<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission File Number: 1-12624
-------
SYRATECH CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3354944
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
175 MCCLELLAN HIGHWAY
EAST BOSTON, MASSACHUSETTS 02128-9114
- ---------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code - 617-561-2200
------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Number of Shares of Common Stock, Par Value $0.01 per share, outstanding at
September 30, 1996-8,676,631.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 1
Condensed Consolidated Income Statements for the three and
nine months periods ended September 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE> 3
PART I - FINANCIAL INFORMATION
SYRATECH CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents .......................................... $ 9,532 $ 78,493
Marketable securities ......................................... 30,561
Accounts receivable, net ...................................... 117,199 31,893
Inventories ................................................... 105,297 41,151
Deferred income taxes ......................................... 8,193 5,105
Prepaid expenses and other .................................... 1,737 1,602
Net assets of discontinued operations ......................... 105 1,834
-------- --------
Total current assets ...................................... 242,063 190,639
Property, plant and equipment, net ............................... 60,831 29,560
Purchase price in excess of net assets acquired .................. 6,994
Other assets ..................................................... 461 367
-------- --------
Total ..................................................... $310,349 $220,566
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities and notes payable ................... $ 82,155 $ 51,735
Accounts payable .............................................. 16,586 6,438
Accrued expenses .............................................. 14,392 4,436
Accrued compensation .......................................... 3,256 2,478
Accrued advertising ........................................... 4,779 1,991
Income taxes payable .......................................... 2,209 1,511
-------- --------
Total current liabilities ................................. 123,377 68,589
Deferred income taxes ............................................ 18,795 3,657
Deferred compensation ............................................ 2,668 1,724
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.10 par value, 500,000 shares
authorized; no shares issued or outstanding
(135,000 shares designated Series A Preferred Stock)
Common stock, $.01 par value, 20,000,000 shares
authorized; 8,676,631 and 8,667,249 shares issued in
1996 and 1995, respectively ................................. 87 87
Additional paid-in capital .................................... 9,835 9,699
Retained earnings ............................................. 155,447 136,728
Cumulative translation adjustment ............................. 143 85
Less: Treasury stock; 218 shares, at cost ..................... (3) (3)
-------- --------
Total stockholders' equity ................................ 165,509 146,596
-------- --------
Total ..................................................... $310,349 $220,566
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
SYRATECH CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................................ $112,869 $62,350 $182,727 $118,619
Cost of sales ........................................ 79,671 44,875 130,303 85,294
-------- ------- -------- --------
Gross profit .................................... 33,198 17,475 52,424 33,325
Selling, general and administrative expenses ......... 18,406 9,738 39,161 24,004
Other operating income ............................... 1,635 5,057
-------- ------- -------- --------
Income from operations .......................... 16,427 7,737 18,320 9,321
Interest expense ..................................... (1,090) (70) (2,083) (212)
Interest income ...................................... 58 1,709 662 3,414
Other income ......................................... 11,900
-------- ------- -------- --------
Income before provision for income taxes ........ 15,395 9,376 28,799 12,523
Provision for income taxes ........................... 5,389 3,235 10,080 4,289
-------- ------- -------- --------
Income from continuing operations ............... 10,006 6,141 18,719 8,234
Discontinued operations:
Income from discontinued operations
of Syroco, Inc., net of income taxes of
$1,645 ......................................... 2,572
Gain on sale of Syroco, Inc net of
income taxes of $16,599 ........................ 30,451
-------- ------- -------- --------
Net income ...................................... $ 10,006 $ 6,141 $ 18,719 $ 41,257
======== ======= ======== ========
Earnings per share:
Continuing operations ............................. $ 1.14 $ 0.52 $ 2.13 $ 0.70
Discontinued operations ........................... 2.79
-------- ------- -------- --------
Net income ...................................... $ 1.14 $ 0.52 $ 2.13 $ 3.49
======== ======= ======== ========
Weighted average common and common
equivalent shares outstanding ..................... 8,770 11,803 8,781 11,814
======== ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
SYRATECH CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 18,719 $ 41,257
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Depreciation and amortization ................................... 3,424 2,426
Deferred income taxes ........................................... (920) (1,065)
Acquisition of Farberware assets ................................ (9,500)
Disposal of Farberware assets ................................... 13,600
Other ........................................................... 1,480 569
Increase (decrease) in cash, net of effect of businesses
acquired:
Marketable securities ....................................... 30,561
Accounts receivable ......................................... (75,604) (10,351)
Inventories ................................................. (41,222) (8,613)
Prepaid expenses and other .................................. 848 (1,086)
Accounts payable and accrued expenses ....................... 7,488 3,705
Income taxes payable ........................................ (967) 1,125
Discontinued operations ......................................... 1,729 (49,460)
-------- --------
Net cash used in operations ........................................ (50,364) (21,493)
-------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired .................. (48,540)
Insurance claim proceeds ........................................... 23,771
Net proceeds on sale of Syroco, Inc. ............................... 133,931
Purchases of property, plant and equipment ......................... (10,161) (1,645)
Other .............................................................. 4 209
-------- --------
Net cash (used in) provided by investing activities ................ (34,926) 132,495
-------- --------
Cash flows from financing activities:
Change in revolving loan facilities ................................ 16,537 (14,349)
Repayment of borrowings ............................................ (300) (875)
Other .............................................................. 92 (26)
-------- --------
Net cash provided by (used in) financing activities ................ 16,329 (15,250)
-------- --------
Net (decrease) increase in cash and equivalents .................... (68,961) 95,752
Cash and equivalents, beginning of period .......................... 78,493 1,866
-------- --------
Cash and equivalents, end of period ................................ $ 9,532 $ 97,618
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
1. FINANCIAL INFORMATION
The accompanying unaudited interim condensed consolidated financial
statements of Syratech Corporation and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1995
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments, which consist only of normal and recurring
adjustments, necessary for a fair presentation of the interim periods. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
<TABLE>
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
------- -------
<S> <C> <C>
Cash paid during the period for:
Interest.............................. $ 1,126 $ 212
------- -------
Income taxes.......................... $11,634 $22,757
------- -------
</TABLE>
3. ACQUISITION OF PRODUCT LINES
On February 15, 1996, the Company, through an indirect wholly owned
subsidiary, acquired the outstanding shares of Rauch Industries, Inc. ("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. 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 ($20,468 in the three months ended September 30, 1996) in connection
with an insurance claim relating to a 1994 fire at Rauch.
4
<PAGE> 7
3. ACQUISITION OF PRODUCT LINES (CONTINUED)
<TABLE>
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1995.
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
--------------------- ------------
1996 1995 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales ............................... $183,336 $151,459 $228,439
-------- -------- --------
Income from continuing operations ....... $ 18,059 $ 4,791 $ 10,404
-------- -------- --------
Net income .............................. $ 18,059 $ 37,814 $ 43,407
-------- -------- --------
Earnings per share:
Continuing operations ................ $ 2.06 $ 0.41 $ 0.88
-------- -------- --------
Net income ........................... $ 2.06 $ 3.20 $ 3.67
-------- -------- --------
</TABLE>
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. ("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. The amount of the
adjustment is being disputed; approximately $2,500 is at issue, of which
approximately $2,300 relates to inventory acquired by the Company. 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. The
consideration paid by Far-B was approximately $32,611, subject to adjustment,
the amount of which is, as noted above, being disputed. 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 existing inventory, the Company will not manufacture or
sell Farberware cookware and bakeware products or noncommercial electric
products. Accordingly, net sales for the nine months ended September 30, 1996
exclude sales of Farberware inventory, and $5,057, net of certain selling,
general and administrative expenses, from these sales has been recorded as other
operating income.
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.
5
<PAGE> 8
3. ACQUISITIONS OF PRODUCT LINES (CONTINUED)
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. 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 Inc. 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.
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 21,
1996 in the amount of $4,000 to CIT Group/Business Credit, Inc. to secure the
Company's aforesaid guaranty.
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.
<TABLE>
4. INVENTORIES
Inventories consisted of the following:
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw material ........................... $ 12,035 $ 3,908
Work-in-process ........................ 7,683 1,744
Finished goods ......................... 85,579 35,499
-------- -------
Total ............................. $105,297 $41,151
======== =======
</TABLE>
5. INCOME TAXES
The provision for income tax expense for the nine month period ended
September 30, 1996 has been computed using an estimated effective tax rate for
the year ended December 31, 1996.
6
<PAGE> 9
6. NOTES PAYABLE
The Company's Amended and Restated Loan and Security Agreement (the "Company
Loan Agreement") provides for maximum permitted borrowings of $60,000, an
interest rate at the bank's prime rate less .25% (8.25% at December 31, 1995),
and an option to borrow at 1.5% over the Eurodollar rate (7.15625%, 30 day
Eurodollar rate, at December 31, 1995). The weighted average interest rate on
borrowings outstanding under this facility for the year ended December 31, 1995
was 8.32%. The Company Loan Agreement expires on November 30, 1997. At December
31, 1995, there were no borrowings outstanding under the Company Loan Agreement,
and at September 30, 1996, $45,399 was outstanding. The credit availability (net
of letters of credit outstanding) under this agreement was $53,808 at December
31, 1995. Borrowings are collateralized by substantially all of the assets of
the Company and its subsidiaries with the exception of Rauch, Farberware,
Silvestri and C. J. Vander. The Company Loan Agreement restricts the payment of
cash dividends to 33-1/3% 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 and C.J. Vander
acquisitions. At December 31, 1995, the Company had $15,400 of unrestricted
retained earnings available for payment of cash dividends.
As a result of the Rauch acquisition, the Company assumed the borrowings of
Rauch (the "Rauch Loan"). The Rauch Loan is from the same lender as the Company
Loan Agreement. During 1996, the Rauch Loan was modified to permit the
continuation of the Rauch Loan under the company Loan Agreement. The Rauch Loan
allowed long-term borrowings up to $12,800 and short-term borrowings up to
$40,000. On September 30, 1996, there was $34,875 outstanding under the Rauch
Loan. Effective October 31, 1996, the Company and the lender entered into an
agreement that extended certain modifications previously agreed upon by the
lender, added Rauch, Farberware and Silvestri as borrowers and limited total
borrowings, including amounts reserved for drawings on letters of credit, to
$100,000 through December 31, 1996 and thereafter 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 8). The
Rauch long-term loan was paid on October 31, 1996.
In July 1996, the interest rate on the Company Loan Agreement and the Rauch
Loan was set at the bank's prime rate less .75% and borrowings under the
Eurodollar rate option was set at 1.0% over the Eurodollar rate.
One of Wallace's Puerto Rican subsidiaries has a revolving credit facility
(the "Facility") which provides for borrowings up to a maximum of $4,000.
Interest on borrowings is charged at the bank's prime rate (8.50% at December
31, 1995). The weighted average interest rate on borrowings outstanding under
this Facility for the year ended December 31, 1995 was 8.33%. There were no
borrowings outstanding under the Facility at December 31, 1995. At September 30,
1996, $1,881 was outstanding under the Facility. The credit availability under
the Facility was $4,000 at December 31, 1995. 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. The Facility expired
on May 30, 1996; however, the Company received a letter of commitment increasing
the line from $4,000 to $10,000, lowering the interest rate to the bank's prime
rate minus .30% or the Eurodollar rate plus 1.70% and extending it to May 31,
1997. As of September 30, 1996, the Company was negotiating the final details of
the line of credit. 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 $10,000 and renewing it to May 31, 1997.
7
<PAGE> 10
At September 30, 1996, the Company had $16,687 of credit availability, net of
$16,758 of letters of credit outstanding, under the Company's revolving credit
facilities.
7. ADOPTION OF NEW 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 1996. 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 nine months ended September 30, 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 nine months ended
September 30, 1996.
8. SUBSEQUENT EVENT
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 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 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, assuming shareholders were to exercise their
option to retain stock in full, the Company would have, as of September 30,
1996, outstanding debt of approximately $262,500. If shareholders do not
exercise their option to retain stock, the Company would have outstanding debt
of approximately $287,500. The transaction is expected to close in the first
quarter of 1997. It is intended that the transaction will be accounted for as a
recapitalization.
8
<PAGE> 11
SYRATECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Some of the information presented in this Management's Discussion and
Analysis of Financial Condition and Results of Operations constitutes forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause actual results to
differ from expectations include the timing of orders received from customers,
the gain or loss of significant customers, changes in the mix of products sold,
competition from other manufacturers or distributors, seasonal changes in the
demand for the Company's products, increases in the cost of raw materials and
changes in the retail market for tabletop, giftware and seasonal products in
general. For additional information concerning these and other important factors
that may cause the Company's actual results to differ materially from
expectations and underlying assumptions, please refer to the reports filed by
the Company with the Securities and Exchange Commission.
RECENT TRANSACTIONS
Rauch Industries, Inc.
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 1996, the Company
received $23.8 million ($20.5 million in the third quarter of 1996) 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
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. 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 $45.8 million, subject to adjustment. The amount
of the adjustment is being disputed; approximately $2.5 million is at issue, of
which approximately $2.3 million relates to inventory acquired by the Company.
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. The consideration paid by Far-B was approximately $32.6 million,
subject to adjustment, the amount of which is, as noted above, being disputed.
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
9
<PAGE> 12
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.
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.
Upon disposal of the existing inventory, the Company will not manufacture or
sell Farberware cookware and bakeware products or noncommercial electric
products. Accordingly, net sales for the nine months ended September 30, 1996
exclude sales of Farberware inventory, and $5.1 million, net of certain selling,
general and administrative expenses, from these sales has been recorded as other
operating income.
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 $25.5 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 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 Inc. 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.
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 Corporation 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.
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.
10
<PAGE> 13
Syroco
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 $133.9 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 these assets or the ultimate resolution of the reassumed liabilities 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, 1994 and 1995 and at September 30, 1996. The results of operations
for the discontinued segment are included in discontinued operations in the
Consolidated Income Statements and Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995
and 1996.
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 pursuant to which THL Transaction I Corp. will be
merged into the Company. Pursuant to the transaction, stockholders of the
Company will receive $32 in cash per share or may elect to receive a portion of
their consideration by retaining stock of the surviving entity.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
Net sales increased 81.0% to $112.9 million for the three months ended
September 30, 1996 from $62.4 million for the three months ended September 30,
1995. Excluding the impact of acquisitions of businesses and product line
completed in 1996, net sales increased 11.0%. This increase reflects primarily
increased sales volume of the Company's sterling silver flatware and certain
tabletop and giftware.
Gross profit increased 90.0% to $33.2 million for the three months ended
September 30, 1996 from $17.5 million for the three months ended September 30,
1995. Gross profit as a percentage of sales was 29.4% for the three months ended
September 30, 1996 compared to 28.0% for the three months ended September 30,
1995. The increase in the gross profit percentage was primarily a result of the
acquisition of the high end Silvestri seasonal product line and improved gross
profit margin on the Company's giftware product line.
Selling, general and administrative expenses increased to 16.3% as a
percentage of net sales or $18.4 million for the three months ended September
30, 1996 from 15.6% or $9.7 million for the comparable period of 1995. The
increase in selling, general and administrative expenses is due primarily to
inclusion of selling, general and administrative expenses of Rauch, Silvestri
and C.J. Vander; selling, general and administrative expenses related to the
disposal of Farberware inventory and increased costs related to the growth in
sales volume including personnel related costs and royalties.
Income from operations increased 112.3% to $16.4 million from $7.7 million in
the three months ended September 30, 1995. Included in income from operations
for the three months ended September 30, 1996 was income of $1.6 million, net of
certain selling, general and administrative expenses, from the disposal of
Farberware inventory. The Company expects the disposal of the Farberware
inventory to continue for the remainder of 1996 and into 1997.
Interest expense, net, was $1.0 million for the three months ended September
30, 1996 compared to net interest income of $1.6 million for the three months
ended September 30, 1995. This change resulted
11
<PAGE> 14
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 seasonal working
capital needs.
The provision for income taxes was $5.4 million for the three months ended
September 30, 1996 compared to $3.2 million for the three months ended September
30, 1995. The effective tax rate was 35.0% for the three months ended September
30, 1996, compared to 34.5% for the comparable three months of 1995. The
increase in the effective income tax rate in 1996 is due to the higher
proportion of income earned in tax jurisdictions with higher income tax rates.
Net income for the three months ended September 30, 1996 was $10.0 million or
$1.14 per share on 8,770,000 shares compared to net income of $6.1 million or
$0.52 per share on 11,803,000 shares for the same period last year.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales increased 54.0% to $182.7 million for the nine months ended
September 30, 1996 from $118.6 million for the nine months ended September 30,
1995. Excluding the impact of acquisitions completed in 1996, net sales
increased 9.5%. This increase reflects primarily increased sales of the
Company's sterling silver flatware and certain tabletop and giftware.
Gross profit increased 57.3% to $52.4 million for the nine months ended
September 30, 1996 from $33.3 million for the nine months ended September 30,
1995. Gross profit as a percentage of sales was 28.7% for the nine months ended
September 30, 1996 compared to 28.1% for the nine months ended September 30,
1995. The increase in the gross profit percentage was primarily a result of the
acquisition of the Silvestri product line and improved gross profit margin on
the Company's giftware product line. The Company expects pressure on its gross
profit percentage during 1996 (and possibly thereafter) due to the acquisition
of Rauch, which historically has had gross profit margins that have been lower
than those of certain other product lines.
Selling, general and administrative expenses increased to 21.4% as a
percentage of net sales or $39.2 million for the nine months ended September 30,
1996 from 20.2% or $24.0 million for the comparable period of 1995. The increase
in selling, general and administrative expenses is due primarily to inclusion of
selling, general and administrative expenses of Rauch and Silvestri; selling,
general and administrative expenses related to the disposal of Farberware
inventory and increased costs related to the growth in sales volume including
personnel related costs, royalties and product and systems development costs.
Income from operations increased 96.5% to $18.3 million from $9.3 million in
the nine months ended September 30, 1995. Included in income from operations for
the nine months ended September 30, 1996 was income of $5.1 million, net of
certain selling, general and administrative expenses, from the disposal of
Farberware inventory. The Company expects the disposal of the Farberware
inventory to continue for the remainder of 1996 and into 1997.
Interest expense, net, was $1.4 million for the nine months ended September
30, 1996 compared to net interest income of $3.2 million for the nine months
ended September 30, 1995. This change resulted 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 seasonal working capital needs.
The provision for income taxes was $10.1 million for the nine months ended
September 30, 1996 compared to $4.3 million for the nine months ended September
30, 1995. The effective tax rate was 35.0% for the nine months ended September
30, 1996, compared to 34.2% for the comparable nine months of 1995. The increase
in the effective income tax rate in 1996 is due to the higher proportion of
income earned in tax jurisdictions with higher income tax rates.
Net income for the nine months ended September 30, 1996, all of which was
from continuing operations, was $18.7 million or $2.13 per share compared to
income from continuing operations of $8.2 million or $0.70 per share for the
same period last year. The nine months ended September 30, 1996
12
<PAGE> 15
included non-recurring pre-tax income of $11.9 million, net of costs, resulting
from a license agreement. Net income for the nine months ended September 30,
1995 was $41.3 million or $3.49 per share. The nine months of 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.
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 1996. 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 nine months ended September 30, 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 nine months ended
September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
On March 28, 1995, the Company sold its casual furniture and accessories
business 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 used in operating activities for the nine months ended September 30,
1996 was approximately $50.4 million. The primary uses of cash were seasonal and
acquisition related increases in accounts receivable and inventories. Partially
offsetting these uses was the decrease in marketable securities as a result of
the repayment of temporary borrowings used to effect the Katy Stock Repurchase.
At September 30, 1996, accounts receivable increased to $117.2 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 $105.3 million at
September 30, 1996 is due to recent acquisitions, including purchased Farberware
inventory, and to a seasonal increase in the Company's inventory in anticipation
of the fourth quarter selling season. 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.
Capital expenditures were approximately $10.2 million for the nine months
ended September 30, 1996. These expenditures were primarily for a warehouse in
South Carolina, computer software and hardware, improvements at the Company's
East Boston facility and machinery, tools and dies for the Company's
manufacturing facilities.
The Company expects capital expenditures for the year ended December 31, 1996
to be approximately $18 million, including preliminary construction costs for a
warehouse facility on the West Coast, the cost of certain machinery and
equipment for Rauch and for a building and equipment for C.J. Vander.
13
<PAGE> 16
As a result of the Rauch acquisition, the Company assumed the borrowings of
Rauch (the "Rauch Loan"). The Rauch Loan is from the same lender as the Company
Loan Agreement. During 1996, the Rauch Loan was modified to permit the
continuation of the Rauch Loan under the company Loan Agreement. The Rauch Loan
allowed long-term borrowings up to $12.8 million and short-term borrowings up to
$40.0 million. On September 30, 1996, there was $34.9 million outstanding under
the Rauch Loan. Effective October 31, 1996, the Company and the lender entered
into an agreement that extended certain modifications previously agreed upon by
the lender, added 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 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. The
Rauch long-term loan was paid on October 31, 1996.
In July 1996, the interest rate on the Company Loan Agreement and the Rauch
Loan was set at the bank's prime rate less .75% and borrowings under the
Eurodollar rate option was set at 1.0% over the Eurodollar rate.
The revolving credit facility of one of the Company's Puerto Rican
subsidiaries expired on May 31, 1996. The Company has received a letter of
commitment increasing the line from $4.0 million to $10.0 million and extending
it to May 31, 1997. As of September 30, 1996, the Company was negotiating the
final details of the line of credit. 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 million and renewing it to May 31,
1997.As of September 30, 1996, the amount of outstanding borrowings under the
line was $1.9 million.
On September 30, 1996, borrowings and credit availability, net of $16.8
million outstanding letters of credit under the Company Loan Agreement, the
Rauch Loan and the Puerto Rican subsidiary's line totaled $82.2 million and
$16.7 million, respectively.
Upon consummation of the Merger (see "Agreement and Plan of Merger" above),
assuming shareholders were to exercise their option to retain stock in full, the
Company would have, as of September 30, 1996 outstanding debt of approximately
$262.5 million. If shareholders do not exercise their option to retain stock,
the company would have outstanding debt of $287.5 million The transaction is
expected to close in the first quarter of 1997. It is intended that the
transaction will be accounted for as a recapitalization.
The Company believes that funds generated from operations and borrowings
available under existing revolving loan facilities will be sufficient to finance
the Company's working capital requirements, provide for all known obligations of
the Company (including the obligations of the Company under its operating
leases) and fund planned capital expenditures until the completion of the
refinancing contemplated with respect to the Agreement and Plan of Merger with
THL Transaction I Corp.
14
<PAGE> 17
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits:
EX-11 Computation of Net Income per Common Share.
EX-27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only and
not filed.
(b) Current Reports on Form 8-K:
A current report on Form 8-K, reporting event dated July 25, 1996,
which described the amendments to the Employment Agreements of Alan R.
Kanter and E. Merle Randolph and that the Company entered into a
Retirement Benefit Agreement with Faye A. Florence.
Report on Form 8-K/A dated August 26, 1996 amending current report on
Form 8-K dated April 2, 1996.
A current report on Form 8-K, reporting event dated October 23, 1996,
which described the Agreement and Plan of Merger with THL Transaction I
Corp.
A current report on Form 8-K, reporting events, dated November 8, 1996,
which described (i) an amendment to, and the termination of, the
Company's Rights Agreement dated October 26, 1992 and (ii) the
redemption of the Rights issued thereunder.
15
<PAGE> 18
SYRATECH CORPORATION AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Syratech Corporation
Dated: November 13, 1996
/s/ E. Merle Randolph
----------------------------------------
E. Merle Randolph
Vice President, Treasurer, and
Chief Financial and Accounting Officer
16
<PAGE> 1
EX-11
SYRATECH CORPORATION AND SUBSIDIARIES
<TABLE>
COMPUTATION OF NET INCOME PER COMMON SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Common stock ..................................... 8,676 11,720 8,676 11,720
Common equivalent shares resulting from
stock options (treasury stock method) ....... 94 83 196 94
------- ------- ------- -------
Total .............................. 8,770 11,803 8,872 11,814
======= ======= ======= =======
Income from continuing operations ................ $10,006 $ 6,141 $18,719 $ 8,234
Income from discontinued operations .............. 0 33,023
------- ------- ------- -------
Net income ................................... $10,006 $ 6,141 $18,719 $41,257
======= ======= ======= =======
Net Income Per Common Share:
Income from continuing operations ................ $ 1.14 $ 0.52 $ 2.13 $ 0.70
Income from discontinued operations .............. 2.79
------- ------- ------- -------
Net income ................................... $ 1.14 $ 0.52 $ 2.13 $ 3.49
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE SYRATECH
CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME AS FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,532
<SECURITIES> 0
<RECEIVABLES> 124,113
<ALLOWANCES> 6,914
<INVENTORY> 105,297
<CURRENT-ASSETS> 242,063
<PP&E> 92,171
<DEPRECIATION> 31,340
<TOTAL-ASSETS> 310,349
<CURRENT-LIABILITIES> 123,377
<BONDS> 0
<COMMON> 87
0
0
<OTHER-SE> 165,422
<TOTAL-LIABILITY-AND-EQUITY> 310,349
<SALES> 112,869
<TOTAL-REVENUES> 112,869
<CGS> 79,671
<TOTAL-COSTS> 79,671
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,090
<INCOME-PRETAX> 15,395
<INCOME-TAX> 5,389
<INCOME-CONTINUING> 10,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,006
<EPS-PRIMARY> $1.14
<EPS-DILUTED> $1.14
</TABLE>
