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, 1997
[ ] 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
175 McClellan Highway
East Boston, Massachusetts 02128-9114
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(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, 1997 - 3,784,018
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 1
Condensed Consolidated Income Statements for the three
and nine month periods ended September 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows for the
three and nine month periods ended September 30, 1997
and 1996 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 13
Signature 14
<PAGE>
PART I - FINANCIAL INFORMATION
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ........................................................... $ 498 $ 3,605
Accounts receivable, net ....................................................... 100,918 60,020
Inventories .................................................................... 107,692 79,355
Deferred income taxes .......................................................... 9,505 8,940
Prepaid expenses and other ..................................................... 3,471 3,803
----------- -----------
Total current assets ....................................................... 222,084 155,723
Property, plant and equipment, net ................................................ 73,316 63,955
Purchase price in excess of net assets acquired ................................... 6,851 7,032
Deferred financing costs .......................................................... 10,150
Other assets ...................................................................... 324 544
----------- -----------
Total ...................................................................... $ 312,725 $ 227,254
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan facilities ...................................................... $ 57,268 $ 6,636
Accounts payable................................................................ 18,949 9,689
Accrued expenses................................................................ 6,589 10,791
Accrued interest ............................................................... 8,716 258
Accrued compensation............................................................ 3,205 4,228
Accrued advertising............................................................. 3,176 3,273
Income taxes payable............................................................ -- 930
----------- -----------
Total current liabilities .................................................. 97,903 35,805
Long-term debt .................................................................... 165,000
Deferred income taxes ............................................................. 20,299 17,706
Pension liability and other long-term liabilities.................................. 3,620 3,495
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized; (25,000
designated as cumulative redeemable preferred stock,
18,000 shares issued and outstanding, liquidation value of $18,000,
and includes accrued and unpaid dividends of $990) .......................... 18,990
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,784,018 and 8,695,449 shares issued in
1997 and 1996, respectively................................................... 38 87
Additional paid-in capital ..................................................... 12,480
Retained earnings .............................................................. 6,677 157,117
Cumulative translation adjustment .............................................. 198 567
Less: Treasury stock; 218 shares, at cost ...................................... (3)
----------- -----------
Total stockholders' equity ................................................. 25,903 170,248
----------- -----------
Total ...................................................................... $ 312,725 $ 227,254
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .............................................. $ 109,044 $ 112,869 $ 194,098 $ 182,727
Cost of sales .......................................... 76,861 79,671 137,939 130,303
----------- ------------ ------------ ------------
Gross profit ...................................... 32,183 33,198 56,159 52,424
Selling, general and administrative expenses ........... 18,855 18,406 51,596 (1) 39,161
Other operating income ................................. 162 (2) 1,635 (2) 1,998 (2) 5,057 (2)
----------- ------------ ------------ -----------
Income from operations ............................ 13,490 16,427 6,561 18,320
Interest expense ....................................... (5,849) (1,090) (10,160) (2,083)
Interest income ........................................ 13 58 215 662
Other income ........................................... -- -- 2,184 (3) 11,900 (3)
----------- ------------ ------------ ------------
Income /(loss) before provision
for income taxes ................................. 7,654 15,395 (1,200) 28,799
Provision for income taxes ............................. 5,180 5,389 1,860 10,080
----------- ------------ ------------ ------------
Net income/(loss) ................................. 2,474 10,006 (3,060) 18,719
Preferred stock dividends accrued ...................... 540 -- 990 --
----------- ------------ ------------ ------------
Net income /(loss) applicable to common stockholders ... $ 1,934 $ 10,006 $ (4,050) $ 18,719
=========== ============ ============ ============
Income/(loss) per common share.......................... $ 0.51 $ 1.14 $ (0.71) $ 2.13
=========== ============ ============ ============
Weighted average common and common
equivalent shares outstanding ....................... 3,784 8,770 5,693 8,781
=========== ============ ============ ============
</TABLE>
(1) Includes a $3,873 charge for compensation expense relating to stock options
as a result of the Merger (see Note 3).
(2) Represents income from disposal of Farberware inventory and income from
royalties.
(3) In 1997, represents income from the sale of equipment associated with the
Farberware settlement and in 1996 represents non-recurring income related
to the one-time licensing fee for the Farberware name on cookware and
bakeware.
See notes to condensed consolidated financial statements.
2
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------
1997 1996
---------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) .................................................... $ (3,060) $ 18,719
Adjustments to reconcile net income/ (loss) to net
cash provided by operations:
Depreciation and amortization ..................................... 4,457 3,424
Deferred income taxes ............................................. 2,028 (920)
Acquisition of Farberware assets .................................. (9,500)
Net proceeds on disposal of Farberware assets ..................... 13,600
Compensation related to stock options ............................. 207 58
Other ............................................................. 358 1,422
Increase (decrease) in cash, net of effect of businesses acquired:
Marketable securities ......................................... 30,561
Accounts receivable ........................................... (40,898) (75,604)
Inventories ................................................... (28,337) (41,222)
Prepaid expenses and other .................................... 332 848
Accounts payable and accrued expenses ......................... 12,191 7,488
Income taxes payable .......................................... (930) (967)
Discontinued operations ........................................... 1,729
-------------- -------------
Net cash used in operations .......................................... (53,652) (50,364)
-------------- -------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired ...................... (48,540)
Insurance claim proceeds ............................................. 23,771
Purchases of property, plant and equipment, including
construction in progress .......................................... (12,971) (10,161)
Other ................................................................ 81 4
-------------- -------------
Net cash used in investing activities ................................ (12,890) (34,926)
-------------- -------------
Cash flows from financing activities:
Change in revolving loan facilities .................................. 50,632 16,537
Proceeds from borrowings ............................................. 165,000
Repayment of borrowings .............................................. (300)
Recapitalization ..................................................... (152,035)
Proceeds from exercise of stock options .............................. 112 78
Other ................................................................ (274) 14
-------------- -------------
Net cash provided by financing activities............................. 63,435 16,329
-------------- -------------
Net decrease in cash and equivalents ................................. (3,107) (68,961)
Cash and equivalents, beginning of period ............................ 3,605 78,493
-------------- -------------
Cash and equivalents, end of period................................... $ 498 $ 9,532
============== =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share and per share data)
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 normally included in consolidated
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 1996 Annual Report on
Form 10-K.
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 to be expected for the full year.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Nine Months Ended September 30,
1997 1996
---- ----
Cash paid during the period for:
Interest................................ $ 1,271 $ 1,126
=========== ===========
Income taxes............................ $ 797 $ 11,634
=========== ===========
Supplemental schedule of non-cash financing activities:
Accrued cumulative redeemable
preferred stock dividends $ 990
==========
3. AGREEMENT AND PLAN OF MERGER
On April 16, 1997, THL Transaction I Corp., ("THL I"), a Delaware
corporation, controlled by affiliates of Thomas H. Lee Company ("Lee
Affiliates"), was merged with and into the Company (the "Merger") pursuant to
the Restated Agreement and Plan of Merger, dated as of November 27, 1996,
effective as of October 23, 1996, as amended on February 14, 1997, between THL I
and the Company.
Pursuant to the Merger, each share of the Company's Common Stock, par value
$0.01 per share ("Common Stock") issued and outstanding immediately prior to the
effective time of the Merger (the "Effective Time") (April 16, 1997) (other than
(i) shares of Common stock held by the Company or any wholly-owned subsidiary
thereof, and (ii) 35,232 shares of Common Stock that were contributed to the
Company by Leonard Florence (former principal shareholder) upon the Merger and
which were then canceled and retired) was entitled to receive at the election of
the holder thereof and as stated below, either (a) $32.00 in cash (except that
Leonard Florence received $28.00 in cash) or (b) one fully paid and
non-assessable share of the Company's Common Stock. Common Stock retained was
limited in the case of each stockholder (other than Management Stockholders) to
34.75% of such stockholder's shares of Common Stock. Also, because no more than
an aggregate of 868,250 shares of the Company's Common Stock could be retained
by stockholders (other than Management Stockholders), the right to retain the
Company's Common Stock was to be subject to proration. In addition, each Company
Stock Option granted under the 1986 and 1993 Stock Plans that were outstanding
immediately prior to the Effective Time, vested and was canceled in exchange for
the excess in cash of $32.00 over the exercise price per share of the Company's
Common Stock. The aggregate amount paid to optionees was $3,685, which was
charged to compensation expense.
Upon the Merger, the Lee Affiliates acquired, directly from the Company, an
aggregate of 18,000 shares
4
<PAGE>
which represented 100% of the Company's 12% Cumulative Redeemable Preferred
Stock and 2,374,793 shares which represented 62.8 % of the Company's Common
Stock, in exchange for corresponding stock interests in THL I, for which the Lee
Affiliates had paid an aggregate of $93,993 in cash. Accordingly, the Lee
Affiliates acquired control of the Company.
At the Effective Time, the Company entered into debt financing arrangements
consisting of $165,000 principal amount of 11% Senior Notes (the "Notes") and a
Senior Revolving Credit Facility of $130,000 (the "Revolving Credit Facility").
The amount invested by the Lee Affiliates in THL I, the purchase price for the
Cumulative Redeemable Preferred Stock, plus proceeds of the Notes and a portion
of the proceeds available pursuant to the Revolving Credit Facility were used to
finance the acquisition of the shares of the Company's outstanding Common Stock
that were not retained by the Company's then existing stockholders, and to
refinance the Company's outstanding indebtedness. The Revolving Credit Facility
is also intended to provide for the Company's working capital requirements at
the time of and following the Merger.
The liquidation preference of the Cumulative Redeemable Preferred Stock is
$1,000 per share plus accrued but 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. The rights of holders of the Cumulative Redeemable Preferred
Stock upon liquidation of the Company rank prior to those of the holders of
Common Stock.
Dividends on shares of Cumulative Redeemable Preferred Stock are cumulative
from the date of issue and are payable when and as declared from time to time by
the Board of Directors of the Company. Such dividends 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. At September 30, 1997, $990 has been accrued.
The Cumulative Redeemable Preferred Stock is 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.
In connection with the Merger, the Company entered into a management
agreement with Thomas H. Lee Company for which the Company pays an annual
management fee in the amount of $450, ($208 expensed for the nine months ended
September 30, 1997).
The transaction was accounted for as a recapitalization.
5
<PAGE>
The sources and uses of funds in connection with the Merger were as follows:
Sources of Funds:
11% Senior notes proceeds $165,000
Cash from exercise of employee stock options (1) 2,763
Equity contribution:
THL:
Cumulative redeemable preferred stock (1) 18,000
Common stock (1) 75,993
Retained by non-management stockholders (1) 24,224
Retained by management (1), (2) 20,872
--------
Total Sources $306,852
========
Uses of Funds:
Merger consideration (1), (3) $275,251
Repayment of existing debt 7,617
Fees and expenses (1), (4) 22,321
Increase in available cash 1,663
--------
Total Uses $306,852
========
(1) The Recapitalization results in a $144,920 charge to stockholders' equity,
net of capitalized costs of $10,800.
(2) Subsequent to the Merger, the former principal shareholder sold $5,000 of
common stock to unrelated parties.
(3) Includes shares retained by management.
(4) Fees and expenses of $11,521 were incurred and charged to equity. Financing
costs of $10,800 have been deferred and will be amortized over the lives of
the new debt facilities (see Note 6).
Reconciliation of stockholders' equity:
Stockholders' equity at January 1, 1997 $170,248
Merger consideration, net (144,920)
Net loss applicable to common stockholders (4,050)
Cumulative translation adjustment (369)
Employee stock options 4,004
---------
Stockholders' equity at September 30, 1997 $ 24,913
=========
At the Effective Time of the Merger, the employment agreement with the
Chairman of the Board and Chief Executive Officer was amended which (i) changed
his term of full-time employment from a rolling five-year term to a fixed
five-year term, (ii) provided for a minimum base salary of $1,150 per annum,
(iii) established $1,150 as the minimum amount upon which the Chairman's
retirement benefit (and the survivor's benefit of his surviving spouse) will be
computed and (iv) created contractual rights with respect to certain perquisites
that he is accorded informally under present arrangements with the Company. The
employment agreement with the Vice President of Purchasing was also amended to
change his term of full-time employment from a rolling five-year term to a fixed
five-year term.
6
<PAGE>
4. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1997 1996
------------- ------------
Raw material............................... $ 10,983 $ 9,020
Work-in-process............................ 9,478 5,980
Finished goods............................. 87,231 64,355
----------- ----------
Total................................ $ 107,692 $ 79,355
=========== ==========
5. INCOME TAXES
The income tax provision for the three month period ended September 30, 1997
has been computed to bring the year-to-date tax provision to the estimated
effective tax rate for the year ended December 31, 1997. A tax benefit for the
nine month period has not been recorded due to the carry-back limitations
imposed by the Internal Revenue Code.
6. REVOLVING LOAN FACILITIES AND LONG-TERM DEBT
The Company's $60,000 Revolving Loan Agreement was terminated on April 16,
1997, the effective date of the Merger. In connection with the Merger, a
Revolving Credit Facility was entered into providing $130,000 of borrowings
including a $30,000 sublimit for the issuance of standby and commercial letters
of credit. Borrowings made under the Revolving Credit Facility bear interest at
a rate equal to, at the Company's option, Eurodollar Rate plus 225 basis points
or the Prime Rate plus 50 basis points. The Revolving Credit Facility expires on
April 16, 2002. Pursuant to the terms of the Revolving Credit Facility, the
Company is required during February and March of each year to maintain excess
availability of at least $45,000. The obligations of the Company under the
Revolving Credit Facility are secured by inventory and accounts receivable of
the Company and its domestic subsidiaries and by a pledge of 100% of the
domestic subsidiaries' and at least 65% of the foreign subsidiaries' outstanding
capital stock. The Revolving Credit Facility contains customary covenants of the
Company and the subsidiary borrowers, including but not limited to, funded debt
to EBITDA and fixed charge coverage ratios, as defined in the Revolving Credit
Facility, and minimum consolidated net worth on or after September 30, 1997 to
be at least $1.00. Availability under the Revolving Credit Facility, net of
outstanding letters of credit, was $54,136 at September 30, 1997.
Prior to the Merger, the Company paid the outstanding borrowings of $252
under its Puerto Rican subsidiaries' $10,000 revolving credit facility. On May
1, 1997, the Company entered into a $1,000 facility (the "Facility"), expiring
on May 31, 1998, with the same lender. The Facility bears interest at a rate
equal to, at the Company's option, the Eurodollar Rate plus 175 basis points or
the bank's prime rate less 25 basis points. Availability under the Facility was
$37 at September 30, 1997.
The Notes due April 15, 2007, issued in connection with the Merger, require
interest payments to be made semi-annually on April 15 and October 15. The Notes
are general unsecured obligations of the Company and rank pari passu in right of
payment with all current and future unsubordinated indebtedness of the Company,
including borrowings under the Revolving Credit Facility. However, all
borrowings under the Revolving Credit Facility are 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 Notes are
effectively subordinated to its obligations under the Revolving Credit Facility
to the extent of such assets. The Notes are redeemable, in whole or in part, at
the Company's option after April 15, 2002.
The Company's ability to pay dividends is restricted by terms of the
Revolving Credit Facility and the Note Indenture.
7
<PAGE>
7. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("Statement 128"), which supersedes Accounting Principles Board No. 15.
Statement 128 specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. The objective of Statement 128 is to
simplify the computation of EPS and to make the U.S. Standard for computing EPS
more compatible with international EPS computations. Statement 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The Company will be required to adopt Statement 128 in the
fourth quarter of 1997 and does not expect the adoption to have a material
impact on the Company's earnings per common share. The pro forma basic and
diluted EPS (as defined by Statement 128) for the three and nine months ended
September 30, 1997 and 1996 are not materially different from the earnings per
common share amounts reported.
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements will be effective for 1998. SFAS No. 130
provides new standards for reporting items considered to be "comprehensive
income." SFAS No. 131 establishes standards for reporting information about
operating segments of the Company. Neither of these pronouncements would have an
impact on reported net income or on the financial position of the Company.
8
<PAGE>
SYRATECH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Except for the historical information contained
in this Quarterly Report on Form 10-Q, the matters discussed 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, general
economic and business conditions; industry capacity, industry trends; overseas
expansion; the loss of major customers; changes in demand for the Company's
products; demand for products upon which the Company receives royalties and
timing of receipt of royalties; the timing of orders received from customers;
cost and availability of raw materials; dependence on foreign sources of supply;
delays at ports or at U. S. Customs; 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.
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.
Agreement and Plan of Merger
See sources and uses of funds in Note 3 of the Condensed Consolidated
Financial Statements.
Results of Operations
Three months ended September 30, 1997 compared to three months ended September
30, 1996
Excluding the impact of the 1996 acquisitions of Rauch, Silvestri, C. J.
Vander and Potpourri Press, net sales increased 8.6% in the Company's core
business. Including the acquisitions, net sales decreased 3.4% to $109.0 million
for the three months ended September 30, 1997 from $112.9 million for the three
months ended September 30, 1996. The Company's Rauch and Silvestri seasonal
businesses experienced a $9.7 million sales decrease which is due primarily to a
delay in implementation of the acquisition strategy. The changes in product
prices did not materially impact net sales.
Gross profit as a percentage of sales was 29.5% for the 1997 third quarter
compared to 29.4% for the comparable 1996 period. Gross profit decreased 3.1% to
$32.2 million for the three months ended September 30, 1997 from $33.2 million
for the three months ended September 30, 1996. The 0.1 percentage point increase
in gross profit percentage reflected decreased sales of the Rauch Christmas
ornament line which carries a lower gross margin than the Company's giftware
product lines. The increase in gross profit margin was not materially impacted
by change in product pricing.
Selling, general and administrative expenses ("S, G & A expenses") increased
to $18.9 million for the three months ended September 30, 1997 from $18.4
million for the three months ended September 30, 1996. This increase was due
primarily to added S, G & A expenses for the Potpourri Press product line which
was purchased in November 1996. However, including the 1996 acquisitions, S, G &
A expenses increased to 17.3% of net sales for the three months ended September
30, 1997 from 16.3% of net sales in the comparable 1996 period. Excluding the
1996 acquisitions, S, G & A expenses were $12.7 million or 16.2% of net sales
for the three months ended September 30, 1997 compared to 18.0% for the same
period of 1996. This decrease in S, G & A expenses as a percentage of net
9
<PAGE>
sales, excluding acquisitions, was due primarily to lower personnel related
costs and decreased royalty expenses. In connection with the Merger, the Company
entered into a management agreement with Thomas H. Lee Company for which the
Company pays an annual management fee in the amount of $0.45 million. For the
three months ended September 30, 1997, approximately $0.2 million has been
included in S, G & A expenses. Expenses associated with the product lines
acquired during 1996 are running at higher levels than had been anticipated due
to delays encountered in implementing the acquisition strategy.
Income from operations of $13.5 million and $16.4 million for the three
months ended September 30, 1997 and 1996, respectively, included other operating
income of $0.2 million and $1.6 million, respectively, resulting from the
disposal of Farberware inventory and from Farberware license revenue.
Interest expense of $5.8 million for the three months ended September 30,
1997 compared to $1.1 million for the three months ended September 30, 1996.
This change results primarily from the increase in interest associated with the
issuance of the 11% Senior Notes in connection with the Merger.
The income tax provision was $5.2 million for the three months ended
September 30, 1997 compared to $5.4 million for the same period of 1996. The
effective income tax rate was 67.7%, due to a change in full year estimates, for
the 1997 third quarter compared to 35.0% for the 1996 third quarter. The income
tax provision for the three month period ended September 30, 1997 has been
computed to bring the year-to-date tax provision to the estimated effective tax
rate for the year ended December 31, 1997. A tax benefit has not been recorded
due to the carry-back limitations imposed by the Internal Revenue Code.
Net income applicable to common stockholders for the three months ended
September 30, 1997 was $1.9 million compared to net income applicable to common
stockholders of $10.0 million for the comparable 1996 period. Income per common
share was $0.51 on average shares of 3,784,018 in the 1997 third quarter
compared to income per common share of $1.14 on average shares of 8,769,878 in
the 1996 third quarter. The reduction in average shares primarily reflects the
Merger which occurred on April 16, 1997.
Nine months ended September 30, 1997 compared to the nine months ended September
30, 1996.
Excluding the impact of acquisitions of businesses and product lines
completed in 1996, net sales increased approximately 11.0%. The primary reasons
for the increase were increased core business sales volume of giftware
(including crystal and silverplated items) and sterling silver flatware.
Including the 1996 acquisitions net sales increased 6.2% to $194.1 million for
the nine months ended September 30, 1997 from $182.7 million for the nine months
ended September 30, 1996. The Company's Rauch seasonal business experienced a
sales decrease due to a delay in implementation of the acquisition strategy.
Gross profit increased 7.1% to $56.2 million for the nine months ended
September 30, 1997 from $52.4 million for the nine months ended September 30,
1996. Gross profit as a percentage of sales was 28.9% for the nine months of
1997 compared to 28.7% for the same period in 1996. The 0.2 percentage point
increase in gross profit percentage reflected a change in product mix, in
particular, increased sterling silver flatware sales and increased production
efficiencies and absorption of fixed overhead in the Company's Puerto Rico
sterling silver manufacturing facility. The increase in gross profit margin was
not materially impacted by changes in product pricing.
Selling, general and administrative expenses ("S, G & A expenses") increased
to $51.6 million for the nine months ended September 30, 1997 from $39.2 million
for the nine months ended September 30, 1996. Excluding the 1996 acquisitions,
S, G & A expenses were $36.6 million or 25.4% as a percentage of net sales for
the nine months ended September 30, 1997 compared to $29.5 million or 22.7% in
the same period of 1996. The increase in S, G & A expenses, excluding the 1996
acquisitions, was due primarily to a $3.9 million charge to compensation expense
related to stock options as a result of the Merger and fees of $0.2 million
under the management agreement with Thomas H. Lee Company. Also contributing to
the increase are increased personnel and related costs and increased costs in
the Pacific Rim offices to support the seasonal acquisitions. Expenses
associated with the product lines acquired during 1996 are running at higher
levels than had been anticipated due to delays encountered in integrating the
product lines.
Income from operations of $6.6 million and $18.3 million for the nine months
ended September 30, 1997
10
<PAGE>
and 1996, respectively, included other operating income of $2.0 million and $5.1
million, respectively, resulting from the disposal of Farberware inventory and
Farberware license revenue. Income from operations in 1997 includes a one-time
charge of $3.9 million to compensation expense related to stock options as a
result of the Merger.
Interest expense of $10.2 million for the nine months ended September 30,
1997 compared to $2.1 million for the nine months ended September 30, 1996. This
change results primarily from the increase in interest associated with the
issuance of the 11% Senior Notes in connection with the Merger.
Other income of $2.2 million for the nine months ended September 30, 1997
relates to the sale of certain machinery, tools and equipment in conjunction
with the February 3, 1997 Settlement reached with U. S. Industries, Inc. and
Bruckner Manufacturing Corp. The nine months ended September 30, 1996 included
non-recurring pre-tax income of $11.9 million, net of costs resulting from the
Farberware license agreement.
The income tax provision was $1.9 million for the nine months ended September
30, 1997 compared to an income tax provision of $10.1 million for the same
period of 1996. The income tax provision for the nine month period ended
September 30, 1997 has been computed to bring the year-to-date tax provision to
the estimated effective tax rate for the year ended December 31, 1997. A tax
benefit has not been recorded due to the carry-back limitations imposed by the
Internal Revenue Code.
Net loss applicable to common stockholders for the nine months ended
September 30, 1997 was ($4.1) million compared to net income applicable to
common stockholders of $18.7 million for the comparable 1996 period. Loss per
common share was ($0.71) on average shares of 5,692,709 in the nine months ended
September 30, 1997 compared to income per common share of $2.13 on average
shares of 8,781,399 in the nine months ended September 30, 1996. The reduction
in average shares primarily reflects the Merger which occurred on April 16,
1997.
Liquidity and Capital Resources
Net cash used in operating activities for the nine months ended September
30, 1997 was $53.7 million. The primary uses of cash were the normal seasonal
increase in accounts receivable and inventories.
The Company's working capital requirements are seasonal and tend to be
highest in the period from August through November due to the Christmas selling
season. Accounts receivable tend to decline at the end of the fourth quarter as
receivables generated during the third and fourth quarters are collected and
remain lower until the next peak season beginning in August. This seasonality
has increased as a result of the 1996 acquisition of the Rauch business and the
Silvestri and Potpourri product lines.
Capital expenditures were approximately $13.0 million for the nine months
ended September 30, 1997. These expenditures were primarily for the purchase of
land and construction of a warehouse facility on the West Coast, purchase of a
single story manufacturing facility for C. J. Vander, improvements at the
Company's East Boston facility and the purchase of machinery, tools and dies for
the Rauch, Puerto Rico and C. J. Vander manufacturing facilities. Capital
expenditures are expected to be approximately $20.0 million for the year ended
December 31, 1997. The additional expenditures expected during the fourth
quarter are primarily due to the construction of the West Coast warehouse
facility.
See Note 3 in the accompanying Condensed Consolidated Financial Statements
for the sources and uses of funds of the Merger.
See Note 6 in the accompanying Condensed Consolidated Financial Statements
for the discussion on borrowings, availability, covenants and dividend
restrictions of the Company under its Revolving Credit Facilities and its Notes
due April 15, 2007.
See Note 3 in the accompanying Condensed Consolidated Financial Statements
for dividend and liquidation terms under the Company's Cumulative Redeemable
Preferred Stock.
The Company believes that the 1996 acquisitions of businesses and product
lines together with the growth in the Company's existing businesses will
generate sufficient cash flow from operations to cover the increased level of
interest, resulting primarily from the Merger and recapitalization. As the 1996
acquisitions are integrated with the core business, and with each other, cost
savings are expected to be realized as redundant functions, services and
facilities are eliminated.
11
<PAGE>
The Company believes that funds generated from operations and borrowings
available under the Revolving Credit Facility 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 the $165.0 million Notes
issued in connection with the Merger and under its operating leases) and fund
planned capital expenditures through December 31, 1998. See "Agreement and Plan
of Merger".
Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("Statement 128") which supersedes Accounting Principles Board No. 15. Statement
128 specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. The objective of Statement 128 is to simplify the
computation of EPS and to make the U. S. Standard for computing EPS more
compatible with international EPS computations. Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company will be required to adopt Statement 128 in the fourth quarter of 1997
and does not expect the adoption to have a material impact on the Company's
earnings per common share.
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements will be effective for 1998. SFAS No. 130
provides new standards for reporting items considered to be "comprehensive
income." SFAS No. 131 establishes standards for reporting information about
operating segments of the Company. Neither of these pronouncements would have an
impact on reported net income or on the financial position of the Company.
12
<PAGE>
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
EX-10-1 Amendment Number 1, dated as of July 31, 1997, to Loan and
Security Agreement, dated as of April 16, 1997.
EX-11 Computation of Net Income per Common Share.
EX-27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended
September 30, 1997.
13
<PAGE>
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 12, 1997 /s/ E. Merle Randolph
--------------------------------------
E. Merle Randolph
Vice President, Treasurer, and
Chief Financial and Accounting Officer
14
Exhibit 10-1
AMENDMENT NO. 1
To
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 dated as of July 31, 1997 is made by SYRATECH
CORPORATION, a Delaware corporation, TOWLE MANUFACTURING COMPANY, a Delaware
corporation, LEONARD FLORENCE ASSOCIATES, INC., a Massachusetts corporation,
WALLACE INTERNATIONAL SILVERSMITHS, INC., a Delaware corporation, SYRATECH
HOLDING CORPORATION, an Arkansas corporation, RAUCH INDUSTRIES, INC. a North
Carolina corporation, ROCHARD, INC., a New York corporation, HOLIDAY PRODUCTS,
INC., a North Carolina corporation, FARBERWARE INC., a Delaware corporation,
SILVESTRI, INC., a Delaware corporation, the financial institutions parties
hereto from time to time as Lenders, and NATIONSBANK, N.A. (formerly named
NATIONSBANK, N.A. (SOUTH), a national banking association ("NATIONSBANK"), as
administrative agent for the Lenders (the "Administrative Agent").
Preliminary Statements
The Borrowers, the Lenders and the Administrative Agent are parties to
a Loan and Security Agreement dated as of April 16, 1997 (said Agreement, the
"Loan Agreement"; terms defined therein and not otherwise defined herein being
used herein as therein defined).
The Borrowers have requested that certain provisions of the Loan
Agreement be corrected or clarified and the Lenders and the Administrative Agent
have agreed to amend the Loan Agreement as hereinafter set forth, upon and
subject to all of the terms, conditions and provisions hereof.
NOW, THEREFORE, in consideration of the Loan Agreement, the Loans made
by the Lenders and outstanding thereunder, the mutual promises hereinafter set
forth and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1.Amendments to Loan Agreement. The Loan Agreement is hereby
amended, effective as of the Effective Date, subject to the provisions of
Section 2, by
(a) amending Section 1.1 Definitions by
<PAGE>
(i) amending the definition "Lee Affiliates" in its entirety
to read as follows:
Lee Affiliates means Lee, Thomas H. Lee Equity Fund III, L.P.,
Thomas H. Lee Foreign Fund III, L.P., THC Co-Investors III-A,
LLC, THL Co-Investors III-B, LLC and any individual who is, at
the date of determination, an employee of Lee.
(ii)amending the definition "Letter of Credit" in its entirety
to read as follows:
Letter of Credit means any letter of credit issued (a) for the
account of a Borrower by any Lender and outstanding on the
Effective Date pursuant to a Reimbursement Agreement
satisfactory to the Administrative Agent or (b) by NationsBank
pursuant to the Master L/C Agreement or Article 3.
(iii) amending the definition "Permitted Guaranties" in its
entirety to read as follows:
Permitted Guaranties means (i) any Guaranty by one Borrower of
Indebtedness of any other Borrower incurred in the ordinary
course of business of such other Borrower, and (ii) Guaranties
arising out of the endorsement of negotiable instruments for
deposit or collection, the issuance of Letters of Credit for
the account of Syratech Hong Kong pursuant to the terms of the
Master L/C Agreement, and similar transactions in the ordinary
course of business.
(b) amending clause (iii)(A) of Section 12.1(m) thereof in its entirety
to read as follows:
(A) Lee Affiliates shall have ceased to control (including by
a proxy granted to them or any of them by the registered owner
thereof or other voting agreement satisfactory to the
Administrative Agent in its reasonable business judgment), at
least a majority of the outstanding voting stock of Syratech
or
Section 2. Effectiveness of Amendment. This Amendment shall become
effective as of April 16, 1997, the Effective Date, on the date (the "Amendment
Effective Date") on which the Administrative Agent shall have received each of
the following documents (in sufficient copies for each Lender):
(a) this Amendment duly executed and delivered by each Borrower and the
Required Lenders,
2
<PAGE>
(b) a certificate of the Secretary of each Borrower having attached
thereto the articles or certificate of incorporation and bylaws of such Borrower
as in effect on the Amendment Effective Date attached thereto (or containing the
certification of such Secretary that no amendment or modification of such
articles or certificate or bylaws has become effective since the last date on
which such documents were delivered to the Administrative Agent pursuant to the
Loan Agreement), and to the further effect that the incumbency certificate and
corporate action delivered in connection with the occurrence of the Effective
Date remain in effect, unchanged,
(c) a certificate of the President or Financial Officer of Syratech to
the effect that
(i) the representations and warranties of the Borrowers
contained in the Loan Documents are true and correct in all material
respects on and as of the Amendment Effective Date as if made on and as
of such date, and
(ii) no Default or Event of Default has occurred and is
continuing,
and such statements shall be true, and
(d) such other documents, certificates and instruments in connection
with the effectiveness of this Amendment as the Administrative Agent or any
Lender may reasonably request.
Section 3. Effect of Amendment. From and after the effectiveness of
this Amendment, all references in the Loan Agreement and in any other Loan
Document to "this Agreement," "the Loan Agreement," "hereunder," "hereof" and
words of like import referring to the Loan Agreement, shall mean and be
references to the Loan Agreement as amended by this Amendment. Except as
expressly amended hereby, the Loan Agreement and all terms, conditions and
provisions thereof remain in full force and effect and are hereby ratified and
confirmed. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Administrative Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
Section 4. Counterpart Execution; Governing Law.
(a) Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
(b) Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
BORROWERS:
SYRATECH CORPORATION
By: /s/ E. Merle Randolph
------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
TOWLE MANUFACTURING COMPANY
By: /s/ E. Merle Randolph
------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
LEONARD FLORENCE ASSOCIATES,
INC.
By: /s/ E. Merle Randolph
------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
WALLACE INTERNATIONAL
SILVERSMITHS, INC.
By: /s/ E. Merle Randolph
------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
SYRATECH HOLDING CORPORATION
By: /s/ Richard Freiman
------------------------------
Name: Richard Freiman
Title: President
4
<PAGE>
RAUCH INDUSTRIES, INC.
By: /s/ E. Merle Randolph
-------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
ROCHARD, INC.
By: /s/ E. Merle Randolph
-------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President/Treasurer
HOLIDAY PRODUCTS, INC.
By: /s/ E. Merle Randolph
-------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President/Treasurer
FARBERWARE INC.
By: /s/ E. Merle Randolph
-------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
SILVESTRI, INC.
By: /s/ E. Merle Randolph
-------------------------------
Name: E. Merle Randolph
Title: Chief Financial Officer/
Vice President
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A. (f/k/a NationsBank,
N.A. (South)
By: /s/ John C. Glazebrook
-------------------------------
Name: John C. Glazebrook
Title: Vice President
5
<PAGE>
LENDERS:
NATIONSBANK, N.A. (f/k/a NationsBank,
N.A.
By: /s/ John C. Glazebrook
-------------------------------
Name: John C. Glazebrook
Title: Vice President
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Elizabeth J. Limpert
-------------------------------
Name: Elizabeth J. Limpert
Title: First Vice President
BANKBOSTON, N.A. (f/k/a The First
National Bank of Boston
By: /s/ Andrew A. Doherty
-------------------------------
Name: Andrew A. Doherty
Title: Vice President
FLEET NATIONAL BANK
By: /s/ Scott E. Carpenter
-------------------------------
Name: Scott E. Carpenter
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Greg Ennis
-------------------------------
Name: Greg Ennis
Title: Vice President
6
<PAGE>
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ Thomas J. Scifo
------------------------------
Name: Thomas J. Scifo
Title: Assistant Vice President
By: /s/ Paul Travers
------------------------------
Name: Paul Travers
Title: Vice President
SANWA BUSINESS CREDIT
CORPORATION
By: /s/ Lawrence J. Placek
------------------------------
Name: Lawrence J. Placek
Title: Vice President
7
EX-11
SYRATECH CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Common stock ...................................................... 3,784 8,676 5,693 8,676
Common equivalent shares resulting from stock options
(treasury stock method) ........................................ 94 105
-------- --------- --------- --------
Subtotal ................................................ 3,784 8,770 5,693 8,781
======== ========= ========= ========
Net income/(loss) applicable to common stockholders ........... $ 1,934 $ 10,006 $ (4,050) $18,719
======== ========= ========= ========
Net income/(loss) per common share ............................... $ 0.51 $ 1.14 $ (0.71) $ 2.13
======== ========= ========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE SYRATECH
CORPORATION 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> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 498
<SECURITIES> 0
<RECEIVABLES> 109,247
<ALLOWANCES> 8,329
<INVENTORY> 107,692
<CURRENT-ASSETS> 222,084
<PP&E> 109,396
<DEPRECIATION> 36,080
<TOTAL-ASSETS> 312,725
<CURRENT-LIABILITIES> 97,903
<BONDS> 165,000
0
18,990
<COMMON> 38
<OTHER-SE> 6,875
<TOTAL-LIABILITY-AND-EQUITY> 312,725
<SALES> 109,044
<TOTAL-REVENUES> 109,044
<CGS> 76,861
<TOTAL-COSTS> 76,861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,849
<INCOME-PRETAX> 7,654
<INCOME-TAX> 5,180
<INCOME-CONTINUING> 2,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,474
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
