forma........... $ 3.88 $ 2.28
======== ========
The pro forma results are not necessarily indicative of results that would
have been reported if all options had been measured under SFAS No. 123.
F-19
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The weighted average remaining contractual life of options outstanding at
December 31, 1996 was 6.99 years. The weighted average fair value of options
granted during 1995 and 1996 was $8.03 and $8.94 per share, respectively.
The fair value of options granted under the Company's stock option plans
during 1995 and 1996 was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 30.6%, risk free interest rate of 6.0%,
and expected lives of either 5.3 or 7.7 years.
Transfer of Shares
On December 31, 1996, the Company's Chief Executive Officer and principal
shareholder (the "Principal Shareholder") of the Company, the Company and THL
Transaction I Corp. entered into agreements with three executive officers
whereby the Principal Shareholder will transfer up to 73,068 shares (the Shares)
of his Syratech common stock to the Company to effect the transfer of an equal
number of newly issued shares to the executive officers. In connection with each
transfer of shares of stock, the agreements also provide for each executive to
receive, from the Company, as additional compensation, an annual lump sum cash
payment (the "Lump Sum Payments") for the reimbursement of income taxes owed by
the executive as a result of such transfer and payment. The transfer of Shares
by the Principal Shareholder and the Lump Sum Payments to the executives are
irrevocable and unconditional and are not based upon the executives future
employment with the Company. On December 31, 1996, 31,812 shares were
transferred and Lump Sum Payments totaling $703 were made to the executives.
Shares aggregating 31,884 were transferred as of January 14, 1997. Additional
shares of up to 9,372 will be transferred on January 14, 1998.
The estimated value of the shares has been recorded as an addition to
additional paid-in capital of $2,338. Total compensation expense equal to the
estimated fair value of the Shares plus an estimate of the aggregate Lump Sum
Payments, or $3,953 was recorded in the fourth quarter of 1996.
Short and long-term compensation payable was $705 and $207, respectively at
December 31, 1996.
The weighted average fair value of the shares was $31.50. The fair value of
the shares based on the provision of SFAS No. 123 was not materially different
from the amounts recorded.
Purchase of Common Stock
On December 29, 1995, the Company effected the Katy Stock Repurchase. The
aggregate purchase price of $52,054 represented approximately $17 per share. The
purchase was financed by the issuance of two promissory notes due January 2,
1996 to subsidiaries of Katy and the assumption of short-term bank debt, all
aggregating $51,735. The two promissory notes and the short-term bank debt were
paid on January 2, 1996. The Company's par and additional paid-in capital values
have been decreased to reflect the purchase.
Shareholder Rights Plan
On October 26, 1992 the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan"). Under the Plan, the Company distributed a dividend of
one right (a "Right") to purchase shares of preferred stock to stockholders of
record on October 31, 1992 and further authorized the issuance of one Right to
each share of common stock which becomes outstanding after the record date. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of a new series of preferred stock ("Series A Preferred
stock") at a price of $50, subject to adjustment. As amended on July 5, 1994,
the Rights become exercisable only if an individual or group (an "Acquiring
Person") acquires 15% or more of the outstanding common stock or commences a
tender offer which would result in its ownership of 30% or more of the
outstanding common stock, or in the case of a person who beneficially owned 20%
or more of the outstanding common stock on October 26, 1992, such person
acquires an additional 1% or more of the outstanding common stock.
F-20
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As required by the Agreement and Plan of Merger (Note 15), effective on
November 8, 1996, the Company redeemed all outstanding Rights and terminated the
Shareholder Rights Plan pursuant to which the Rights were issued. The redemption
price for each Right is one cent and if holders of Rights have not received
payment of the redemption price prior to the Effective Time they will have the
redemption price of their Rights added to the payment of the cash price for
their shares of Company Common Stock in the Merger.
12. Related Party Transactions
A beneficial owner of less than 1% of the Company holds a significant
management role in Service Merchandise Co., Inc. ("Service"). A different person
is a director of the Company and is also a director of Service. The Company had
net sales to Service of approximately $9,909, $10,706 and $12,432 in 1994, 1995
and 1996, respectively. The Company had accounts receivable from Service of
approximately $756 and $1,260 at December 31, 1995 and 1996, respectively.
Effective July 12, 1996, the Company, through an indirect wholly-owned
subsidiary, granted a license to Service to use certain trademarks, patents and
copyrights relating to certain electric and other products. The agreement is
subject to cancellation with six months notice by the licensee.
Wacker Industrial Company ("Wacker"), a major supplier, is owned by a
holder of less than 1% of the Company's common stock. In 1994, 1995 and 1996,
the Company had purchases from this supplier of approximately $6,176, $5,371 and
$4,478 respectively. Accounts payable to this supplier approximated $75 and $93
at December 31, 1995 and 1996 respectively.
Other transactions with companies affiliated with certain
directors/stockholders include net sales of approximately $297, $735 and $790
and purchases of products and services of $1,228 and $746 in 1994 and 1995,
respectively. There were no purchases of products and services in 1996. As of
December 31, 1996, amounts receivable from these companies approximated $7,
there were no accounts payable.
In addition, included in other operating income in 1996 was revenue from
the disposal of Farberware inventory of $10,166 to Service, $5,033 to Lifetime
and $1,660 to a company affiliated with a certain director/stockholder. At
December 31, 1996 amounts receivable from Service and Lifetime were $316 and
$455, respectively.
13. Foreign Operations
The Company's foreign operations relate to its Hong Kong subsidiary, and as
of May 8, 1996, its C.J. Vander subsidiary, the sales of the Hong Kong
subsidiary are substantially to customers in the United States and the sales of
its C.J. Vander subsidiary are primarily to foreign customers. Summarized
financial information about the Company's operations in different geographic
areas is as follows:
F-21
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31,
-----------------------------------
1994 1995 1996
----------- ----------- ----------
Net sales:
United States................. $114,457 $122,950 $212,516
Hong Kong..................... 32,834 46,570 54,749
Other foreign................. -- -- 3,666
--------- --------- --------
Total........................ $147,291 $169,520 $270,931
========= ========= ========
Income (loss) from operations:
United States................. $ 7,497 $ 9,846 $ 15,372
Hong Kong..................... 3,581 5,599 8,235
Other foreign................. -- -- (505)
--------- --------- --------
Total........................ $ 11,078 $ 15,445 $ 23,102
========= ========= ========
Identifiable assets:
United States................. $185,632 $213,162 $212,377
Hong Kong..................... 5,052 7,404 7,754
Other foreign................. -- -- 7,123
--------- --------- --------
Total........................ $190,684 $220,566 $227,254
========= ========= ========
14. Litigation
The Company has been named as a defendant in several legal actions arising
from its normal business activities. The Company carries insurance against
liability for certain types of risks. Although the amount of liability that
could result from any litigation cannot be predicted, in the opinion of
management, the Company's potential liability on all known claims would not have
a material adverse effect on the consolidated financial position or results of
operations of the Company.
15. Agreement and Plan of Merger
On October 23, 1996, the Company and THL Transaction I Corp., a company
organized and controlled by affiliates of Thomas H. Lee Company, entered into an
Agreement and Plan of Merger, dated November 27, 1996, effective, as of October
23, 1996, as amended effective as of February 14, 1997, pursuant to which THL
Transaction I Corp. will be merged into the Company (the "Merger"). Pursuant to
the transaction, stockholders of the Company will receive $32.00 in cash per
share (except that the Principal Shareholder will receive only $28.00 in cash
per share) or may elect to receive a portion of their consideration by retaining
stock of the surviving entity.
Upon consummation of the Merger, the Company would have on a pro forma
basis, as of December 31, 1996, outstanding debt of approximately $162,319
(unaudited). The transaction is expected to close in the first half of 1997. It
is intended that the transaction will be accounted for as a recapitalization.
The common equity contribution to be made by THL I Transaction Corp. will
constitute approximately $100,217 (unaudited) and up to $18,000 (unaudited) of
Cumulative Redeemable Preferred Stock will be issued (less the value of the
shares retained by stockholders other than the Company's Principal Shareholder
and 63,696 shares that were issued to, and will be retained by, certain
management stockholders). The Company's stockholders' equity on a pro forma
basis is $22,048 (unaudited) at December 31, 1996 considering the effects of the
Merger, because the distribution to stockholders, as well as approximately
one-third of the Merger expenses, will reduce common stockholders' equity.
The consummation of the Merger is conditioned upon the availability of
adequate financing (both debt and equity). It is expected that the financing
will include the issuance of $155,000 of Senior Notes (the "Senior Notes"). The
Senior Notes are expected to be general unsecured obligations of the Company
ranking senior to all existing and future subordinated indebtedness of the
Company, including indebtedness of up to $130,000, including a $30,000 letter of
credit sublimit, under a 5 year Credit Facility (the "Revolving Credit
Facility"). However, the
F-22
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
obligations of the Company under the Revolving Credit Facility are expected to
be secured by the accounts receivable and inventory of the Company and its
domestic subsidiaries and, accordingly, such indebtedness would effectively rank
senior to the Senior Notes to the extent of such assets. The Revolving Credit
Facility is expected to include a requirement to maintain excess availability of
at least $45.0 million at certain periods during the year. The Senior Notes will
be fully and unconditionally guaranteed on a joint and several basis by each of
the Company's wholly-owned domestic subsidiaries. (The "Guarantor
Subsidiaries").
The following condensed consolidating financial statements as of December
31, 1995 and 1996 and for each of the three years in the period ended December
31, 1996, present separate financial information for the Company
("Issuer/Guarantor Parent"), the Guarantor Subsidiaries, the Non Guarantor
Subsidiaries, and Discontinued Operations. Separate financial statements of each
guarantor are not presented because management believes that such statements
would not be materially different from the information presented herein.
F-23
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 1995
<TABLE>
<CAPTION>
Issuer
Guarantor Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............... $ 63,354 $ 11,786 $ 3,353 $78,493
Marketable securities.............. 30,561 30,561
Accounts receivable, net........... 30,129 1,764 31,893
Inventories........................ 39,415 1,695 $ 41 41,151
Deferred income taxes.............. 1,582 3,523 5,105
Prepaid expenses and other......... 516 854 232 1,602
Net assets of discontinued
operations......................... 1,834 1,834
-------- -------- ------- --------- --------
Total current assets.............. 97,847 85,707 7,044 41 190,639
Property, plant and
equipment, net.................... 29,256 351 (47) 29,560
Other assets....................... 130,914 358 9 (130,914) 367
-------- -------- ------- --------- --------
Total............................ $228,761 $115,321 7,404 $(130,920) $220,566
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and
notes payable..................... $ 51,735 $ 51,735
Accounts payable................... $ 4,964 $ 1,474 6,438
Accrued expenses................... 922 3,314 199 $ 1 4,436
Accrued compensation............... 2,212 266 2,478
Accrued advertising................ 1,991 1,991
Income taxes payable............... 20,152 (19,104) 469 (6) 1,511
-------- -------- ------- --------- --------
Total current liabilities......... 72,809 (6,623) 2,408 (5) 68,589
Deferred income taxes.............. 1,819 1,838 3,657
Pension liability.................. 1,724 1,724
Intercompany (receivable)
payable........................... (63,540) 68,727 (5,590) 403
Stockholders' equity............... 217,673 49,655 10,586 (131,318) 146,596
-------- -------- ------- --------- --------
Total............................ 228,761 $115,321 $ 7,404 $(130,920) $220,566
======== ======== ======= ========= ========
</TABLE>
F-24
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 1996
<TABLE>
<CAPTION>
Issuer/ Non-
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............... $ 18 $ 146 $ 3,441 $ 3,605
Accounts receivable, net........... 56,719 3,301 60,020
Inventories........................ 74,134 5,180 $ 41 79,355
Deferred income taxes.............. 729 8,211 8,940
Prepaid expenses and
other............................. 2,653 1,150 3,803
Total current assets............. 747 141,863 13,072 41 155,723
Property, plant and
equipment, net.................... 62,219 1,805 (69) 63,955
Purchase price in excess
of net assets acquired............ 7,032 7,032
Other assets....................... 179,442 544 (179,442) 544
-------- -------- ------- --------- --------
Total........................... $180,189 $211,658 $14,877 $(179,470) $227,254
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities
and notes payable................. $ 6,604 $ 32 $ 6,636
Accounts payable................... 7,637 2,052 9,689
Accrued expenses................... $ 1,058 9,420 571 11,049
Accrued compensation............... 3,812 416 4,228
Accrued advertising................ 3,273 3,273
Income taxes payable............... 19,907 (19,581) 598 $ 6 930
-------- -------- ------- --------- ---------
Total current
liabilities..................... 20,965 11,165 3,669 6 35,805
Deferred income taxes............... 2,295 15,411 17,706
Pension liability................... 3,288 3,288
Other long-term liabilities......... 207 207
Intercompany (receivable)
payable............................ (62,863) 62,863 (5,718) 5,718
Stockholders' equity................ 219,792 118,724 16,926 (185,194) 170,248
-------- -------- ------- --------- ---------
Total........................... $180,189 $211,658 $14,877 $(179,470) $227,254
======== ======== ======= ========= =========
</TABLE>
F-25
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING INCOME STATEMENTS
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Issuer/
Guarantor Guarantor Non-Guarantor Discontinued
Parent Subsidiaries Subsidiaries Operations Eliminations Consolidated
------------ --------------- ---------------- -------------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $114,457 $53,495 $(20,661) $147,291
Cost of sales.................. 81,946 43,315 (20,661) 104,600
-------- ------- -------- --------
Gross profit.................. 32,511 10,180 42,691
Selling, general and
administrative expenses....... 25,269 6,599 (255) 31,613
-------- ------- -------- --------
Income from operations........ 7,242 3,581 255 11,078
Interest expense............... (496) (63) (559)
Interest income................ 80 18 98
Other income................... $2,000 2,000 (4,000)
------- -------- ------- -------- -------
Income before provision for
income taxes................. 2,000 8,826 3,536 (3,745) 10,617
Provision for income taxes..... 157 1,995 606 2,758
------- -------- ------- -------- --------
Income from continuing
operations................... 1,843 6,831 2,930 (3,745) 7,859
Discontinued operations, net $12,068 -- 12,068
------- -------- ------- -------- -------- --------
Net income................... $1,843 $ 6,831 $ 2,930 $12,068 $ (3,745) $ 19,927
======= ======== ======= ======== ======== ========
</TABLE>
F-26
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING INCOME STATEMENTS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Issuer/
Guarantor Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------------- --------------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $122,950 $67,354 $(20,784) $169,520
Cost of sales........................ 87,593 53,027 (20,784) 119,836
-------- ------- -------- --------
Gross profit........................ 35,357 14,327 49,684
Selling, general and administrative
expenses............................ 25,522 8,728 (11) 34,239
-------- ------- -------- --------
Income from operations.............. 9,835 5,599 11 15,445
Interest expense..................... (198) (89) (287)
Interest income...................... $4,496 336 49 4,881
Other income......................... 1,300 1,300 (2,600)
------- -------- ------- -------- --------
Income before provision for
income taxes....................... 5,796 11,273 5,559 (2,589) 20,039
Provision for income taxes........... 2,623 3,303 937 6,863
------- -------- ------- ------- --------
Income from continuing
operations......................... 3,173 7,970 4,622 (2,589) 13,176
Discontinued operations, net......... 33,023 33,023
------- -------- ------- ------- --------
Net income......................... $36,196 $ 7,970 $ 4,622 $(2,589) $ 46,199
======= ======== ======= ======= ========
</TABLE>
F-27
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING INCOME STATEMENTS
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Issuer/
Guarantor Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------------- --------------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $212,530 $85,498 $(27,097) $270,931
Cost of sales....................... 154,622 66,582 (27,091) 194,113
-------- ------- -------- --------
Gross profit....................... 57,908 18,916 (6) 76,818
Selling, general and administrative
expenses........................... $(360) 46,844 11,880 (700) 57,664
Other operating income.............. 3,948 3,948
----- -------- ------ -------- --------
Income from operations............. 360 15,012 7,036 694 23,102
Interest expense.................... (3,114) (36) (3,150)
Interest income..................... 70 535 166 771
Other income........................ 11,900 11,900
----- -------- ------- -------- --------
Income before provision for
income taxes...................... 430 24,333 7,166 694 32,623
Provision for income taxes.......... 1,092 9,835 1,307 12,234
----- -------- ------- -------- --------
Net (loss) income................. $(662) $ 14,498 $ 5,859 $ 694 $ 20,389
===== ======== ======= ======== ========
</TABLE>
F-28
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Issuer/
Guarantor Guarantor Non-Guarantor Discontinued
Parent Subsidiaries Subsidiaries Operations Eliminations Consolidated
----------- --------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................ $ 1,843 $ 6,831 $ 2,930 $ 12,068 $ (3,745) $ 19,927
Adjustments to reconcile net
income to net cash provided
by (used in) operations:
Depreciation and
amortization.................... 3,074 451 (255) 3,270
Deferred income taxes............ 1,439 (1,870) (21) (452)
Other............................ 116 217 (1) 332
Increase (decrease) in cash:
Accounts receivable............. (7,738) (246) (7,984)
Inventories..................... (6,350) (240) (6,590)
Prepaid expenses and other 566 145 711
Accounts payable and
accrued expenses............... 3,661 494 4,155
Income taxes payable............ (1,283) 5,046 (64) 3,699
Intercompany account............ (3,158) (13,235) (3,199) 15,592 4,000
Discontinued operations.......... (27,660) (27,660)
------- -------- ------- ------- ----- ---------
Net cash provided by (used in)
operating activities............. (1,043) (9,798) 249 (10,592)
------- -------- ------- ------- ----- ---------
Cash flows from investing
activities:
Purchases of property, plant and
equipment........................ (2,391) (212) (2,603)
Other............................. (194) 1 (193)
------- -------- ------- ------- ----- --------
Net cash used in investing
activities....................... (2,585) (211) (2,796)
------- -------- ------- ------- ----- --------
Cash flows from financing
activities:
Change in revolving loan
facilities....................... 11,944 11,944
Repayment of borrowings........... (1,624) (1,624)
Other............................. 1,043 62 1,105
------- -------- ------- ------- ------ --------
Net cash provided by financing
activities....................... 1,043 10,382 11,425
------- -------- ------- ------- ------ --------
Net (decrease) increase in cash
and equivalents.................. (2,001) 38 (1,963)
Cash and equivalents,
beginning of year................ 2,475 1,354 3,829
------- -------- ------- -------- ------ --------
Cash and equivalents, end of
year............................. $ -- $ 474 $ 1,392 $ -- $ -- $ 1,866
======= ======== ======= ======== ====== ========
</TABLE>
F-29
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Issuer/
Guarantor Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 36,196 $ 7,970 $ 4,622 $ (2,589) $ 46,199
Adjustments to reconcile net
income to net cash provided
by (used in) operations:
Depreciation and
amortization......................... 3,089 175 (11) 3,253
Deferred income taxes................. (1,202) (1,027) (2,229)
Other................................. 102 1,158 1,260
Increase (decrease) in cash:
Marketable securities................ (30,561) (30,561)
Accounts receivable.................. (3,273) (376) (3,649)
Inventories.......................... (772) (45) (817)
Prepaid expenses and other (516) (914) (16) (1,446)
Accounts payable and
accrued expenses.................... 922 (686) 359 595
Income taxes payable................. 21,241 (23,837) 290 (2,306)
Intercompany account................. (47,093) 47,421 (2,928) 2,600
Discontinued operations............... (49,915) (49,915)
-------- -------- ------- ------- --------
Net cash (used in) provided by
operating activities.................. (70,826) 29,129 2,081 (39,616)
-------- -------- ------- ------- --------
Cash flows from investing activities:
Net proceeds on sale of Syroco, Inc 133,931 133,931
Purchases of property, plant and
equipment............................. (2,559) (120) (2,679)
Other.................................. 61 61
-------- -------- ------- ------- --------
Net cash provided by (used in)
investing activities.................. 133,931 (2,498) (120) 131,313
-------- -------- ------- ------- --------
Cash flows from financing activities:
Change in revolving loan
facilities............................ (14,504) (14,504)
Repayment of borrowings................ (875) (875)
Other.................................. 249 60 309
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities.................. 249 (15,319) (15,070)
-------- -------- ------- ------- --------
Net increase in cash and
equivalents........................... 63,354 11,312 1,961 76,627
Cash and equivalents,
beginning of year..................... 474 1,392 1,866
-------- -------- ------- ------- --------
Cash and equivalents, end of
year.................................. $ 63,354 $ 11,786 $ 3,353 $ -- $ 78,493
======== ======== ======= ======= ========
</TABLE>
F-30
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Issuer/
Guarantor Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................. $ (662) $ 14,498 $ 5,859 $ 694 $ 20,389
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operations:
Depreciation and amortization................ 4,466 279 22 4,767
Deferred income taxes........................ 1,329 (4,085) (2,756)
Acquisition of Farberware assets............. (9,500) (9,500)
Disposal of Farberware assets................ 13,600 13,600
Farberware electrics license................. 500 500
Transfer of shares........................... 2,338 1,317 3,655
Other........................................ 78 1,542 5 1,625
Increase (decrease) in cash net of
effect of businesses acquired:
Marketable securities....................... 30,561 30,561
Accounts receivable......................... (18,129) (227) (18,356)
Inventories................................. (16,352) (754) (17,106)
Prepaid expenses and other.................. 516 (816) (171) (471)
Accounts payable and accrued
expenses................................... 49 (2,235) (684) (2,870)
Income taxes payable........................ (245) (1,979) 129 (2,095)
Intercompany account........................ 689 1,147 (122) (1,714)
Discontinued operations..................... 1,834 1,834
-------- -------- ------- ------- ---------
Net cash provided by (used in) operating
activities................................... 36,487 (16,026) 4,314 (998) 23,777
-------- -------- ------- ------- --------
Cash flows from investing activities:
Insurance claim proceeds...................... 23,771 23,771
Acquisitions of businesses net of cash
acquired..................................... (48,540) (998) 998 (48,540)
Purchases of property, plant and
equipment.................................... (13,643) (1,482) (15,125)
Other......................................... (130) 10 (120)
-------- -------- ------- ------- --------
Net cash used in investing activities......... (48,540) 9,998 (2,470) 998 (40,014)
-------- -------- ------- ------- --------
Cash flows from financing activities:
Change in revolving loan facilities........... (51,735) (5,296) (2,044) (59,075)
Repayment of borrowings....................... (300) (300)
Other......................................... 452 (16) (8) 428
-------- -------- ------- ------- --------
Net cash used in financing activities......... (51,283) (5,612) (2,052) (58,947)
-------- -------- ------- ------- --------
Effect of exchange rate changes on cash
and equivalents.............................. 296 296
Net increase (decrease) in cash and
equivalents.................................. (63,336) (11,640) 88 (74,888)
Cash and equivalents, beginning of year....... 63,354 11,786 3,353 (78,493)
-------- -------- ------- ------- --------
Cash and equivalents, end of year............. $ 18 $ 146 $ 3,441 $ -- $ 3,605
======== ======== ======= ======= ========
</TABLE>
F-31
<PAGE>
================================================================================
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the Offering covered by this Prospectus, and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Company or the Underwriters. This Prospectus
does not constitute an offer to sell, or the solicitation of an offer to buy
the securities in any jurisdiction where, or any person to whom, it is unlawful
to make such offer for solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create an
implication that there has been a change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof.
----------------------------------
TABLE OF CONTENTS
Page
------
Prospectus Summary................................. 4
Risk Factors....................................... 13
The Recapitalization............................... 18
Use of Proceeds.................................... 20
Capitalization..................................... 21
Pro Forma Condensed Consolidated
Financial Statements.............................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 29
Business........................................... 34
Management......................................... 46
Security Ownership of Certain
Beneficial Owners and Management.................. 51
Certain Transactions............................... 52
Description of Senior Notes........................ 54
Description of Other Indebtedness.................. 72
Description of Cumulative Redeemable
Preferred Stock................................... 73
Underwriting....................................... 74
Legal Matters...................................... 75
Experts............................................ 75
Available Information.............................. 75
Index to Financial Statements...................... F-1
================================================================================
[LOGOTYPE]
SYRATECH(TM)
------------
CORPORATION
$165,000,000
11% Senior Notes due 2007
--------------------------------------
PROSPECTUS
--------------------------------------
NationsBanc Capital Markets, Inc.
Chase Securities Inc.
April 10, 1997
